What is Diagonal Integration?

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.

Competition in the new tourism will not be dominated by full capacity utilisation, cost cutting, over-production, price-cutting and mark-downs. 

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.  

Diagonal Integration can best be understood by comparing it vertical and horizontal integration and even with diversification.  

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. 

What is Horizontal Integration?

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).

Horizontal Integration

What is Vertical Integration?

Firms vertically integrate to control various stages of production of their products.  Ford, for example, produced its own steel and tyre-manufacturing factories.  The example illustrated in the figure below, shows how Ford and Thomas Cook were able to gain greater control of the entire ‘production’ process by integrating vertically forward and backward.  Ford, for example, not only manufactures cars but they also retail cars as well.  This is an example of forward vertical integration.  They also integrated backwards to control the production of tyres and steel for car parts.  In this way they are in greater control of the cost of production and the supply of raw material.  Similarly, Thomas Cook took control of airline and hotel operations so that they could control their guest expenditure at all levels.  And to ensure that the sale of their packages reached the consumer, they control the travel agency business so well.
Vertical Integration

What is Diversification?

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).

The Focus of the Different Types of Integration

As the chart below illustrates, each form of integration has a different production focus.  Vertical Integration focuses on many stages of production as was illustrated by Ford – automobile production (finished good), steel and tyre production (raw materials).  Horizontal integration, as in the case of Carnival Cruise Lines, focuses on the same stages of production.  Diversification related to many unrelated production processes and activities.  And diagonal integration relates to many tightly-related services catering to a well-identified target market.
Diagonal Integration - SAGA Case Study

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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