Advantages & disadvantages of horizontal integration
Horizontal integration refers to expansion of business at the same point in the supply chain. This strategy is adopted when companies have their existence in the same product line or market.
The goal of horizontal integration is to consolidate the market by acquiring or merging like companies and exploit the market by monopolising the industry. The phenomenon is also referred to as horizontal expansion because it is an expansion of a firm within an industry for increasing its market share for a particular product.
Techniques of Horizontal Integration
Horizontal integration can be done either by acquiring a company or by merging with it. Acquisition happens when one company purchases or acquires another company and becomes the new owner, whereas merger is a strategy when two companies merge with each other without losing their individual identities, to form a new company for a participating share.
Economies of Scale
Economies of scale provide cost advantage to the companies through expansion of their product output. When goods are produced in larger quantities, the average cost per unit reduces, thus increasing the profitability of the company. Integrating horizontally provides the companies with broader access to different unreached markets, resulting in an increase in demand of their product. Reaching to economies of scale by horizontal integration can help a company to achieve cost monopoly and eliminate competition from the market.
- Economies of scale provide cost advantage to the companies through expansion of their product output.
- Integrating horizontally provides the companies with broader access to different unreached markets, resulting in an increase in demand of their product.
Economies of Scope
Horizontal integration helps the companies to achieve economies of scope. Economies of scope provide cost advantage in production of two or more products. Companies can share resources common to different products, thus removing cost redundancy. Integrating with another company can increase the number of products promoted at the same advertising cost and also results in reduction in per-unit distribution cost. Horizontal integration creates synergies between the companies.
- Horizontal integration helps the companies to achieve economies of scope.
Increasing Market Power
Integrating horizontally consolidates the industry and creates monopoly. This helps the companies to gain power in the market, as well as dominate supplies and downstream channel members in terms of cost and quality.
Integrating horizontally helps a company to enter foreign markets directly. This reduces the cost of international trade by allowing the company to both produce and sell the product in the foreign market.
Horizontal integrations consolidate the market by allowing companies to acquire or merge with other companies, putting small companies out of business. The new company tries to dominate the supplies, vendors and customers, in terms of price and quality of the product. Customers are bound to purchase at higher price due to unavailability of similar products in the market.
Synergy creation is the main objective of horizontal integration. However, sometimes companies fail to materialise the anticipated gain because they do not focus adequately on creating corporate synergy before integration.
Shilpi Singh has been working as a freelance writer since 2009. Her areas of expertise are environmental studies, carbon emissions, renewable energy, strategic management and organizational behavior. Singh is a chemical engineer with specialization in alcohol technology and a Master of Business Administration in power and energy management.