“We collectively, to get things done, work together as a team because the work happens horizontally in our company, not vertically. Products are horizontal.” Tim Cook
Horizontal integration is a competitive strategy companies use to consolidate their positions and set themselves apart from their competitors. It occurs when a business grows by purchasing related businesses—namely, its competitors.
In other words, horizontal integrations help companies expand in size, diversify product offerings, reduce competition, and expand into new markets.
Let’s take a closer look at horizontal integration’s primary forms, benefits, and drawbacks.
Primary forms of horizontal integration
Two separate entities create a new, joint organization striving to become a larger presence in their existing market. The brand of one of those two companies is usually retained, though the composition of operations and personnel are shared between the former individual companies. In addition, the product line of both companies is often similar and equally competitive in the market.
It occurs when one company outright takes over the operations of another company. Though the two companies technically join together, one company remains in control. The acquiring company’s staff, executives, and operations often remain in place, while the acquired company’s resources are integrated as management sees fit.
For example, Microsoft wanted to enhance its presence in the video game market. Therefore, it acquired Activision Blizzard in January 2022.
3- Internal Expansion
Through internal expansion, a company chooses to strategically change course and apply more resources in a different way.
Instead of committing capital to acquire an external company or transition with a merging firm, it decides to deploy those resources in-house to train staff, buy equipment, make capital investments, and grow a new branch of operations on its own.
For example, a restaurant can expand to offer catering companies, or a beverage manufacturer may branch off to make food products.
Benefits of horizontal integration
1- Larger market share
Successful mergers create a large market share for the integrated company or business units. Horizontally integrated firms improve market share through the expansion of business activities, cost synergies in marketing, combined product base, and shared technology, among others.
When two companies come together, they also bring different consumer bases. As a result, the new firm has access to a large customer segment.
By increasing its market share and consumer base, the new company has the ability to increase its revenue two-fold or more.
Drawbacks of horizontal integration
Despite the increased potential profitability of horizontal integration from the increased value and synergies, the strategy has some potential drawbacks:
1- Reduces flexibility
Horizontal integration may impede the flexibility of the acquired firm since it must conform to the operations of the bigger company.
2- Threatens competition
Mergers and acquisitions of large corporations usually lead to monopolies to the detriment of consumers. Market dominance may fuel unethical practices, such as indefinite hiking of market prices or the narrowing of products and services. For this reason, monopolies are subject to antitrust laws, not to mention the scrutiny of regulatory bodies.
Monopoly: the exclusive possession or control of the supply of or trade in a commodity or service.
Commodity: a raw material or primary agricultural product that can be bought and sold, such as copper or coffee.
Reasoning: the act of thinking about something in a logical, sensible way.
Perception: the ability to see, hear or become aware of something through the senses.
Decrease: make or become smaller or fewer in size, amount, intensity, or degree.
(Not) Measure up: it is not satisfactory; it doesn’t compare well with the standards.
“This designer’s work just doesn’t measure up to the quality we’ve come to expect.”
Zero in on: to zero in on something means to focus closely on it.
“We’ve tried a lot of strategies, but we need to zero in on what’s working.”
A man is judged by the company he keeps: a person tends to be very similar in attitude, character, ability, or personality to the people with whom they associate or spend time.
Be the face of (something): to represent or embody something as a whole in the eyes of the public.
Essential Financial Terms￼ https://www.englishpriority.com/essential-financial-terms/
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