Horizontal integration definition
/What is Horizontal Integration?
Horizontal integration occurs when two businesses merge that produce goods or services at the same level in the value chain. The reason for doing so is to create economies of scale, as well as to cross-sell to each other’s customers. This can result in the creation of a monopoly or oligopoly. A horizontal integration is one of the most common types of merger, since it essentially means that competitors in the same market are combining their operations and assets.
Examples of Horizontal Integration
Here are several examples of horizontal integration:
Two manufacturers of electric engines merge. One entity produces engines for cars, while the other entity produces engines for trucks.
Two manufacturers of retail homes merge. One entity builds lower-income housing, while the other constructs high-end homes near golf courses.
Two consulting firms merge. One entity provides software development services in the defense industry, while the other entity provides the same service, but in the oil and gas industry.
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Advantages of Horizontal Integration
The horizontal integration strategy may be employed for several reasons, including the following:
To gain production efficiencies by producing more units at central manufacturing facilities.
To gain purchase volume discounts by buying raw materials in bulk.
To plug holes in the product line of the acquirer with products made by the acquiree. This is an especially fine advantage when there is evidence that customers are leaving because of specific holes in the product line.
To gain sufficient mass in the marketplace that the resulting combined company may make price increases stick.
To eliminate duplicative positions within the companies, thereby stripping out costs. For example, the combined entity could reduce its sales force by having fewer salespeople sell the entire product range of both organizations.
Disadvantages of Horizontal Integration
Horizontal integration has some potential disadvantages. These include the following:
Regulatory scrutiny. Large-scale horizontal integration may raise concerns about monopolistic practices, leading to regulatory investigations or legal challenges.
High acquisition costs. Acquiring competitors can be expensive, potentially leading to financial strain if the expected synergies are not realized.
Integration challenges. Merging two companies often involves integrating different corporate cultures, operational systems, and management styles, which can lead to conflicts and inefficiencies.
Reduced flexibility. A larger, more complex organization may become less agile and slower to respond to market changes or emerging competitors.
Overdependence on one market. Horizontal integration often focuses on consolidating within a specific market or product range, reducing diversification and exposing the company to sector-specific risks.
May alienate customers. If horizontal integration reduces competition significantly, it might lead to higher prices, lower quality, or fewer choices, potentially alienating customers.
Employee morale issues. Mergers often lead to redundancies as the company eliminates overlapping roles, which can cause employee dissatisfaction and damage workplace morale.
Market saturation. Horizontal integration can lead to market cannibalization, where the company’s own products or services compete against each other, reducing overall profitability.
By weighing these disadvantages, businesses can better evaluate whether horizontal integration aligns with their long-term strategy and risk tolerance.
Anti-Trust Aspects of Horizontal Integration
If there are several horizontal integration mergers within the same industry that concentrate market share with a small number of companies, this is considered an oligopoly. If the resulting market share is largely held by one entity, this is considered a monopoly. In either case, the acquirer may be investigated under anti-trust laws, and a proposed acquisition may be rejected by the government.
The Difference Between Horizontal and Vertical Integration
A different type of merger is vertical integration, which is when companies merge that are in different positions in the value chain. For example, a car manufacturer could buy a producer of car tires, in order to secure this input to its production line. The key difference between the horizontal and vertical integration concepts is that horizontal integration occurs among similar businesses, while vertical integration occurs between suppliers and customers.