Horizontal integration is a business expansion strategy where a company merges with or acquires another company that operates within the same industry and at the same stage of the production process. This approach represents a path for growth that is focused on consolidating market presence by combining with a direct competitor. The decision to pursue this type of integration is a strategic move used to strengthen a company’s position against rivals and expand its overall reach.
Defining Horizontal Integration Clearly
The defining characteristic of horizontal integration is that the two combining entities exist on the same level of the value chain. This means a manufacturer merges with another manufacturer, or a retailer acquires a competing retailer. The companies involved are typically direct competitors, offering similar products or services to the same customer base.
The structure of the deal involves combining operations that perform similar functions, such as two smartphone manufacturers merging to create a single, larger technology entity. For example, if two regional coffee shop chains join forces, they are pursuing horizontal integration because both operate at the end-stage of the coffee supply chain, selling finished goods to consumers.
The Strategic Goals of Horizontal Mergers
Companies pursue horizontal mergers primarily to achieve three distinct business outcomes that strengthen their market standing.
One goal is realizing economies of scale, which involves reducing the production cost per unit by increasing the overall volume of output. The combined entity can often negotiate better prices for bulk raw materials or utilize shared distribution networks, thereby lowering the average cost of production.
A second objective is significantly increasing market share by eliminating a competitor. When a company acquires a rival, it instantly gains access to that rival’s customer base, intellectual property, and geographic footprint. This consolidation strengthens the new company’s position and market power against remaining competitors.
The third outcome is synergy, where the combined value of the two companies operating as one is greater than the sum of their individual values. Synergy is realized when complementary resources, such as creative talent and established distribution systems, are merged to create a more efficient and profitable operation. This combined capability allows the new entity to offer a broader range of products or services and enhance profitability.
Real-World Examples for Easy Understanding
High-profile deals demonstrate the concept of horizontal integration across various industries.
A clear example from the entertainment sector is The Walt Disney Company’s 2006 acquisition of Pixar Animation Studios. Both companies operated in the same industry—creating and distributing animated content.
Another notable instance occurred when Marriott International acquired Starwood Hotels and Resorts Worldwide in 2016. Both businesses were hotel chains competing to offer lodging, and the merger created a single, substantially larger hotel group. Similarly, the combination of T-Mobile and Sprint, two major mobile carriers, represents a horizontal merger within the telecommunications space.
In social media, Meta Platforms (formerly Facebook) utilized this strategy by acquiring platforms like Instagram and WhatsApp. They all operate within the same industry of digital social networking and content sharing. These acquisitions allowed the parent company to consolidate its position and reduce competition.
How Horizontal Integration Differs from Vertical Integration
The primary distinction between horizontal and vertical integration lies in the relationship between the companies being combined. Horizontal integration focuses on businesses at the same point in the supply chain, while vertical integration involves combining companies that operate at different stages of the production process. Vertical integration is an expansion strategy that moves backward or forward along the supply chain.
Backward vertical integration occurs when a company acquires a supplier, such as a car manufacturer buying a tire company to gain control over raw materials and input costs. Conversely, forward vertical integration is when a company acquires a distributor or a retailer, allowing it to control the sale and distribution of its finished goods. The goal of vertical integration is to streamline the supply chain, reduce costs, and ensure consistent product quality.
Horizontal integration, by contrast, focuses on market consolidation and increasing production capacity for the same product or service. The main purpose is to increase market power by removing a direct rival. A merger between two different car manufacturers is horizontal, but a car manufacturer acquiring a steel mill is vertical.