The advantages of vertical expansion – in good times and bad

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The advantages of vertical expansion

While horizontal expansion has serious advantages in terms of the economies of scale and scope, it is a high-risk strategy. It is a perfect example of putting all your eggs in one basket.

In contrast, vertically integrated companies can be successful even in dire situations where other companies fail.

When demand falls, a vertically integrated company can immediately adjust supply processes to compensate; by reducing quantities, switching manufacturing tasks, enact changes in distribution or replenishment strategies, and offer online or direct shopping options to customers. For this reason, they are also more likely to succeed in the post-COVID era, because they have an innate capacity for agility. They can expand quickly when demand surges back again. This is a winning trait in a fickle, trend-driven business.

Agility is always a big factor for success in the Fashion and Sportswear industry, where quick responses to changes in fashion trends are essential to profitability – even in good years.

For brands in the Fashion and Sportswear industries, vertical integration brings numerous strengths – not just operational resilience. Aligned objectives lead to operational efficiencies, and brands have more control over quality, production capabilities and distribution. All parties work toward the ultimate goal of satisfying the same ideal customer.

There are several main areas of improvement that vertical integration can bring:

  • Keeping profit of each stage
  • Controlling costs via control of process
  • Can invest in process bottlenecks directly
  • Competitive advantage, delivering profit to customer (as savings)
  • Processes more efficient and effective (tailored to one goal)
  • Quality control

Of course, we shouldn’t fool ourselves into thinking that vertical integration is a magic bullet; it can’t solve every problem and over-integration comes with a strong financial risk. It cannot reduce cyclicality or volatility, and enhanced distribution capabilities do nothing to alter diminished demand when it happens.

It isn’t suitable for every kind of business. Industries with typically low transaction volume and high degrees of market certainty probably have little to gain from extensive vertical integration – this is the case for most heavy industrial manufacturers, for example, who benefit from bilateral monopolies (due to asset specificity) but not much more beyond this.

The strongest argument for vertical integration is for those companies who have high transaction volumes, coupled with high market uncertainty. Fashion, apparel and sportswear companies certainly match those criteria.

There are also many options for quasi-integration that give many of the advantages but with less investment risk. Indeed, several ‘vertical’ businesses operate using closely-aligned collaborations.

vertical integration

Vertical integration as a collaboration

Vertical integration is most often looked at in the context of a single company performing all aspects of the supply-to-fulfilment operation; however it can also consist of strategic partnerships and collaborations among distinct companies.

When you think about it, this is not so different to the single-company model – it just means that the employees have more diverse logos on their uniforms. What it does require, however, is for all collaborating partners to act like a single company. This means a lot of trust and great communication. Partners need to work together with clearly-defined aligned goals, and coordinate with each other as if they are all on the same side – because they are!

Collaboration is one of the most powerful tools the human species has – it is the reason we have ‘companies’ to begin with. With our current ability to collect, process, and share data it is easier than ever to collaborate to achieve mutual advantages.  But we have deeply engrained attitudes and behaviours to overcome if we want to release this potential.

When parties recognise that they have aligned goals it becomes a logical step to work in alignment, even when you are in competition.

So, for a supply chain that is striving towards a common goal it should be easier to form stronger collaborations with partners to operate in a vertically-integrated way. Brands and retailers have the shared objective of getting products into the hands of the consumer, so a vertically-integrated supply chain makes good business sense. Indeed, the vertical model is evolutionarily better-equipped to deal with difficult trading conditions and thrives when times are good. This makes the vertical supply chain the inevitable supply chain of the future.

It can be hard for any company to determine which opportunities for vertical integration makes sense for them. Some of this comes from the inertia of the current business model, which means managers and other employees are resistant to change. Collaboration and outsourcing is one way we can cross this threshold more easily.

How to find opportunities for vertical integrations in your company

Being more vertically integrated means that your company needs to be more collaborative internally.

Each department can then operate in close alignment, using a rich exchange of information to achieve common end-goals. Digital transformation is an important step in this journey. This has advantages beyond increasing throughput and profit – the whole organisation becomes much more effective too. With the free flow of information, it is easier to work in alignment.

All stakeholders are then focused on the end goal: targeting the ideal customer. All aspects of the supply chain can be fine-tuned to this end, and this ultimately has better results for all links in the chain.

There are many possibilities for vertical expansion, such as ‘Direct-to-Consumer’ offensives, or expansion into Omni-channel sales. A task force needs to examine the whole process with a sharp focus on how they are serving the end consumer. This means you need to conduct an audit of your supply-chain and operation strategy, a re-targeting of your operating model, and widespread digitisation.

That last element can be investment-heavy, but we know that investors are keen to see companies putting money in future growth and resilience. While a widespread IT transformation can be costly, the free flow of information is vital to make it work.

Bringing all stakeholders into this enterprise helps to clarify to all parties that the conversion of sales does not happen when product is passed to the next link in the chain, but when it actually reaches the end-consumer’s hands.

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How Retailisation enables collaborative action in vertical businesses

The biggest factor in achieving success as a vertical business is ensuring the smooth flow of information from all parts and the translation of this data into coordinated and meaningful actions. While many companies create custom IT solutions to achieve this, the Retailisation software can work with any business model. It can realise a high level of business intelligence and coordination, with some very attractive benefits for companies that are expanding vertically.

The software is designed to bring together and process information from multiple sources, giving an overview of the entire company. It is perfect for companies that operate Omni-channel or online sales, but also Brick-and-Mortar only companies or those looking to expand, because it can bring together different data sources into one seamless overview. Inventory levels are available with multiple filters, and the smart algorithm works together with pre-defined thresholds to generate the right order – every time. Replenishment and reallocation options are also just a few clicks away. 

The software’s perspective encompasses the entire operation, and not just each department – this helps to ensure collaborative working across the entire chain with clearly-aligned objectives.  Detailed metrics and reports clearly identify areas for improvement, and the system feeds back real-time sales data which can inform supply decisions further back along the chain.

Information is the lifeblood of a vertically integrated company – and the Retailisation software is a big part of keeping both information – and inventory – flowing in the right direction.

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