Vertical or Horizontal Growth

When growing your business you need to decide on a growth strategy

Here are two examples:
1) Vertical growth - focusing on current customers to make additional purchases of your
product or services. Develop new products or services to appeal to existing customer base.
2) Horizontal growth - finding new customers to buy existing products or services. Expand the
geographic reach of your business as well as sell to different customers in same area.Don't limit
yourself. You can combine both strategies. If you are a smaller firm, concentrate on one at a
time.
Communication Tip - when communicating to your target market - U.S. Mail postage, envelope,
paper and labor on average will cost you $1 per person, an email about 3 cents per person.
In microeconomics and management, the term vertical integration describes a style of
management control. Vertically integrated companies are united through a hierarchy with a
common owner. Usually each member of the hierarchy produces a different product or (market-
specific) service, and the products combine to satisfy a common need. It is contrasted with
horizontal integration. Vertical integration is one method of avoiding the hold-up problem. A
monopoly produced through vertical integration is called a vertical monopoly, although it might
be more appropriate to speak of this as some form of cartel. Nineteenth century steel tycoon
Andrew Carnegie introduced the idea of vertical integration. This led other businesspeople to
use the system to promote better financial growth and efficiency in their companies and
businesses. In microeconomics and strategic management, the term horizontal integration
describes a type of ownership and control. It is a strategy used by a business or corporation that
seeks to sell a type of product in numerous markets. Horizontal integration in marketing is much
more common than vertical integration is in production. Horizontal integration occurs when a
firm is being taken over by, or merged with, another firm which is in the same industry and in
the same stage of production as the merged firm, e.g. a car manufacturer merging with another
car manufacturer. In this case both the companies are in the same stage of production and also in
the same industry.
A monopoly created through horizontal integration is called a horizontal monopoly.
A term that is closely related with horizontal integration is horizontal expansion. This is the
expansion of a firm within an industry in which it is already active for the purpose of increasing
its share of the market for a particular product or service.

Advantages of Horizontal integration

Economies of scale, in microeconomics, are the cost advantages that a business obtains due to
expansion. They are factors that cause a producer’s average cost per unit to fall as scale is
increased. Economies of scale is a long run concept and refers to reductions in unit cost as the
size of a facility, or scale, increases.[1] Diseconomies of scale are the opposite. Economies of
scale may be utilized by any size firm expanding its scale of operation. The common ones are
purchasing (bulk buying of materials through long-term contracts), managerial (increasing the
specialization of managers), financial (obtaining lower-interest charges when borrowing from
banks and having access to a greater range of financial instruments), and marketing (spreading
the cost of advertising over a greater range of output in media markets). Each of these factors
reduces the long run average costs (LRAC) of production by shifting the short-run average total
cost (SRATC) curve down and to the right.
Related Corporate Diversification
When multiple lines of business are linked in a firm, the firm is pursuing a
strategy of related
diversification. Such a firm is conscious of leveraging its resources and
capabilities beyond a
single product or market into those businesses that are related to their
current activities.
Related diversification can happen in two ways:
�Related-constrained – when all the businesses in which a firm operates
share
a significant number of inputs, production technologies, distribution
channels, similar customers, etc.
� Related-linked – when the different businesses that a single firm pursues
are
linked on only a couple of dimensions, or if different sets of businesses are
linked along very different dimensions.
Examples help in understanding the critical difference between related-
constrained
and related-linked types of diversification.
Bic, the French Company, produces products such as disposable razors,
cigarette
lighters, and pens. The company pursues a related-constrained
diversification strategy
because all their products share significant commonalities in the areas of
plastic injection
molding, retail distribution, and brand name.
Newell Rubbermaid is a good example of a related-linked firm. After Newell
Company acquired Rubbermaid, the company is organized into five
segments: cleaning and
organization; home and family; home fashions; office products; and, tools
and hardware. All
five segments share common distribution channels – supermarkets (such as
Wal-Mart) and
office supply stores (Staples, Office Depot, etc.). The products are sold under
various brand
names (Sharpie, Levolor) and do not typically share common technology or
inputs across segments.
Related Diversification
and Competitive Advantage
 Competitive advantage can result from related diversification when a company captures cross-
business opportunities to
 Transfer expertise/capabilities/technology
from one business to another
 Reduce costs by combining related
activities of different businesses into
a single operation
 Transfer use of firm’s brand name reputation
from one business to another
 Create valuable competitive capabilities via cross-business collaboration in performing related
value chain activities
What Is Unrelated Diversification?
 Involves diversifying into businesses with
 No cross-business strategic fits
 No meaningful cross-business
value chain relationships
 No unifying strategic theme
 Basic approach – Diversify into
any industry where potential exists
to realize good financial results
 While industry attractiveness and cost-of-entry tests are important, better-off test is
secondary