Horizontal or vertical expansion, which is best for you?

There are a number of alternative strategies supporting profitable growth and development. Two alternatives are vertical or horizontal expansion. Both are viable, it depends entirely upon your goals and resources, both work.

Vertical development is following the natural chain of value added commerce as follows: importing or manufacturing, wholesale distribution, retail sales, direct sales to the consumer. Down the line of development. The natural flow of product from the original source to the end user through all the appropriate channels. Each channel is a vertical step.

Horizontal development, is more about growth by expanding more of what you are currently doing, such as expanding manufacturing in other locations, creating more distribution outlets or expanding the territory, adding more stores, geographically expand or internal expansion creating greater and more diverse capacity, and capability, more machines more product more locations, more warehousing capacity, more product. etc.

With the invent of the Internet, the direct market, as well as the wholesale market and the business to business market is completely open and accessible affording manufacturers, wholesale distributors and even retailers the opportunity to sell direct to anyone who has access to the internet. Almost no cost of marketing just an effective web site and you can expand horizontally.

Thus a manufacturer can begin distribution and even retail and direct sales to the market. A retail store can sell direct through the internet, open more stores and if it has enough margin, it may even create a wholesale distribution network, horizontal and vertical expansion as one feeds of the other. Both are natural development paths, both can be successful, as opportunities are available to expand in either direction, horizontal or vertical.

Clearly another important and limiting factor is the amount of capital and other necessary resources required to support your expansion plans. Do the cash flow pro-forma and plan the expansion effectively based on the cash required and what is available.

In vertical expansion situations, clear separation between the stages are sometimes necessary, as competing with your own customers and suppliers can be tricky as you expand vertically. However it can be very successful if each layer of vertical development is operating independently and separate from each other.

The old adage, that in real estate the three most important factors are location, location, and location apply to both vertical and horizontal expansion, as location can determine the likelihood of success in any level of expansion. It is not that there are specific winning factors that defines success when determining what location is best, it depends upon your marketing program. Discount Flooring Inc. made their mark by being in remote low rent ares with no frills other then low price, that works as an entire marketing program and strategy which supported horizontal expansion.

Factory outlets bring factory cost to retail pricing, an opportunity for deep discounts and sizable profits.
Locating in a discount mall which attracts a huge population, is expensive overhead, yet with large traffic the location creates significant revenue potential, and is another successful strategy.

Locating distribution channels were competition is not doing a great job or were there is a large client opportunity. Most any growth plan can work if it is integrated with the location and supported by a marketing plan that takes everything into consideration. Many good business’s languish because of inappropriate location.

The first important decision is how you want to expand, the second important decision is were you site your new location and then what your marketing strategy may be. If its all tied together and well thought out and implemented, you will succeed, either way you choose to go.

Look at your industry, your competition, your client base and your available capital and then determine what path for expansion will work best for you, then match your resources to the plan, over time, and design your expansion accordingly.

Horizontal or vertical? Both work, its a matter of preference,strategy and opportunity, market dynamics and availability  of capital to support the growth requirements.

Analyze and then choose. Call for help 413-584 2581.

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