The Trend Back Towards Vertical Integration is Gathering Pace| By |Mark Walker

With Google’s launch of their Pixel phones, Microsoft’s announcement of the Surface Studio, and Samsung’s acquisition of Viv, there’s a new business model in town.

Only it’s not really new.

They’re all examples of vertical integration, a business model that’s been around since Ford was rolling out the Model Ts, but one that fell out of favour when these tech companies found so much success by specialising in one part of the value chain i.e. software, leading to their billion dollar valuations.

So given the obvious advantages and success found in being horizontally integrated over the past 20 years or so, why the shift in strategy?

There are four main reasons.

  1. They’ve outgrown their partners

A major issue these tech companies have run into with a horizontal or distributed business model is that their partners have not kept up with a changing market, and this has led to them falling behind.

For example, PC manufacturers have spent a decade or more producing unremarkable PCs that have led to tanking sales for the market as a whole. So Microsoft is realising it has to a bold step and get involved. Ditto with Google, and its move into mobile phone production with the Pixel.

  1. They still have strong ecosystems

For the likes of Google and Microsoft, a move back towards vertical integration means they are able to have their cake and eat it too.

This is because they’ve built up such a dominant software position that their partners need to continue working with them, even though they’re now directly competitive.

They also have strong developer ecosystems and ‘functional integration’ at play, helping bring diversity and ‘complements’, which strengthen their position. And they still choose to work with best-in-class suppliers where it makes sense.

For example Netflix makes original series, but continues to license content as well; and Google still works with suppliers in microprocessors and chip components to power core aspects of its Pixel phones.

  1. Design matters more

If you think about a lot of hardware from the past 20 years, it became commoditised and mostly sold on features like power and memory. However Apple showed the power of bringing unique hardware – beautifully designed and packaged – to market, with the iPod, iPhone and iPad all pretty much creating new categories from scratch.

Now everyone’s a design critic. No one settles just for functional utility; everyone expects beauty too.

Think about Microsoft’s Dial and the unique features of its interactive Surface screen; or the advanced AI that will be plumbed into Google’s Pixel phone (and now Samsung’s Galaxy 8 thanks to its acquisition of Viv).

  1. A more direct relationship with consumers

The comfort with which consumers purchase goods directly from brands online has continued to disrupt the need for traditional distribution channels that a software company would have relied on.

Now they can sell it direct, on their terms. Even Tesla, a car manufacturer, is able to bypass dealerships and sell direct to the consumer.

The new operating model: Experience Integration

With a mix of vertical integration, horizontal/distributed and functional strategy, what ties them together into a coherent operational strategy?

There are 4 consistent elements to their approach.

Project management. The big tech companies are really made up of a large number of semi-autonomous teams, each managing complex projects executed by very smart specialists. They take a flexible approach to how those projects are delivered, working with in-house teams and specialist suppliers as needed.

Brand coherence. A key element tying these projects together is an increasing commitment to brand coherence, where users can expect the same product experience across platforms and devices. This consistency of experience builds loyalty.

Quality assurance. This is necessary for creating a positive user experience across the whole brand, and is essential to building and maintaining trust, which is in turn a prerequisite to loyalty.

Emphasis on the user experience. What really sets this new model apart is its relentless focus on the user experience across the value chain, from how components will make the end product perform, to how users purchase and unpack the product, and not to mention how it looks and feels in their hands. This is what creates fandom, and differentiated business value.

In short, what makes this a coherent operating model is a focus on Experience Integration.

Today’s business giants are competing by offering an integrated brand experience inside and out, and delivering it by controlling all the key consumer touch-points (particularly design), while taking a flexible attitude towards working with external suppliers when the economics make sense.

A good model for your business?

How should the rest of the business world react to this shifting strategy?

Firstly, if you’re a start-up, it still makes sense to launch as a specialist at one point in the value chain. Starting out with a distributed model is far less capital intensive, and less risky too.

However as you grow, here are three signs that you might also want to adopt an Experience Integration model.

You can do it cheaper. If it becomes costly to buy a particular supplier’s goods or services as you scale, it may start to make more economic sense to own that part of the supply chain yourself, which is why Netflix started to produce its own shows, because licensing content was becoming too expensive.

You can do it better. At some point you may realise you can serve your customers better by moving up or downstream. After all, you know what your customers want better than anyone else. This is why Microsoft and Google have moved towards a model of Experience Integration.

You can create unique value. If you spot aspects of the user experience currently delivered by another company, and you can innovate or create significant new value for the consumer by doing it yourself, this could help you steal a market-leading position on your competitors. Think of Tesla refusing to go the traditional route of using car dealerships.

The key take-away

The main take-away for any growing business is that above all else, you’re responsible for your brand and the customer experience.

Any aspect of the customer experience that may damage your relationship needs to be addressed (and ideally owned) by you.

That is the essence of a strong Integrated Experience strategy.

via Technology & Innovation Articles on Business 2 Community


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