Reviewed by Aug 27, 2020| Updated on
What is Horizontal Integration?
Horizontal integration refers to the mode of acquiring a business operating at par in the value chain either in a similar or different industry. It is opposite to vertical integration, where entities expand into upstream or downstream activities, that are at different production stages.
How does Horizontal Integration work?
The real motive behind many horizontal mergers is that corporations want to reduce "horizontal" competition in the form of replacement competition, possible new entrants' competition, and existing rivals' competition.
Horizontal integration involves competitive strategy which can develop economies of scale, and build market power over distributors and suppliers. It also involves improving product differentiation and helps entities grow their business or penetrate new markets. By merging two companies, they will be able to increase sales than they might have done individually, due to the synergy.
Upon the success of horizontal integration, it may lead to a reduction of competition which is often at the expense of its customers. If horizontal integrations take place to consolidate market share among a small number of companies within the same sector, it constitutes an oligopoly. In case one company ends up with a dominant market share, it leads to a monopoly. Therefore, the genuineness of horizontal integration is verified under the Indian Competition Act.
Advantages and Disadvantages of Horizontal Integration
Companies commit to horizontal integration to benefit from synergies. Marketing, Research and Development (R&D), manufacturing, and distribution can have economies of scale or cost synergies. Alternatively, there may be economies of scope that allows the manufacturing of different products simultaneously as more cost-effective rather than manufacturing them alone.
The formation of Brook Bond Lipton India Ltd is an example of horizontal integration in India.
The combination of goods or markets may also understand synergies. Marketing imperatives also push horizontal integration. Diversifying product offerings can create cross-selling opportunities and increase the demand for any company.
A retail business that sells clothes may also choose to provide products, or may combine with a similar company in another country to establish a foothold there and avoid creating a distribution network from scratch.
On the flip side, as in every merger, horizontal integration doesn't always produce the desired synergies and added value. It may also result in negative synergies that decrease the overall profitability of the firm if the larger organisation is too unwieldy and inflexible to handle. Alternatively, the merged businesses may encounter difficulties created by radically different types of leadership and cultures of companies. And if it threatens a merger with competitors, it could attract the attention of the Competition Commission of India.