The technology sector is rapidly moving from companies competing as technology specialists to vertically integrated companies competing on solutions. HP acquires EDS and (pending) 3Com Corp. Dell quickly follows with acquisition of Perot Systems. Oracle buys Sun Microsystems (beating out IBM by 10 cents a share). Even Apple, the original vertically integrated company, is deepening its integration by acquiring chip-maker P.A. Semi. I could go on and on.
What’s creating these seismic changes in business models and business model strategy?
Economists call it the natural evolution of industry structure. After new technologies are proven, horizontal strategies (i.e., going after multiple market segments) often win the game, as they secure economies of scale and afford the significant innovation costs required to stay on the leading edge of technology.
But over time, thanks to the dynamic forces of competition, maturing technologies become commodities. The “unmet” needs in the market then rest in resolving how poorly these technologies work together or the frustration customers experience in managing the acquisition of a diverse range of technologies. The winning business model often becomes vertically integrated at this stage.
The savvy technology companies will focus on specific customer segments: they’ll design their vertically integrated business models and develop proprietary knowledge and tools to meet the unique needs of target customer segments. Finding solutions for governments vis a vis traffic is different than finding solutions for large national retailers vis a vis customer relationship and inventory management.
Technology companies that choose not to integrate had better build best-in-class benefits or cost savings that motivate customers to buy technology components separately. This is what Accenture is banking on, as least as far as I know reading last week’s business press. Or, the technology specialists might design business models selling to the vertically integrated technology companies, winning their “make versus buy” calculations for the specialist’s technology. Will Dell wish it remained a specialist given how late in the game it’s entering software-driven solutions? Will vertical integration be a bigger problem for Accenture than Tiger’s behavior off the greens?
The subject of vertical integration matters to more than just technology companies.
Health care industry participants had better think through industry structure if the U.S. Congress passes proposed national health care policy changes. At present, health insurers and providers need not be vertically integrated to secure winning margins. My bet is that integrated systems (hospitals with aligned physician groups and providers with an insurance arm) will be the winning business model going forward as they alone will be able to design systems that advance quality while cutting costs.
Similarly, integration of architectural, engineering and construction services into one firm may provide the integrated firm with a higher probability of winning design-build contracts. Project teams composed of three separate firms often fail to align design and construction decisions to truly maximize customer value.
Restaurants and caterers vertically integrated into food supply – or at least with highly collaborative partnerships with food suppliers – may be better off than those who purchase food inputs tactically in daily markets. The former will be better able to attest to food quality and safety, increasingly important to today’s consumers.
What’s the lesson for you? A winning business model may not win in a different environment. What’s changing in your markets? What are the implications for your business model? What business model strategy is best for your customers and your bottom line?
For insight on business model innovation and business model strategy, read my recently released book, Beyond Price.