Horizontal Integration: Definition and How it Works

Market entry strategies allow companies to expand their operations to new markets. When companies contemplate entering new markets, they will utilize these strategies. Usually, companies will have several requirements when it comes to their expansion. These requirements will also dictate the specific strategy that they will use. Overall, these strategies fall into three categories.

There are two aspects of the expansions that companies must consider. These include products and markets. Usually, companies may have new markets or new products, or existing ones. When considering new products and new markets, the diversification of market entry strategies will be critical. One of these includes horizontal diversification or integration. However, it is crucial to understand what growth by diversification is.

What is growth by Diversification?

As mentioned, companies usually have to contemplate between expansion through new products or new markets. Companies only select one factor due to the lower risks and requirements. However, companies may also expand through new products in new markets at the same time. Therefore, they must use growth by diversification market entry strategies.

Growth by diversification includes market entry strategies that involve deploying resources into new products and new markets. Therefore, the company becomes involved in activities that are substantially different from their primary activities. If it involved only one of these, the company would have a familiar working base. However, growth by diversification involves a significant unfamiliar area for companies.

The growth by diversification strategy targets several areas simultaneously. It includes product lines, targeted customers, manufacturing and distribution arrangements, etc. Diversification strategies are usually riskier compared to others and also require a significant financial commitment. A failure in this field can set a company back financially.

Overall, growth by diversification allows companies to expand significantly. However, the increased rewards also come bearing more risks. There are several strategies that fall under this classification. These include horizontal integration, vertical integration, and conglomerate diversification. Each have these has its own advantages and disadvantages.

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What is Horizontal Integration?

Horizontal integration, commonly known as horizontal diversification, is a market entry strategy. It falls within the growth by diversification category and allows companies to explore new markets through new products. The strategy involves the development into activities that are competitive to a company’s present activities.

Horizontal products can impact a company’s own product line. Since it may include competitive products, it can affect its profits adversely. However, companies must ensure the benefits from these products exceed the losses from existing products. Similarly, horizontal integration may include complementary products as well. In this case, the company can increase its profits while also maintaining revenues from existing ones.

Lastly, horizontal integration may also include development into by-products. It has a similar impact as complementary products. By-products allow companies to benefit from existing processes while also maintaining current sales. Horizontal integration requires companies to increase production at the same part of the supply chain. Apart from internal expansion, companies may also utilize mergers and acquisitions to do so.

Horizontal integration may also lead to a company establishing a monopoly. If a company captures the vast majority of the market for its products, it can become a market leader. Overall, it involves the merger of business at the same value chain level within the same industry. It aims to achieve greater market power and share while also minimizing losses.

How does Horizontal Integration work?

When expanding, companies usually prefer to go outside their industry. While penetrating the existing industry can result in significant profits, it can also adversely impact its profits. However, horizontal integration focuses on expansion at the same level of the supply chain. Companies usually identify an opportunity in the market that can allow them to increase their market share and power.

Usually, companies apply horizontal integration through acquisitions or mergers of another company. In some cases, it may also involve internal expansions. External integration can enable companies to obtain more experience, skills, and networks. However, internal expansion can also allow companies to build on existing processes.

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Either way, horizontal integration does not leave the supply chain level at which a company is. Usually, companies seek to increase production while reducing production costs with this strategy. Similarly, it can result in economies of scale. Due to these, the company’s customers also get the benefit of better and more inexpensive products.

In most cases, horizontal integration begins with a takeover, merger, or acquisition. It differs from vertical integration, where companies expand into forward or backward activities. The primary factor with horizontal diversification is the expansion into the same supply chain level. Successful horizontal integration can also reduce the competition, thus, increasing a company’s market share.

What are the advantages of Horizontal Integration?

Horizontal integration can have several advantages to companies, their consumers, and the industry. These advantages make it a lucrative market entry strategy. Some of the primary benefits of the horizontal integration strategy are as follows.

Create synergies

Horizontal integration creates synergies that allow companies to increase their production. As mentioned, it involves an acquisition, merger, or takeover. Therefore, companies also acquire the skills, knowledge, and networks that come with the acquisition. These synergies can also result in more efficient processes and better products as a whole.

Decrease competition

Horizontal integration can decrease the overall competition for a company. It is a defense against competitive and substitute products. For companies, the reduced competition can help focus on meeting customer needs. Similarly, it results in higher profits while also increasing a company’s customer base. Horizontal integration also gives companies more power over their suppliers and distributors.

Access to new markets

The horizontal integration market entry strategy allows companies to gain access to new markets. Similarly, it helps them expand their existing customer base. Through this strategy, companies can acquire or merge with other companies that operate in different regions. This way, they can expand their operations to new markets.

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Diversify product portfolio

Horizontal integration can widen a company’s product portfolio. By expanding into the same supply chain level, companies can also reduce their reliance on one product. Similarly, it helps them decrease the power that customers have in the market. With a diversified portfolio, companies can attract new customers and increase profits.

What are the disadvantages of Horizontal Integration?

Despite its many advantages, horizontal integration can also have several disadvantages. These drawbacks can significantly impact companies, their customers, or the industry. Similarly, companies may not adopt this strategy due to its cons. Some of the primary disadvantages of the horizontal integration strategy are as below.

Threaten competition

As mentioned, horizontal integration may promote monopolistic behavior from some companies. Therefore, it may threaten competition in the industry. In the absence of healthy competition, companies can charge customers significantly more. Similarly, it increases customers’ dependence on a single company.

Create issues

As companies use horizontal integration, they will grow in size. However, it may also create issues for the management. With horizontal integration, companies have the potential to become too large and challenging to manage. Similarly, differences in managerial opinions can create conflicts with the company and create unexpected efficiencies.

Require more

Horizontal integration may compel companies to increase their resources and strategic capabilities. This issue relates to the above disadvantage. As companies expand, their operations will require more finances and strategic capabilities. If companies fail to meet those demands, they will succumb to the pressure. Integrating acquired firms into existing setups can also be challenging.

Conclusion

Companies use various strategies to expand into new markets. The horizontal integration strategy involves acquisitions, takeovers, or mergers. With this strategy, companies expand their operations within the same supply chain level. Horizontal integration can have many advantages. However, it may also come with some disadvantages, as mentioned above.

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