In 2012, Facebook bought Instagram for $1 billion in cash and stock with the intention to keep Instagram management independent. Horizontal integration is a competitive strategy where business entities operating at the value chain level and within the same industry merge to increase the production of goods and services. JetBlue's 2022 merger with Spirit Airlines, Marriott's 2016 acquisition of Starwood Hotel & Resorts, Anheuser-Busch InBev's 2016 acquisition of SABMiller (brewers), AstraZeneca's 2015 acquisition of ZS Pharma (biotech), Volkswagens 2012 acquisition of Porsche (automobiles), Facebook Inc.'s (now Meta Inc.'s) 2012 acquisition of Instagram (social media), Disney's 2006 acquisition of Pixar (entertainment media), Mittal Steels 2006 acquisition of Arcelor (steel). This is in contrast to vertical integration, where firms expand into upstream or downstream activities, which are at different stages of production. ", Microsoft. A contrasting approach to horizontal integration is vertical integration, in which a company acquires a firm operatingin the same industry, but at a different stage of the production process. Get more info. However, these business combinations may create a monopoly power in an industry, which may be a disadvantage to the consumer. Travelopia is the world's largest collection of specialist travel brands. Just as you might expect, profits have a tendency to increase when firms increase the number and type of customers they serve. If two companies that offer virtually identical or similar goods or services decide to undergo a merger, the transaction is considered to be horizontal integration. | {{course.flashcardSetCount}} A retail business that sells clothes may decide to also offer accessories or it might merge with a similar business in another country to gain a foothold there and avoid having to build a distribution network from scratch. In horizontal integration, the fundamental purpose is to eliminate competitors or even gain control over a rival, business or customer base. Weaknesses of horizontal integration. Horizontal Talent. Indeed, the real motive behind a lot of horizontal mergers is that companies want to reduce competitioneither from potential new entrants, established rivals, or firms offering substitute or alternative goods. By merging, two businesses may be able to produce more revenue than they would have been able to do independently. A successful horizontal integration equips companies with the ability to cut down on costs by using the same research and development, technologies, marketing and advertising, production, and distribution. There are many disadvantages to horizontal integration. Businesses and companies use horizontal integration to strengthen their market position. Stay up to date with the latest practical scientific articles. By doing this, the company can combine resources and create a larger, more competitive entity. Large companies are more difficult to manage as they are less flexible in introducing new products to the market, Backwards vertical integration: when the company creates businesses that produce the raw material, Forward vertical integration: when the company buys or builds businesses in which to distribute its product/service, Compensated vertical integration: subsidiaries are established that supply raw materials and at the same time distribute the product. This was one of the main Mexican juice companies, with the objective of expanding its beverage portfolio mainly in Latin America. Horizontal integration is important because it allows a company to grow, expand, diversify, and gather a larger market presence. The company Apple is an example of this since it took advantage of its intelligence in the manufacture of telephone products (iPhone) to open up new markets such as tablets. One of the most important goals of any commercial company is growth. GATT History, Purpose & Members | What is GATT? Horizontal integration occurs within the same industry so that the entities involved can enhance their competencies together. Horizontal Integration is also a competitive strategy that can create economies of scale, increase market power over distributors and suppliers, increase product differentiation and help enter new markets. For this reason, horizontal mergers are heavily scrutinized by regulators, to see if they violate antitrust laws. 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Such horizontal mergers or acquisitions reduce competition from new potential rivals or from already established rivals that wish to acquire the company. Horizontal Integration involves the amalgamation of companies on the same level of the supply chain in an industry. Businesses in strategic alliances target outcomes that provide more resources, market, competence, and efficiency. Horizontal Integration - Merger Strategy. Horizontal integration is a competitive strategy where business entities operating at the value chain level and within the same industry merge to increase the production of goods and services. In this way, Coca-Cola was able to cover other fronts by taking over the manufacture of substitute products such as energy drinks in the first instance as occurred with the launch of Powerade and juices. The Grange and the Populist Party Platform: Goals, History & Definitions, Functional Strategy Areas & Examples | Third Level of Strategic Planning, Employee Salary & Benefit Surveys: Uses & Importance, Competitive Strategies in Fragmented, Emerging & Declining Industries. Your rating is more than welcome or share this article via Social media! Horizontal integration occurs when similar companies merge in the same stage of a supply chain merge. Following are the synergies that companies can obtain through horizontal integration, Improve the market power. Advantages and Disadvantages of Horizontal Integration, Horizontal Integration vs. Vertical Integration, Vertical Integration Explained: How It Works, With Types and Examples, Merger: Definition, How It Works With Types and Examples, Mergers and Acquisitions (M&A): Types, Structures, Valuations, What Is an Acquisition? Acquiring competitors and other similar firms is risky and can result in: Now it doesn't seem possible that a company could lose value after an integration but if the acquisition doesn't result in improved business and profit, that's exactly what could happen! By increasing its market share and consumer base, the new company has the ability to increase its revenue two-fold or more. "Global M&A Market Defies Gravity in 2021 Second Half. Diversifying product offerings may provide cross-selling opportunities and increase each business market. Vertical Integration is the opposite from Horizontal Integration, and it models the style of ownership and control. Horizontal integration occurs when a company acquires similar businesses to increase its profits. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU. A merger is an agreement that unites two existing companies into one new company. By merging two businesses there is a higher chance to generate increased revenues than the revenue that could be generated by either one of the merged organisations. Obtain economies of scale. Benefits of horizontal integration to both the firm and society may include economies of scale and economies of scope. horizontal integration definition: a situation in which a company buys another company that has the same activities: . If a company acquires or merges with another company and both firms are in a very similar industry, it is most likely an example of horizontal integration. [8][9] Both produce processed food for the consumer market. 5. How to cite this article: The two amalgamated entities should be better positioned to realize more revenue than they would have when operating independently. Supply Chain Integration Overview & Use | What is a Supply Chain Integration? Mergers and acquisitions of large corporations usually lead to monopolies to the detriment of consumers. 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Horizontal Integration: Benefits and Drawbacks. Plus, get practice tests, quizzes, and personalized coaching to help you Learn more. Horizontal integration in tourism examples Travelopia is a great example of a tourism organisation with lots of horizontal integration. The company is expanding from its current position in the manufacturing process and performing a backward vertical integration. [3] Companies looking to grow in size, increase revenue, expand to new product lines, and diversify operations may consider pursuing horizontal integration. Mattel is the worlds leading toy company. The acquisition business was officially closed at the price of $300 million in cash and 23 million shares. But there is such a thing as too much of a good thing. Or there may be economies of scale, which make the simultaneous manufacturing of different products more cost-effective than manufacturing them on their own. Both horizontal integration and vertical integration are the practice of a company expanding its current operations. Why Do Companies Merge With or Acquire Other Companies? The acquiring company's staff, executives, and operations often remain in place, while the acquired company's resources are integrated as management sees fit. Larger companies are also more difficult to manage, which can lead to less flexibility and reduced innovation, making the company less competitive in an ever-changing market. , a business entity acquires another business operating in the production process of the same industry. Procter & Gambles 2005 acquisition of Gillette is a good example of a horizontal merger that realized economies of scope. She has a BA in International Studies from Christopher Newport University and a MBA in Logistics & Supply Chain Management from Kaplan University. Volkswagen. At its core, horizontal integration is the term used to describe the merger of two or more corporations that operate in the same areas of production. Earlier you learned that firms were able to increase their market share and profits by introducing this strategy.
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