Divestopedia Explains Horizintal IntergrationHorizontal integration is pursued by a firm to strengthen its position in the industry. Acquiring production units that are complementary or competitive creates economies of scale or reduces competition. If all firms of a particular industry merge to create a monopoly, it becomes lateral integration. However, if industry concentration increases significantly, anti-trust issues may arise. The purpose of horizontal integration is to grow the firm in size, increase product differentiation, achieve economies of scale, reduce competition or access new markets. In the current scenario, horizontal integration also leads to reduction in the cost of international trade by operation of production units in foreign markets. However, even when potential benefits exist, there must be an explicit strategy formulated by the management for materialization of these synergies.
Horizontal integration is effective when:
- The firm is competing in a growing industry
- The competitors lack some skills, capabilities, competencies or resources that a firm already possesses
- Economies of scale have significant effect
- The firm has sufficient resources to manage mergers and acquisitions
- If it leads to a monopoly, it is permitted by the government
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