Horizontal integration is a business strategy that can be used to expand a company’s overall aspects. One of the most significant advantages of it is to minimize competition. But how did horizontal integration limit competition? This question can make you confused for hours.
Don’t worry! Keep reading till the end to find out the answer and enhance your knowledge in the business field.
What Is Horizontal Integration?
Before getting the correct answer of “how did horizontal integration limit competition?,” we need to know what “horizontal integration” exactly means.
Horizontal integration is the process of merging, acquiring, or taking over other companies (competitors) in the same industry value chain. Thus, it leads to industry consolidation.
By using this strategy, the holding company can achieve its purposes:
- Expand the company in size
- Take advantage of economies of scale
- Access new markets and especially
- Minimize rivalry
How Did Horizontal Integration Limit Competition?
Horizontal Integration Diminishes The Number Of Competitive Companies.
The quantities of companies in the market are closely related to the level of contention. So the number of active companies decreases means less competition in a market.
To our knowledge, the answer for “How did horizontal integration limit competition” is seen right in the meaning of the phrase “horizontal integration.”
When two firms at the same stage of the value chain merge, they create a more prosperous and profitable business. Thus, two become one, leading to the decrease in the number of independent companies in the market.
In terms of minimizing competition, what is the real motive behind horizontal integration strategy? The explanation is based on three of five competitive forces, which are pointed out in Porter’s Five Forces model. And those competitive forces are shaping every industry.
Porter’s model believed that almost all companies using horizontal integration as their business strategy want to reduce rivalry in the form of horizontal competition from established rivals, the potential of new entrants, and the intimidation of substitutes.
However, the decline of competition often comes with the advent of oligopoly or even monopoly, of which governments highly disapprove.
Therefore, if the horizontal integration strategy succeeds and competition reduces, the customers might suffer from many disadvantages due to the high price.
Horizontal Integration Creates Synergies In Many Aspects.
Another way to explain the question “How did horizontal integration limit competition” is that it creates synergies to those united companies, thus reducing the competition among several firms in the industry.
When applying horizontal integration strategy successfully, the companies can use economies of scale, which leads to scale up production and less cost per unit. Therefore, the profit of these companies will increase as they save money from the production stage.
Furthermore, synergies also come from combining products or markets of two different united companies. Offering diversified products/services can enhance cross-selling opportunities and widen each business’s market.
Especially in the current COVID-19 pandemic, synergies from horizontal integration help several companies survive and stand firmly in the market.
In detail, this strategy deals with the problem of competition in the market and makes effective synergies for all united firms in the same industry. As a result, all of the benefits above are the key for “How did horizontal integration limit competition.”
Popular Examples Of Using Horizontal Integration Successfully
Let’s take a look at some examples below to get more specific information on “How did horizontal integration limit competition?”
The acquisition of Gillette by Procter & Gamble in 2005 could be a must-know example of a horizontal merger. Both firms focused on producing hygiene-related products so that collaboration could lessen the marketing and product development cost.
Another famous horizontal integration is The Walt Disney Company, which acquired 21st Century Fox in December 2017. The acquisition enabled Disney to access a bulk of assets, such as 20th Century Fox film studio, FX Networks, and a 30% stake in Hulu. Then, the competition in the industry of producing movies is lessened.
Finally, ICL (India Cements Ltd.) raised a hostile takeover bid for RCL (Rassie Cements Ltd.) in 1998. After many changes, the RCL’s promoter finally made a deal for selling 32% of RCL to ICL, and that price is much lower than the open offer price before. Meanwhile, ICL also obtained financial institutions, thus raising its stake in RCL to 85%.
Final Verdict
In conclusion, we hope this post has helped make clear the question “How did horizontal integration limit competition?” If you have any questions, please don’t mind leaving a comment below so that we could read it and try our best to explain any problem.
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