vertical-market

Vertical Market: What Is A Vertical Market And Why It Matters In Business

A vertical or vertical market usually refers to a business that services a specific niche or group of people in a market. In short, a vertical market is smaller by definition, and it serves a group of customers/products that can be identified as part of the same group. A search engine like Google is a horizontal player, while a travel engine like Airbnb is a vertical player.

AspectExplanation
Concept Overview– A Vertical Market, also known as a niche market, refers to a specific industry or sector where businesses offer products or services tailored to meet the unique needs and requirements of that industry. Unlike a horizontal market, which serves a broad range of industries, a vertical market focuses exclusively on a particular niche. Vertical markets can be defined by industry type, geography, or a combination of factors, and they often require specialized knowledge and expertise to serve effectively.
Key Characteristics– Vertical markets exhibit several key characteristics: 1. Specialization: Businesses in vertical markets specialize in catering to the unique needs of a specific industry. 2. Industry Expertise: They often possess deep knowledge of the industry, its challenges, and its regulations. 3. Tailored Solutions: Offer products, services, or solutions customized to address industry-specific problems and requirements. 4. Niche Focus: Concentrate on a narrower customer base within a specific industry, which can lead to strong customer loyalty. 5. Industry Associations: May participate in industry associations or groups to stay updated on industry trends and regulations. 6. Vertical Integration: Some companies in vertical markets vertically integrate by providing a range of services within the industry.
Examples– Examples of vertical markets include: 1. Healthcare: Companies specializing in healthcare IT, medical equipment, or pharmaceuticals. 2. Real Estate: Real estate software providers, property management companies, and construction firms. 3. Finance: Firms offering financial services, software for financial institutions, or insurance providers. 4. Hospitality: Businesses focused on hotel management, restaurant technology, or travel agencies. 5. Agriculture: Companies providing agricultural machinery, crop protection products, or farm management software. 6. Legal: Law firms specializing in a particular area of law, legal software developers, or legal consulting firms.
Advantages and Challenges– Vertical markets have their advantages and challenges: Advantages: 1. Expertise: Deep industry knowledge enables tailored solutions and better customer understanding. 2. Niche Leadership: Can become market leaders within their specific verticals. 3. Customer Loyalty: Build strong relationships and customer loyalty due to specialized offerings. 4. Reduced Competition: May face less competition than horizontal markets. Challenges: 1. Limited Market Size: Smaller customer base compared to horizontal markets. 2. Industry Dependency: Vulnerable to economic downturns or regulatory changes within their chosen vertical. 3. Specialized Talent: Need to attract and retain talent with industry-specific expertise. 4. Market Saturation: Intense competition within a narrow niche can lead to market saturation.

Horizontal vs. Vertical Markets

horizontal-vs-vertical-integration
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

To understand the concept of vertical market, we can look at the concept of vertical integration and horizontal integration.

In a vertically integrated strategy, a company gets closer and closer to the final customer, or perhaps it gets more control over the product manufacturing.

Take the case of Luxottica and how it integrated vertically in the eyewear industry. Luxottica didn’t expand to cover other verticals (for instance, by moving from eyeglasses to footwear) instead it moved vertically by controlling more and more of the manufacturing and distribution process.

On the other hand, think of the case of Alphabet that controls Google.

While the company still operates the leading search engine, the search market by definition has grown to cover many verticals (publishing, travel, e-commerce, and many many other small niche markets).

This makes Google, in part a horizontal player, therefore, able to cover various niches.

Key Highlights:

  • Horizontal vs. Vertical Players: The distinction between horizontal and vertical players in the market is crucial. Horizontal players like Google operate across multiple industries and niches, while vertical players like Airbnb focus on a specific industry, such as travel.
  • Horizontal Integration: Horizontal integration involves expanding market share within the same industry and supply chain level. Google is an example of a horizontal player as it operates across various verticals like publishing, e-commerce, and more.
  • Vertical Integration: Vertical integration occurs when a company gains control over various stages of the supply chain or gets closer to the end customer. Airbnb can be seen as a vertical player since it concentrates on the travel industry and offers services directly related to it.
  • Vertically Integrated Strategy: Companies pursuing a vertically integrated strategy seek to control various aspects of production and distribution. Luxottica is an illustration of this concept, as it focused on controlling manufacturing and distribution within the eyewear industry.
  • Google’s Horizontal Approach: Google, owned by Alphabet, demonstrates a horizontal approach by offering services that span across multiple niches and industries. Its search engine covers various verticals, including publishing, e-commerce, and more.
  • Alphabet’s Diverse Ventures: As the parent company of Google, Alphabet’s presence extends beyond just being a search engine. Its diverse ventures include investments and acquisitions in numerous industries, showcasing a horizontal market strategy.
  • Airbnb’s Vertical Focus: Airbnb exemplifies a vertical focus by concentrating solely on the travel industry. Its services revolve around accommodations and travel experiences, illustrating a commitment to a specific market niche.
  • Market Dynamics: Understanding horizontal and vertical strategies is crucial for grasping how companies position themselves in the market. Horizontal players have broader reach, while vertical players dive deep into specific industries.
  • Industry Evolution: Companies may evolve from horizontal to vertical or vice versa based on market demands and strategic decisions. Luxottica’s vertical integration and Google’s horizontal expansion demonstrate the versatility of business strategies.
  • Adaptation and Innovation: Companies’ ability to adapt their strategies and innovate in response to changing market dynamics is a key factor in their success. Both horizontal and vertical players must continuously refine their approaches to stay competitive.

Connected Business Concepts And Frameworks

Supply Chain

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Data Supply Chains

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distribution to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Distribution

whats-distribution
Distribution represents the set of tactics, deals, and strategies that enable a company to make a product and service easily reachable and reached by its potential customers. It also serves as the bridge between product and marketing to create a controlled journey of how potential customers perceive a product before buying it.

Distribution Channels

distribution-channels
A distribution channel is the set of steps it takes for a product to get in the hands of the key customer or consumer. Distribution channels can be direct or indirect. Distribution can also be physical or digital, depending on the kind of business and industry.

Vertical Integration

vertical-integration
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.

Horizontal vs. Vertical Integration

horizontal-vs-vertical-integration
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

Horizontal Market

horizontal-market
By definition, a horizontal market is a wider market, serving various customer types, needs and bringing to market various product lines. Or a product that indeed can serve various buyers across different verticals. Take the case of Google, as a search engine that can serve various verticals and industries (education, publishing, e-commerce, travel, and much more).

Vertical Market

vertical-market
A vertical or vertical market usually refers to a business that services a specific niche or group of people in a market. In short, a vertical market is smaller by definition, and it serves a group of customers/products that can be identified as part of the same group. A search engine like Google is a horizontal player, while a travel engine like Airbnb is a vertical player.

Entry Strategies

entry-strategies-startups
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Market Types

market-types
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

Market Analysis

market-analysis
Psychosizing is a form of market analysis where the size of the market is guessed based on the targeted segments’ psychographics. In that respect, according to psychosizing analysis, we have five types of markets: microniches, niches, markets, vertical markets, and horizontal markets. Each will be shaped by the characteristics of the underlying main customer type.

Decoupling

decoupling
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.

Disintermediation

disintermediation
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all, can produce products that customers want.

Reintermediation

reintermediation
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.

Coupling

coupling
As startups gain control of new markets. They expand in adjacent areas in disparate and different industries by coupling the new activities to benefits customers. Thus, even though the adjunct activities might see far from the core business model, they are tied to the way customers experience the whole business model.

Bullwhip Effect

bullwhip-effect
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.

Dropshipping

dropshipping-business-model
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.

Consumer-To-Manufacturer

consumer-to-manufacturer-c2m
Consumer-to-manufacturer (C2M) is a model connecting manufacturers with consumers. The model removes logistics, inventory, sales, distribution, and other intermediaries enabling consumers to buy higher quality products at lower prices. C2M is useful in any scenario where the manufacturer can react to proven, consolidated, consumer-driven niche demand.

Transloading

transloading
Transloading is the process of moving freight from one form of transportation to another as a shipment moves down the supply chain. Transloading facilities are staged areas where freight is swapped from one mode of transportation to another. This may be indoors or outdoors, depending on the transportation modes involved. Deconsolidation and reconsolidation are two key concepts in transloading, where larger freight units are broken down into smaller pieces and vice versa. These processes attract fees that a company pays to maintain the smooth operation of its supply chain and avoid per diem fees.

Break-Bulk

break-bulk
Break bulk is a form of shipping where cargo is bundled into bales, boxes, drums, or crates that must be loaded individually. Common break bulk items include wool, steel, cement, construction equipment, vehicles, and any other item that is oversized. While container shipping became more popular in the 1960s, break bulk shipping remains and offers several benefits. It tends to be more affordable since bulky items do not need to be disassembled. What’s more, break bulk carriers can call in at more ports than container ships.

Cross-Docking

cross-docking
Cross-docking is a procedure where goods are transferred from inbound to outbound transport without a company handling or storing those goods. Cross-docking methods include continuous, consolidation, and de-consolidation. There are also two types of cross-docking according to whether the customer is known or unknown before goods are distributed. Cross-docking has obvious benefits for virtually any industry, but it is especially useful in food and beverage, retail and eCommerce, and chemicals.

Toyota Production System

toyota-production-system
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.

Six Sigma

six-sigma
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.

Scientific Management

scientific-management
Scientific Management Theory was created by Frederick Winslow Taylor in 1911 as a means of encouraging industrial companies to switch to mass production. With a background in mechanical engineering, he applied engineering principles to workplace productivity on the factory floor. Scientific Management Theory seeks to find the most efficient way of performing a job in the workplace.

Poka-Yoke

poka-yoke
Poka-yoke is a Japanese quality control technique developed by former Toyota engineer Shigeo Shingo. Translated as “mistake-proofing”, poka-yoke aims to prevent defects in the manufacturing process that are the result of human error. Poka-yoke is a lean manufacturing technique that ensures that the right conditions exist before a step in the process is executed. This makes it a preventative form of quality control since errors are detected and then rectified before they occur.

Gemba Walk

gemba-walk
A Gemba Walk is a fundamental component of lean management. It describes the personal observation of work to learn more about it. Gemba is a Japanese word that loosely translates as “the real place”, or in business, “the place where value is created”. The Gemba Walk as a concept was created by Taiichi Ohno, the father of the Toyota Production System of lean manufacturing. Ohno wanted to encourage management executives to leave their offices and see where the real work happened. This, he hoped, would build relationships between employees with vastly different skillsets and build trust.

Jidoka

jidoka
Jidoka was first used in 1896 by Sakichi Toyoda, who invented a textile loom that would stop automatically when it encountered a defective thread. Jidoka is a Japanese term used in lean manufacturing. The term describes a scenario where machines cease operating without human intervention when a problem or defect is discovered.

Andon System

andon-system
The andon system alerts managerial, maintenance, or other staff of a production process problem. The alert itself can be activated manually with a button or pull cord, but it can also be activated automatically by production equipment. Most Andon boards utilize three colored lights similar to a traffic signal: green (no errors), yellow or amber (problem identified, or quality check needed), and red (production stopped due to unidentified issue).

Read Also: Vertical Integration, Horizontal Integration, Supply Chain.

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