David Hsu here with a lecture on expansion strategy.
Here's the phenomenon.
Suppose that you are able to be get some traction with your first segment that you
enter into as a entrepreneur company.
What guides whether you should remain in that segment or
start thinking about going into a different area all together.
Let me illustrate this.
Walt Disney Company, when it enters, is initially a film studio.
They achieved excellence in their animation.
They are quite detailed in their investments in becoming a studio.
Subsequently decades later they decide to integrate into theme parks.
And, at first blush, you might think that this is quite a surprising move.
And so the question that animates this particular lecture is, under what
circumstances should you be going deeper into the first area that you succeeded in
and how could you know whether it makes sense to get into a different area?
We'll talk about the first phenomenon
of staying in the same area as an instance of vertical expansion,
remaining in the same initial vertical, in this case, the studios.
We'll talk about the horizontal expansion.
We're getting into a different area.
As an instance of horizontal expansion,
that would be the example of getting into Disney World or Disneyland.
One important aspect of thinking about the distinction between vertical versus
horizontal expansion is the set of circumstances you might pay attention
associated with each of the different expansion strategies.
So under vertical expansion, remaining in the same industry but
getting into different geographies, getting into different segments of
the same industry is very different than the decision to go horizontally.
And so let me say a few words about each.
Vertical expansion, you might think about offering the same products but
in a different geography or
thinking about backward of forward integration in the same vertical industry.
Let me illustrate this with the example of easyJet in Europe.
So easyJet entered the market, they were very successful and
made a reputation and brand associated with being a no frills or
low frills provider of getting passengers from point A to point B within Europe.
Now they could have in terms of expansion strategies be thinking about should we
take that the same formula and go to Asia or Africa or North America that would
largely be retaining the same competitive position in the exact same industry.
Another example of vertical expansion could be, let me as easyJets go
integrate backwards into the supply of the various
inputs to servicing the passengers in this industry.
Or forward expansion maybe getting a bit into
some of the downstream type of activities associated with servicing exact same
customers in exact same vertical industry.
By contrast, a horizontal expansion is very much like the Disneyland or
Disney World play.
That is, getting into a different industry vertical relative to your home base.
And it's driven by different set of logics, so one would be diversification.
So, in contrast to vertical expansion, if you are able to expand horizontally,
maybe you've know some of the portfolio in which the assets that you hold do not move
together, and that could be beneficial from a diversification standpoint,
much like what you probably know from financial theory.
The other consideration when you think about horizontal expansion is
brand extension.
Is it actually logical, from the consumer standpoint,
that you're in one asset class, or vertical as compared to what you know or
are known for in your home vertical in case of Disneyland,
maybe because you have these assets of Mickey Mouse or Donald Duck.
Maybe that makes sense when it comes to entering into
the theme park type of category.
Now, one underlying construct both in terms of the vertical and
horizontal expansion is paying attention to your evolving core capabilities.
And so that is essentially answers the question, what is actually distinctive
here and hard to replicate as the enterprise, because after all,
when you enter into different aspects of a vertical market or
horizontal expansion path, you're going to bump up against competitive rivalry.
And to the extent that you can carve out something that's distinctive,
that you're known for, that you can extend your brand in.
That's going to serve you well.
Associated with that, you often think about these notions of fit or
consistency between what you're doing on an organizational basis.
That is, does it actually make sense as the Walt Disney company for
example, that you're getting into theme parks because do they share
a set of activities as what you're doing on the studio business?
And so the outcome of that decision or discussion in your company as you think
about expansion, will actually help guide your expansion path forward.
That is, are you extending something that's hard to imitate,
something that is at the essence of what you're doing in terms of a core skill
that's going to be difficult for others to come in and replicate.
Let's talk little bit more about vertical expansion.