BUSINESS

Horizontal Integration Examples to Help Drive Business Efficiencies

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We’re going to illustrate some horizontal integration examples to help you understand why it is used, and how it helps business to win against competing companies.

In a nutshell, horizontal integration refers to the acquisition of a company operating at the same level of the value chain. The acquired business can belong to either a similar industry or different one. Unlike in the case of vertical integration, whereby a company either expands upstream or downstream.

A few horizontal integration examples will enable us to clarify what it means in a better way. You can refer to some below, in this post.

 

Why is Horizontal Integration Used?

A horizontal integration is a business growth strategy (or a competitive strategy) that could be implemented for a number of reasons varying from:

  1. Diversification and pursuit of increased product offerings, increasing product differentiation
  2. Achieving economies of scale
  3. Trying to curb down the competition
  4. Gaining market power over suppliers and distributors
  5. Pursuing new markets through market development
  6. Expanding customer base

Horizontal integration thus helps create a competitive advantage over other players in the market. With the help of horizontal mergers, a small group of companies can gain a collective market share thereby creating an oligopoly.

Likewise, if the company is able to gain dominant market share then it can turn in to a monopoly.

 

Examples of Horizontal Integration

  1. Facebook acquiring Instagram: Facebook acquired Instagram in 2012 for $1 billion. Instagram is a photo sharing platform that uses 11 filters, before the acquisition it didn’t have any monetizing strategy, yet had a lot of potential. Both Facebook and Instagram have been known to belong to the same social media industry and had been in similar production stages. For Facebook, this acquisition meant gaining more market share and thus being able to strengthen its positioning in the social sharing space. Eventually, the opportunity also helped access new audience for Facebook and reduce competition thus resulting in higher synergy.
  1. Walt Disney acquiring Pixar Animation Studios: The Walt Disney Company acquired Pixar Animation Studios in 2006 for $7.4 billion. Before this acquisition, Walt Disney that started off as an animation studio had been facing creative stagnation and market saturation. Pixar which had contemporary technology when it comes of digitally animated movies appeared more innovative and also the right company to acquire knowing that it was in the same animation space and the right fit for horizontal integration. This deal led to an increased market share and amplified profits.
  1. Marriott International acquiring Starwood Hotels: In 2015, Marriott International acquired Starwood Hotels for a whopping $13.6 billion thus being able to create the world’s largest hotel chain. This helped the hotel chain gain a strong hold for market share in the international market.
  1. Exxon acquiring Mobil in 1998: In 1998, the two major oil companies merged and it turned out to be the biggest merger in corporate history. Exxon bought Mobil for $73.7 billion thus being able to have complete access to Mobil’s gas stations and reserves. This enabled operational efficiency and now ExxonMobil is the biggest oil company in the world and also the 10th largest in terms of revenue.

 

Advantages of Horizontal Integration

  1. As a result of a horizontal merger, the number of companies in an industry is reduced which mean less competition to deal with and utilizing time to focus on core competencies and enhancing operational or production efficiency. The company can then offer the customer a cost-effective product.
  2. It also enables economies of scale as a result of the reduction in per unit cost of production and there can be an increase in bargaining power as well as far as suppliers are concerned. This is made possible because of the resultant huge size and impact of the company resulting from the merger.
  3. Managing the target company becomes convenient for the top management because of it being in the same business rather than being a new business category altogether.

 

Disadvantages of Horizontal Integration

  1. The customers could be at the losing end if the company as a result of this kind of merger utilizes its monopoly power to keep demand for its products inelastic. This could also turn out to be a means of customer exploitation.
  2. The deal could later pave the way for a lack of corporate synergy between the parent company and that acquired hence the anticipated gain may fail to get materialized. Management restructuring could also backfire leading to a major HR issue within the company.
  3. This may also lead to a reduction of the firm’s overall value, meanwhile, it is implied that the firm would focus its entire attention on the integration including costs and manpower. If the technology becomes obsolete or futile because of the change in government policy then the firm would be at the losing end despite all the effort put in.

 

 

 

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