When you run a company with a diverse portfolio of businesses, you’ve set yourself and your people up for success. How else are you going to keep up in a world that changes all the time — and often without warning? Yet you need to pick which type of diversification growth strategy works best for your needs.
For instance, would you be better served by vertical or horizontal integration? Picture your supply chain as a straight line, with your company on some point along the line. When you vertically diversify, you take on another stage of the supply chain either downstream (ahead of where you are on the line) or backward (behind where you are on the line.) Or, you take over all of the supply chain functions and enter into a process of balanced integration.
On the other hand, horizontal integration deals with reducing competition by gaining more market shares. This can happen by buying out or merging with a competitor, or simply capturing more of the total available market for your product or service.
Vertical vs. Horizontal Integration: Why I Chose Vertical
As a founder, you get to decide which form of integration makes sense for you, but I’ll walk you through my experiences.
During my time as a jack of all trades entrepreneur, I’ve leaned into vertical integration strategies because they seemed to make the most sense. Case in point: Years ago, I started a mobile home management business. A natural supply chain piece of the mobile home management industry is mobile home manufacturing. Consequently, I grew my company into one that manufactured and managed mobile homes. This would be a great example of backward vertical integration.
Later, I realized that I was spending a lot in trucking costs to ship materials to my mobile home manufacturing facility. As a result, I decided to get involved with trucking and shipping (Again, another backward vertical integration move.). Each business expansion ended up being a smart, sensible strategy. I eliminated the “middle man” and continued to grow all my businesses.
I’m not suggesting that horizontal integration isn’t valuable, though. It is. But I appreciate the numerous benefits that can come with vertical integration, including the following.
1. You have more control over the supply chain.
Vertical integration allows you to exercise more thoughtfulness over your supply chain. You aren’t at the mercy of another organization’s decision to use subpar products or products that don’t fit with your corporate mission or values. Though this increases your accountability, it also increases your potential.
2. You can often lower your costs.
Adding a part or parts of your existing supply chain to your portfolio can be quite economical. Because you’re cutting out extra steps and costs, you have more pricing power (You can thank the principle known as “economies of scale.”). Who wouldn’t want to lower costs and be able to pass savings onto customers?
3. You can avoid some supply chain interruptions.
When you aren’t dependent on external vendors or suppliers, you have a better chance of lowering supply chain disruptions. To be sure, you may still experience hiccups if the economy takes a major turn, as in 2020. But you may still be able to continue working more efficiently than your market competitors.
4. You can bump up your industry expertise.
I enjoy becoming knowledgeable about every aspect of the goods and services I offer the public and other businesses. Vertical integration helps me dive deeper and better understand the full scope of any industry. If one of your personal goals is to become a thought leader, vertical integration can help you get there.
5. You can disrupt by creating your own (cheaper) version of whatever’s trending.
You already have a handle on your industry’s current and anticipated trends. Could vertical integration allow you to replicate a bestselling product, without violating patents, of course. Many organizations sell lower-priced, ethical “knock-offs” of high-demand items because they have such power over their markets due to their presence at important points in the supply chain.
Overcoming Obstacles to Making Vertical Integration Work
Now, it would be misleading to suggest that vertical integration is without its downsides. Certainly, it’s not all perks. You’ll want to seriously consider how to overcome the challenges inherent in vertical integration before starting or buying a business.
The first disadvantage comes straight from your pocketbook. Vertical integration frequently requires more investment than horizontal integration. For that reason, you’ll need to make sure you have the capital or access to the capital necessary to expand without risking your other enterprises.
Another vertical integration issue relates to the sudden growth of owning another company. Large organizations or portfolios can be beasts to manage. Consequently, you’ll want to bring aboard the right talent. That way, you’ll lose less sleep worrying about mismanagement or excessive waste.
Finally, you’ll need to conduct serious research before jumping into another part of your supply chain. Get your hands on all the information you can so you’re completely aware of what’s coming. Or, only vertically integrate into a field you already know. That’s what I did when I started a mortgage company when financing went south for manufactured housing. I had been in banking previously, so the move wasn’t into a foreign industry.
Despite any possible snags, a vertically integrated corporate diversification strategy can work. If you’ve wanted to create a system of diverse income streams, keep vertical integration in mind. And if you want to talk more about business expansion ideas, connect with me on Facebook.