Horizontal Integration: A Management Strategy

Strategic management is all about the initiatives taken by the middle and mostly upper echelons of management with respect to optimum utilization of business resources. This is done as a means of achieving higher profitability and enhanced performance.

Horizontal integration is one such tool which is used to strengthen the position and presence of a business in the market. It is basically a marketing-based integration, as opposed to a vertical integration which is a style of management control over the industrial supply chain.

While the former is an attempt to influence the market in its favor, the latter attempts to coordinate and control the supply chain of a consolidated vertical production process.

As per definitions provided by Investopedia and Wikipedia respectively, horizontal integration takes place 'when a company expands its business into different products that are similar to current lines' and 'when a firm is being taken over by, or merged with, another firm which is in the same industry and in the same stage of production as the merged firm,..

... for example, a car manufacturer merging with a competitor. In this case, both the companies are in the same stage of production and also in the same industry. This process is also known as a buyout or takeover.' If we try and dissect both these definitions, two main points come to the fore-same industry and same stage of production.

So the question arises that why would a company want to integrate with another which practically deals with the same product, that too in the same stage of production? Well, there is a very important factor-they share the same market. This form of business strategy is aimed at eliminating competition.

Besides buying out, it also brings about economies of scale and scope involved in increased production. Even in terms of marketing efforts, a consolidated campaign is far more effective for customer conversion, than a dozen small business enterprises fighting tooth and nail for a share in the same market.

Examples of horizontal integration can be seen in the form of a number of significant mergers and acquisitions around the world. One of the most prominent instances in recent times was Tata Steel's acquisition of Corus.

The acquiring of a high value product manufacturer by one of the lowest cost steel producers in the world boasting of self-sufficiency in raw materials, meant that the steel market would now have access to a product which boasted of high quality at a lower price.

Another example is GAP Inc. retail clothing corporation, which controls Banana Republic, GAP, and Old Navy. This enables it to cater to different customer needs without having to compete with the other similar brands.

When a firm, which is part of an industrial supply and distribution chain, acquires or merges with other firms within the same chain, it is known as vertical integration. The purpose here is to cut out supply chain inconsistencies and hold-up issues.

On the other hand, horizontal integration is when firms dealing in the same product line which are at the same stage of production, combine together with a purpose of earning manufacturing and marketing economies and eliminating competition.

Therefore, the former consolidates all stages in a production process under management control, while the latter is an attempt to dominate a market through increased market share and production capacity.

The market dominion brought about by such integration often sows the seeds for a monopoly, and many antitrust laws have been enacted with a bid to keep a check upon such anti-competitive conduct of firms.