In a discussion with a client today, the topic switched to discussing the two major types of growth that a company can go through. We discussed the pros and cons of each type and [of course] I have my own theories.
In this, the first part of a 2-part entry, I will be talking about the concept of horizontal growth:
I should first point out that some people describe horizontal growth and vertical growth in exact opposites of how I was taught in college. Just so there’s no misunderstanding, this is my take on the two:
Horizontal growth
Horizontal growth is, in effect, buying companies or vendors in your specific market. Company A competes with Company B and in an effort to expand their business, Company A acquires Company B. Now looking at this purely on the level of buying competitors, you could say that buying your competitor out can be perceived as being scared of competition, not being a good enough company to just drive your competition out of business, so on and so forth.
However, horizontal expansion via mergers and acquisitions have a much deeper root than simply being all about acquiring customers or customer bases.
What happens with well thought out mergers and/or acquisitions is a reduce in average cost. If two companies supply the same or similar products, have the same target audience, the same distribution channels and similar approaches to business, then he average costs of doing business reduces. As the assets are merged, and the companies become one you see a very obvious decrease in advertising costs, also. It can make sense to purchase a competing company, but only if it is well thought out and not just about bragging rights and customer numbers.
Another example of horizontal expansion for a company would be buying one of your suppliers or service providers. Let’s take an advertising agency as a short and sweet example:
If Company A uses Agency B for advertising materials and product development, then Company A can drastically reduce, in the long term, their costs of doing business by purchasing the advertising company. This model is often seen in the corporate world. Instead of paying inflated fees and being tied to contracts, you can now own the very agency that you used to hire. An advantage of this would be if the company is in stealth ownership (opens up a whole new line of possibilities). Perception is only one part of the selling game, granted, but it is a vital part. Maybe Company A didn’t want to reduce their costs - maybe they wanted to keep their costs at the same level but increase their exposure. More bang for the buck, so to speak.
There’s many examples of horizontal expansion and it depends on your line of business for determining how horizontal expansion could work for you. The fact is though that buying a competing company does not always have to be about proving who the big dog in the yard is. It can be about smart business models and thinking on your feet.
The concluding part of this blog (part 2 for those who have had too much coffee today) will be online in the next 72 hours.
July 7th, 2006 at 4:11 pm
What about vertical? When is better for a company to have an vertical integration or an horizontal expansion.
July 7th, 2006 at 4:16 pm
Anthony:
See http://www.simonorourke.com/2006/06/07/vertical-vs-horizontal-growth-part-2-of-2/ for my comments on vertical growth. I also summarised my thoughts on growth in general.