horizontal-integration

Horizontal Integration In A Nutshell

Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Perhaps, a manufacturer who buys or merges with another manufacturer, in the same industry, is an example of horizontal integration.

Horizontal integration, just like vertical integration can happen in several ways. Companies willing to expand will do that by either using their internal resources to take more space within the same part of the supply chain and within the same industry (internal expansion).

Or they might merge, by forming a single entity. Or through acquisition.

When and why horizontal expansion makes sense?

Horizontal expansion can happen for several reasons:

  • Limiting competition: in some cases, companies look to dominate specific segments of a market, to retain a competitive advantage, for longer.
  • Growth and expansion: horizontal integration can shortcut the growth and expansion within the same industry.
  • Economies of scale: in theory, horizontal integration might help the merged companies to benefit from economies of scale.
  • Survival: in other cases, horizontal acquisition also helps in surviving a market getting increasingly competitive.

What are the potential drawbacks of horizontal integration?

  • Market monopolies: horizontal integrations can limit competition, at the point of creating monopolies, which overall might reduce the options for consumers. On the other hand, they also raise regulatory concerns.
  • Diseconomies of scale: while in theory horizontal integration can create economies of scale, in practice, from integrating two different groups in he same industry can also lead to the opposite, effect, diseconomies of scale.
  • Cultural clashes: the hardest part of integrating or merging companies, might be about really making it work from a cultural standpoint. And as horizontal integration usually works by creating a new, larger group. This renewed scale might cause cultural clashes, which are hard to overcome.

Horizontal integration case studies

Let’s see a set of horizontal integrations happened in the digital era, which might help us understand how the process has been used by current market players to expand, defend or redefine their business models.

Uber Eats’ acquisition of Postmates to stay competitive in the meal delivery industry

uber-eats-business-model
Uber Eats is a three-sided marketplace connecting a driver, a restaurant owner and a customer with Uber Eats platform at the center. The three-sided marketplace moves around three players: Restaurants pay commission on the orders to Uber Eats; Customers pay the small delivery charges, and at times, cancellation fee; Drivers earn through making reliable deliveries on time.

Uber Eats is among the largest players in the meal delivery industry. Launched by Uber, it gained traction quickly, and it became among the largest players in the US.

In July 2020, Uber announced a multi-billion dollar deal, which would enable it to be among the largest players, as a result of the consolidation happening in the meal delivery industry, which leads us to the next example.

The merger between GrubHub and JustEat to create one of the largest meal delivery players on earth

Grubhub is an online and mobile platform for restaurant pick-up and delivery orders. In 2018 the company connected 95,000 takeout restaurants in over 1,700 U.S. cities and London. The Grubhub portfolio of brands like Seamless, LevelUp, Eat24, AllMenus, MenuPages, andTapingo. The company makes money primarily by charging restaurants a pre-order commission and it generates revenues when diners place an order on its platform. Also, it charges restaurants that use Grubhub delivery services and when diners pay for those services. 

In June 2020, GrubHub and JustEat merged in a deal worth over seven billion dollars, to create one of the largest meal delivery players in the world. The deal happened after Uber had been looking into the possibility of acquiring GrubHub.

That raised concerns as it would have created a monopoly in the US. At the same time GrubHub and Uber might have not found a deal given their cultural differences.

As the deal slipped, the merger between GrubHub and JustEat got finalized.

TikTok acquisition of Musical.ly and its rebranding

tiktok-business-model
TikTok is the Chinese creative social media platform primarily driven by short-form video content. It launches challenges of various types to tap into the creativity of its users and generate engaging (if not addicting content) accessible via an infinite feed. TikTok primarily makes money through advertising, thus making it an attention-based business model.

Back in 2017, TikTok acquired Music.ly and by 2018 it rebranded it within its own app, to create a single platform, which scaled extremely quickly.

TikTok, therefore, used the acquisition of Music.ly to expand, quickly.

Facebook acquired Instagram and kept it as independent product (for a few years)

instagram-business-model
Instagram makes money via visual advertising. As part of Facebook products, the company generates revenues for Facebook Inc. overall business model. Acquired by Facebook for a billion dollar in 2012, today Instagram is integrated into the overall Facebook business strategy. In 2018, Instagram founders, Kevin Systrom and Mike Krieger, left the company, as Facebook pushed toward tighter integration of the two platforms.

Back in 2012, Facebook acquired Instagram, for a billion dollar. What seemed expensive at the time, for a mobile app that wasn’t profitable, it became among the most valuable products for the Facebook portfolio.

At the time, Facebook opted for a multi-product strategy (for the first time), where Instagram was left as an independent product of the Facebook family, free to develop on its own, and by slowly integrating it into the Facebook ecosystem.

Yet, over the years, Facebook tightened its clasp over Instagram, and it became part of its advertising platform. Today Instagram is the product that makes most of the revenues for Facebook, as it successfully converted to mobile.

In addition, thanks to Instagram, Facebook also managed to thrive in the coming wave of social media apps. Where Facebook had to convert its website to mobile, and it took a few years. Instagram was native to that!

Connected Business Frameworks

AI Supply Chains

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distributed to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Bullwhip Effect

bullwhip-effect
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.

Supply Chain

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Data Supply Chains

data-supply-chain
In a data supply chain the closer the data to the customer the more we’re moving downstream. For instance, when Google produced its own physical devices. While it moved upstream the physical supply chain (it became a manufacturer) it moved downstream the data supply chain as it got closer to consumers using those devices, so it could gather data directly from the market, without intermediaries.

Last-Mile Delivery

last-mile-delivery
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that indeed this usually refers to the final part of the supply chain journey, and yet this is extremely important, as it’s the most exposed, consumer-facing part.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"