What Are The Advantages And Disadvantages Of Horizontal Integration?
The intention of any business, as every entrepreneur knows, is to gain a competitive edge by either going a level up from
By teammarquee . January 8, 2022
The intention of any business, as every entrepreneur knows, is to gain a competitive edge by either going a level up from their competition or eliminating their competition altogether. If there is one pebble that can hit both the birds in one shot, it would be horizontal integration.
Suppose a car manufacturing company merges with another car manufacturing company – it would become a classic case of horizontal integration. However, if a car manufacturing company merges with a construction firm, it would become an altogether different ball game. The textbook horizontal integration definition looks something like this –
What does horizontal integration mean?
Horizontal integration is a process where one company takes over, acquires, or merges with some other company in the same value chain.
It is a competition-focused business strategy which is used by businesses to grow their company’s market hold, increase the service or product offering, build economies of scale, lower competition and in the end increase their revenue.
Typically, horizontal integration can happen in three ways: Merger, Acquisition, and Takeover.
While this answers the what part, in order to truly understand what horizontal integration stands for, it is important to understand the advantages and disadvantages of horizontal integration.
What are the different benefits of horizontal integration?
1. Ease of trade
The laws of different countries and governments are different. For a business looking to enter international waters, it would take a lot of resources and time to start their businesses from scratch. One of the key horizontal integration advantages lies in the fact that it brings down the international trade costs by building partnerships with foreign countries.
2. Economy of scale and economy of scope
Economy if scale happens when businesses are able to bring down the cost of bulky manufacturing and production. In horizontal integration because businesses are able to combine their production processes, the cost automatically lowers.
Likewise, economy of scope is another horizontal integration advantages. It happens when companies are able to achieve low marginal cost over time by manufacturing complementary services or products.
3. Lower competition
One of the most obvious advantages of horizontal integration can be seen in lowered competitions.
Businesses in one operative model and supply chain prefer to merge with, acquire, or takeover other businesses as their platform so that they can cut the competition down and in some cases even create a monopoly in the industry.
Horizontal integration often results into an efficient distribution of product, better production system, enhanced research and development, marketing and promotion, and competitive pricing offers. Because of the horizontal integration strategy, other competitors won’t be able to provide offers.
Above all, the combined efficiency and resources won’t necessarily develop something new, but it would always complement the current product portfolio.
5. Increased customer base
As two similar businesses combine their value offerings, they are able to reach a greater customer base compared to when they operate as individual units.
An increase in the customer count is one of the biggest reasons why businesses choose to enter the horizontal integration model.
What are some of the horizontal integration disadvantages?
Generally, acquisition and merger tend to eliminate competition from the market that leads to one player dominating it. The concept in itself goes against the idea of a free market. This is one of the primary reasons why horizontal integration teends to attract givernment laws, regulations, and scrutiny.
2. Management issues
Whenever two big companies combine their resources, they become too inflexible to manage. It usually happens because there are several unrelated operations, leadership styles, and office culture involved. These issues make it difficult for businesses to survive seamlessly.
Now that we have looked into what horizontal integration stands for and the horizontal integration pros and cons, it is time to look into some success stories of the horizontal integration business model.
Real-world horizontal integration examples
Facebook and Instagram
The social media giant merged its business with Instagram in 2012 for a whopping $1 billion. Since both the companies were in social media division, Facebook saw the acquisition as the perfect strategy to increase its dominance in the market.
The merger is the biggest case study in the energy sector. It involved combining two of the biggest energy companies in the USA which led to their domination. The Merger was known to cost Exxon $75 billion.
Vodafone Mannesmann merger
Touted as the largest merger in the history of the corporate world, it led to Vodafone becoming the biggest mobile operator in the world. What did it cost them? $180 billion.
Amidst the many benefits and disadvantages of the model, I know you must be wondering when is the right time to do horizontal integration. It is one of the common questions we get asked when entrepreneurs consult us for our merger and acquisition services. Let me answer it for you.
When is the right time to go for horizontal integration?
Businesses should majorly think in the lines of horizontal integration when they meet the following conditions;
- When they have enough operational and management capacity to handle integration
- If it provides them economies of scale
- The competitors and rivals don’t have the expertise they have
- When businesses are growing.
Hope we got you the answers you were looking for and the clarity you need to initiate your horizontal integration process. If there is something more you would like to explore, bookmark our blog section.
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