Horizontal integration is when companies producing similar products or services merge to increase market share. It is different from vertical integration, which aims to control all aspects of production. Horizontal integration can bring advantages, but unplanned expansion can lead to legal problems and overwhelm the business.
Horizontal integration is a business practice whereby companies that produce a similar product or provide a similar service merge. In general, a company will engage in horizontal integration to increase its market share for a certain type of product or service. Such horizontal growth is an important part of the study of business and microeconomics, and it is also an important strategic management skill. If a company manages to control all the production of a given product or service, it is said to have a horizontal monopoly.
Integration is considered horizontal only if all mergers and acquisitions are done at the same level of production. An auto company that merges with another auto company is participating in horizontal integration, but an auto company that buys a refinery or food chain is not. The goal of horizontal integration is not to control all aspects of production, from raw materials to the final product. It is, instead, being able to produce a large quantity of the same product or similar products and control a large part of the market.
Vertical integration, on the other hand, has the goal of controlling all aspects of the production of a product or service. An auto company that engages in vertical expansion would, in fact, try to acquire refineries, mines, factories, and whatever else is necessary to make the finished product. A monopoly formed through vertical expansion is known as a vertical monopoly. Horizontal expansion and integration is much more common than vertical expansion and integration.
Horizontal integration brings many advantages to those companies that can expand effectively. They can sell more of their products, which is generally the goal of any company. Companies that supply a few different products or services can manage their resources more effectively after the merger. Controlling more of a given market gives a company greater power over the flow of products and resources from other companies. All of this additional control, power, and productive capacity adds to the effectiveness of the business.
There are also potential drawbacks to horizontal integration. When a large enough share of a market is concentrated in a small number of companies, antitrust legal problems can arise. Furthermore, unplanned expansion can do more harm than good. If a business expands without a solid horizontal plan, it can quickly become overwhelmed. However, with proper planning, horizontal expansion can lead a business to great rewards.
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