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!

Google acquisition of YouTube

When back in 2006, Google acquired YouTube for $1.65 billion that seemed a disproportionate amount for a company which was so young and which burned cash at high speed.

how-does-google-make-money
Google has a diversified business model, primarily making money via its advertising networks that, in 2019, generated over 83% of its revenues, which also comprise YouTube Ads. Other revenue streams include Google Cloud, Hardware, Google Playstore, and YouTube Premium content. In 2019 Google made over $161 billion in total revenues.

However, since YouTube’s growth had been skyrocketing, Google had tried to launch its own video division, called Google Video, and yet it didn’t work.

The Google acquisition of YouTube is a great example of horizontal integration, where the company managed to acquire a valuable asset, to expand its presence in an existing market.

In fact, 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-ad-revenue
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 Walt Disney Company acquired Pixar Animation Studios in 2006 in an all-stock deal worth $7.4 billion.

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 brand value. 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 was able to increase market share and profit by combining its strong storytelling heritage with Pixar’s innovations.

United Airlines and Continental Airlines

United Airlines (then UAL Corporation) merged with Continental Airlines in an all-stock deal valued at $8.5 billion in 2010.

The merger of two of the world’s premier airlines enabled the new company to be more competitive in a dynamic and crowded aviation industry.

The resultant airline, known as United Airlines, offered services to four continents from ten hubs across the United States.

The merger also allowed United Airlines to offer enhanced services to business customers in small and medium-sized communities.

Arcelor and Mittal

Indian company Mittal Steel merged with Arcelor of Luxembourg in 2006 in a deal worth €26.9 billion.

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.

Indeed, the new company would become a behemoth with three times the capacity of second-placed rival Nippon Steel and a 10% global market share.

Exxon and Mobil

The $75.3 billion merger of Exxon and Mobil in 1998 was, at the time, the largest merger in corporate history.

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.

With $203 billion in revenue, ExxonMobil became the largest corporation in the world and surpassed Shell as the largest privately-owned oil and gas company.

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.

Connected Business Concepts

Vertical Integration

vertical-integration
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.

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.

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
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distribution 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.

Horizontal vs. Vertical Integration

horizontal-vs-vertical-integration
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. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

Decoupling

decoupling
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.

Entry Strategies

entry-strategies-startups
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.

Disintermediation

disintermediation
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all, can produce products that customers want.

Reintermediation

reintermediation
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.

Scientific Management

scientific-management
Scientific Management Theory was created by Frederick Winslow Taylor in 1911 as a means of encouraging industrial companies to switch to mass production. With a background in mechanical engineering, he applied engineering principles to workplace productivity on the factory floor. Scientific Management Theory seeks to find the most efficient way of performing a job in the workplace.

Poka-Yoke

poka-yoke
Poka-yoke is a Japanese quality control technique developed by former Toyota engineer Shigeo Shingo. Translated as “mistake-proofing”, poka-yoke aims to prevent defects in the manufacturing process that are the result of human error. Poka-yoke is a lean manufacturing technique that ensures that the right conditions exist before a step in the process is executed. This makes it a preventative form of quality control since errors are detected and then rectified before they occur.

Gemba Walk

gemba-walk
A Gemba Walk is a fundamental component of lean management. It describes the personal observation of work to learn more about it. Gemba is a Japanese word that loosely translates as “the real place”, or in business, “the place where value is created”. The Gemba Walk as a concept was created by Taiichi Ohno, the father of the Toyota Production System of lean manufacturing. Ohno wanted to encourage management executives to leave their offices and see where the real work happened. This, he hoped, would build relationships between employees with vastly different skillsets and build trust.

Dual Track Agile

dual-track-agile
Product discovery is a critical part of agile methodologies, as its aim is to ensure that products customers love are built. Product discovery involves learning through a raft of methods, including design thinking, lean start-up, and A/B testing to name a few. Dual Track Agile is an agile methodology containing two separate tracks: the “discovery” track and the “delivery” track.

Scaled Agile

scaled-agile-lean-development
Scaled Agile Lean Development (ScALeD) helps businesses discover a balanced approach to agile transition and scaling questions. The ScALed approach helps businesses successfully respond to change. Inspired by a combination of lean and agile values, ScALed is practitioner-based and can be completed through various agile frameworks and practices.

Kanban Framework

kanban
Kanban is a lean manufacturing framework first developed by Toyota in the late 1940s. The Kanban framework is a means of visualizing work as it moves through identifying potential bottlenecks. It does that through a process called just-in-time (JIT) manufacturing to optimize engineering processes, speed up manufacturing products, and improve the go-to-market strategy.

Toyota Production System

toyota-production-system
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.

Six Sigma

six-sigma
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.

Read Also: Vertical Integration, Horizontal Integration, Supply Chain, Backward Chaining, Horizontal Market.

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