Horizontal integration

From CEOpedia | Management online

Horizontal Integration is a competitive strategy, focused on the acquisition or merger of companies, which can be adopted by organisations that operate in the same industry or that develop identical products/services (Millenaar 2016). In this way, companies combine its assets and production processes, getting new competitive advantages over their competitors.

Acquisition is a strategy employed by companies with the aim of obtaining the majority or the entire share portfolio of one of the parties involved. Through this procedure, companies aim to create positive synergies that allow for greater production efficiency, an increase in market share, and consequently a higher profit (Chen et al 2021).

Moreover, the companies also have the possibility of merging with other organisations and ceasing to act individually in the markets. In this way, both companies pool its resources, with the main objective of creating a company with more power (Kudełlo et. al 2015)..

Implementation of horizontal integration

For horizontal integration to be successfully implemented, it is essential that companies are guided by certain aspects. First, it is important to conduct a market analysis in order to understand the possible partners that fit with its objectives and values. In addition, it is fundamental to select companies that have complementary and advantageous competences for the development of the business. In the next phase, after the selection of the company, it is necessary to establish an agreement where the essential aspects of the integration are defined. Finally, and already with the horizontal integration implemented, companies should analyse the acquired resources, technology and know-how, managing them in order to achieve a greater presence in the market.

Advantages and disadvantages of horizontal integration

In order to ensure that the implementation of this type of strategy is carried out effectively, it is necessary that companies analyse in advance all the advantages and disadvantages associated with horizontal integration (Kenton 2022).

According to the Managerial Economics Principles (2012), the company will benefit from a set of privileges:

  • Achieve economies of scale, allowing an optimisation of the production process through the production of goods in large quantities, reducing costs per unit produced.
  • Enjoy economies of scope, which allows the simultaneous production of different products at a lower cost than when producing it individually.
  • Gain a greater market share, since it combine the percentages that each company held and, furthermore, since the number of consumers is greater, the number of sales will be greater.
  • Obtain greater negotiating power over suppliers and distributors since, as two companies become one, the supplier no longer has at his disposal several companies with which he can cooperate. Thus, the company's power of substitution is greater than that of the suppliers/distributors, which gives it greater bargaining power that benefits it.

On the other hand, horizontal integration may not generate the success desired by the company in the following situations:

  • In the case of an acquisition, the acquired company will have less decision-making power and control over the operationalisation of the company, since the main company is responsible for managing the entire organisation (Manning & Baines 2004).
  • Possibility of conflicts of interest, if there are diametrically opposed analysis perspectives, values and/or organisational cultures (Ceausescu 200).

Conclusion of horizontal integration

In conclusion, horizontal integration allows a company to increase its notoriety and reputation in the market, leading to an increase in revenues and, consequently, in profits. However, it is important to note that this strategy may not originate an added value for the companies involved. Thus, it is necessary to carefully analyse the pros and cons associated with horizontal integration before implementing it.

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Author: Ana Inês Jorge Gonçalves, Inês Espregueira Guerra Teixeira de Morais, Marta Gomes Ribeiro