When it comes to business strategies, horizontal and vertical integration are two terms that are sure to find their way in a boardroom conversation, whether by example or suggestion. For the emerging microbusiness owner or small business, they may not be relevant at this stage, but it’s helpful to get familiar with these concepts. More importantly, they provide the foundation and context for a business strategy that’s finally earned a name. But first, the basics.
What is Vertical Integration?
In business and economics, vertical integration occurs when a company owns two or more stages of the supply chain of a product or service normally performed by another company. Whether the business is acquired before or after the company in the supply chain, determines the direction of vertical integration.
What does this look like in real life, for say, a business that sells medical marijuana?
A cannabis company is vertically integrated when it grows, packages, and distributes its own brand of legal marijuana from a retail store that it owns. Each one of these steps along this business’ supply chain can be operated by a separate vendor. The reasons a business might do this often considers the reduction of cost for the business as well as increasing efficiency. In other words, a company can gain control of more parts of the fundamental aspects of the business that keeps it running. And from what we understand about business, efficient companies are often more competitive.
What is Horizontal Integration?
Horizontal integration happens when a cannabis company begins to merge or take over another company in the same production phase of the supply chain. For a cannabis company, this could mean buying a smaller company that retails a CBD oil or increases production by acquiring a small grower in addition to their own. Horizontal integration creates economies of scale and helps the business expand with increased control over suppliers and distributors. A great example of this is Costco, which sells its own brand of pizza or its equally popular gas stations. Integrating horizontally allows Costco to sell its own products and services at a competitive price because it consolidates other companies at the same part of the production supply chain.
But, by far our favorite example of horizontal integration is the eponymous company *Horizontal Integration, a digital agency and staffing agency...or is it a staffing agency then digital agency? You must admit, not only was it technically clever to name and brand their company Horizontal Integration, it seems to be a business model that works.
Horizontal integration can happen across similar industries, through successful mergers and acquisitions to create product diversification, or within the same industry to gain an edge in market share. A company may also choose to integrate this way as an alternative to outsourcing.
“I literally took wine fans and started an advertising agency.” – Gary Vee
It may sound unorthodox, but it turns out producing different industry-types of products and services can be the strategy your business or brand needs to grow. We coined this strategy Horizontal Augmentation.
So, what is Horizontal Augmentation? While Horizontal Integration creates a relationship between two or more entities that share related industries, horizontal augmentation makes a leap in another direction where the link may or may not be explicit or even required.
“Horizontal Augmentation is sorta like finding a blue ocean but in another part of the map.” – Hassan del Campo
Horizontal Augmentation occurs when a business develops new products or services for the market that may or may not exist in the same industry. Through successful horizontal augmentation, a business or brand can leverage its primary business to create an entry and new product offering into another industry. A company may have an aspect of its brand that offers a competitive edge, strength, or synergy that can affect the greater sum of the business. This is an opportunity to dive into a different sector and launch a business that inherits the strengths and opportunities of the overall brand. Another way to approach this is to think of how your business can pull territories from your current business model canvas to start a new venture.
This is sorta like finding a blue ocean in another part of the map.
Here’s a Venn Diagram to help illustrate the concept.
Horizontal Integration is a close cousin to Horizontal Augmentation, with shared nuances but with some key differences:
Horizontal Integration: helps a company that wishes to advance at a competitive edge through increased market share and efficiency
Horizontal Augmentation: drives a brand’s bottom-line by operating complimentary, but independent products or services
Horizontal Integration: requires capital to acquire, merge with, or take over another company
Horizontal Augmentation: utilizes branding to drive the introduction of an additional and independent product or service
Horizontal Integration: leads to greater economies of scale and differentiation
Horizontal Augmentation: leads to a greater deviation between two more products and services
Integration: discovers opportunities that can happen before or after the company in the supply chain
Horizontal Augmentation: discovers opportunities where technical assets can be moved to start a new product line
Horizontal Augmentation: is about rapidly developing and testing products to market, using the opportunities and assets of your existing business
Like any business strategy, there are risks, rewards, and nothing guaranteed – except for a fun ride. Challenges that come with horizontal augmentation originate from the idea that you essentially create another line of business likely while your other primary business is in operation. Not only does this raise logistical concerns, like; do we have the capacity, resources, and acumen to do that? But, it also goes against the golden rule of starting more than one business at a time.
For this to work, your business needs to start with a strong brand or an existing one that you can continue to grow. If you’ve built a personal brand that also manifests into your existing business, this will be an easier transition. If you haven’t figured it out yet, horizontal augmentation needs to have a strong brand because that is one of the few aspects of your business that is portable. It also means that you are able to pivot a position in your systems & operations or use an asset in your business model to accelerate the introduction of a product or service. Those familiar with working within a lean startup template can revisit those concepts to get started. Imagine your business model canvas as a launchpad for developing your next venture – pulling from it transferrable resources and opportunities.
Additionally, it requires some imagination. In order to find synergy between current assets to your future business, you must master Robert Greene levels of ideation. But, don’t fret. These relationships are not public, not even to the most astute competitor. On the contrary, they rely on your most intimate understanding of your business’s unique proposition.
Does this sound viable your business? Are you willing to make a leap? Let us know, below.
*Fun fact: Social Mediums started as a staffing agency, under a different name, and then became a digital marketing agency afterward. Spooky.