horizontal integration


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Horizontal Integration

1. A business strategy in which a company expands its operations to provide similar goods and services at the same point on the supply chain. For example, a widget retailer may begin selling whatsits in addition to widgets. More concretely, an oil exploration company may also begin exploring for natural gas. It is important to note that horizontal integration always occurs at the same point on the supply chain: a retailer does not move into wholesale and vice versa. See also: Vertical integration.

2. See: Horizontal acquisition.

horizontal integration

  1. the specialization of a firm at a particular level in the production or distribution of a product.
  2. the increase in MARKET CONCENTRATION arising from the ORGANIC GROWTH of firms, or, more specifically, EXTERNAL GROWTH through MERGERS and TAKEOVERS, and the subsequent integration of firms supplying the same product.

    Horizontal integration may be advantageous to firms if it permits them to lower unit costs by exploiting ECONOMIES OF SCALE, and to increase their market share, enabling them to exercise greater control over market conditions. On the other hand the firm may experience DISECONOMIES OF SCALE as it grows larger and be unable to adapt quickly and flexibly to change in customers demands because it is too bureaucratic (see DOWNSIZING). Moreover there are limits to horizontal expansion as a growth strategy for the firm. Overspecialization may increase the firms exposure (risk) to cyclical and secular downturns in demand. The former causes profits to vary and can lead to cash-flow problems while the latter threatens the very survival of the firm (see PRODUCT LIFE CYCLE). The internationalization of the firm's operations (see MULTINATIONAL EXTERPRISE) can help but in many cases DIVERSIFICATION may be necessary to sustain the expansion of the firm. In addition, firms' ability to increase market share by merger and takeover may be restricted by COMPETITION POLICY. In the UK, for example, mergers and takeovers which take a firm's market share of a product above 25% may be challenged by the OFFICE OF FAIR TRADING. See BUSINESS STRATEGY, COMPETITIVE ADVANTAGE, PRODUCT MARKET MATRIX.

horizontal integration

  1. 1the tendency for firms to specialize (see SPECIALIZATION) at a particular level in the production and distribution of a product rather than engage in a number of successive stages (VERTICAL INTEGRATION). Also called lateral integration.
  2. the MERGER of firms making the same product. From the firm's point of view, expansion through horizontal integration may be advantageous because it enables the firm to reduce its production and distribution costs by securing ECONOMIES OF SCALE and ECONOMIES OF SCOPE, or because it removes or reduces competitive pressures and increases the firm's control over the market (see MONOPOLY). On the other hand, the firm may experience DISECONOMIES OF SCALE as it grows larger and be unable to adapt quickly and flexibly to changes in customers’ demands because it is too
bureaucratic (see DOWNSIZING). Moreover, there are limits to horizontal expansion as a growth strategy for the firm. Overspecialization may increase the firm's exposure (risk) to cyclical and secular downturns in demand. The former causes profits to vary and can lead to cash-flow problems while the latter threatens the very survival of the firm (see PRODUCT LIFE CYCLE). The internationalization of the firm's operations (see MULTINATIONAL COMPANY) can help, but in many cases DIVERSIFICATION may be necessary to sustain the expansion of the firm.

In terms of its wider impact on the operation of market process, horizontal integration may, on the one hand, promote greater efficiency in resource use and reduce market supply costs and prices, or, on the other hand, by reducing competition and increasing the level of SELLER CONCENTRATION in the market, it may result in a less efficient allocation of resources and the danger of monopolistic exploitation.

Thus, horizontal integration may produce, simultaneously, both beneficial and detrimental effects. Under the FAIR TRADING ACT 1973, horizontal integration by an established monopoly firm or a proposed merger (TAKEOVER) between two competing firms involving a market share in the product concerned of over 25% can be referred by the OFFICE OF FAIR TRADING to the COMPETITION COMMISSION to determine whether or not it operates against the public interest. See OLIGOPOLY, PRODUCT-MARKET MATRIX, COMPETITION POLICY (UK), COMPETITION POLICY (EU).

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