Diversifying product offerings may provide cross-selling opportunities and increase each business’ market. Companies can also embark on horizontal integration by making more conscious allocations of internal capital. Through internal expansion, a company simply chooses to strategically change course and apply more resources in a different way.

On the other hand, horizontal integration strives to eliminate competitors, grow in market size, and create economies of scale. Both horizontal integration and vertical integration are the practice of a company expanding its current operations. Horizontal integration occurs when a company aims to remain within its current part of the supply chain. The company often wants to enhance its existing product or get a larger share of the market.

Horizontal integration examples (companies)

As seen in the horizontal integration example given, Marriot used this competitive strategy to create economies of scale, increase its market power, and expand its market (or enter new markets). Horizontal Integration generally occurs between firms with similar products, operations, or services. Even when a merger between two different industries takes there is a common point in terms that are used. The improvement in economies of scale more than offsets the cost incurred as part of the integration deal. The purpose of horizontal integration (HI) is to grow the company in size, increase product differentiation, achieve economies of scale, reduce competition or access new markets.

• They purchase coffee growers and at the same time, merge with their resellers, opening Starbucks cafeterias all over the world for direct sales.
• Yet both firms were operating in the social media industry – offering its consumers a way of socialising and communicating with each other.
• Pixar operated in the same animation space as Disney, but its (digitally) animated movies used cutting-edge technology and an innovative vision.
• While the firms operate in some of the same areas, there are areas that AT&T did not operate in until acquiring those companies.
• Hence, in this regard, Instagram was acquired by Facebook in 2012 for a reported $1 billion but still operates independently as its own social media platform.
• Facebook’s horizontal integration of Instagram was truly historic with a return of 100% in just over six years.

Now it doesn’t seem possible that a company could lose value after an integration but if the acquisition doesn’t result in improved business and profit, that’s exactly what could happen! In 2005, Kmart took over Sears, but had to get rid of it a few years later when revenue dropped by over 10%. Walt Disney studios bought out Pixar in 2006 in an effort to jump technologically in animation methods. While Disney had excellent characters and successful formulaic storytelling, they struggled to shift from traditional cell animation to computer animation. Pixar, however, had made the leap technologically to make great computer-based animations but was not as successful in storytelling. So, the merging of these two companies strengthened each other’s weaknesses and resulted in a large spike in profits for both studios.

Vertical vs. Horizontal Integration: Key Differences

Although horizontal integration can take place between industries, it usually occurs between two competitors – generally because it creates greater efficiencies. In turn, this can potentially result in a monopoly if the two firms are large enough. For instance, Boeing and Airbus both manufacture airplanes – owning a combined 99 percent market share.

Where horizontal integration helps to reduce competition and drive up sales for the company, vertical integration seeks to increase competition in order to drive sales. When a company vertically integrates, it has a much larger degree of control over the product it is producing and can produce it at reduced costs. This lets the company produce higher quality goods for cheaper, which can help it get ahead in a competitive market. By contrast with vertical integration, horizontal expansion supposes merging with companies that are in the same industry and at the same stage of the supply chain. These can be competitors, suppliers, or companies that produce similar goods or services. Mostly, businesses choose this approach to increase market share, reduce competition, and achieve economies of scale.

Companies engage in horizontal integration to achieve economies of scale, increase market power, reduce competition, and improve profitability. Horizontal integration occurs when one company agrees to purchase the other – an acquisition. Alternatively, two companies may decide to form one company and agree to a merger. This is done with the aim of capturing a number of advantages – primarily increased efficiency and lower costs of production.

Mittal Steel started the bid for a merger by offering cash to the shareholders of Arcelor. Initially, Arcelor’s board did not agree to the merger but after several discussions, Mittal horizontal integration example improved its bid. Hence, looking at the proposed synergies that the new entity would offer, Mittal paid 40.37 euros a share to the shareholders of Arcelor and bought them out in 2006.

As is the case with any merger, there is a risk that a horizontal merger will not result in the expected cost savings and revenue enhancements. In many cases, a merger drives away key employees, resulting in an overall decline in the value of the combined businesses. This risk is enhanced when the firms have differing company cultures, so that the employees of the acquired entity become unhappy with the culture of the acquirer that is being imposed on them. Vertical integration is the strategy of expanding across the supply to get better at processes the company is currently not involved in. For example, a manufacturer may acquire a raw materials distributor to have better control over the quantity, pricing, or timing of when it gets raw goods.

Take your time to learn about all the technical and cultural details of your future merger and prepare well to make the process smooth and seamless. The well-known businesses who integrated horizontally are Disney, Facebook and Coca-Cola. Vertical integrations are no different to any other M&A transaction in that the due diligence phase is a demanding process where significant amounts of transaction value are created or destroyed.

Horizontal Integration: Strategy

Larger companies are also more difficult to manage, which can lead to less flexibility and reduced innovation, making the company less competitive in an ever-changing market. And speaking of size, if the horizontal integration makes a company so large that it essentially inhibits competition, a company may be deemed a monopoly under anti-trust laws and forced to break up. Since then, the companies have featured a competitive rise as they integrated their capabilities and bundled technologies, gained greater market power, and now provide higher quality.

In May 2010, United Airlines (known then as UAL Corporation) acquired Continental Airlines. The merger also granted stakeholders 1.05 shares of UAL stock for each share they held in Continental Airlines. Once the shares transferred over, the company agreed to change its name to United Continental Holdings. In 2009, US food giant Kraft Foods launched a hostile bid for British chocolate maker Cadbury. It was the final acquisition needed by Kraft to allow it to be restructured and split into two companies. The acquisition of Cadbury’s provided scale for its snacks business, especially in emerging markets.

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This can come at the cost of stricter regulations as officials look to curb its market power. Yet some are arranged on the basis of strict regulations and/or with parts of the company splitting off into independent units. Horizontal integration generally occurs when two companies in the same industry combine (although infrequently occurs in unrelated industries, but at the same stage of the supply chain).

Different companies or organizations look for growth opportunities by adopting integration strategy i.e. vertical or horizontal integration with other organizations or companies. Horizontal integration is a common business strategy to gain a stronger foothold in a marketplace. How it works is a company merges with another company within the same marketplace, either through buying out the other company or through consolidating and merging. When we look through examples of companies that have undergone horizontal integration, we find a lot of them were facing cost pressures. By combining, they are able to benefit from the economies of scale and the efficiencies it presents.

Vertical Integration vs. Horizontal Integration: Key Differences, Explanation & Examples

However, many companies have been saved through horizontal integration and rolled into a larger, more successful company. Horizontal Integration is a strategy that a company adapts when it seeks to offer its products or services in different markets in order to strengthen its position in the industry. This can be done by either merging with or acquiring another company that produces or offers the same services. Publicly traded companies can use their stock shares or cash proceeds from subsequent stock issuance to achieve significant growth through horizontal or vertical M&A.

• When many firms pursue this strategy in the same industry, it leads to industry consolidation (oligopoly or even monopoly).
• Indeed, the real motive behind a lot of horizontal mergers is that companies want to reduce competition—either from potential new entrants, established rivals, or firms offering substitute or alternative goods.
• A company that now has a 30 percent market share instead of 15 percent has a greater influence.
• One of the first things that KHC did was to make cuts in any existing redundancies in an effort to boost profits.
• When a company vertically integrates, it has a much larger degree of control over the product it is producing and can produce it at reduced costs.

The combined company can also benefit from the increased purchasing power of suppliers, as well as the knowledge and expertise of the company it is combining with. One company may have a more efficient process that it can share with the other, thereby reducing costs. We know ExxonMobil as one company today, but that entity originates from the 1998 merger between Exxon and Mobil – two separate companies in the oil and gas industry. At the time, the merger was said to be worth over $73 billion – making it the third most valuable company in the world. The deal became one of necessity as a new entrant, Jio, took more and more market share away – eventually becoming the market leader in 2019.

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One reason privately held companies consider going public is to participate in M&A deals to rapidly expand growth and market share. There are plenty of great horizontal integration examples throughout history, the most infamous being Rockefeller’s Standard Oil company and its monopolization of the oil industry. There are plenty of recent examples as well, such as Walt Disney Studios and Facebook who each merged with companies in their industries in a similar fashion, but did so for different reasons. Exxon-Mobil is one of the most successful horizontal integration companies across the globe. The merger between these two standalone major oil companies in the oil and gas industry was said to be the biggest in corporate history at the time, worth over $73 billion. Facebook saw that instead of Instagram taking its consumers, it was best that it acquired it early on.

The most important factorfor horizontal integrations to work is the presence of economies of scale.Without them, there is little value to be created in joining firms together. Most companies decide on horizontal integration because they feel they will achieve great synergies and cost savings. There is a huge level of optimism from both parties – including shareholders. Share prices tend to rise on the back of such deals – with millions and billions of cost savings forecast. As part of horizontal integration, two companies join together and create an even bigger one – the market share of each is combined. A company that now has a 30 percent market share instead of 15 percent has a greater influence.