The acquisition of additional business activities at the same level of the value chain is referred to as horizontal integration. This form of expansion contrasts with vertical integration by which the firm expands into upstream or downstream activities. Horizontal growth can be achieved by internal expansion or by external expansion through mergers and acquisitions of firms offering similar products and services. A firm may diversify by growing horizontally into unrelated businesses.
Some examples of horizontal integration include:
The Standard Oil Company's acquisition of 40 refineries. *
An automobile manufacturer's acquisition of a sport utility vehicle manufacturer. *
A media company's ownership of radio, television, newspapers, books, and magazines.
Advantages of Horizontal Integration
The following are some benefits sought by firms that horizontally integrate:
Economies of scale - achieved
by selling more of the same product, for example, by geographic expansion. *
Economies of scope - achieved by sharing resources common to different products. Commonly referred to as "synergies." *
Increased market power (over suppliers and downstream channel members) *
Reduction in the cost of international trade by operating factories in foreign markets.
Sometimes benefits can be gained through customer perceptions of linkages between products. For example, in some cases synergy can be achieved by using the same brand name to promote multiple products. However, such extensions can have drawbacks, as pointed out by Al Ries and Jack Trout in their marketing classic, Positioning.
Pitfalls of Horizontal Integration
Horizontal integration by acquisition of a competitor will increase a firm's market share. However, if the industry concentration increases significantly then anti-trust issues may arise.
Aside from legal issues, another concern is whether...
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