When a company starts its operations, it may be relatively small. Startups is the term used to describe those companies. Usually, they have limited resources and seek to obtain finance from various sources. Once they get this finance, they fund their operations to grow. This growth occurs through organic methods. In most cases, it involves focusing on current markets and products.
However, as companies grow larger, their existing products and markets may not be sufficient. Therefore, they will want to venture into other areas. This process falls under the growth or expansion strategies that companies follow. Usually, companies use one of the four growth strategies by Ansoff to obtain that expansion. Within those strategies, companies have more options to adopt during the process.
Ansoff’s growth strategies include the different areas where companies can expand operations. These focus on two primary aspects, products and markets. Usually, smaller companies choose to focus on their existing areas. However, some companies may also seek to expand through new products or markets. In some cases, companies may also target both these areas. When choosing to do so, they must follow the diversification strategy.
What is the Diversification Strategy for growth?
The diversification strategy is an expansion strategy that companies use to develop their operations. It involves widening the scope of those operations across new markets and products. In other words, a company uses this strategy for those two areas. By using diversification, companies enter into a new market or industry. This market is an area where the company is not currently operating. Similarly, they offer unique products that are not identical to the existing ones.
The diversification strategy allows companies to grow and expand into unfamiliar areas. On top of that, it also enables them to produce new products and services. By doing so, companies can expand their business and attract new customers. This strategy further allows companies to maintain their current operations. In some cases, those operations can fund the growth.
With the diversification strategy, companies can diversify their existing business. In that regard, it is similar to the strategies investors use to protect their portfolios from specific risks. However, with this strategy, companies can diversify their business in two areas, as mentioned above. On top of that, it can also increase sales volumes while also creating synergies. Through those synergies, companies can keep their costs low.
Overall, diversification is a strategy used by companies to enter new markets through new products. It is a demanding process since it involves exploring two new areas simultaneously. Companies can use this strategy in various ways. Usually, it includes deciding between diversifying with the supply chain or outside. In the former category, companies can use vertical or horizontal integration. However, they are different in various aspects.
What is Vertical Integration?
Vertical integration involves taking over or merging with other supply chain participants. However, they must lie on the vertical axis. The supply chain is the contributors involved in producing and delivering a product to a customer. On its vertical axis, companies with differing activities lie. Usually, they include suppliers and distributors with the company in consideration. The vertical integration strategy involves merging with or taking over those parties.
The vertical integration strategy allows companies to streamline their operations. They can achieve that by taking direct ownership of the various stages involved within the supply chain. Essentially, those stages relate to the production process. By doing so, companies can control those areas without relying on external contractors or suppliers. This process can also lead to efficiencies and better customer satisfaction.
Vertical integration relates to diversification since it involves new markets and new products. Although the company connects with those markets through the supply chain, it does not operate in those areas. Similarly, the products from those areas are crucial to manufacture and deliver a finished product. Nonetheless, the company does not produce each product on that list. With vertical integration, companies can be more active in the supply chain.
Overall, vertical integration involves taking over or merging with other supply chain participants. However, those participants include suppliers and distributors. With this strategy, companies can control more of their supply chain. Companies can either establish their suppliers or distributors or acquire them. Either way, it allows them to create synergies in various areas.
What is Horizontal Integration?
Horizontal integration is the same as vertical integration in that it involves integrating within the supply chain. However, this integration occurs sideways rather than the vertical axis. With this strategy, companies do not target their distributors or suppliers. Instead, they merge with similar companies that offer similar services. Essentially, horizontal integration happens by integrating with competitors and similar companies.
With horizontal integration, companies can still create synergies. However, it does not focus on that area. Instead, horizontal integration involves reducing competition in the market. Usually, it occurs when companies overtake or merge with their competitors. By doing so, companies can take over a larger market share while also reducing competition. This way, horizontal integration can allow for better operations.
Horizontal integration can allow companies to increase in size and create economies of scale. In essence, it helps them achieve similar results to vertical integration. However, it doesn’t concern distributors or suppliers. With this strategy, companies focus on their competitors. By growing in size, companies can achieve more power in the vertical supply chain. By doing so, they can also impact their suppliers and distributors.
Overall, horizontal integration involves an expansion in the horizontal axis of the supply chain. This axis includes competitors or equivalent companies. With this strategy, companies can expand their operations. However, it is not similar to vertical integration, which involves suppliers and distributors. Nonetheless, this strategy can also impact those parties indirectly.
Vertical vs Horizontal Integration: Top Key Differences
Vertical and horizontal integration are similar since they fall under diversification strategies. However, there are several differences between vertical and horizontal. These differences relate to how they interact with the supply chain, the impacted parties, etc. It is crucial to understand those differences to know how they work.
Overall, the top key differences between vertical and horizontal integration include the following.
Supply chain level
Vertical integration involves parties within the vertical axis of the supply chain. As mentioned, these parties usually include suppliers and distributors. On the other hand, horizontal integration allows companies to target similar businesses or competitors. These parties fall on the horizontal axis within a supply chain. The supply chain level each integration strategy targets differs.
Design
In vertical integration, the companies involved do not share similar activities or products. Therefore, these companies may be significantly different from each other. In contrast, horizontal integration usually includes a merger between similar companies. These companies share operational activities for their products or services. Similarly, they target the same customers.
Objective
The primary objective of vertical integration is to regulate the supply chain. When companies integrate with other companies vertically, they can control more processes in that chain. In contrast, horizontal integration only targets grown size. On top of that, it also focuses on increasing the market share. While both result in more revenues, their objectives are different.
Categories
Vertical integration can have various categories, including forward and backward integration. The former involves integrating with distributors in the supply chain. In contrast, backward integration involves targeting suppliers. These types constitute the vertical integration strategy. On the other hand, horizontal integration is straightforward and doesn’t include any categories.
Outcome
Vertical integration helps reduce cost and wastage from the supply chain. By controlling more of the supply chain, companies operate more efficiently. On the other hand, horizontal integration does not offer the same. However, it eliminates the competition in the market. By doing so, this integration allows companies to increase their market share.
Conclusion
Diversification is a growth strategy that allows companies to enter new markets through new products. It involves two categories, including vertical and horizontal integration. Usually, these strategies include some similarities. However, they can also have several differences. These differences relate to the supply chain level, design, objective, categories and outcomes.
