Small-business owners can understand both their companies and industries in terms of vertical and horizontal relationships. In your industry, seeing how interdependent relationships affect one another can help you develop your strengths as a competitor and identify potentially beneficial strategic alliances. Within your company, understanding vertical and horizontal development can help you turn your employees into capable supervisors.
An alliance between businesses can change the competitive landscape. For example, two small businesses might have complementary strengths, meaning a merger would raise the prospects of all. Horizontal integration occurs when two direct competitors in an industry merge to create a weightier competitor. Major disadvantages of horizontal integration include the danger of forming an illegal monopoly, as well as the headaches and legal wrangling a complicated merger or acquisition can involve, according to the book “Strategic Management Theory: An Integrated Approach,” by Charles W. L. Hill and Gareth R. Jones.
Vertical integration occurs when a company expands its operations into an adjacent stage within its industry. For example, suppose a supermarket believes it can profit from making its own bread rather than paying a premium to bread suppliers. To establish more control and better prices, the supermarket might create a bakery department or it might merge with or acquire one of its suppliers. One disadvantage of such a move is decreased flexibility: if consumer demand for bread goes down, the supermarket can’t simply order less from its suppliers, as it could before. Now it must downsize operations and perhaps take a loss on its investment.
Employee development also involves a vertical and horizontal dynamic. Vertical skills development refers to training employees to handle increased responsibilities. For example, a factory manager might promote an experienced machine operator to oversee an entire department. After some time, the next step might be to promote him to oversee several departments, and so on. The worker moves up through the chain of command, acquiring management skills along the way.
Horizontal skills development involves training an employee to handle multiple tasks of a similar type or level of difficulty. For example, a factory manager might reassign a machine operator to a different department, where he will learn how to operate a different machine. The key difference is that the skills the operator gains won’t elevate him into the company’s power hierarchy.
Specialized skills development differs from both vertical and horizontal types in that the employee training leads to a highly developed specialty, such as a high-level engineer might have within a specific technology.
