What is Horizontal Integration?

Horizontal Integration

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Horizontal Integration

Horizontal integration is a business strategy where a company acquires, merges with, or takes over another company in the same industry and at the same stage of production. This is in contrast to vertical integration, where a company would take control of elements within its supply chain (e.g., a car manufacturer acquiring a tire company).

The primary goal of horizontal integration is to consolidate market power and potentially gain economies of scale, which can result in cost efficiencies. By acquiring or merging with a direct competitor, a company can increase its market share, reduce competition, diversify its products or services, and expand its geographic reach.

For example, if PepsiCo, a major player in the beverage industry, were to acquire Coca-Cola, another major player in the same industry, this would be an example of horizontal integration.

However, horizontal integration can come with regulatory scrutiny because it can lead to a monopolistic situation, which can be detrimental to competition and ultimately harmful to consumers. Therefore, such moves often need regulatory approval and are carefully examined under antitrust laws.

Example of Horizontal Integration

Let’s take a look at an example from the tech industry.

In 2016, Microsoft, a major player in the technology and software sector, acquired LinkedIn, a leading professional networking and social media platform. Even though Microsoft and LinkedIn offer different types of products, they operate within the same broader industry: technology and digital platforms.

By acquiring LinkedIn, Microsoft implemented a horizontal integration strategy. This acquisition allowed Microsoft to expand its product portfolio and leverage LinkedIn’s unique database of professional profiles to enhance its own products (for example, by integrating LinkedIn data with Microsoft’s Office Suite).

On the flip side, LinkedIn gained access to the resources of a much larger company, which could support the development of new features and products.

As is typical with horizontal integration, this move was scrutinized by regulatory bodies to ensure it did not lead to unfair competitive practices. In the end, it was approved because Microsoft and LinkedIn were not direct competitors, so the acquisition didn’t significantly reduce competition in the social media or software markets.

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