Platt Perspective on Business and Technology

Rethinking vertical integration for the 21st century context 11

Posted in business and convergent technologies, strategy and planning by Timothy Platt on October 4, 2016

This is my eleventh 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 Business Strategy and Operations – 3 and its Page 4 continuation, postings 577 and loosely following for Parts 1-10.)

I began addressing a set of three topic points in Part 9:

1. What makes global online interactive connectivity so powerful an enabler, in making a more vertical integration system work?
2. How does this compel a rethinking and a redefining of what “lean and agile” means?
3. And how will that affect and even redefine business-to-business collaborations, as individual enterprises determine what they should do themselves in-house and what they would more effectively outsource, for example to supply chain partners?

And I have been systematically working my way through the first of these points since then. My goal here in Part 11 is to conclude that phase of this overall discussion, at least for the core framework issues that I would raise in response to Part 1’s question.

More specifically, I ended Part 10 by offering these follow-up issues, that I would address in continuation to my response to the above re-stated question 1 (noting here that I have been successively presenting an Apple, Inc. based case study as a source of working examples, throughout this series and that I continue to do so here):

• A discussion of Apple’s move into content with its Apple App Store, and its iTunes and iBooks and more, where they seek to become a leading content/format gateway too. And this will bring me to a key detail that I have only noted in passing and without comment up to here. Apple has moved from seeking to do everything that is in any way important to their business in-house, to taking on a business model position in which they seek to do almost everything in-house. Their “almost” is crucially important there, for understanding where Apple is now and where they seek to go as a business.
• And when I address this, I will directly and specifically challenge a point of detail that I noted in Part 10 when I wrote of Apple now pursuing a “more unified, vertically integrated, one source approach.” That is true for many of the key pieces of their marketable puzzle, but there are pieces to that, that they do not seek or want to offer strictly from in-house. And the dividing lines there are crucial to understanding Apple’s more current success.

When Bill Gates and his founding business partners first built Microsoft, they planned and built its basic business model and the organization that sprang from it on the basis of a simple, but then entirely counterintuitive insight: a computer, and certainly a desktop computer is simply a large and ungainly paperweight, without software to bring it to life and give it functionality. Bill and his colleagues were software people – not hardware designers or engineers, and they had the finances and resources that would be needed to develop software – not the many, many millions of dollars that would have been needed and even then, to attempt to set up and run a hardware design and manufacturing system. And it might be argued that Microsoft’s founders exemplified the insight that might be contained in the old adage: “if the only tool you have is a hammer, everything begins to look like a nail.” But in this, they were right. They could and did build software, and from an operating system out and they could and did openly allow and support any and all hardware manufacturers who would build desktop computer hardware, to adapt and use their software and their operating system standards to these manufacturers’ product offerings – making those computer systems incompatible with other competing operating systems and their software for working effectively on those computers’ central processing units.

Apple took a diametrically opposed view and tried to design and control everything in-house – the first time they tried a massively vertically integrated in-house business model approach. I have already at least briefly discussed that case study story in this series. The second time, along with building their basic business model in terms of the interactive internet and social media capabilities for building and cultivating a customer base, they began selectively divesting themselves of some very strategically selected segments of this potentially “everything in house,” leaving those opportunities to others.

There are, in fact three basic elements to the overall systems that Apple and their competitors have sought to work in and dominate: hardware and software as already noted in discussion of their businesses from before the internet, and information and its flow – where that has become a basic core element here and certainly since the wide acceptance and proliferation of the interactive online and social media. Apple still seeks to control and in a very fundamental sense own their system’s hardware and even when they do outsource production, under tightly controlled exclusive production and supply terms. And they still seek to fundamentally own their operating system and related software. But they have become much more open to allowing and supporting third party software, and particularly app development. And they seek to control that to the extent that they do, through exclusive sales and software installation channels, through their Apple App Store.

Yes, I oversimplify here. Even during the peak of their first try at “control and own and produce everything in-house,” vertical integration, Apple did come to agreement with Microsoft, for example in support of their offering an Apple-compatible version of their Microsoft Office productivity software. But these agreements were the exception, where Apple’s current system of agreements with third party app developers and other software developers are more the rule.

The key detail of what I just noted there, that I will follow through on here is that Apple might allow and support third party software development, and as a basic part of their business model now – but they still studiously, systematically maintain “exclusive sales and software installation channels” for this third party software that they do allow for and support on their hardware. And they do their own vetting and quality assurance there, to make sure that everything going into their branded devises works compatibly and securely there. And this brings me to their selected and vetted iTunes and iBooks and related content offerings. They sell licenses to outside publishers and producers for allowing sales and distribution of their products through Apple-run online sales operations, for downloading and use on Apple devises. And they sell this flow of available content, and video and more to users – as well as offering a selection of free content such as out of copyright e-books.

• Apple does not need or want to own the production or sourcing of this vast multi-formatted flow of content. They do want to own and control its vetting and access, and its downloading and use on their branded hardware. And they do that, as part of their now-core business model, as updated from their desktop computer, pre-interactive online days for today’s marketplace and consumer-driven world.
• And they use their active, ongoing two-way connections to their interactively connected marketplace and customer base, to keep their offerings relevant – from their customer’s perspective where their purchasing and usage decisions determine business success there.

I expect to have some more to say on question 1 and its issues, in subsequent postings here. But I am going to turn in my next series installment to explicitly discuss question 2, from the top of this posting:

2. How does this compel a rethinking and a redefining of what “lean and agile” means?

Then after completing my basic discussion of that, I will complete this set with the above question 3 topic point. And I will finally delve into the laundry list of more technical issues that I noted at the end of Part 10, as still being up for discussion here.

Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 4, and also at Page 1, Page 2 and Page 3 of that directory. And see also Ubiquitous Computing and Communications – everywhere all the time and its Page 2 continuation.

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