Horizontal integration

Definition

Horizontal integration is a strategy used by businesses to increase their market share by acquiring or merging with other companies operating at the same level in the supply chain. This approach enables firms to consolidate operations, reduce competition, and achieve economies of scale, thereby optimizing their supply chain strategy and design for greater efficiency and profitability.

5 Must Know Facts For Your Next Test

1. Horizontal integration helps companies reduce competition by acquiring rivals, which can lead to a stronger market position.
2. This strategy can facilitate the sharing of resources and technologies between merged companies, enhancing operational efficiency.
3. Companies pursuing horizontal integration often aim for growth in their existing markets rather than entering new ones.
4. It can lead to significant cost savings through increased production volume and shared administrative functions.
5. Successful horizontal integration can create a more diversified product offering for consumers, resulting in better customer retention.

Review Questions

• How does horizontal integration enhance a company's competitive advantage in its market?
  • Horizontal integration enhances a company's competitive advantage by reducing competition through acquisitions or mergers with other firms in the same industry. This allows the integrated company to consolidate resources, streamline operations, and achieve economies of scale. By increasing market share and reducing the number of competitors, companies can improve their pricing power and strengthen their overall market position.
• Discuss the potential risks and benefits associated with horizontal integration in supply chain strategy.
  • Horizontal integration offers several benefits, including increased market share, cost efficiencies through economies of scale, and enhanced resource sharing. However, it also comes with risks such as potential regulatory scrutiny, cultural clashes between merged companies, and the possibility of overextending financial resources. Companies must carefully evaluate these factors to ensure that the advantages outweigh the risks when pursuing this strategy.
• Evaluate the long-term implications of horizontal integration on industry competition and consumer choice.
  • The long-term implications of horizontal integration can significantly alter industry competition and consumer choice. As companies consolidate and reduce the number of competitors in the market, there may be less price competition, leading to higher prices for consumers. However, the efficiency gains from integration can also lead to lower costs and improved product offerings. Ultimately, while some consumers may face fewer choices due to fewer competitors, others might benefit from better products as companies invest in innovation post-integration.

Related terms

Market share: The percentage of an industry or market's total sales that is earned by a particular company over a specified time period.

Economies of scale: The cost advantage that arises with increased output of a product, as fixed costs are spread out over a larger number of goods.

Merger and acquisition (M&A): A general term that refers to the consolidation of companies or assets, often involving the purchase or combination of one company with another.