Horizintal Intergration

What Does Horizintal Intergration Mean?

Horizontal integration refers to the acquisition of additional business activities at the same level of the value chain. The different firms involved in horizontal integration are at the same stage of production that facilitates resource sharing. A firm may diversify by growing horizontally in unrelated businesses. The firm expands its control over other similar or closely related businesses.

Divestopedia Explains Horizintal Intergration

Horizontal 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

Horizontal integration is more relevant in industries with high fixed costs as higher output levels can be achieved at lower per-unit costs. They also result in more efficient distribution networks.