Horizontal Integration
The acquisition of additional business activities at the same level of the value chain is referred to as horizontal integration. This form of expansion contrasts with vertical integration by which the firm expands into upstream or downstream activities. Horizontal growth can be achieved by internal expansion or by external expansion through mergers and acquisitions of firms offering similar products and services. A firm may diversify by growing horizontally into unrelated businesses.
Some examples of horizontal integration include:
- The Standard Oil Company’s acquisition of 40 refineries.
- An automobile manufacturer’s acquisition of a sport utility vehicle manufacturer.
- A media company’s ownership of radio, television, newspapers, books, and magazines.
Advantages of Horizontal Integration
The following are some benefits sought by firms that horizontally integrate:
- Economies of scale – acheived by selling more of the same product, for example, by geographic expansion.
- Economies of scope – achieved by sharing resources common to different products. Commonly referred to as “synergies.”
- Increased market power (over suppliers and downstream channel members)
- Reduction in the cost of international trade by operating factories in foreign markets.
Sometimes benefits can be gained through customer perceptions of linkages between products. For example, in some cases synergy can be achieved by using the same brand name to promote multiple products. However, such extensions can have drawbacks, as pointed out by Al Ries and Jack Trout in their marketing classic, Positioning.
Pitfalls of Horizontal Integration
Horizontal integration by acquisition of a competitor will increase a firm’s market share. However, if the industry concentration increases significantly then anti-trust issues may arise.
Aside from legal issues, another concern is whether the anticipated economic gains will materialize. Before expanding the scope of the firm through horizontal integration, management should be sure that the imagined benefits are real. Many blunders have been made by firms that broadened their horizontal scope to achieve synergies that did not exist, for example, computer hardware manufacturers who entered the software business on the premise that there were synergies between hardware and software. However, a connection between two products does not necessarily imply realizable economies of scope.
Finally, even when the potential benefits of horizontal integration exist, they do not materialize spontaneously. There must be an explicit horizontal strategy in place. Such strategies generally do not arise from the bottom-up, but rather, must be formulated by corporate management.
Recommended Reading
Mark N. Clemente and David S. Greenspan, Winning at Mergers and Acquisitions : The Guide to Market Focused Planning and Integration
Reference: QuickMBA