This business strategy enables the acquiring company to expand its reach in a sector it already serves without forming an entirely new entity from the ground up. For instance, a wine and spirits maker might merge with a brewery producing hard seltzers. There may be economies of scale or cost synergies in marketing; research and development (R&D); production; and distribution. Or there may be economies of scale, which make the simultaneous manufacturing of different products more cost-effective than manufacturing them on their own. Horizontal integration is the merger of two or more companies that occupy similar levels in the production supply chain.
Horizontal Acquisition vs. Vertical Acquisition
A vertical acquisition is another kind of business transaction that results in the consolidation of two or more companies. Such horizontal mergers or acquisitions reduce competition from new potential rivals or from already established rivals that wish to acquire the company. The government and financial regulators of certain countries frown examples of horizontal integration upon horizontal integration for several reasons. Horizontal integration is often used to eliminate competitors from the market. This puts production and pricing power in the hands of a few—or even one—players, which can be harmful to consumers. Government agencies often put antitrust laws in place to prevent this from happening.
Disney-Pixar
The main advantage of horizontal integration is the strategically focused decision to penetrate a specific section of a supply chain. Horizontal integration allows a company to potentially acquire a competitor, gain greater insight into the market, expand its product line, or create economies of scale. Horizontal integration is a way for a company to simply do better at what it was doing before. Horizontal and vertical acquisitions both occur between companies that operate in the same industry. A horizontal acquisition happens between two companies that are in the same production stage while a vertical acquisition takes place between two companies that are in different stages of the production process. It allows the acquiring company to access equipment that is either closer to or further away from the end client.
This can reduce competition, potentially leading to higher prices and less choice for consumers. Because of these concerns, such strategies often require approval from regulatory authorities to ensure they don’t violate antitrust laws designed to maintain market competition. Contrasting horizontal alliance with vertical integration, where a company takes control of multiple stages of its supply chain, horizontal integration strictly involves companies at the same level of operation. This distinction is vital for companies looking to expand internationally or consolidate their position within an existing market. A horizontal monopoly involves horizontal integration to the point that the combined businesses entirely or nearly completely control a specific step in the supply chain. The company will likely fall under regulatory scrutiny in these cases, as creating a horizontal or vertical monopoly is usually considered an illegal business transaction.
Merger
Merging operations through horizontal integration allows companies to achieve economies of scale. Combining production facilities, distribution networks, and administrative functions enables integrated companies to spread fixed costs over larger outputs. Horizontal integration happens when similar companies amalgamate in the supply chain similar stage. Compared to vertical integration, which helps a company move earlier or later in the supply chain, horizontal integration strengthens a company’s present position along a manufacturing process. If horizontal mergers within the same industry concentrate market share among a small number of companies, it creates an oligopoly.
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The company Apple is an example of this, since it took advantage of its intelligence in the manufacturing of telephone products (iPhone) to open up new markets such as tablets. These days Apple is one of the biggest companies in the world in terms of having access to various markets in the world of technology. The merger of Exxon and Mobil to form ExxonMobil (XOM) is another great example of horizontal integration. As individual entities, the two were similar in size and operation and joined together to form a stronger company in 1999.
This move toward horizontal cooperation allowed Disney to strengthen its market power and increase its market share in the film and television sectors. Post-merger, Marriott has access to over 6,000 properties in about 125 countries. The biggest challenge this deal faced was merging the loyalty programs of the two chains because of the different benefits each program provides. The merger was officially complete, consolidating the various loyalty programs into one during the second half of 2018.
- It happens when one company acquires another within the same industry where the target is at a different part of the supply chain.
- It can lead to increased market power and control for the companies that successfully engage in this strategy, allowing them to dominate market segments or even entire industries.
- When a company is trying to grow itself, it usually has so much money to invest in.
Legal and regulatory hurdles can delay or block mergers, especially if there is concern about reduced competition in the market. Finally, customer retention can be an issue if the integration process leads to service disruptions or changes that affect the customer experience. Companies must carefully plan and execute their integration strategies to overcome these challenges and realize the potential benefits of horizontal integration. To strengthen their market presence and competitive positions, companies will execute one of three horizontal integration transactions–mergers, acquisitions, or internal expansion.