Everyone knows aout horizontal and vertical integration. But have you ever heard about diagonal integration?
For eons, firms have integrated horizontally and vertically. They have even diversified their operations. Today, the new best practice is Diagonal Integration.
Diagonal Integration, diversification, market segmentation, and total innovation will increasingly become “best practices” for competitiveness.
Diagonal integration is a term coined by Dr. Auliana Poon, Managing Director of Leve Global, in her book, Tourism, Technology and Competitive Strategies. It explains the process in which firms use information technology to get closer to their customers and to systematically combine a range of services required by their carefully-identified target clientele. For example, American Express produces a range of services – travel, insurance, real estate, financial services, investment services – to their carefully-targeted clients.
Firms diagonally integrate for best productivity and most profits. As they move into new activities, there are tremendous systems gains, synergies and scope economies to be had from integration. Diagonal integration is a key tool for controlling the process of value creation and will continue to blur the boundaries among industry players.
The purpose of diagonal integration is not to produce a single service and market it to a supermarket of clients. Rather, the objective is produce a range of services and to sell them to a target group of consumers. The consumers targeted are expected to simultaneously consume these services at regular intervals over their lifetime (for example, travel + insurance + credit + holiday + personal banking + entertainment + Internet + Radio + TV + Music).
In other words, the benefits of integrating activities are greater than providing each activity separately.
Diagonal integration is facilitated by new information technologies. It is the process by which firms use information technologies to logically combine services (for example, financial services and travel agencies) for best productivity and most profits. One of the key attractions to firms in diagonally integrating is the lower costs of production that comes with it. This is made possible through the synergies, systems gains and scope economies that firms reap when they use an IT platform to integrate diagonally.
The examples would illustrate that the distinguishing feature of diagonal integration is that firms become involved in tightly related activities to reduce costs and to get closer to their consumers through IT.
Firms integrate horizontally to increase market share. The key is that firms that integrate are at the same stage of production, producing similar products or in the same market. For example, Carnival Cruise Lines gobbled up P&O Cruises, Aida Cruises, Cunard and Costa Cruises to become the world’s largest supplier of leisure cruises (Tourism Intelligence International, Successful Hotels and Resorts, 2005).
Firms diversify in order to spread risks. The companies acquired need not be in the same industry or at the same stage of production. A suitable example of diversification is the Phillip Morris Company. Cigarettes and food are completely disconnected industries and products. However, Phillip Morris is involved in both. The main reason was to reduce risk. Phillip Morris has faced the reality that cigarette consumption in many modern markets will decrease over time as a consequence of anti-smoking campaigns and the banning of smoking in public indoor spaces. Now the company has delved into other areas including wine, coffee, cereals, confectionary and others. All under different brand names of course. Don’t be surprised if they get involved in the supply of outdoor furniture (all smokers smoke outside now).
Saga had a clear target market – the Over 50s market. And they systematically identified and provided a cluster of services dedicated to their target market. They provided insurance, personal finance, assisted care, magazines and a radio station, all in addition to holiday and cruises.
Saga’s strategy is clear and dedicated. They are not catering to a supermarket of clients; they are not trying to be everything to everyone and cover the entire market like Carnival Cruises; they are not trying to control the stages of production (as did Ford); and they are not entering markets ‘willy nilly’. Saga remains specifically dedicated to their target clientele.
Diagonal Integration is one of the 26 Strategies (A-Z) identified to help companies and destinations lead and drive the New Travel and Tourism Paradigm. For more information on the report publication entitled – The Paradigm Shift in Travel and Tourism please click h`ere.
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