Horizontal Integration: Benefits and Drawbacks

Undergoing horizontal integration can be very beneficial for two companies. Typically, this happens when two companies competing in the same industry at the same stage of production decide to unify. But before considering it, businesses should weigh the pros and cons of the strategy and how becoming one large organization would play out for their bottom line.

When it is done correctly, there are many advantages to horizontal integration. These include (but are not limited to) an increase of market power or market share, reduced competition, and increases in other synergies. But as with anything else, there are also downsides. Among them are antitrust issues and legalities, a reduction in flexibility, and destroying value rather than creating it.

We'll look a little more closely at some of the pros and cons of this strategy. But before that, here are a couple of well-known examples of horizontal integration you may recognize.

As mentioned above, horizontal integration takes place when two companies that compete in the same industry at the same stage of production merge. One such example is Disney's acquisition of Pixar in 2006. Disney was facing stagnation in the market and was rejuvenated after the purchase of Pixar. The two companies were operating in the same (animation) space and were able to merge their technology, thereby increasing market share and profitability.

The merger of Exxon and Mobil is another great example of horizontal integration. As individual entities, the two were similar in size and operation and joined together to form a stronger company in 1998.

There are numerous benefits to undergoing horizontal integration.

Larger Market Share

The most obvious benefit is an increased market share or market power. When the two companies merge, they also combine the product base, technology, and services that are available on the market. With more products under one name, the new company can increase its foothold among consumers.

Bigger Base of Customers

Because the two companies may be operating in the same industry, they may not necessarily have the same consumer base. By merging the two companies into one, the new organization now has access to a larger base of customers.

Increased Revenue

By increasing its customer base, the new company can now boost its revenue. In fact, it's typical for companies that undergo a horizontal integration to see more revenue than when they were individual entities.

Additional Benefits

Here are a few other advantages of going through horizontal integration:

• Reducing competition
• Increasing other synergies such as marketing
• Creating economies of scale and economies of scope
• Reducing other production costs

As with any process, there are also disadvantages that must be considered along with the benefits.

Regulatory Scrutiny

The first and most troublesome is the level of scrutiny this kind of strategy faces, especially from government agencies. Big mergers like these are the reason why antitrust laws are in place. These laws prevent big corporations from acquisitions and mergers that would narrow the competitive market and possibly create a monopoly. This is seen as being a predatory act, giving one player dominance in the market. It creates the idea that the large corporation may take advantage of consumers with higher prices and narrow product/service choices.

Additional Cons

Other cons of horizontal integration include:

• Stunting economic growth of the new enterprise.
• Reduced flexibility: This happens because the company is now a larger organization. The addition of more personnel and processes means the need for more transparency and therefore, more accountability and red tape.
• Destroying value rather than creating it: This happens because the synergies never materialize despite the costs of the horizontal integration.