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Horizontal Integration

Definition
1.

It is the process of acquiring or merging with competitors,


leading to industry consolidation.

2.

Horizontal integration is a strategy where a company


acquires, mergers or takes over another company in the same
industry value chain.
What is horizontal integration?
It is a type of integration strategies pursued by a company in
order to strengthen its position in the industry. A corporate that
implements this type of strategy usually mergers or acquires
another company that is in the same production stage. Examples
are Disney merging with Pixar (movie production), Exxon with
Mobile (oil production, refining and distribution) or the infamous
Daimler Benz and Chrysler merger (car developing,
manufacturing and retailing).
The purpose of horizontal integration (HI) is to grow the company
in size, increase product differentiation, achieve economies of
scale, reduce competition or access new markets. When many
firms pursue this strategy in the same industry, it leads to
industry consolidation (oligopoly or even monopoly).
HI can occur in a form of mergers, acquisitions or hostile
takeovers. Merger is the joining of two similar sizes, independent
companies to make one joint entity. Acquisition is the purchase of
another company. Hostile takeover is the acquisition of the
company, which does not want to be acquired.
HI may be an effective strategy when:

Organization competes in a growing industry.

Competitors lack of some capabilities, competencies, skills


or resources that the company already possesses.

HI would lead to a monopoly that is allowed by a


government.

Economies of scale would have significant effect.

The organization has sufficient resources to manage M&A.


The following diagram illustrates HI in manufacturing industry:

Difference between horizontal and vertical integrations


HI is different from vertical integration, where a firm usually
expands into another production stage rather than merging or
acquiring the company in the same production stage. For
example, a company is vertically integrating if it expands from
manufacturing industry to retailing industry, while HI would mean
buying other firms in the same manufacturing industry.

Horizontal integration examples

Acquiring company

Acquired company

Porsche

Volkswagen

Daimler Benz

Chrysler

Kraft Foods

Cadbury

Quaker Oats

Snapple

PepsiCo

Quaker Oats

Pfizer

Wyeth

Pfizer

Pharmacia Corporation

Glaxo Wellcome

SmithKline Beecham

AT&T

T-Mobile

AT&T

Bell South

Mittal Steel

Arcelor

HP

Compaq

Oracle

PeopleSoft

Delta

Northwest Airlines

United Airlines

Continental

JPMorgan Chase

Bank One

Microsoft

Taleo

Microsoft

Yahoo!

Apple

AuthenTec

BP

Amoco

Advantages of horizontal integration

Lower costs. The result of HI is one larger company, which


produces more services and products. The higher output leads to
greater economies of scale and higher efficiency.

Increased differentiation. The combined company can offer


more product or service features.

Increased market power. The larger company has more


power over its suppliers and distributors/customers.

Reduced competition. The result of industry consolidation is


fewer companies operating in the industry and less intense
competition.

Access to new markets. New markets and distribution


channels can be accessed by integrating with a company that
produces the same goods but operates in a different region or
serves different market segment.
Disadvantages of the strategy

Destroyed value. M&A rarely add value to the companies.


More often M&A fail and destroy the value of the companies
involved in it because expected synergies never materialize.

Legal repercussions. HI can lead to a monopoly, which is


highly discouraged by many governments due to lack of
competition. Therefore, governments usually have to approve any
larger M&A before they can happen.

Reduced flexibility. Large organizations are harder to


manage and they are less flexible in introducing innovations to
the market.