Wednesday, September 21, 2011

Lesson #96: Vertical vs. Horizontal Growth Options

Posted By: George Deeb - 9/21/2011


& Comment

For most startups, I give them the clear message to focus on building one business at a time, like we learned back in Lesson #40.  But, what happens when you are huge success in that business and need to look for additional growth options?  Those decisions typically revolve around vertical vs. horizontal growth strategies.  Vertical growth is getting deeper in your current line of business.  Horizontal growth is getting into new product areas that are not directly associated with your current line of business.  We are going to discuss assessing these options, and a few variations to this theme, below.


I am going to use iExplore as the example company looking at options to grow its business throughout this lesson.  iExplore was a tour operator for adventure travel in 100 countries, serving an affluent demographic.  Domestic vertical growth options for iExplore could include things like: (i) launching high-end tours in additional countries; (ii) launching a line of more affordable trips to appeal to the middle-market; or (iii) launching a line of tours that are less "active" (e.g., hiking, biking, diving) and more "experiential" (e.g., culinary, wildlife watching, expedition cruise).  In each of these examples, iExplore's growth is around their core business of running adventure tours.  This is usually the first place startups will look for growth, in their core business.  The only things to be sensitive about here are things like: (i) will any changes to your product or price impact your current brand positioning (e.g., less expensive trips could tarnish a high-end brand name); and (ii) is there really enough demand for the new products under consideration (e.g., do enough people really want to travel to South Sudan to justify building a tour?).


International vertical growth options for iExplore would mean taking its core trips today and marketing them to people who live in countries outside of their U.S. home.  There would be many things to consider here: (i) is there a demand for your product overseas (e.g., do people in Europe buy adventure travel, or do they prefer cruises); and (ii) what will you need to do to localize the product (e.g., designing tours with native language tour guides, brochures, websites, call centers, etc.).  Please re-read Lesson #81 for Considerations for Global Expansion for more detailed thoughts here, as you assess your options around international growth.


Continuing on with iExplore's growth options, maybe they have tapped out all their growth options in their core adventure travel category.  In a category I call semi-vertical growth, iExplore may want to remain being a seller of travel as its core business, but is considering: (i) vertical integration within adventure travel; or (ii) new travel verticals altogether.  Vertical integration would be iExplore wanting to acquire its on-site suppliers, hotels or sub-contractors that it uses to fulfill its tour service, to get a higher margin or to better control their inventory position.  The problem with this route is running a hotel is very different than running a tour operator marketing business, with a huge capital expense for acquiring and maintaining properties, staffing the hotel and keeping it at full occupancy.  As for new travel verticals, iExplore may want to start selling cruises, spas, lodges, vacation rentals, ski trips, golfing vacations or other travel categories beyond adventure travel.  The question here:  is there demand for such verticals from iExplore's existing customers (lowest hanging fruit for marketing such new services), and how will getting into those businesses impact its brand positioning (e.g., adventure travelers wouldn't be caught dead on a Carnival cruise ship).


I split horizontal growth into two categories, endemic to your industry and non-endemic to your industry.  Endemic horizontal growth for iExplore, would be extending their travel brand into new travel related businesses.  That could include:  (i) launching a line of iExplore branded tour books; (ii) launching an iExplore travel show on Discovery Channel; or (iii) starting an iExplore branded travel insurance company.  All of these businesses require completely different skills than being a tour operator (e.g., book publishing, TV programming, insurance underwriting), but all can easily be sold to the same iExplore demographics and customers (e.g., buy a trip and we'll sell you the travel insurance, read our books while on your trip, watch our TV programming while not on vacation).  Just make sure you have the appropriate management skills required for each of these distinct businesses, before drifting too far from your core strengths.


Non-endemic horizontal growth for iExplore, would largely revolve around turning iExplore into a "lifestyle" brand, and selling those iExplore travel customers, everything else they need for their high-end lifestyle.  For an affluent lifestyle, that could include selling iExplore customers opportunities around fashion, automobiles, boats, homes, restaurants, event tickets, etc.  As you can imagine, the skills for selling fashion is pretty far removed from the skills for selling adventure tours.  So, I would highly advise tapping out all other logical growth options, before taking it this far.

Hopefully, you have a better sense to the various vertical or horizontal growth options you can consider for your business.  I have roughly put them in the order I would prioritize such efforts.  That said, sometimes markets will let you take your time and grow them in a sequential process.  And, other times you don't have that luxury.  As an example, look how quickly Google evolved from a search engine, to also being an email, calendar, social networking, news, maps, web browsing, content, mobile, etc. business in their attempt to take over anything and everything internet related.  But, that took a lot of venture capital and management bench strength to pull off growth like that.  And, not all of us have that luxury.  So, don't bite off more than you can easily digest.

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