Vertical vs. Horizontal Business Strategies

This article is intended to explore some of the key differences between vertical versus horizontal business strategies. In this regard, identifying the potential merits as well as the limitations that are associated with either choice can assist in choosing the best long-term strategic direction for the company.

What are Horizontal vs. Vertically Aligned Businesses?

Companies that have horizontally aligned businesses are those that manufacture products or provide services which they sell across a variety of end uses and into multiple industries. The company’s business strategy is centered on strengthening its market identity based on the products, technologies, or services they offer.

Horizontal business strategies are commonly associated with manufacturers of raw materials or additives that provide a particular function or serve a general purpose applicable in a variety of formulated manufactured products. Distributors and manufacturers of processing equipment certainly fit the characteristics of companies that, by the nature of their business, normally employ a horizontal approach to doing business. As you move forward in the supply chain to formulated products, tier manufacturers, and eventually to companies that produce finished goods, the choice of employing a horizontal or a vertical business strategy becomes more complex.

For companies that employ a horizontal business strategy, favorable logistics, strong sales relationships, or other unique aspects of the business represent differentiators. Their overall business strategy revolves around the development and promotion of their products or services across multiple market applications. This approach helps circumvent the in-depth involvement, resource commitments and other ancillary costs required to build and support a vertically oriented business position directed at a particular industry.

In all cases, a horizontal business approach is characterized by a company that has a strategic direction that is concentric to the products, technology or the services they offer.

A vertically aligned business is one that has reasonably definable boundaries linked under the umbrella of an industry (e.g., automotive, packaging, industrial equipment) or market space which has a commercially recognized purpose.

In vertical aligned businesses, many of the products and/or services offered are tailored to address specific end use application needs or requirements within a given industry. Vertically aligned business strategies are normally global in scope. They are led by multinational corporations as major participants positioned at different levels of the supply chain. These companies are in many cases the recognized market leaders or the market challengers.

One of the challenges that these multinational corporations face in reinforcing their business position as a market leader or major challenger is enhancing brand image. To be recognized as a significant industry player, it is increasingly difficult to avoid segregating the company’s efforts in some way.

Organizationally, this may include creating a separate business unit, business group, division, etc. This signals the company’s commitment to the strategic importance of the industry to all levels of the supply chain and competitors as well. Internally, it provides for a more focused effort and control of resource allocation decisions intended to address industry specific issues and long-term needs. To stay competitive in a vertically oriented business and position the company for future growth, regardless of your company’s position in the supply chain, you need to demonstrate a commitment and an ability to support the next levels up in the value chain.

In addition to the major players, there are many medium-sized or specialized manufacturers that chose to pursue a vertical business strategy. In certain cases, these companies only participate in specific geographic regions.

Others have narrowed their business focus to certain end uses where their technology provides sufficient differentiation to support some level of a vertical business strategy. In general, the choice of pursuing a vertical strategy for these companies is based on their achieving stronger long-term business growth which delivers greater profitability for the company.

In general, the level of commitment required to support a successful vertically oriented business effort is much higher than for a horizontal business strategy. A successful industry-directed effort includes taking an active part in many of its component parts. This includes trade organizations, specification setting groups or agencies, research or technology institutes or similar groups. These organizations commonly provide critical services to support the individual needs of the industry they represent. Examples included test methods, performance and quality standards, certification practices, safety regulations, etc.

Overall, the costs and resources required to maintain an industry-directed competitive business position are very high and often very complex. When considering that fact that, on a global scale, there are significant regional variations that also need to be accommodated to be successful, it limits the number of companies that are able to effectively compete.

Strategic Considerations – Vertical versus Horizontal Considerations

Vertically oriented business strategies represent an important option for major corporations worldwide. This is particularly true for companies who supply formulated products or participate forward in the supply chain to finished goods. The value of having a focused effort directed at a particular industry has become an expectation by customers serving that space.

Suppliers of raw materials compete to position themselves with the market leader or key market challengers forward in the supply chain. Alignment with those companies that provide the greatest access to industries where their products or services have a best fit is a critical issue for success with many companies.

One of the important benefits from pursuing a vertical business strategy is the leverage it provides within the supply chain. Distributors who have a strong business position in supplying to a given industry will favor those suppliers that have brand recognition and can provide broad geographic coverage. This limits the number of suppliers needed to serve this market space. Second tier suppliers are left with less favorable options.

The option of selecting a vertical market business strategy often precludes smaller and most mid-sized companies. The resources and the costs involved to support a successful industry-focused effort exceed their capabilities to compete especially on the global scale.

The Role of Niche Players

Smaller or medium-sized companies that have novel products or technology results in a differentiated business position within a vertical market space, and fit within the description of a niche player. The objective of a niche player is to sufficiently narrow the company’s business scope and strategic objectives to better match its resources and capabilities to compete.

Choosing a niche strategy, is an important tactic for smaller, innovation-driven companies, which offer technology that provides a unique solution or next generation improvement over the present state-of-the-art. The business focus is normally directed at selected segments or sub-segments of a vertical market or industry. Niche players also normally have a regional focus as opposed to an identifiable level of global participation.

Summary

While the costs attributable to pursuing a vertical business strategy are high, the benefits can be significant. This is certainly true for those companies that attain a position as the market leader or that of a strong market challenger within a particular industry. These companies have a high market share (globally or in certain cases regionally), are low-cost manufacturers, and have more complete, often innovative product lines. The company image and branding strength are tailored to a particular industry, which creates strong barriers for potential new entrants.

Niche players also benefit from pursuing a vertically oriented business strategy. It allows them to focus on those segments of the industry that are both a “best fit” for the company’s strengths in products or technology where they can maximize profitability and growth expectations going forward. At the same time, the costs and resourcing required to successfully serve the broader industry are avoided.