Horizontal integration

Definition

Horizontal integration is a business strategy in which a company expands its operations or acquires similar businesses at the same level of the value chain.

What is horizontal integration?

It involves the acquisition of businesses that operate in the same industry and offer similar products or services. These companies are often direct competitors in the market.

By acquiring competitors, a company can rapidly increase its market share. This can lead to a stronger competitive position and greater influence in the industry.

Horizontal integration allows a company to diversify its product or service offerings within the same industry. This can lead to a broader range of choices for customers and potentially capture a larger share of the market.

Through horizontal integration, companies can often achieve economies of scale. This means that as production or service levels increase, the average cost per unit decreases, leading to increased profitability.

Horizontal integration can provide a competitive advantage by reducing the number of competitors in the market. It can also enhance the company’s ability to negotiate with suppliers and exert pricing power.

Types of horizontal integration

There are three primary forms of horizontal integration. These include:

• Merger: When two companies merge, they combine to create a new, joint organisation. Typically, the brand of one of the companies is retained, while operations and personnel from both are integrated. The product lines of the merging companies are often similar and competitive in the market. The goal of a merger is to become a larger presence within the existing market.
• Acquisition: An acquisition occurs when one company takes over the operations of another. While the two companies join together, the acquiring company remains in control. The acquiring company’s staff, executives, and operations typically stay in place, while the acquired company’s resources are integrated as needed. Acquisitions are often pursued to achieve specific strategic goals.
• Internal expansion Companies can also pursue horizontal integration through internal expansion, reallocating internal capital strategically. This involves changing course and applying resources differently to grow the business.

Horizontal Integration vs. Vertical Integration

Horizontal integration involves a company acquiring or merging with another company at the same stage of the supply chain within the same industry, wanting to increase market share and reduce competition. Vertical integration involves a company expanding its operations either backward into its supply chain (upstream) or forward into the distribution chain (downstream) to gain more control over production, distribution, and overall cost efficiencies.

Both strategies want to i business growth and competitiveness but do so by focusing on different aspects of the supply and production process.

Example of horizontal integration

XYZ Corporation is a well-established company in the electronics manufacturing sector, specialising in the production of smartphones and other consumer electronics. They identify a key competitor, ABC Electronics, which also manufactures smartphones and has a significant market share.

XYZ Corporation decides to pursue a strategy of horizontal integration by acquiring ABC Electronics. As a result of the acquisition, XYZ Corporation now owns both its original operations and those of ABC Electronics. This horizontal integration brings several advantages, including economies of scale, shared research and development capabilities, and a broader product portfolio.