Horizontal Integration Defined
In the simplest terms, horizontal integration is the process of procurement of a commercial entity that has been functioning at a similar echelon. The entity may belong to a similar or a different industry. Unlike vertical integration, horizontal integration does not entail a business procuring another business entity that is in a dissimilar stage of production.
A Little More on Horizontal Integration
The primary objective of horizontal integration is to enhance production efficiency, create market domination in the production and distribution arenas, enhance product differentiation and explore newer horizons. Often, two business entities perform better in generating revenue as a merger than they would have been able to on their own. Yet, there is an inherent negative aspect to a successful horizontal merger that comes in the form of significant reduction or in some cases, a total obliteration of market competition. Horizontal integration within an industry will result in a company or a small number of companies controlling the industry, leading to either a market monopoly or an oligopoly. In fact, this institutional control of the market has led to the formation of antitrust laws to protect the consumer.
Advantages of Horizontal Integration
Horizontal integration not only reduces production cost, but also enhances the scope for marketing, facilitates better R&D, and strengthens the production and distribution chain of the new merger. For a merger occurring within an industry, horizontal integration also effectively introduces diversity in the product portfolio and potentially reduces marketing cost by integrating the separate portfolios of the merging companies into a single portfolio. Horizontal integration not only combines products; in fact, it potentially combines markets.
Marketing imperatives are a driving force behind horizontal integration. A business that procures another business entity that has an operational base in a country in which the parent business itself has had no prior exposure, not only gets immediate access to a new market, but also has at its disposal, ready marketing infrastructure to introduce its portfolio there.
Porter’s Five Forces model lists five competitive forces that essentially drive any industry
1. Horizontal competition from substitute products
2. Competition from new entrants in the market
3. Competition from rivals
4. Bargaining power of customers
5. Bargaining power of suppliers
Horizontal integration aims to address the first three competitive forces. Disadvantages of Horizontal Integration. We have already mentioned that horizontal integration has directly resulted in the formation of antitrust laws to deal with any unhealthy competition in markets. Even if the merger complies with the competition regulations of the market, horizontal integration does not always guarantee benefits. Inflexibility in management owing to the sheer size of the new merger and incompatibility of leadership of the two merging businesses can and will negatively affect the business value of the merger.
Examples of Horizontal Integration
Examples of horizontal integration in the 21st century include:
- Hewlett Packard’s acquisition of Compaq
- Fiat’s acquisition of Chrysler to form Fiat Chrysler Automobiles N.V
- Facebook’s acquisition of Instagram and WhatsApp
- Kraft Foods’ acquisition of Cadbury
- Pfizer’s acquisition of Wyeth
References for Horizontal Integration