Why Vertical Integration is a Game Changer Throughout the Economy
It is the natural order of things; categories evolve and mature. In the race to the bottom that has plagued so many industries, alliances that promote the ultimate customer experience must take form[i]. Vertical integration is back, and will extend not only to the supply chain, but to service companies as well.
A telling example is Microsoft’s re-entry into the tablet market. After decades of deferring production of chips and PC’s to component makers, Microsoft recently cried uncle. With the release of “Surface”, Microsoft will control the hardware and software from end to end. Unfortunately, Microsoft is just following suit as Apple has clearly built an ecosystem, and Google’s acquisition of Motorola Mobility represents its attempt to build an entire technology platform.
Computing is just the latest industry to be rebuilt from the ground up. Commoditization is the norm in almost every sector of the economy and is driving the trend to control costs, raw materials and inventory. Smaller companies failing to recognize these structural changes may face irrelevance or extinction.
The traditional distribution model is deeply flawed. When customer and supplier or vendor and distributor are in an adversarial relationship, or one that is not synergistic, the net affect is an offer that is at a competitive disadvantage. In this form of cage fighting, it is not product vs. product, it is business model versus business model.
One of our clients, a market leader in a specialized retirement plan product built a back end last year to sell to their competitors. Not only do they profit from selling retirement plans, but from the administration of managing them. Thus, integration is not just for large companies or those distributing a physical product , but for any with the will to think differently about their structure.
While the concept of building an ecosystem is nothing new, it is taking on new found importance as every step in the value chain is becoming more transparent and better understood. In health care, hospitals and physicians are realizing the importance of their cooperation, and merging to create health care systems that can co-exist with insurers. Such alliances will become more commonplace as companies doing business with one another will have to build more meaningful relationships that take cost out of the system and enable technologies that deliver a more satisfying customer experience.
Companies should seek out more profound understanding of their suppliers (upstream) and customers (downstream) and form alliances to their mutual benefit. Their survival may require it.
[i] Why Vertical Integration is Making a Comeback, HBR by Rita McGrath