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Horizontal integration is a business strategy where a company merges or acquires another firm that operates in the same industry, aiming to increase its market share. By doing so, companies can achieve economies of scale^[1], increased market power, and a stronger competitive position. However, this strategy also involves challenges such as regulatory hurdles and potential cultural clashes between the merging entities. The integration may stir the industry dynamics, creating a more competitive environment. A notable example includes the merger of Kraft and Heinz. Horizontal integration is a type of merger and acquisition strategy, which is a broader term that also includes vertical and conglomerate mergers.

Terms definitions

1. ↑ economies of scale. Economies of scale is a term used to describe the increased efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production because fixed costs are shared over an increased number of goods. Factors contributing to economies of scale include purchasing (bulk buying of materials through long-term contracts), managerial (increased specialization of managers), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments), marketing (spreading the cost of advertising over a greater range of output), and technological (taking advantage of the inverse relationship between the capital cost of the equipment and its size). It's important to note that economies of scale can also be enjoyed externally, for example, through the growth of an industry within a specific geographical area.

Glossary

Horizontal integration (Wikipedia)

Horizontal integration is the process of a company increasing production of goods or services at the same level of the value chain, in the same industry. A company may do this via internal expansion, acquisition or merger.

The process can lead to monopoly if a company captures the vast majority of the market for that product or service.Other benefits include, increasing economies of scale, expanding an existing market or improving product differentiation.

Horizontal integration contrasts with vertical integration, where companies integrate multiple stages of production of a small number of production units.

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