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Horizontal or Vertical Expansion: Which is Best for You?

Article | April 13, 2019

When deciding what type of expansion to employ, the decision comes down to a matter of preference, strategy, opportunity, market dynamics and the availability of capital to support the growth requirements. This article will help you choose the right path.

Arrows moving up and out

Various, distinct strategies can support profitable growth and development. Two examples of these strategies are Vertical and Horizontal expansion. Although both are viable, each method depends entirely upon your goals and resources.

Vertical development consists of abiding by a natural chain of value added commerce. It works down a line of development where you begin with the natural flow of a product from its source and terminate with the end user, using all appropriate channels in between. In other words, the chain is as follows: importing or manufacturing, wholesale distribution, retail sales, and direct sales to the consumer. Each channel is considered a “vertical step.”

On the other hand, Horizontal development consists more of a growth done through expanding current sections. For example, you may want to expand manufacturing in other locations or create more distribution outlets. You may also want to expand territory by adding more stores or geographically expanding. Perhaps you may opt to expand internally by creating a greater and more diverse capacity and capability through more machines, more locations, more warehousing, and more products.

The direct market, the wholesale market, and the business to business markets have all become completely open and accessible thanks to the development of the internet. With this innovation, manufacturers, wholesale distributors, and even retailers now have the opportunity to sell products directly to any individual who has access to the internet. It is a strategy in which you can expand horizontally and vertically with a low cost of marketing.

As a result, a manufacturer can begin distribution and possibly even retail as well as direct sales to the market. A retail store can then sell directly through the internet, open more stores, and may even create a wholesale distribution network if the margins are sufficient. This is an example of horizontal and vertical expansion as one feeds off the other. The two are natural paths of development. Also, as opportunities are available to expand in either direction (vertical or horizontal), they can both be successful.

Supporting expansion plans can also depend on other important and limiting factors such as the amount of available capital and other necessary resources. Vertical expansion can be very successful if each layer of the vertical development is operating independently and separately from each other. In vertical expansion situations, clear distinctions between the stages are sometimes necessary because as you expand vertically, competing with your customers and suppliers can become very tricky.

In a horizontal expansion, “The three most important factors are location, location, and location”: this is the adage of real estate. Well, it can also be applied to both vertical and horizontal expansion. Location can determine the likelihood of success in any level of increase. When determining which location is best, success will not be defined by any specific winning factors. Instead, it will all largely depend on your marketing program. Discount Flooring Inc. is a prime example of this method. They made their mark by situating themselves in a remotely low-rent area. Other than low prices, there were no frills. This is a technique that works as an entire marketing program itself and further supports horizontal expansion.

Another successful strategy is situating you in a discount mall. These malls attract a large population. Although it can be an expensive overhead, the substantial amounts of traffic create significant revenue potential for your location. In the end, factory outlets bring factory cost to retail pricing which is an opportunity for deep discounts and sizable profits.

The idea to keep in mind is to locate distribution channels where competition is doing a poor job or where there is an opportunity for expansion. Unfortunately, many good businesses languish as a result of their inappropriate locations. However, if integrated with a proper location, supported by a complete marketing plan, and with adequate capital to support the expansion most, any growth plan will function.

No matter which direction you decide to go, three important decisions must be made. First, determine how you would like to expand. Second, choose the site of your new location. So lastly, opt for a comprehensive marketing strategy. If all three factors are tied together, well-thought out, and appropriately implemented, you will succeed.

Observe your industry, competition, client base, and available capital and determine which path of expansion will work best for you. Then, match your resources over time to the plan of action and design the expansion accordingly.

Horizontal or vertical? Both are effective. It’s a matter of preference, strategy, opportunity, market dynamics and availability of capital to support the growth requirements. Analyze and then decide. Second Wind can help.

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