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.
Growthandexpansion
Horizontal integration can shortcut the growth and expansion within the same industry.
Economies of scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.
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?
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.
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.
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.
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.
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 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.
TikTok’s acquisition of Musical.ly and its rebranding
TikTok is the Chinese creative social media platform driven by short-form video content enabling users to interact and generate content at scale. TikTok primarily makes money through advertising, and it generated $4.6 billion in advertising revenues in 2021, thus making it among the most popular attention-based business models or attention merchants.
In 2017, TikTok acquired Music.ly, and by 2018, it rebranded it within its own app to create a single platform, which scaled exceptionally quickly.
TikTok, therefore, used the acquisition of Music.ly to expand quickly.
Facebook acquired Instagram and kept it as the independent product (for a few years)
Instagram makes money via visual advertising. As part of Facebook products, the company generates revenues for Facebook Inc. overall businessmodel. 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.
What seemed expensive at the time for a mobile app that wasn’t profitable, 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!
Google’s acquisition of YouTube
When back in 2006, Google acquired YouTube for $1.65 billion, which seemed a disproportionate amount for a company that was so young and which burned cash at high speed.
In 2021, Google generated $209.5 billion in revenues from advertising, which represented 81.4% of the total revenues, compared to the $147 billion in revenues, which represented 80.6% of revenues. Therefore, most of the revenues from Alphabet, the mother company of Google, come from advertising.
However, since YouTube’s growth had been skyrocketing, Google tried to launch its own video division, called Google Video, yet it didn’t work.
The Google acquisition of YouTube is a great example of horizontal integration, where the company acquired a valuable asset to expand its presence in an existing market.
When the web finally moved from text to videos, Google found itself extremely well-positioned to take advantage of that!
Today, YouTube is an incredible advertising machine, which generated almost $30 billion in 2021, thus probably giving it a valuation of anywhere between $300-500 billion!
YouTube, by 2021, generated over $28 billion in advertising revenues. In the first nine months of 2022, YouTube generated over $21 billion in advertising revenues.
The Walt Disney Company and Pixar Animation Studios
The deal was part of a broader move by Disney to acquire brand-name properties and reinvigorate the company’s lackluster animation capabilities, which became less competitive as the industry went more digital.
Pixar had neither Disney’s legacy nor its brandvalue. But what it did possess was the technology and expertise to produce modern animation films.
The merger proved to be one of the most successful examples of horizontal integration.
Disney increased its market share and profit by combining its strong storytelling heritage with Pixar’s innovations.
As part of the merger, the new company would incorporate Mittal’s steel plants across four different continents and several low-cost facilities in Mexico, Kazakhstan, and the Czech Republic.
These facilities would be combined with Arcelor’s predominantly western European mills that specialized in high-grade steel production for the automotive industry
Then chairman of Arcelor Mittal Joseph Kinsch noted that the deal would create “global leadership in steel” in terms of value and tonnage.
The heavily scrutinized deal gave Exxon access to Mobile’s gas stations and oil reserves, but it was also driven by a need to cut costs since an excess of crude oil had forced prices to rock-bottom levels.
Nevertheless, the merger reunited two of the most significant parts of John D. Rockefeller’s Standard Oil monopoly that was broken up by regulators in 1911.
Smaller gasoline operators objected to the proposed merger, particularly in states such as Connecticut where Exxon and Mobile owned around 40% of all service stations.
Environmentalists were also concerned that the new company would intensify its exploration activities and exacerbate global warming.
What is horizontal integration with example?
Horizontal integration is the process of expanding the presence of company within a market by integrating at the same level of a supply chain. Take the example of Google taking over YouTube, thus expanding its market shares in the video segment. Or Facebook acquiring Instagram to horizontally cover more in the same space.
What are vertical and horizontal integrations?
Whereas in horizontal integration a company expands by acquiring other companies that move in the same space of the supply chain. In vertical integration the company moves either upstream or downstream to cover more parts of that supply chain. Take the case of Google, which in 2017, acquired a chunk of HTC’s smartphone division so it would get into the manufacturing of hardware to serve its market.
The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.
Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.
When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation.
Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.
Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.
Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.
An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage. Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.
The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.
In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.
Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categories.
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.
Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.
The peer-to-peer (P2P) economy is one where buyers and sellers interact directly without the need for an intermediary third party or other business. The peer-to-peer economy is a business model where two individuals buy and sell products and services directly. In a peer-to-peer company, the seller has the ability to create the product or offer the service themselves.
The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.
In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.
How do you protect your rights as a worker? Who is there to help defend you against unfair and unjust work conditions? Both of these questions have an answer, and it’s a solution that many are familiar with. The answer is a labor union. From construction to teaching, there are labor unions out there for just about any field of work.
The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”
Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.
Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.
The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth. The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.
Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846. Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.
The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organizationscale further.
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.
An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
