Horizontal Integration: Definition, Benefits & Examples

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  • 0:00 What Is Horizontal…
  • 0:30 Acquiring New Firms
  • 1:57 Advantages
  • 2:35 Disadvantages
  • 3:34 What Happens Next?
  • 3:52 Lesson Summary
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Lesson Transcript
Instructor: Kimberly Winston
When a company wants to grow, it will buy growth though the acquisition of other companies. In this lesson, you will learn how firms use a horizontal integration strategy to grow.

What Is Horizontal Integration?

In business when someone refers to horizontal integration or lateral integration, they are referring to a strategy in which a firm acquires similar firms to increase its market share and profits. A firm's market share is its percentage of total sales over a specific period of time in a market, a pool of current and future customers. Firm's adopt this strategy as a way to strengthen their position in the market.

Acquiring New Firms

The acquired companies are most often competitors or similar companies whose customers are a different demographic. Horizontally integrated companies are able to gain market share because they have access to the customers of the company they acquired. Just as you might expect, profits have a tendency to increase when firms increase the number and type of customers they serve.

It is important to note that horizontally integrated companies must possess the necessary financial resources to acquire and manage other firms or they risk failing to achieve the desired effects of horizontal integration.

Firms usually acquire other firms through:

  • Acquisition
  • Merger
  • Hostile takeover

An acquisition is simply one company purchasing another. Mergers are a little more complicated because they include two companies joining together. Just as the name applies, a hostile takeover is for the lack of a better word, hostile. It is when a company has been acquired that did not want to be acquired.

One example of a horizontally integrated company is AT&T. AT&T is a telecommunications company that has acquired other firms in that industry, such as T-Mobile and BellSouth. While the firms operate in some of the same areas, there are areas that AT&T did not operate in until acquiring those companies. AT&T was able to increase its market share by acquiring the customers of T-Mobile and BellSouth.

Advantages

The advantages of horizontal integration include:

  • Increased market share and profits
  • Improved service
  • Increased industry and customer knowledge

Horizontally integrated firms obtain many different benefits from implementing this strategy. Earlier you learned that firms were able to increase their market share and profits by introducing this strategy. Firms are also able to improve service and increase their capabilities, since the companies that they acquire often have different capabilities. They are able to better serve their customers as well as expand their knowledge of customer demands and the industry.

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