It's almost a given that most businesses aim to grow. But how can they achieve it? This is where growth strategy comes in. It’s how business leaders ensure that they strive to grow in a way that makes sense for them. Such expansion strategies vary, but vertical growth is one of the most popular ones. Read on to find out more about this specific type of growth strategy.
What is vertical growth?
Growing as a business doesn’t have to mean breaking brand-new ground. Alternatively, consider expanding vertically into existing markets—also known as vertical growth. Vertical growth is a business strategy where a company expands by developing its existing products and services or increasing control over its supply chain. Instead of broadening into new markets or diverse product lines, vertical growth focuses on building more capabilities and influence within the company’s existing market and production processes.
How vertical growth works
In a nutshell, vertical growth is about strategically expanding a company’s involvement in its supply chain or core industry operations, rather than attempting to expand into an entirely new market. This process, also often referred to as vertical integration, typically involves taking back more control over production, distribution, or other critical parts of the value chain. Here are the 2 routes that make up vertical integration.
- Forward integration: When a company gains more control over the later stages in its production process, for example, getting a bigger cut of profits from retail outlets.
- Backward integration: When a company takes more ownership over earlier stages of its supply chains, for example building its own manufacturing plants.
Horizontal or vertical growth strategies: Which is right for your business?
Both horizontal and vertical growth strategies can help you achieve your revenue goals. There is no one size fits all when it comes to business development, and both of these strategies have huge growth potential as well as their own challenges. Let’s look at a couple of examples.
Examples of vertical and horizontal growth
Let’s begin with a textbook example of vertical growth: Amazon. Initially an e-commerce platform, the company expanded into logistics and delivery by creating its own delivery network (Amazon Logistics) and acquiring fleets of trucks, planes, and warehouses.
A prime example of backward integration, Amazon invested in warehouses and inventory management systems, allowing it to streamline storage and order fulfillment. Supplementing this tactic with forward integration, Amazon built its own delivery network, bypassing traditional carriers like UPS or FedEx, to deliver directly to customers.
In contrast, horizontal growth happens when a company expands its operations or product offerings by entering new markets or acquiring similar businesses in the same industry. This strategy focuses on broadening the company’s reach, increasing market share, and diversifying its offerings.
In a high-profile example, Disney acquired Pixar Animation Studios in 2006 for $7.4 billion. This is a clear example of horizontal growth, because both Disney and Pixar were in the same industry: animated film production. By acquiring Pixar, Disney expanded its portfolio of successful animated movies, increased its creative capabilities, and strengthened its position as a leader in the field of animation.
How to choose a strategy that works for you
Which strategy is right for your business? It all depends on your goals and position within your current market. For example, a brand may have reached market saturation when consumer demand for its existing products or services has been maximized. At this point, the only way to go is up: You can achieve further growth only through new product improvements, by taking existing market share from competitors, or by increasing overall consumer demand.
The advantages of vertical growth
A vertical growth strategy helps businesses grow by increasing revenue and long-term return on investment (ROI) while gaining more control over their supply chains. Here are some of its main benefits.
Reduce supply chain costs
Focusing on vertical growth eliminates intermediary costs by bringing more steps of the supply chain in-house. This also reduces dependency on external suppliers or distributors, avoiding markups and ensuring better pricing control.
Improve brand recognition in your existing market
Vertical integration gives companies the freedom and flexibility to differentiate themselves by offering unique value propositions, such as specialized features or eco-friendly sourcing. These features can become signatures of the company’s brand and help build customer loyalty.
Deepen the loyalty of your customer base
A vertical growth strategy nurtures stronger connections with your existing customers, keeps them coming back for more, and increases profit margins in the process.
The potential risks of vertical growth
Vertical expansion often comes at a cost for business leaders. In deploying a vertical growth strategy, you’re taking on increased management complexity, higher costs, and, in some cases, more risk.
Increased investment costs
Expanding into new stages of the supply chain often requires significant capital for acquisitions, infrastructure, or new technologies. Purchasing or developing upstream suppliers can be an expensive maneuver that puts long-term ROI at risk.
Market uncertainties
By choosing vertical growth, you increase your reliance on a single market. In a storied example, car manufacturer Ford integrated backward to own the rubber plantations behind its tire production in the early 20th century. As it turned out, managing these plantations was costly, inefficient, and, ultimately, unviable due to market changes and geopolitical risks at the time.
Ford ultimately abandoned the initiative after incurring substantial losses, with the fallout serving as a cautionary tale for businesses considering backward integration.
Reduced flexibility
A vertically integrated company may be less agile in adapting to market changes, as it becomes locked into its fixed supply chain processes or infrastructure. As well as being susceptible to market shifts, a vertically integrated company becomes more reliant on its own resources, like factories or distribution networks, rather than external suppliers. This reduces its ability to quickly switch suppliers or adapt to new technologies or practices.
Higher operating costs
Managing diverse aspects of the supply chain can increase overhead and fixed costs, while overseeing an increasingly complex organization requires more personnel, expertise, and administrative oversight.
How to build a vertical growth strategy
Achieving vertical expansion requires systematically planning and implementing steps to gain greater market share and more control over your business supply chain.
Assess current market performance
This analysis is important to help you understand your core business and identify your strengths, weaknesses, and areas where vertical integration could add value (like cost savings, quality control, and customer experience). As well as your market position, evaluate your supply chain. Which stages are most critical or cost intensive? Where are there potential vulnerabilities like supplier dependency or logistical delays?
Once you’ve evaluated these strengths and weaknesses, you can start to map out ROI potential, narrow down your product or market focus, and identify areas where you might need to increase efficiency, train or hire employees, or take actions to mitigate vertical integration risks.
Conduct thorough market research to identify demand
Customer needs and market trends need to stay at the forefront of your strategy and help shape your goals. Reducing supply chain costs and improving product quality are critical objectives, but they’re only going to secure you a significant competitive advantage if they’re in line with what the market wants.
At this stage, consider going deep with market research: Source as much data as you can about customer demand, whether it be from surveys, interviews, focus groups, talking to an expert, or anything else. From the resulting insights, you can build out your product roadmap and content marketing plan.
Integrate customer feedback into your vertical growth strategy
Establishing feedback loops within your vertical growth strategy ensures you stay on track with customer demand. The supply chain flexibility granted by vertical integration means you can customize products based on fresh customer insights.
To achieve this, create a seamless flow of customer insights between your downstream and upstream operations. Your production and supply chain teams need to be able to respond quickly to feedback about product defects, material preferences, or feature requests.
Test and add new product functionalities
In order to expand upward within an existing customer base, businesses need to refine their current offerings.
Vertical integration presents ideal opportunities for product innovation. For instance, a coffee company that controls its bean sourcing could experiment with unique blends.
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A hybrid approach can be considered for business growth
It is possible to have the best of both worlds. Combining horizontal and vertical growth strategies can create a comprehensive approach to business expansion, maximizing market share and control over the supply chain while diversifying risk and scaling operations
The benefits of a hybrid strategy
Combining both vertical and horizontal growth is a strategy in itself, which enables companies to scale efficiently, diversify revenue streams, and improve operational control simultaneously. An example might be an auto manufacturer acquiring a competing brand (horizontal growth) while taking ownership of manufacturing plants (vertical growth), allowing it to expand its offerings while reducing production costs.
How to combine vertical and horizontal growth strategies
To combine these 2 strategies, focus on leveraging their synergies. Prioritize areas where vertical integration supports horizontal expansion, such as controlling production to streamline new product launches. Balance resources and scale gradually, ensuring both strategies align with your overall business objectives. For example, a company might acquire suppliers (vertical) to reduce costs while introducing complementary products to new markets (horizontal).
Key takeaways
- Choosing the right strategy for your business requires introspection and evaluation: Look inwards at your goals and resources and outwards at the competitive landscape and market conditions to determine the best strategy for your business.
- Vertical expansion leads to more market power: The benefits of vertical growth include increased market share, reduced supply chain costs, and higher customer lifetime value.
- Vertical growth carries new challenges and potential risks: These include higher up-front acquisition investments and overexposure to market turbulence.
Combining both vertical and horizontal expansion can be the most effective growth strategy: A hybrid strategy can enable businesses to scale efficiently, diversify revenue streams, and improve operational control simultaneously.