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Imagine a scenario where your business becomes so big that you start acquiring your competitors in the same industry! This strategy will help you further scale your business and is known as horizontal integration. By merging your business with the other organization, you can aim at increasing market share and serving more customers.
Many organizations across the world indulge in horizontal integration, which makes it easy for them to reduce competition. While it seems an easy way, each merger and acquisition gets cleared by a regulator that checks if there’s no violation of antitrust laws.
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Horizontal Integration Meaning
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Horizontal Integration Examples
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Types Of Horizontal Integration
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Advantages Of Horizontal Integration
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Disadvantages Of Horizontal Integration Strategy
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Business Scalability: Essential For Every Organization
Horizontal Integration Meaning
When two businesses that manufacture goods or services at the same level of the value chain unite, this is known as horizontal integration. The goal is to achieve economies of scale while also cross-selling to each other’s clients. A monopoly or oligopoly can form as a result of this.
One of the most typical types of mergers is horizontal integration, which involves competitors in the same market integrating their operations and assets.
Here’s a basic example to understand horizontal integration meaning: if a department store enters a new market in a different country, it can decide to merge with a similar one in another nation to begin operations there.
The goal would be to generate greater money following the merger. In an ideal world, the organization would make more money than if it were two separate businesses.
Horizontal Integration Examples
You can find many horizontal integration examples in day-to-day life. In the startup ecosystem, many acquisitions take place on a regular basis. Besides, many traditional organizations often prefer a horizontal integration strategy to diversify into different verticals.
Some of the major horizontal integration examples from the industry include:
1. Hotel Chains Marriott and Starwood
Starwood Hotels & Resorts Worldwide, Inc., was acquired by Marriott International, Inc., in 2016. This resulted in the world’s largest hotel organization being formed at that time.
The purpose of the merger was to give the corporation a broader portfolio of properties. While Marriott was prominent in the luxury, conference and resort areas, Starwood had a significant international presence.
Following their merger, the two organizations owned a total of 5,500 hotels and 1.1 million rooms around the world.
2. 21st Century Fox And The Walt Disney Company
The Walt Disney Company completed its acquisition of 21st Century Fox in March 2019. The merger aimed to improve Disney’s content and entertainment alternatives to meet customer expectations, grow into the foreign market and extend its direct-to-consumer products, such as ESPN+ and Disney+ and the two organizations’ joint ownership position in Hulu.
Other horizontal integration examples include the many acquisitions that Reliance Industries has made, such as Haptik, Saavn, Embibe, among others.
Types Of Horizontal Integration
Horizontal integration takes place in the form of mergers, acquisitions and takeovers:
- A merger is the uniting of two independent organizations of equal size to form a single entity
- The purchase of another organization is referred to as an acquisition
- The acquisition of an organization that doesn’t wish to be acquired is known as a hostile takeover
Horizontal integration in strategic management can be a good strategy if:
- The organization competes in a rapidly expanding industry
- Competitors lack some of the qualities, competencies, skills or resources that the organization has
- Horizontal integration would result in a government-sanctioned monopoly
- Scale economies would have a big impact
- The organization has enough resources to handle mergers and acquisitions
As far as the types of horizontal integration are concerned, an organization can choose either of the three above-mentioned types to go ahead with the horizontal integration strategy.
Advantages Of Horizontal Integration
Horizontal Integration in strategic management plays an important role in not only providing scopes of expansion to organizations but also helping organizations save on certain costs.
Some of the advantages include:
- Reduced expenses: Horizontal integration results in the formation of a larger organization that offers more services and goods. With reduced expenses comes greater economies of scale
- Improvement in differentiation: A combined organization will be able to provide more product or service options with horizontal integration
- Increase in market dominance: With integration, the larger corporation gets more dominance among its suppliers, distributors and customers
- Less competition: As a result of industry consolidation, there are fewer organizations functioning in the industry and rivalry is less severe
- Gaining access to new markets: Integrating with an organization that produces the same items but operates in a different region helps an organization to gain access to newer markets
Now, let’s look at some drawbacks of horizontal integration.
Disadvantages Of Horizontal Integration Strategy
Here are some reasons why this strategy doesn’t work:
- Mergers and acquisitions rarely add value to businesses as many times projected synergies never materialize and frequently fail
- Owing to a lack of competition, the horizontal integration can develop into a monopoly, which many countries strongly oppose
- Large enterprises are more difficult to manage and less adaptable when it comes to presenting new products to the market
So, you can see that even this strategy has some pros and cons. Evaluate the same before you decide whether to implement it or not.
Business Scalability: Essential For Every Organization
In today’s era, if a business is scalable, an organization would be able to earn profits easily and investors will also be interested in the scalable business model. Often, the organizations find it difficult to make decisions related to mergers and acquisitions because they involve certain costs and come with a risk, too. During such times, managers or the top leadership team needs hand-holding so that they continue their journey on the right track and grow their organization.
Select a Strategy is a Harappa pathway that will help you steer an organization through the VUCA world of business. Learn about horizontal and vertical integration and how they feature as an integral part of an organization’s growth strategy. Learn more.
