Outlines what are verticals in business, vertical integration and markets, examples of both show how you can use the strategies in your own business practices for success.
What are verticals in business? Simple definition
There are two vertical forms that are important when asking what are verticals in business: vertical markets and vertical integration. Vertical markets see sellers offering ‘bundles’ of related goods and services to their buyers. Vertical integration sees brands setting up their own supply of materials and services for their products.
Vertical markets are markets that are geared towards a certain specialization, e.g. plastics manufacturing or transportation technology. Put simply, a vertical market is a market in which goods or services from business areas of a certain industry are offered.
Under certain circumstances “holistic solutions” are offered, that is, a bundle of goods and services from the same business area. This bundle is put together specifically for the customer by the provider, which requires the customer to cooperate and excludes middlemen.
Vertical market examples
A provider of telecommunications solutions who equips a call center. The call centre (as the customer) receives telephone sets, a telephone system, lines, connections, software, employee training and education as well as a leasing contract for the devices.
A marketplace for the wood processing industry offers a wide variety of types of wood, but also information that is particularly interesting for this industry: news from the wood industry, for example, or other services such as a placement exchange for staff from the wood processing sector.
Marketplaces for medical supplies are aimed at doctors, laboratories, specialist retailers or the purchasing departments of hospitals or rehabilitation clinics. The target audience is also clearly defined in this example. The news and information offered on medical supplier’s website portal will even be geared precisely to the needs of this target group.
In all these cases of vertical markets, the customer enters into a longer relationship, as both have to learn a lot about their partner in order to ensure a successful cooperation. That brings planning security, but also dependency.
What is vertical integration? Simple definition
When a company vertically integrates, it essentially creates (or acquires) its own suppliers and distributors, controlling the supply chain and the revenue. Vertical integration allows brands to completely control every step of the production process, and thereby also boost efficiency and make cost savings.
There are two types of vertical integration. Backward integration is when the brand moves back into the production path, such as a manufacturer buying the supplier of its raw materials or components. Forward Integration is when the brand moves foward in its supply chain, buying or creating the distribution and sometimes retail sales.
Vertical integration examples
Some car brands own their own steel foundries, at which they process the raw ore into steel, which is then sent to their factories for pressing into car bodies. The brands may also own their own chain of car dealerships, allowing them to also control the retail end of their market.
Netflix was launched originally as a DVD rental brand, then branched out into streaming movies under license from studios. It’s next logical step was to produce its own content to stream to customers, and its distribution channel now shows that as well as the licensed movies and series.
No list of vertical integration would be complete without Apple: probably the prime example today. From being a company that supplied tech, it moved to developing its own huge global network of retail stores, and its own manufacturing factories. But it has also bought up companies that were its suppliers of components such as the iPhone fingerprint sensor and — more recently — has created more of its own supply chain with the launch of the first Apple chips.
Vertical integration vs horizontal integration
Horizontal integration is the planned cooperation on a production level between legally and economically independent economic units or the merger of operational units, for example in the case of expansion. Put simply, horizontal integration is when one brand buys another brand within the same industry that sells a similar product or provides a similar service. The aim of such a merger is the realization of “economies of scale” in production, the provision of larger quantities of a product for the market (capacity expansion), the provision of larger uniform lots to strengthen the position in business or the use of cost advantages when purchasing raw materials.
Where vertical integration will see stronger supply chains (less disruption from outside events) and lower costs, there is also the risk that brands can become too large and unwieldy — and thus lose focus on their original capabilities.
Horizontal integration also aims to cut costs by economies of scale, but also to expand by controlling a bigger share of the market and reducing competition. However, this can see some brands in legal trouble if regulators believe there is risk of a monopoly (or even duopoly), or unlawful cartel operation.