Vertical vs Horizontal vs Non-Integration
As a little background to this article I have to go back to the October Builder Breakfast where the featured speaker, Steve Kennealy, Dir of Modular Housing for MA, said "you have a good association in the MHBA but modular housing is not an industry. Rather it is a group of separate factories that happen to build houses on a production line and don’t really talk with each other."
I liked this and for the time being I will change my thinking from the “Modular Home Industry” to the “Business of Modular Housing.” I agree with Steve that we are not yet an industry onto ourselves. Becoming an ‘industry’ will happen sooner rather than later if Tom Hardiman, Dir of the MHBA, and I have anything to say about it. We are approaching this ‘industry’ thing from two directions and I hope we can make an industry out of just a bunch of factories having production lines.
Now back to the problems of integration in the business of modular housing.
First, why is it even a topic we should be talking about? That’s a simple question with three distinct answers.
What is Vertical Integration?
Vertical integration is the process in which several steps in the production and/or distribution of a product or service are controlled by a single company or entity, in order to increase that company’s or entity’s power in the marketplace.
Simply said, every single product that you can think of has a big life cycle. While you might recognize the product with the Brand name printed on it, many companies are involved in developing that product. These companies are necessarily not part of the brand you see.
An example in housing would be Toll Brothers or Ryan Homes. Each of them buy raw land, develop it, put up sales offices, take orders for new homes, build them and service them for one year…themselves. They don’t just build houses, they produce a total experience for new home buyers.
Types of Vertical Integrations
There are basically 3 classifications of Vertical Integration namely:
Backward integration – The example discussed above where Toll Brothers and Ryan Homes tries to own all or most of the home building process.
Forward integration – Where the business tries to control the post production areas, namely the distribution network. An example of this would be Clayton Homes that do little land development but own some of the sales process.
Balanced integration – You guessed it right, a mix of the above two. A balanced strategy to take advantages of both the worlds. Most commercial modular construction falls into this category.
What is Horizontal Integration?
Much more common and simpler than vertical integration, Horizontal integration (also known as lateral integration) simply means a strategy to increase your market share by taking over a similar company. This take over / merger / buyout can be done in the same geography or probably in other countries to increase your reach.
Examples of Horizontal Integration. A couple of examples are currently happening in modular housing. IBS, where its’ mergers and acquisitions happen in order to increase the reach of their business. Another is Express Modular who is the only national modular home builder with sales reps and affiliate modular factories throughout the US.
What is Non-Integration?
This occurs when a company refuses to move either up or out but prefers to remain insular and isolated from the rest of its competitors. A company using this strategy most often remains in a non-growth state until it either ceases operation or is bought out by either a vertical or horizontally integrated organization.
Most modular factories fall into this category, owning only one factory, being insular and isolated from others in the same business and not having any backup plan or group in place in the event the economy changes.
A past speaker at one of my Builder Breakfasts this year was Andy Gianino, owner of The Home Store, who spoke on the need for factories to begin integrating themselves more into the home builder's business. He was widely received at the time but quickly brushed aside as many modular factories withdrew back into their insular worlds.
It really doesn’t matter whether a factory embraces a vertical or horizontal approach in the future but we will never become an “Industry” until we all leave the Non-Integration category.