Which direction should you scale your startup in 2021 – horizontally or vertically?
The months ahead continue to look challenging for companies of all shapes and sizes and across most geographies. The Middle East and North Africa region, too, will continue to grapple with challenges intrinsic to the on-going pandemic situation. Not to forget, the UAE faces an unique problem of a shrinking population because of the region’s typically higher expat vs resident mix.
Markets are not at a complete standstill, leaving substantial scope and room for growth. For example, according to the Dubai government’s statistics, the emirate’s GDP is expected to increase by 4% in 2021. This is encouraging news considering Dubai’s 6.2% GDP contraction last year. A Lazard Market Research study noted that the UAE would most likely recover quickly once vaccine distribution occurs. It attributed this sunny outlook to Abu Dhabi’s “deep pockets and 100s of years of oil reserves” and the Dubai government’s potential to take quick action that will aid recovery.
However, it is quite challenging to identify an actionable strategy that can promote stability and profits despite the constraints and uncertainties presented by the pandemic. So, the biggest question that lies before startups is:
How to strategise the business growth plan – horizontally or vertically?
Horizontal growth denotes the process of using existing assets to cater to new or newly relevant needs. For instance, globally, hotels are being used for ‘institutional quarantine.’ Companies that typically make clothes are now using their resources to manufacture high-quality face protection masks
Startups that want to pursue lucrative and sustainable long-term ROI from a horizontal growth approach will also need to confront the teething problems that accompany new markets. Also, you cannot forget the bigger fishes who are playing on home turf. Startups looking to align their strategy with the horizontal growth approach are essentially looking to enter new geographies and new markets, which – on the face of it – might not be ideal at this time. However, some of the questions that startups that are keen on this route might want to consider are:
1. How much physical movement is essential to marketing the product in the new geography or the new market?
2. Will the pandemic affect their logistics and supply chain infrastructure?
3. Will the rates for distribution and marketing be inflated if one attempts to break into a new market or geography?
4. Will the restrictions on movement negatively impact the quality of the finished product?
The availability of pre-pandemic costing, logistical and supply chain roadmaps, marketing and sales plans, and product quality standards will aid comparison and better decision-making as per the above checklist.
On the other hand, a vertical growth strategy aims to scale products/services within an existing market.
Startups who are keen to adopt the traditional (also popularly touted to be safer) vertical growth approach might still face budgetary issues.
However, vertical growth has been the popular choice for decades because it is easier to implement, especially in challenging times. After all, it is far easier to scale up products and services in an existing market where one already has a foothold. Additionally, there may be a supply gap left by some pandemic-affected player.
Startups that are keen to opt for the vertical growth approach in the “new normal” must ask themselves:
1. Do they have the bandwidth – in terms of human resources and production/ procurement resources – to propel this growth?
2. Do they have the budgets to undertake this sort of product or service offering expansion at the moment?
3. Do they have the financial might to keep their existing product or service offering underway should the new project not succeed?
4. Has the present situation contributed to some lacuna or opportunity that they are hoping to bridge or exploit by expanding their product and/or service offering?
While tapping into existing markets (or the vertical approach) seems like the most commendable card to play, when you look at the growth game through the lens of a shrinking population, tapping new geographies and new markets by leveraging existing assets might seem like a befitting option.
Is the choice wholly black or white?
This is where it gets tricky. Once you’ve made the distinction between the horizontal and vertical lines, there comes the choice of opting between the lesser of two evils – what if prospects look dicey on both fronts?
In all likelihood – given the difficult times we’re in – that is indeed the case. You could choose to stay still and not chase new business. Alternatively, you could evaluate which of the two approaches presents you with a more comfortable risk-reward ratio. This is where you ask yourself practical questions like:
1. How much capital do you stand to risk by tapping into a new geography or a new market with existing assets? How much do you stand to gain?
2. How much capital do you stand to risk by developing and launching a new product/service in the market? How much might you gain if all goes well?
Remember to be brutally honest while answering such questions. Hold these ratios up against each other for a valid apples-to-apples comparison. Whatever you do, don’t act on ‘a hunch’ or any advice that is not tailored for your specific business and industry.
As you can see, whether you should opt for the vertical or horizontal approach depends mainly on your business and the industrial sector your startup operates in.
The bottom line is – the choice between the horizontal and vertical lines of growth essentially depends on the answers you craft to the questions suggested above. The debate is highly subjective, and it depends on your startup’s unique needs and, of course, your visions and goals.