Horizontal integration is where one business merges with/acquires another business operating at the same level of value in the same industry. Doing this means increased market share and more power over distributors and suppliers, and the company can create economies of scale (where the company increased production and lowers costs)
The contrast is vertical integration where one business acquires suppliers, distributors or retail locations and then brings them under the company's control.
Example of horizontal integration
The Walt Disney Company acquired 21st Century Fox in March 2019. The two are competitors in the same industry, so this move means Disney's market share will increase given Fox's market share that has since been acquired, and Disney will have more power over suppliers and distributors (cinemas, DVD producers, subscription movie channels like Sky Cinema/Sky Box Office, and streaming services), and new economies of scale will be created once the deals that existed before the merger come to an end.
Example of vertical integration
Netflix started as a DVD rental company and then moved onto online streaming of Films and TV shows licensed from film and TV studios and channels like 20th Century Fox, MGM, AMC and USA Network. This required using distributors for the DVDs going to customers, suppliers of the DVDs themselves and suppliers of the media (ie the studios). Then executives realised they can improve their profit margins by creating their own original content like The Witcher, The Umbrella Academy and Stranger Things.
Advantages of horizontal integration
Synergies - economies of scale for things like R&D and marketing; and economies of scope making the manufacturing of different products more cost-effective than manufacturing them on their own.
Horizontal integration is also driven by urgent or imperative marketing points for both companies/brands. By diversifying product offerings, each business' market will increase and may even provide for more cross-selling opportunities.
Reducing competition is a big one. Look at the Disney-Fox merger. By acquiring Fox, Disney has eliminated a competitor on the same level as them. It also reduces competition from established competitors, as well as potential new entrants into the industry.
Downsides of horizontal integration
There is the potential that negative synergies may appear which can reduce the overall value of the business. This can happen if the larger firm becomes too big or complicated to manage effectively, or if the two combining firms have different styles of leadership it could result in culture clashes.
Also if the newly formed firm becomes too big ad it threatens healthy competition in the market, it can attract the attention of the Competition and Markets Authority (CMA) who will review to see if the proposed merger/acquisition might result in market dominance.
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Credit: Cover image photo by Emily Morter on Unsplash
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