Horizontal Integration

Strategic management is all about initiatives taken by the middle and mostly upper echelons of the management with respect to optimum utilization of business resources. This is done as a means of achieving higher profitability, from enhanced business performance, with the external business environment acting as the functional and evaluative background for all such activities and undertakings. Horizontal integration is one such tool of strategic management which is used to strengthen the position and presence of a business in numerous markets. This strategic management tool is basically a marketing-based integration, as opposed to vertical integration which is a style of management control for industrial supply chain. While the former is an attempt to influence the market in its favor, the latter attempts to coordinate and control the supply chain of a consolidated vertical production process and supply/ distribution chain. Saying that, let's get to the details of horizontal integration now.

What is Horizontal Integration?

As per horizontal integration definitions provided by Investopedia and Wikipedia (respectively), horizontal integration takes place "when a company expands its business into different products that are similar to current lines" and "when a firm is being taken over by, or merged with, another firm which is in the same industry and in the same stage of production as the merged firm, e.g. a car manufacturer merging with another car manufacturer. In this case both the companies are in the same stage of production and also in the same industry. This process is also known as a 'buy out' or 'take-over'." If we try and dissect both these definitions, two main points come to the fore - same industry and same stage of production.

So, the question arises that why would a company want to integrate with another which practically deals with the same product, that too, in the same stage of production? Well, the fact that both firm's products are the same and both are in the same stage of production has a very important implication - they share the same market. Well, I guess, now the chief reason for such integration must have struck you! Yes! Horizontal integration is a major tool for eliminating competition! Besides buying out competition, horizontal integration also brings about economies of scale, stocks and scope involved in increased scale of production. Also, in terms of marketing efforts also, a single, united, consolidated campaign is far more effective for customer conversion than a dozen small business enterprises fighting tooth and nail for a share in the same consumer market.

Horizontal Integration Examples

Examples of horizontal integration can be seen in the form of a number of significant mergers and acquisitions around the world. One of the most prominent instances of horizontal integration in recent times is Tata Steel's acquisition of Corus. The acquiring of a high value product manufacturer by one of the lowest cost steel producers in the world boasting of self-sufficiency in raw materials meant that the steel market would now have access to a product which boasted of high quality at a lower price.

Another example of horizontal integration is the GAP Inc. retail clothing corporation which controls Banana Republic, GAP and Old Navy. This enables GAP Inc. to cater to different customer needs without having to compete with either Banana Republic and Old Navy.

Horizontal Integration vs Vertical Integration

When a firm, which is part of a particular industrial supply and distribution chain, acquires or merges with other firms within the same chain, it is known as vertical distribution. The purpose here is to cut out on supply chain inconsistencies and hold-up issues. On the other hand, Horizontal integration is when firms dealing in the same product line which are at the same stage of production combine together (either via media merger, acquisition, takeover, amalgamation, etc.) with a purpose of earning manufacturing and marketing economies and eliminating competition. Therefore, vertical integration coordinates all stages in a production process while horizontal integration is an attempt to dominate a market by eliminating competition once for all and to earn various manufacturing and marketing economies.

That explains what horizontal integration is all about. It is a management tool that is aimed at ousting competition by taking over competitors rather than trying to outrun them in the market, thereby, reducing marketing costs involved in wasteful competitions. However, the market dominion brought about by such integration often sow the seeds for market monopoly and many anti trust laws have been enacted with a bid to keep a check upon such anti-competitive conduct of firms who participate in horizontal integrations.