Horizontal integration is a process of increasing the production of goods or services of a company in the same part of the supply chain. It is a very important part of business development because this process can grow the company size, increase the production capacity, and help the company explore new markets.
What Is Horizontal Consolidation?
Horizontal integration is the acquisition of a related business. A horizontal integration happens when one firm acquires another firm that was also operating in the same industry or producing the same products. Horizontal integration increases the market power and value of a company. Usually, horizontal integration occurs when a business grows by purchasing its competitors. Companies that follow the horizontal consolidation can easily realize economies of scale and minimize the production cost. This way a company can easily increase the revenue. However, you have to remember that horizontal integration does not always lead to increased value and profitability as expected. Sometimes this procedure may lead to a dismal performance, devaluation, inefficiency, etc.
Understanding Horizontal Integration
Horizontal integration is a competitive strategy that helps businesses in strategic alliances provide more resources, market, competence, and efficiency. It also helps businesses in strategic alliances generate more revenue than they would have when operating independently. Horizontal integration also involves the optimization of activities or the consolidation of strategic business activities within the firm’s scope of processes and activities. It can happen because of the new business expansion as well as the new market segments, economies of scale, economies of scope and experience, and the price difference in the factors of production.
Aspects Of Horizontal Integration
There are few aspects of horizontal integration that differ this business module from other business combinations. The aspects are:
1. The direction of horizontal integration
2. Profitability of integration
3. Target of integration
4. Forms and intensity of integration
You can easily distinguish horizontal integration from conglomerate integration thanks to the direction. Usually, horizontal integration is preserved for companies with financial surpluses. Horizontal mergers of related companies happen between the same industry and line of products so that the businesses involved can properly use their capabilities.
Most of the time companies want to merge and expand their activities in sector-related products or services for the best utilization of their time and resources. So if you are a business owner and want to increase your profitability then you can adopt horizontal integration within the same product lines.
Pros And Cons Of Horizontal Integration
Horizontal integration has both pros and cons. Among the many benefits of horizontal integration, the most obvious benefit is the increased market share of the company. When you combine two companies, it means the combination of their products, technology, and the services that they provide to the market.
So it’s obvious when a company multiplies its products, it also increases its consumer foothold. It means after the horizontal integration companies can benefit from a larger customer base. After merging the new organization now has access to a larger base of customers.
When the customer base increases for a company it also boosts the revenue for that new company. It also means reduced competition in the market thus increasing the synergy between two companies also reduces the production cost.
With all these business benefits; horizontal integration also has downsides for the market, especially when they succeed. This kind of strategy faces a high level of scrutiny from government agencies. Moreover, when two companies of the same industry merge, it means less competition which leads to less choice/option for the customers.
This type of situation will create a monopoly, where one company plays a dominant force, controlling the availability, prices, and supply of products and services. Therefore, antitrust laws are in place to prevent big mergers. The main purpose of the antitrust laws is to prevent predatory mergers and acquisitions that may create a monopoly.
Horizontal integration also has some other drawbacks including reduced flexibility within the new organization. Merging might help two companies operate more nimbly, but now the new company is a larger organization. This means more employees and internal processes. Moreover, the new company now requires more bureaucracy and a greater need for transparency.
Pros Of Horizontal Integration
1. Increased market share
2. Larger consumer base
3. Increased revenue
4. Reduced competition
5. Synergistic efforts (combined marketing efforts, technology, etc.)
6. Create economies of scales and economies of scope
7. Reduce production costs
Cons Of Horizontal Integration
1. High level of scrutiny from government agencies
2. Creation of a monopoly
3. Higher prices for consumers
4. Less option for consumers
5. Reduced flexibility for the new, larger company
6. Lack of alignment between company values destroys overall company value
Examples Of Horizontal Integration
Over the years, there are quite a few examples of horizontal integration. Three major examples of horizontal integration are –
1. The Merger of Marriott and Starwood Hotels in 2016
2. The Merger of Anheuser-Busch InBev and SABMiller in 2016
3.The Merger of The Walt Disney Company and 21st Century Fox in 2017
The Merger Of Marriott And Starwood Hotels In 2016
In 2016, Marriott International, Inc. acquired Starwood Hotels & Resorts Worldwide, Inc. This merge made Marriott International, Inc. the world’s largest hotel company. The main purpose of this merge was to create a more diverse portfolio of properties for the company. Starwood Hotels & Resorts Worldwide, Inc. had a very strong international presence while Marriott had a strong presence in the luxury, convention, and resort segments. The combination of these two companies created more choices for consumers as well as more opportunities for employees and added value for the company’s shareholders. After the merge, the two companies had approximately 5,500 hotels and 1.1 million rooms worldwide.
The Merger Of Anheuser-Busch InBev And SABMiller In 2016
The merger of Anheuser-Busch InBev and SABMiller happened in October 2016 and the total value of this merger was $100 billion. After the merger, these two companies now trade under one name, Newbelco. This merger has happened between the world’s two leading beer companies therefore, before closing, the companies had to agree to sell off many of their popular beer brands, including Peroni, Grolsch, and the Czech Republic’s Pilsner Urquell, to comply with anti-trust laws. There were many reasons, these two companies merge but the main reason was to increase Anheuser-Busch InBev’s market share in developing regions of the world, such as China, South America, and Africa, etc. In these countries, SABMiller already had established access to those markets so it was much easier for the Anheuser-Busch InBev’s to enter these markets.
The Merger Of The Walt Disney Company And 21st Century Fox In 2017
The merger between The Walt Disney Company and 21st Century Fox was finalized in March 2019. The main target of this merger was to increase Disney’s content and entertainment options to satisfy consumer demands. Moreover, the target was also to expand into the international market and expand its direct-to-consumer offerings, including ESPN+, Disney+, and the two company’s combined ownership stake in Hulu. This merger between The Walt Disney Company and 21st Century Fox included Twentieth Century Fox, Fox Searchlight Pictures, Fox 2000 Pictures, Fox Family and Fox Animation, Twentieth Century Fox Television, FX Productions, and Fox21, FX Networks, National Geographic Partners, Fox Networks Group International, Star India, and Fox’s interests in Hulu, Tata Sky and Endemol Shine Group.
References: 1 https://www.investopedia.com/ask/answers/051315/what-difference-between-horizontal-integration-and-vertical-integration.asp
References: 2 https://en.wikipedia.org/wiki/Horizontal_integration
Last Updated on August 6, 2022 by Ana S. Sutterfield
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.