How Does Horizontal Integration Work? Pros, Cons and Examples (2024)

Most businesses seek growth, which they often pursue by investing significant resources inentering new markets, enlarging their customer base or introducing new products andservices. Alternatively, business leaders can also grow by acquiring, merging with orotherwise aligning with another company. Horizontal integration is one such approach, inwhich one company combines with another that operates at the same level in the value chainin a particular industry. For example, a big-box electronics retailer may embark on ahorizontal integration by acquiring a complementary chain of stores selling similarproducts, or an auto manufacturer might merge with another carmaker. While horizontalintegration comes with its share of challenges, the strategy can offer a number of benefitsfor businesses when the integration is carried out successfully.

What Is Horizontal Integration?

Horizontal integration is a business-growth strategy that companies pursue to expand theirfootprint in the marketplace. In a horizontal integration, a business combines forces withanother company that offers similar products or services. This type of integration differsfrom vertical integration, in which a company expands either upstream or downstream byacquiring firms in an earlier or later phase of the value chain, such as a manufacturer taking over adistributor or merging with a retailer. In contrast, a horizontal integration involves acompany acquiring or merging with another company in the same industry that operates at thesame point in the value chain. The combination of the two businesses typically results in asingle company that sells more products and/or services than either organization couldindividually and thus has a more dominant role in the marketplace.

Key Takeaways

• Horizontal integration occurs when a company acquires or merges with another company inthe same industry that is operating at the same level in the value chain.
• Companies may pursue horizontal integration to grow their existing business or prevent acompetitor from gaining market share.
• Potential benefits of horizontal integration include a stronger competitive position,increased revenues, greater economies of scale, access to new markets and customers, anddiversification of products and services.
• Executing a successful horizontal integration can be difficult. In some cases, itincreases organizational complexity, creates internal strife as teams adjust to new waysof doing business and leads to potential legal issues and regulatory scrutiny,particularly if the resulting industry consolidation risks creating a monopoly.

Horizontal Integration Explained

Horizontal integration as a growth strategy can enable a company to edge out competitors andenhance their position in the marketplace, achieve greater economies of scale, expand intonew geographic markets, reach additional customer segments, or acquire desirable productlines, to name a few reasons. Businesses may engage in horizontal integration for a varietyof reasons: to enter into new geographic markets, reach additional customer segments, expandor diversify their product or service offerings, or gain economies of scale.

At the heart of the horizontal integration approach is often a desire to neutralizecompetition, whether from direct rivals, new entrants in the industry, or companies offeringalternative or complementary products and services. The end goal is a stronger position inthe marketplace and, in the best-case scenario, profitable growth.

A company can horizontally integrate in three ways:

• Merging with another company. In this approach to horizontalintegration, two separate companies come together to create a newly combinedorganization. In some cases, the individual brands remain intact while sharingcommon operations and resources; in other cases, one brand is absorbed by another.Mergers often occur among companies offering similar products or services that haverelatively equal positions in the market. JetBlue and Spirit Airlines, for example,agreed to merge in 2022.

• Acquiring another company. A horizontal integration may also involveone company purchasing and taking over the operations of another company. Theacquiring company assumes control of the purchased company, integrating staff andother resources as needed. Business leaders will often pursue horizontal integrationby acquisition to procure an advantage in the marketplace. For example, Microsoftacquired Activision Blizzard in 2022 to strengthen its presence in the video gamemarket.

• Expanding internally. Companies may also achieve horizontalintegration by strategically deploying capital in-house to expand their own presenceat the same level of the value chain. A manufacturer of protein bars may decide toexpand into soft drink production, for example.

Benefits and Drawbacks of Horizontal Integration

Horizontal integration by acquisition or mergercan offer a number of benefits to businesses, from providing greater access to new marketsto gaining a stronger competitive position in the marketplace. Some of the most significantbenefits associated with horizontal integration include:

• Reduced competition. The integration of two or more companies typicallyresults in less competition and increased industry consolidation. In some cases, acompany may acquire or merge with a direct competitor, thereby reducing competition forparticular products or services.
• Increased market share. Effective horizontal integration can result ingreater market share for the combined company, since it often expands the number ofproducts and services it offers.
• Expanded customer base. When companies come together in a horizontalintegration effort, each one brings its own customers. If the two companies have littlecustomer overlap and can retain customers during the strategic transaction, theintegrated entity will often enjoy a much larger customer base. A horizontal integrationmay also open up opportunities for cross-selling new products or services to existingcustomers, thereby increasing profitability.
• Revenue growth. Companies that pursue horizontal integration and areable to grow their market share and customer base will often see a lift in revenues, aswell.
• Improved efficiencies. Horizontal integration may empower companies toreduce overall costs by sharing technology, marketing, research and development(R&D),production and distribution resources. The integrated company may also be able toproduce a greater number of products or services more cost-effectively than the twoindividual companies were able to achieve on their own.
• Greater product and service differentiation. A company may integratewith another business that sells different or complementary products or services, thusexpanding its portfolio of offerings.
• Access to new markets. One company may merge with or acquire anothercompany that operates in different geographic markets, offers enhanced distributionchannels or serves an additional segment of the market.
• Increased market power. The larger company created through horizontalintegration may have more sway in the marketplace with suppliers, partners, distributorsand customers.

Despite the opportunities for profitable growth and expansion, business leaders may want toevaluate several possible downsides to horizontal integration. Potential drawbacks include:

• Operational integration challenges. Combining two companies —particularly two large companies — is no easy task. The integration of corporateoperations, technologies, processes and people can be messy and can result in employeeturnover, customer churn and lost value. In some cases, efforts to bring two companiestogether may be bumpy or fail altogether.
• Leadership or culture clashes. Vastly different leadership styles,company cultures and organizational norms can make horizontal integration difficult— or, in some cases, doom the effort.
• Reduced flexibility. As organizations grow larger, they can become lessadaptable to changes in the marketplace. Big organizations can be less nimble and lessable to innovate than smaller ones. For example, a smaller firm may be easier to manageand may be able to bring innovations to the market more quickly than a much largercompany.
• Regulatory and legal issues. While the purpose of horizontalintegration is sometimes to absorb competition, widespread industry consolidation canlead to monopolistic behaviors, like price gouging and limited choices for consumers.Business leaders engaging in horizontal integration must consider any legal andregulatory challenges that may arise from integrating, as well as the possible costs ofaddressing them.
• Failed expectations. The anticipated benefits of horizontal integrationmay not always materialize, and overhyped economies of scales may not deliver thepredicted savings for the integrated organization. In the worst-case scenario, a failedhorizontal integration can destroy value for the organizations involved.

Horizontal Integration vs. Horizontal Alliance

It is possible for a company to achieve some of the benefits of horizontal integrationwithout merging with or acquiring another company. A horizontal alliance among companiesoperating at the same level within an industry value chain, also known as horizontalcooperation, can also enable businesses to team up in mutually beneficial ways.

With a horizontal alliance, companies set up a strategic contract with each other tocollaborate on some level, but, unlike horizontal integration, each participant continues tooperate as an independent company. Companies in a horizontal alliance work together toimprove their position in the marketplace, for example, by uniting to provide complementaryproducts or services to customers; pursuing economies of scale in a certain aspect of business,like logistics or distribution; orcollaborating on developing or setting standards for an innovative new product.

For example, in 2015, high-end women’s fashion brand and retailer Lilly Pulitzer forgeda strategic alliance with big-box chain Target to sell more affordable, limited editions ofits apparel in Target’s stores. Lilly Pulitzer was able to expand its reach and brandawareness, and Target benefited from a boost in its perceived brand value and plenty ofbuzz, selling out of the garments in record time. More recently, in 2022, Fox PostproductionServices in Hollywood, California, inked a horizontal partnership with Formosa Group, apost-production studio specializing in audio. The horizontal alliance brought togetherFormosa’s creative audio talent and Fox’s high-end sound facilities, providingexpanded business opportunities for both companies.

Horizontal Integration vs. Vertical Integration

Horizontal integration and vertical integrationare both ways in which a company can expand its corporate footprint by acquiring one or morecompanies. However, each integration strategy takes a distinct approach and involvesdifferent objectives, benefits, drawbacks and potential results.

The most obvious distinction between horizontal integration and vertical integration is thedirection in which the integration moves. Horizontal integration is so named because itinvolves a company expanding its reach within its existing level in an industry value chain— for example, a law firm acquiring another law firm or a semiconductor manufacturermerging with another chipmaker. Vertical integration, on the other hand, occurs when acompany connects with a company that operates further upstream or downstream on its valuechain — such as a manufacturer merging with a supplier or joining forces with aretailer to sell its goods directly to customers.

Horizontal integration and vertical integration both involve growth and expansion, but thegoals differ. When horizontal integration occurs, a company aims to boost its positionwithin its existing corner of the value chain, seeking a bigger piece of the market; anopportunity to expand its customer base, geographic footprint or product mix; or a chance tolimit competition. With vertical integration, a company wants to grow beyond its currentcore competency and acquire a foothold further up or down its value chain for the purposesof greater control or visibility.

Examples of Horizontal Integration

Most mergers and acquisitions that occur between companies in the same industry areconsidered horizontal integrations. A wide variety of industries have seen horizontalintegrations — successful and otherwise. Some well-known recent examples of horizontalintegration include:

2022: JetBlue’s proposed merger with Spirit Airlines

With limited opportunities for rapid expansion in the airline industry, the merger could fuelthe ability of the two airlines to compete head-to-head with bigger carriers. JetBlueofficials have said they expect the proposed merger with no-frills air carrier SpiritAirlines to yield $700 million in annual savings and estimated that the combined airlinesmay produce about $11.9 billion a year in revenue.

2019: Walt Disney Company’s acquisition of 21st Century Fox

Announced in 2017 and finalized more than a year later, Disney’s goal with its $52.4billion purchase was to grow the company’s content and entertainment products,increase its direct-to-consumer streaming offerings and expand internationally. Disney hadpreviously completed a horizontal integration (via acquisition) with Pixar in 2016.

2016: Marriott International’s acquisition of Starwood Hotels & Resorts

When Marriott paid $13 billion for rival Starwood, it created the world’s largest hotelcompany. The horizontal integration combined Marriott’s strong presence in the luxury,convention and resort segments of the hospitality industry with Starwood’s broaderinternational footprint. The move was widely regarded as successful, resulting in morechoices for consumers, increased opportunities for employees and additional value forshareholders.

2015: Heinz’s merger with Kraft Foods

The horizontal integration of Kraft Foods and Heinz, in a deal valued at $46 billion, createdone of the largest food companies in the world. But the results were less than stellar. As a2019 New York Times article pointed out, the post-merger company faced slumping sales,shareholder lawsuits, layoffs and questions about its accounting practices.

2012: The Facebook (Meta) acquisition of Instagram

The rationale behind Facebook’s billion-dollar acquisition of photo-sharing socialmedia platform Instagram is a tale as old as business: Instagram was becoming a competitivethreat. The company paid a high price to neutralize the competition, but the strategy hasreaped rewards. In 2022, Instagram was responsible for 41.5% of Facebook’s revenues,as its ad revenues outpaced those of Facebook, which were in decline.

2008: Tata Motors’ acquisition of Jaguar Land Rover

The auto industry is riddled with stories of failed horizontal integration efforts, like theDaimler-Benz purchase of Chrysler. But an integration that industry experts may have hadlittle faith in initially, Tata Motors’ acquisition of British luxury brand JaguarLand Rover, proved to be one of the industry’s more successful. India’s TataMotors oversaw the turnaround of JLR and benefited from its European manufacturing sites inEurope, as well as the implementation of JLR’s state-of-the-art R&D centers in itscore businesses.

2005: Procter & Gamble’s acquisition of Gillette

Consumer packaged-goods giant P&G completed its largest acquisition to date when itclosedits $57 billion purchase of Gillette. Experts point to this horizontal merger as a primeexample of how the strategy can deliver economies of scale, since the combined entity wasable to significantly reduce research and development and marketing costs for its products.

Is It Time to Integrate Horizontally? Your NetSuite Data Can Tell You

When it comes to deciding whether to integrate horizontally, business intelligence, supportedby enterprise data collection and analytics, can inform decision-making, providing greatervisibility into acquisition and merger opportunities and allowing teams to negotiate thebest terms for improving the success of integrations.

Companies that implement enterprise resource planning(ERP) software that brings together financial, operational and other pertinent datahave an advantage in assessing horizontal integrations. These businesses are able to collectand analyze data and insights across multiple business functions to help leaders jointlydetermine which horizontal integration opportunities make sense for the company. Inaddition, companies that have invested in cloud-based enterprise systems are poised forsmoother horizontal integration transitions.

NetSuiteERP is an integrated, cloud-based business management solution that gives businessesreal-time visibility into operational and financial performance within a single suite ofapplications. Keeping accounting, inventory, production, supply chain and warehouseoperations data in one place helps decision-makers identify new opportunities for horizontalintegration and better measure and analyze performance following a horizontal merger oracquisition.

Horizontal integration can enable growth for companies across industries, but successfulhorizontal integration is far from guaranteed. It requires the business leaders involved tofigure out the best ways to combine operations, cultures and leadership approaches; navigatepotential legal issues and regulatory scrutiny; and diligently pursue the outlined goals ofthe proposed merger or acquisition. When the strategy is well-thought-out and executed,however, horizontal integration can offer companies the ability to expand, diversify andoptimize in ways they may not have accomplished on their own. Companies with high visibilityinto their own performance and that of their targets, along with access to integrated dataanalytics, will be best equipped to explore the opportunities and reap the benefits ofhorizontal integration.

Horizontal Integration FAQs

What are the different types of horizontal integration?

A company can horizontally integrate by either acquiring or merging with a similar company atthe same level in its value chain. Companies can also form strategic partnerships, calledhorizontal alliances, that can offer similar benefits while allowing both companies tocontinue to operate independently.

What companies are horizontally integrated?

Many mergers and acquisitions are examples of horizontal integration, whereby one companymerges with or acquires another similar company operating at the same level in a value chainof a particular industry. Examples may include a women’s clothing retailer acquiringanother retailer or an airline merging with another air carrier. Some well-known recentexamples of horizontal integration include Walt Disney Company’s acquisition of 21stCentury Fox, Marriott International’s acquisition of Starwood Hotels & Resorts andtheFacebook (Meta) acquisition of Instagram.

Why do companies do horizontal integration?

Horizontal integration occurs when a company acquires a competitor or related business,expanding its footprint in its core competency. The main purpose of horizontal integrationis typically a strategic aim to expand within a specific area of a value chain to dominatethe competition. A shoe retailer may buy another chain of shoe stores, for example, toeliminate competition, expand into new geographic markets, acquire more customers orincrease overall sales. Other benefits of horizontal integration may include increasedmarket power over distributors or suppliers, greater product or service differentiation andgreater economies of scale.

What are vertical and horizontal integration?

Vertical integration involves the acquisition of a key component of a company’s supplychain, either upstream or downstream from its own core competency. For example, amanufacturer may acquire a retail company so that it can control not only the process ofproducing certain goods, such as designer handbags, but selling the bags as well. Companiespursue vertical integration for a number of reasons, including the potential for increasedcontrol, reduced costs or improved profit margins. When a company takes over an upstreamstep, such as a manufacturing business taking over sourcing of raw materials, the company iscompleting a backward integration. When a company brings a downstream step in-house, such asa manufacturer that opts to open retail or ecommerce direct sales channels, the company isinvolved in a forward integration. A company may also pursue a balanced integrationapproach, expanding its reach in both directions.

Horizontal integration, on the other hand, takes place when a company acquires a competitoror related business, expanding its footprint within its core competency horizontally acrossits current level in the value chain. A grocery chain may buy a rival chain to, say,eliminate competition, expand into new geographic markets or increase overall sales.

What is an example of horizontal integration in history?

Any acquisition or merger involving two similar or complementary companies operating at thesame level in a value chain is an example of horizontal integration. While rudimentary formsof horizontal integration likely predate recorded accounts, business historians often pointto the merger of Andrew Carnegie’s Carnegie Steel with several other steel companiesowned by banker JP Morgan in 1901 to create U.S. Steel as an early illustration ofhorizontal integration. The resulting mega-company was capable of much greater efficiencyand profitability than its competitors. More recent examples of horizontal integrationinclude Walt Disney Company’s acquisition of 21st Century Fox, MarriottInternational’s acquisition of Starwood Hotels & Resorts, and the Facebook (Meta)acquisition of Instagram.