It is the natural order of things; categories evolve and mature. In the race to the bottom that has plagued so many industries, alliances promoting the ultimate customer experience must take form. Vertical integration is back, and will extend not only to the supply chain, but to service companies as well.

A telling example was Microsoft’s reentry into the tablet market. After decades of deferring production of chips and PCs to component makers, Microsoft finally cried ‘uncle.’ When it released Surface in 2012, Microsoft controlled the hardware and software from end to end. Unfortunately, Microsoft was simply following suit. Apple has built an ecosystem, and Google’s acquisition of Motorola Mobility represented its attempt to build an entire technology platform.

Computing is the latest industry to be rebuilt from the ground up. Commoditization is the norm in almost every sector of the economy, and drives 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 effect is an offer at a competitive disadvantage. In this form of cage fighting, it is not product versus product; it is business model versus business model.

A few years ago, a market leader with a specialized retirement plan product built a backend to sell to competitors. The company still profits not only from selling retirement plans, but also from the administration of managing them. 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 newfound importance as each step in the value chain becomes more transparent and better understood. In healthcare, hospitals and physicians are realizing the importance of their cooperation, and are merging to create healthcare systems that coexist with insurers. Such alliances will become more commonplace as companies doing business with one another build more meaningful relationships. These relationships will take costs out of the system, and enable technologies that deliver a more satisfying customer experience.

Companies should seek out a 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 by Rita McGrath, HBR