What Are The Advantages And Disadvantages Of Horizontal Integration?

In this story, We will discuss What Are The Advantages And Disadvantages Of Horizontal Integration? But before that, We will have a brief discussion of what is horizontal integration and what are the types of it.

So, Let’s start.

Horizontal Integration is a process in which a company increases its production of goods and services to strengthen its position in the market place. It is done by expanding through acquisitions or mergers in the same level of the supply chain.

The expansion can be done in the same market or in different markets depending upon the company.

Horizontal Integration is the opposite of Vertical Integration in which the company expands upwards or downwards in its production stream I.e. Different levels of production.

In simple words, According to the Horizontal Integration strategy, a company acquires another company or merges with another company on the same level of the supply chain.

The prime intention of adaptation of the horizontal integration strategy by a company is to gain more market share in the industry and expand to new market space.

It can also benefit the company by creating an economy of scope, the economy of scale, and increase product differentiation.

It is very essential for a company that wants to acquire different markets.

By merger or acquisition, the companies can create synergies and take advantage of existing knowledge and experience rather than starting from level zero.

In this way, they will able to generate more revenue than they would have done independently.

Advantages Of Horizontal Integration

Reducing Competition

By expansion, the company reduces its competition in the market space. This is done by acquisition of the market share of the acquired company in the current market space.

By reducing the competition the company will have the largest market share and it will be able to create a monopoly in the market space.

The company’s negotiating power also increases with its customers and suppliers due to its dominance in the market space.

Benefit From Synergy

The expansion can also benefit from the synergy in competitive pricing, marketing, research & development, production, distribution, etc.

The competitor may lack the abilities and knowledge that the company already possesses.

The company may also have technological capacity, human talent, and other resources to complement the integration.

The process complements the existing product portfolio rather than creating a new brand from scratch.

Economy Of Scope

The economy of scope describes the situations in which the long-run average and marginal cost reduction of a company happens due to the production of complementary goods and services.

It is the efficiency formed by variety, not due to the volume of the products.

Economy Of Scale

The economy of scale describes the situation in which cost advantages are gained by the company due to the heavy production of goods.

Companies can achieve economies of scale by increasing its production and lowering its cost.

This happens because the cost is distributed in a large number of goods.

Ease In International Trade

There are different foreign policies in different countries for the entrance of new businesses.

Rather than starting the company from scratch in a foreign land, it is beneficial to acquire or partner with a homegrown company. This will help the parent company in various ways such as the reduction in costs of international trade, the experience of the market, some liberation in rules and regulations.

Increases In The Organization’s Income

The overall income of the company increases if the integration goes well and the company develops.

Disadvantages Of Horizontal Integration

Always Does Not Yield Positive Synergy

Horizontal integration doesn’t always yield positive synergies and add values as expected. It can even result in negative synergies and reduce the value of the total business.

Difficult To Manage

The larger organization often becomes too wide and inflexible to manage. They face more difficulty to manage as they are less flexible in introducing products to the new markets.

The reasons for the above problem can be the difference in leadership styles, office culture, and organizational structure of the company.

Monopoly In The Market

Horizontal integration can also lead to monopoly.

If the company ends up with the majority of the market share, then the situation is known as a monopoly.

Horizontal mergers are heavily scrutinized under anti-trust laws. It is discouraging for many governments due to the lack of competition from other organizations.

The above are the disadvantages of horizontal integration. Along with the opportunity in business expansion, a company can also face these problems.

Here, In this story, we discussed the advantages and disadvantages of Horizontal Integration.

Want to know What is Horizontal Integration? What is its definition? What are the advantages and disadvantages of it? How it is different from Vertical Integration?

Then, you can visit my blog and read an article about it. I have discussed all of these in a very precise manner along with proper examples. Click here to visit the article.

Thanks for reading the story.