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?
- What are the potential drawbacks of horizontal integration?
- Horizontal integration case studies
- Uber Eats’ acquisition of Postmates to stay competitive in the meal delivery industry
- The merger between GrubHub and JustEat to create one of the largest meal delivery players on earth
- TikTok acquisition of Musical.ly and its rebranding
- Facebook acquired Instagram and kept it as independent product (for a few years)
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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
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
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
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)
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!