What is Horizontal Integration?

Horizontal integration is a practice in business by which companies that produce a similar product or provide a similar service merge. Generally, a company will engage in horizontal integration to increase its share of the market for a certain kind of product or service. Such horizontal growth is an important part of the study of business and of microeconomics, and is also an important strategic management skill. If a business comes to control all production of a given product or service, it is said to have a horizontal monopoly.

Integration is considered horizontal only if all mergers and acquisitions are conducted at the same level of production. A car company that merges with another car company is engaging in horizontal integration, but a car company that purchases a refinery or a food chain is not. The goal of horizontal integration is not to control all aspects of production, from raw materials to the final product. It is, instead, to be able to produce a large number of the same product or similar products and to control a large share of the market.

Vertical integration, on the other hand, does have a goal of controlling all aspects of the production of a product or service. A car company engaging in vertical expansion would, indeed, attempt to acquire refineries, mines, factories, and anything else necessary to make the finished product. A monopoly formed through vertical expansion is known as a vertical monopoly. Horizontal expansion and integration is much more common than vertical expansion and integration.

Horizontal integration brings many advantages to those businesses that are able to effectively expand. They are able to sell more of their products, which is usually the goal of any company. Businesses that supply a few different products or services can more effectively manage their resources after merging. Controlling a larger share of a given market gives a business greater power over the flow of products and resources from other companies. All of this added control, power, and productive ability adds to the effectiveness of the business.

There are possible downsides to horizontal integration, as well. When a large enough share of a market becomes focused in a small number of businesses, anti-trust legal issues can arise. Also, unplanned expansion can be more harmful than beneficial. If a company expands without a solid horizontal plan, it can quickly be overwhelmed. With the proper planning, though, horizontal expansion can lead a business to great rewards.