Horizontal Integration: As a business person when you hear the term Horizontal Integration (or Lateral Integration) your first thought should be “Industry Consolidation” as Horizontal Integration is simply a business growth tool that eliminates competition within a market segment to increase a companies market share within the particular segment.
Horizontal Integration – absorption into a single firm of several firms involved in the same level of production and sharing resources at that level (Source: www.thefreedictionary.com)
When you hear Horizontal Integration, industry consolidation, it is generally and cleverly disguised with words like economies or scale, operational uniformity, increased differentiation, lower costs, access to new markets, or expanded operational knowledge base. Truth is anyway you word it this is a strategy of growth by subtraction. The subtraction is within the marketplace by eliminating competition. Some will argue this is Natural Selection at work in the business world “Survival of the Fittest” and in some ways this is a fitting description as Company A is in a stronger financial position, has a newer technology, or more effective business process and has a clear advantage in taking the product or service to market so they are able to exploit this advantage and eliminate a “weaker” competitor.
So what’s the problem; Survival of the Fittest… The challenge in this growth strategy lies in the true economies of scale proposition. More often than not the economies of scale are not realized within the operation which end up destroying the value of the company. There are often real management issues within the merger that are never anticipated because a true hard look is never given to this area of a merger. Management issues lead to a rigid structured organization that has a hard time innovating and adapting to market changes. If the horizontal integration is to big, such as creating a company with more than 25% market share, it can also have legal ramifications and create regulation hassles due to the monopoly (No Competition) or oligopoly (Few Competitors) the merger created.
As a Speaking Business example I am going to use two different technology/entertainment horizontal integrations to show a successful integration and one that went way wrong. The first I will use is an older attempt, but very relevant, the Time Warner/AOL merger. I will show this one as a FAIL. Then we will look at the Google/You Tube merger as a strong use of the growth strategy.
Time Warner/AOL: This M&A (Merger & Acquisition) had all the makings of a great company. It was hailed as revolutionary by many in the entertainment and web market space. Both companies operated in the same market space by providing subscription based entertainment services. They had content development, distribution platforms, and both companies had a substantial customer base generating amazing revenue. The number one challenge in this M&A was management ego and incompatibility. Time Warner was founded and grew from a traditional, old school media company. They grew through a strategy of both horizontal and vertical integrations. So you would have thought they would have been able to capitalize on the AOL acquisition. Problem was that AOL was a new tech founded company and had a completely different corporate culture and corporate design than anything Time Warner management had ever seen. Due to an inflexibility and lack of vision on the part of Time Warner execs this merger failed miserably. Economies of scale never materialized. The company failed to utilize the increased distribution platform. There was minimal ability to innovate and create as that was frowned upon in the Time Warner traditional media culture.
Google/You Tube: This M&A on the other hand was look at by some as ridiculous. Why would Google “BUY” You Tube. You Tube was actually was a step backwards from a technology platform for Google, but and it is a big BUT, You Tube owned the video distribution space that no one else was able to touch. Google looked at launching their own service to compete with the multiple video entertainment channels that existed, but realized You Tube had built and more importantly, monetized, there service. They had millions of loyal followers viewing video daily and Google knew they could add additional monetization to the service with minimal technical investment. This is an example where both companies were highly successful in the online market place. Google has the culture and technical capabilities to do what ever they want to do technically. Corporately, at Google, management understood that You Tube had a solid strategy, they were able to mesh cultures and continue to add value through innovation. The created economies of scale by merging back office functions and facilities. They were able to increase company value through the process.
These are just two examples of domestic companies utilizing Horizontal Integration, good and bad, and there are hundreds more on both sides of the ledger. When you add a multi-national component you add additional layers of difficulty across all levels. I discussed the multi-national issue with my friend Tim Shanahan, who I’ve spoke with before for a Speaking Business piece. Tim works primarily in multi-national finance in a large cap environment. Horizontal Integration on a global scale still has the same basic reason at the core. Increase market share, eliminate competition, maximizes economies of scale, etc. He did say that one of the biggest challenges also presented one of the greatest opportunities for multi-national horizontal integration. That is the cultural differences and the ability to do business in a new market for a firm from another part of the world. Sometimes this creates a challenge simply do to language or cultural beliefs. This is true at both the consumer and the corporate levels. A recent horizontal merger on a global scale that emphasized the good and the bad both was the Daimler-Benz / Chrysler Corporation merger. There were unbelievable synergies between the companies from passenger cars to heavy industry. The ability to create a better economy of scale was always at question based on brand platforms, but the real challenge for anyone that’s done business with a German firm knows. The business and work ethic are completely different. The challenging of merging an American unionized firm into a German corporation, yes culture shock definitely existed for the American counterparts. There are preconceived consumer mentalities to deal with in this merger. Preconceived corporate expectations to be dealt with. This horizontal integration had every single challenge you could think of and will eventually be an model of education on what to do and not to do with a multi-national horizontal integration.
Hopefully this will help next time you see the term Horizontal or Lateral Integration, remember to think Consolidation first. Then try to understand if the buzz words actually apply to that particular M&A to know if it is a good deal or not.
Special Thank You to Tim Shanahan for his contributions to the thoughts for this week’s Speaking Business. To find more on Tim visit his LinkedIn page. Tim Shanahan on LinkedIn