Last time, we looked at vertical integration, asking 'who is making our product?' and 'do they work for us or do we have to ask other companies for help?'
We learned that a company's goal is to become strongly vertically integrated. The less reliant they are on outside companies, the more profit a company can make. Being strongly vertically integrated gives a company greater control over production and often saves it money as well. It can also be a way to deny equipment and personnel to rivals. Horizontal integration asks a different question: it asks 'what product(s) are we making?' and 'could we be making anything else?' Let's see it in action:
In the last post, I asked you to imagine a game company that starts off as two people with an idea. In the early days, that company was weakly vertically integrated. It had to ask for outside help at almost every step of the way. Several years have passed. The company has in-house writers to come up with ideas at the development stage. It has its own computer suite for making video games and hires a full time team of employees to actually produce them. The company is still small as game companies go, but it's much more strongly vertically integrated.
Then: disaster. The company's latest game doesn't do well and sales targets are missed. The company doesn't make back the money that the game cost and now doesn't have the money needed to develop the next game. Worse, borrowing the money proves difficult: nobody wants to take a chance after the performance of our last game. The problem is that all we've been good at up to this point is making video games - except now, audiences don't even think we're good at that. It's not long before the company has to either announce that it can no longer operate or hope that another company will buy it. This can all too often be the fate of small companies. Despite being well vertically integrated, our company was not horizontally integrated. It only made one thing, and when problems hit that product, there was nothing else to turn to to keep the company going.
Successful companies set their sights on offering lots of products and services. When one area isn't doing so well, it matters a lot less. Other areas of the company can do well while the struggling area recovers. When a company offers lots of different products and services, we say that it is strongly horizontally integrated. Companies can achieve this in many ways.
A quick way is to purchase other, smaller companies already making a product or service well. For example, a video game company might purchase a toymaker and have them make action figures and playsets based on their games. A video game company might purchase a computer company and task them with making the company's first games console instead of having to make video games for the consoles of other companies. Depending on how successful the company and its products become, it can keep purchasing other media companies - perhaps printing books or even making films or TV shows based on their games. Sometimes, all of these companies are managed by an even bigger company whose sole job is just to own other companies - we call this a media conglomerate. This isn't always an easy process. When one company buys another, sometimes it's just a transfer of ownership. For staff in the company, things continue more or less as normal, they just have a new owner they are making things for. Sometimes, though, a company, its team, skills and resources are absorbed. The smaller company ceases to exist. The company being absorbed can struggle to adjust for working for their new company and conforming to its way of working. Some employees might leave because they don't want to be part of the new company. Similarly, some employees may be asked to leave after the companies are merged because there are now too many employees. Equally, companies might decide to create their own new products and services from scratch to avoid this problem. This of course takes longer and there's less guarantee of success, not to mention it's likely that outside help will be needed at first, making vertical integration weaker for a little while.
Case Study: Disney
Disney is a superb example of a company that has performed this sort of horizontal integration. While we think of Disney as a film company that makes cartoons first and foremost, Disney is a very strongly integrated company horizontally that offers a whole wealth of products and services including (but not limited to):
Toys
Merchandise
Books
TV shows
Streaming (Disney+, Hulu)
Theme parks, cruises and hotels
Video games
Shops (the Disney Store)
If one area of Disney's business doesn't do so well, it matters less because it can rely on other areas that are performing more strongly.
There's also one other type of horizontal integration a company can perform: absorbing companies that make the same (or similar) products. For example, a large video game company can absorb a smaller one. That doesn't mean the resulting company is making any new products, but what it does mean is that a rival has been taken off the market and its best employees now work for you. Earlier in the post, I said our failing company might hope to be bought out by another. Just as with horizontally integrating with a company making something different, not all employees may make it across to the new company, either because they don't want to work for the company taking over or because there are too many employees and some are asked to leave. This sort of horizontal integration is happening in the real world right now, with Microsoft trying to acquire Activision.
There are very strict laws in lots of countries about this to avoid creating what's called a monopoly, where a company is the only company making the product that it makes. When a company has no competitors, it can - in theory - charge what it likes for its products (even if they're not very good) because they simply can't be bought anywhere else. Competition means that companies have to make sure they're offering quality products at a good price to stay competitive with their rival(s). In the Microsoft/Activision case, regulators are worried that Microsoft would be taking over one of the biggest companies in gaming to then stop them making games for the Sony PlayStation or Nintendo Switch. This would mean if you wanted to play Activision's games, you would have to buy an Xbox. Microsoft has denied that this is their plan, but it is a great example of a company integrating horizontally by taking over a similar business.
Can a company 'disintegrate?' Absolutely. You might be reading this and thinking that all a company has to do to be successful is integrate both vertically and horizontally as fast and as strongly as possible. Not so. A company can expand too quickly or into areas that other companies already dominate. It then has to look at products or services or areas of production that aren't doing well and think about not offering them anymore.
Consider that Google once tried to launch its own social network. I'll bet you didn't even know this. When it was clear Google couldn't compete with Meta (Facebook, Instagram), Twitter and the others, it stopped supporting Google+. In fact, Google's parent company Alphabet is a particularly well known example of a company that tries to integrate horizontally but also disintegrates horizontally very often. There's a huge list of companies and ideas that Google has discontinued because they didn't work out or someone else was already doing them better. Did you know that Nintendo and Sony once planned to work together on a games console in the face of Sega's success? That was until Sony believed they could go it alone. In a great example of integration-gone-wrong, the partnership broke apart. Nintendo was quietly confident Sony would fail. Sony released the PlayStation and we're now on the PS5.
Nintendo would struggle to regain its fortunes until the launch of the Wii in late-2006 and would never compete in the same arena as Sony again, while Sega, once the other big console maker of the 90s, stopped making consoles altogether. They now make videogame titles, ironically enough for Nintendo and others.
Case Studies to research: LEGO, Warner Brothers or your favourite company This is a really good opportunity for you to do some of your own research. Explore how either LEGO or Warner Brothers have become horizontally integrated and make notes! If you want more of a challenge, pick your favourite media company and research them!
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