Platt Perspective on Business and Technology

Rethinking vertical integration for the 21st century context 3

Posted in business and convergent technologies, strategy and planning by Timothy Platt on January 1, 2016

This is my third installment to a series on what goes into an effectively organized and run, lean and agile business, and how that is changing in the increasingly ubiquitously connected context that all businesses, and that all individuals operate in (see Part 1 and Part 2.)

I have been focusing in this series, at least up to here on a two component model of a business’ ongoing systems: their replicably recurring operational processes, practices and procedures and the infrastructure resources and systems that they maintain in place for carrying them out.

• With a value creation footprint, that represents what a business actively directly does and functionally is, and is immediately prepared to do operationally,
• And with an infrastructure footprint that represents its accumulated resource base that it would carry this out with.

And my goal for this posting is to at least begin to discuss what lean and agile mean and are coming to mean, and particularly in our still rapidly emerging ubiquitously connected, information-rich business and marketplace context. And that will, of necessity, mean addressing the issues of vertical integration and specialization and of what should and should not go into the two footprints and why, and both to remain lean and agile and to meet ongoing and evolving due diligence and risk remediation concerns.

And I begin this by repeating a question that I posed earlier on in Part 2, that I deferred addressing when I initially raised it there:

• How can you best objectively distinguish between bloat and its negative excess, and more positive “prudent excess” in operational processes and supporting infrastructure in place, that is not routinely used and that might never fully be but that genuinely needs to be there and maintained for business-supportive reasons?

I offered a very real-world example of bloat in Part 2, where its negative consequences meant spending several hundred thousands of dollars per year on software licenses that were not needed. That specific example was very clear cut as falling outside of both ongoing normal operations-defining lean and agile, and any reasonable or justifiable risk accommodation excess that might be added to day-to-day required systems for risk management purposes. But how do you identify dysfunctional bloat, that is neither called for on a day-to-day basis, or needed for due diligence back-up and support purposes?

• A detailed, fine-tuned, context and business-specific answer to that has to be based on detailed analysis of contingencies and needs that prudent risk management would call for, and for the specific business under review.
• But at least in my experience, it is possible to arrive at a largely effective first draft answer to that question by looking for business processes and resources that are simply carried out in a business, and primarily on the basis of momentum and because they “always” have been.
• Business process activities and supporting infrastructure resources that enable them that are carefully thought through and maintained for their meaningful effectiveness, almost always fit into and support a lean and agile business core, and certainly when their logic and reasoning for inclusion are consistently and at least relatively objectively considered and reviewed to keep them connected in and relevant.
• Anything that you find that is just there, and because it has seemingly always been there or done that way – is likely to be outmoded and in need of review and updating, or just plain bloat and better reduced or eliminated.
• This, approach is generic and only represents a first-cut step in identifying and eliminating dysfunctional bloat. But it is almost always serves as a first essential step for any more context-driven, business and marketplace-specific analysis and remediation endeavor.

And with this in place, I finally turn to consider the issues of specialization and vertical integration: the core topic points of this brief series. And to keep this simple, I do so with a specific, and I add carefully selected type of business in mind:

• A high-tech business that operates in a highly competitive, rapidly evolving industry and one that serves an at least as rapidly evolving marketplace, where its average consumer is always looking for newer and better (and not just some small percentage of that marketplace that would comprise its more outlier pioneer and early stage innovation adaptors.)
• I am describing, to cite one possible set of examples here, essentially any manufacturer in the business of producing cutting edge tablet computers and smart phones, to offer to an audience that essentially by definition is always going to want faster and more capable so they can tap into that next new and improved communications and interactive online experience.

I have written on a recurring basis here, of the trap of a business seeking to do and to directly manage everything rather than focusing on its core defining needs in meeting its core business goals: the specific business activities and resources needed if it is to achieve its greatest competitive value in fulfilling its business model. And for most businesses that means doing their essentials in-house, and maintaining the resources that they would need for that themselves, with prudent cushioning added and both in the form of back-up and contingency business processes planned out and in place, and with back-up resources in place that would be needed to carry them out. And such a business would outsource what for it were more secondary, non-core processes and services, and enter into supportive supply chain and similar business-to-business relationships for them, accordingly, as needed to get these tasks done and reliably and cost-effectively so (e.g. such as bringing in an outside cleaning and maintenance business for office housekeeping services, or a third party delivery service for inter-office deliveries where those activities fall outside of the core business and its systems.)

• Vertical integration within a business makes sense, and certainly in the context of the example category that I raise here, when a business would need to delve deeper into the flow of processes that are needed to produce parts and components needed to for it to manufacture its finished products,
• Or deeper into its distribution and sales systems used, and in-house, in order to maintain essential control over its proprietary products and its defining branding and image for offering them.

Specialization per se generally means doing one thing, or at most a few closely related things better than anyone else, and in ways that can out-compete any other business in a targeted marketplace and to its buying consumers. Bringing vertical integration in-house generally means doing and seeking to do a whole series of such things and sets of them, that under a simpler specialization model would be carried out by different, if contractually connected businesses with each focusing on the activities where they can create their own greatest, most competitive sources of value – and their own greatest profitability from that. And this approach begins to make sense when due diligence considerations would indicate that it, long-term would be most protective in both building and maintaining a best overall competitive position.

This is an approach that Apple, Inc. has been pursuing. And I add that I have at least occasionally raised Apple as a negative example there, from before their move into tablets and smart phones and from when they remained a stubbornly niche market alternative in desktop computer manufacturing as their primary business.

Apple pursued a tightly do-everything in-house, vertically integrated approach from their earliest days when this was not necessarily a good approach for them, limiting them to that niche market status. And then technology and consumer need changed, and ubiquitously connected and communicating evolved to more accurately meet the terms of that name with tablets and smart phones, and they were able to leverage their tightly managed vertically integrated, proprietary technology implementations into becoming a market defining powerhouse.

• What are the defining qualities of the ubiquitously connected and communicating context that have made this possible?

I am going to at least begin a discussion of that, in my next series installment. And as part of that I will reconsider what specialization and vertical integration mean. Meanwhile, you can find this and related postings at Business Strategy and Operations – 3, and at Page 1 and Page 2 of that directory. And see also Ubiquitous Computing and Communications – everywhere all the time and its Page 2 continuation.

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