What is Horizontal Integration?
The strategy when two businesses, that are competitors or operate in the same market space, acquire each other’s businesses or merge each other’s operations to strengthen the position in the industry is known as integration. If this competitive strategy, where companies use to consolidate their position among competitors, occurs between two companies that belong to the same industry, it is known as horizontal integration.
In April 2012, when Facebook acquired Instagram for a reported $1 billion, both were competing social media platforms. With the merger, Facebook was able to strengthen its position in the social-media and social-sharing space, reducing competition from a potential contender, and implementing cross-platform synergies. This is a classic example of horizontal integration.
Here, companies can take advantage of their combined knowledge and collective experience to establish themselves in new markets, expand their portfolio of offerings, and reduce competition. There are many other advantages that can emerge from horizontal integration, such as economies of scale in the production line, combined R&D, savings on logistics such as storage and shipping, integrated marketing campaigns, and many more.
Advantages of Horizontal Integration
Let us take a look at the benefits of horizontal integration in detail.
✅ The combined knowledge and collective experience: One of the most important benefits of horizontal integration is gaining and transferring new knowledge among the organisations. The overarching structure of horizontal integration leads to people communicating and connecting with one another more effectively and creating and sharing knowledge. The focus is not just about acquiring people, but also their thoughts, methodologies, and relationships.
✅ Lower costs: Due to the efficiencies, similar business operations and increased sale and production in the newly integrated firm, there are cost savings arising out of it. Advantages of horizontal integration also include economies of scale comprising of bulk-buying, technical and financial.
✅ A new business model: An acquisition or merger may also offer a successful business model, service or product line.
✅ Increased market power: The larger company has more power over its suppliers and customers; this results in attaining a higher market share and can even influence prices.
✅ Increase the market share and long-run pricing power: When two companies come together, there are more products, technology and services under their belt that can increase the position among consumers.
✅ Reduced competition: The result of a horizontal merger eliminates key rivals and competition; there are fewer companies operating in the industry with less intense horizontal competition.
✅ Expand into new markets: If two organisations, producing the same products, but having operations in different geographical locations or different market segments come together, it is easier to access new markets and distribution channels.
✅ Bigger customer base: Even if two companies belong to the same industry, they may have a different consumer base. By merging the two companies into one, the new organisation now has access to a larger base of customers.
✅ Increased revenue: Once the merged companies get an increased customer base, there is an escalation in the cash flow. The companies see more revenue than when they were independent entities.
✅ Diversification: Companies use horizontal integration to diversify business operations by entering into new markets or by offering new products or services. This also gives cross-selling opportunities and increases each other’s business’ market. For instance, an Agro business that sells Agro equipment and farm machinery may decide to also offer bio-fertilizers or micronutrients. Or a travel firm might merge with a similar business in another country to gain a foothold and achieve their goals more quickly and easily than with a solo expansion.
Disadvantages of Horizontal Integration
While the advantages clearly are many and proven, horizontal integration does have some areas of concern. There are, of course, solutions for these arguments but it helps to recognise and understand them.
❌ Adapting to a changed entity: As with any change, there are challenges that accompany horizontal integration. The larger the entities that are involved in the horizontal integration, the more the complexities encountered. There will be various aspects to examine and each would have potential areas that need pre-empting to ensure zero impact and maximum synergies upon integrating.
From regulatory angles to operational challenges and even possible employee angst, the situation calls for allaying any developments that could affect the continuity of business.
❌ Regulatory aspects - Compliance and Scrutiny: Merging two companies is a huge task that involves multiple challenges. But it is the regulatory aspects that demand the most attention and work. The legal requirements need to be adhered to without any slip-ups. Due diligence has to be done of the company being integrated to ensure there are no liabilities or legal issues pending.
Horizontal integration of two reasonably large or even medium sized companies is often a matter of closer scrutiny from a regulatory standpoint. The regulators would be watching closely to ensure there are no moves to suggest the final entity can be a threat to the free market philosophy. There are anti-trust laws that come under scrutiny.
❌ Possible monopolies: When two companies in the same industry and engaged in the same products or services merge, there is a substantial consolidation of market share that takes place. The end result can be a monopoly with this stronger entity having more power to dominate the market with potentially unhealthy results.
This can include the usual monopolistic practices like increasing prices, having a much bigger grip over available supplies and vendors, and even insensitivity towards the customer requirements and quality.
❌ Possible employee turnover: Horizontal integration often involves significant changes in the operations of the merged entity. This invariably calls for a review of the management team and other staffing strength going forward.
The result could require relieving the existing part of the workforce that is a process that can be unsettling for the overall personnel. There is a real possibility of some employees proactively leaving the company sensing the chances of layoffs.
❌ Challenges in management: There are bound to be changes in the vision, mission statement and management styles of the organisations that are integrating. This can obviously come with its own challenges in addressing these differences and aligning them to a common goal.
While these can be overcome with effort and in time, these can cause minor, if not major, setbacks. The operational challenges in managing a bigger organisation that gets formed by combining two companies could slow down the pace of growth. There is lesser flexibility and speed in taking decisions till such time things settle down.
There are challenges also in managing finances, marketing, public relations and human resources. Surely these are aspects that would have been thought through by the respective managements but there is often an impact on cost, effort and time spent.
❌ Risking quality for quantity: Often, in the pursuit of size and numbers, mergers have a tendency to result in the final entity becoming large at the cost of its intrinsic values and the quality of its product and services. Usually, it is over managed and contained eventually but it takes time for things to settle down.
❌ The potential threat to shareholder value: Not all mergers and integrations turn out to be successful and produce the planned outcomes. While some of the integrated entities struggle with the new form and face setbacks, others could take much longer to settle down. All this can be detrimental to the value of the business and the equity that shareholders possess.
❌ The possible slowdown of growth: It is a fact that not all mergers and integrations result in proportionate growth and revenues. The larger size of such organisations makes it slower and even unfocussed in its objectives. There are instances also of integrations failing or, at least, not producing the desired results leading to hard measures taken to salvage the situation.
This is, usually, the result of an inability to forge synergies as foreseen in the initial stages. Just two companies being in the same space or having some commonality may not be enough for the integration to produce the desired results.
Examples of Horizontal Integration
We had mentioned the example of Facebook-Instagram earlier. There are many other notable examples of horizontal integration.
Disney-Pixar: One of the most successful mergers of time, Walt Disney Company's $7.4 billion acquisition of Pixar Animation Studios is a perfect example of horizontal integration. The largest media and entertainment corporation was facing market saturation when they decided to join hands with Pixar and take advantage of their cutting-edge technology and innovative vision. The deal led to increased market shares and profits.
Exxon-Mobil: The mega merger of two of the major oil companies resulted in the creation of the largest oil company in the world. This led to a reduction in competition in the oil industry. The deal was valued at $81 billion and facilitated the combination of Exxon’s rich experience in deep water exploration with Mobil’s production and exploration acreage in Nigeria and Equatorial Guinea.
As companies in the same work space try to fight off competition from significantly well-performing rivals, horizontal integration is the standard way to stay in business and sustain growth.
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