What is Horizontal Integration?
Horizontal integration is a business strategy where a company expands its operations by acquiring or merging with other companies that operate at the same stage of the production process or within the same industry. This strategic move allows the acquiring company to increase its market share, expand its product offerings, and achieve economies of scale.
Understanding Horizontal Integration
Horizontal integration involves the expansion of a company’s activities into new markets or product lines that are closely related to its existing business operations. Here are some key points to understand about horizontal integration:
- Expansion within the Same Industry: Unlike vertical integration, which involves expanding into different stages of the production process or supply chain, horizontal integration focuses on acquiring or merging with companies that operate within the same industry or market segment.
- Increased Market Share: Horizontal integration enables companies to increase their market share by combining their operations with those of their competitors or complementary businesses. By consolidating resources and eliminating competition, the acquiring company can strengthen its position in the marketplace.
- Diversification of Product Offerings: Through horizontal integration, companies can diversify their product offerings and enter new market segments. This allows them to cater to a broader range of customer needs and preferences, reducing their dependence on a single product or market.
- Achievement of Economies of Scale: By combining operations with other companies in the same industry, horizontal integration can lead to economies of scale. This means that the combined entity can benefit from cost savings, increased efficiency, and higher production volumes.
Types of Horizontal Integration
Horizontal integration can take various forms, depending on the nature of the expansion and the objectives of the acquiring company:
- Acquisitions: Companies may pursue horizontal integration through acquisitions, where they purchase other businesses operating within the same industry or market segment. These acquisitions may be friendly or hostile, depending on the willingness of the target company to be acquired.
- Mergers: Horizontal integration can also occur through mergers, where two or more companies combine their operations to form a single entity. Mergers can create synergies between the merging companies and lead to enhanced competitiveness in the marketplace.
- Strategic Partnerships: In some cases, companies may pursue horizontal integration through strategic partnerships or alliances with other businesses in the same industry. These partnerships may involve joint ventures, licensing agreements, or collaboration on specific projects or initiatives.
Example of Horizontal Integration
Let’s consider an example of horizontal integration in the retail industry:
Company A is a leading supermarket chain that operates a network of grocery stores across the country. In an effort to expand its market presence and increase its competitiveness, Company A decides to pursue horizontal integration by acquiring Company B, a smaller rival supermarket chain.
Through the acquisition, Company A gains access to Company B’s network of stores, customer base, and brand assets. By consolidating operations, eliminating duplicate costs, and leveraging synergies between the two companies, Company A is able to strengthen its position in the retail market and increase its market share.
As a result of the horizontal integration, Company A is able to offer a wider range of products and services to its customers, achieve economies of scale in purchasing and distribution, and enhance its overall competitiveness in the industry.
Conclusion
Horizontal integration is a strategic business move that involves expanding operations by acquiring or merging with other companies operating within the same industry or market segment. By combining resources, increasing market share, and achieving economies of scale, companies can strengthen their position in the marketplace and drive sustainable growth and profitability.
Reference:
- Investopedia. (2022). “Horizontal Integration.” Investopedia. Link