Q.

A. Grossman and Hart (1986) states horizontal integration as merger or acquisition of another company who occupy
similar levels in production supply chain either in same or different industry. It is also called lateral integration. Capron
(1999) suggests that improvement in cost efficiency contributes to an appreciation of firm’s value. The integration
provides avenues for information sharing, transfer/redeployment of knowledge and skills (Moatti, Ren, Anand, and
Dussauge, 2014). It assists companies in costs reduction, technological advancement, access to more research and
development, and more value by achieving economies of scale, access to wider markets thereby enhancing their
competitive strength.

Main objectives of horizontal integration are to eliminate duplicate facilities, enhance production line, increase breadth
and width of products, boost sales, increased market share (Flouris and Oswald, 2006). For example, Marriot
International acquired Starwood in 2016, creating world's largest hotel company, with a view of diversifying its
properties portfolio. Marriott had strong presence in luxury, convention, and resort segments, but Starwood's
international presence was robust/powerful. The integration offered better option for consumers, more opportunities for
employees, and added value for shareholders and post integration both companies had approximately 5,500 hotels and
1.1 million rooms worldwide. Horizontal integration can also open up a firm’s access to resources not available before,
as seen in the above example which was done to gain international presence. Therefore, horizontal integrations could
also benefit a company in terms of growth, reduction of competitors, rise in product differentiation and accessibility into
newer markets. Another such advantage is that horizontal integration develop synergies. These synergies are realized by
the combination of markets or products as it is beneficial in terms of research and development, distribution channels,
and above all, cost effective solutions. The Procter & Gamble’s acquisition of Gillette in the year 2005, is a suitable
example of a horizontal merger that realized economies of scope. Since both the firms engaged in the production of a
plethora of hygiene-related products from razors to toothpastes, the merger reduced marketing costs and product
development costs per product. Therefore, the utilisation of this form of integration benefits from an economic scale,
which occurs when the costs of operation are lesser than the profits that the firm makes from those operations (Gareth
and Hill, 2012).

Horizontal integration is often driven by marketing imperatives. Diversifying product offerings may provide cross-
selling opportunities and increase each business’ market. However, there are disadvantages as well that comprise of
increase in per unit cost of production at times when synergies are not fully realized, regulatory issues, cultural
differences, conflicts amongst employees, government laws and regulations that prevent large enterprises from such
activities of mergers and acquisitions that could narrow down competition and create a monopoly. Another shortcoming
is destroying value rather than creating it when the synergistic energy between the two companies never materialize,
despite costs (Tarver, 2021). For example, eBay purchased Skype for $2.6 billion in 2005, thinking buyers and sellers
could contact one another through video communications which failed, as consumer’s were unprepared with main
question being who and why would anyone wish to video chat with strangers. Skype’s management team was changed
four times in four years by eBay to recover from downfall, but ultimately, eBay finally sold off 65% in 2009.
To conclude, horizontal integration envisages acquiring or merging with competitors with aims of awarding benefits
such as synergies in costs, higher value product and window to greater revenues, future competitive advantage, however
not all integrations are successful. Hence, with effective planning and being mindful of pitfalls, corporates can still resort
to horizontal integrations to reap future benefits. However, Kenton (2021) suggests that the success of horizontal
integration activities is often at the expense of consumers, especially if it assists in the reduction of competitive rivalry.
Therefore, it is for this reason that horizontal integrations are deeply investigated and analysed by government rules and
regulations, to ensure the prevention of violating anti-trust laws.

Moatti V, Ren C, Anand J and Dussauge, P. 2014. Disentangling The Performance Effects of Efficiency and Bargaining
Power. Strategic Management Journal.

Grossman S and Hart O. 1986. The Costs and benefits of Ownership: A theory of Vertical and Lateral
Integration. Journal of Political Economy. 94(4). pp: 691-719.