Saturday, April 20th, 2019

Vertical Integration, or Virtual Integration?

In the introduction to Selling Change, I cite the trend away from vertical integration as one of the forces changing the business landscape. I also coined the term “The Great Reboot of 2009” to refer to the trend of companies overhauling their businesses, setting them on entirely new courses.

Reading recent business headlines, it is clear that companies, and even industries, will be undergoing significant changes for years to come. However, the data is mixed regarding a discernible trend toward vertical or virtual integration.

Vertical Integration

Examples of Vertical Integration

Examples of Vertical Integration

Vertical integration is the notion of companies acquiring key suppliers and customers in order to control the entire supply chain in an industry segment. Due to the ailing financial health of many companies, entire industries are rapidly consolidating into a few companies (see “More Companies Prone to Go Vertical“, Wall Street Journal, December 1, 2009). It is certainly a buyer’s market. Companies with weak cash positions can be purchased at bargain prices. Sun Microsystems, once a flagship of the high-tech industry, has been in a weak position since the burst of the tech bubble in 2001 and was finally purchased by Oracle Systems. Hewlett Packard recently purchased 3Com. The examples are many (see the table of recent vertical deals compiled by Bloomberg) .

One question will be interesting to watch: Will companies that were unable to compete effectively before and during The Great Reboot of 2009 magically turn into successful, productive assets for the acquiring companies? Or, do items bought at one yard sale simply end up in another yard sale a year later?

Virtual Integration

Sharp is Integrating 18 Companies Under One Roof

Sharp is Integrating 18 Companies Under One Roof

Virtual integration is the notion that shareholders are best served if companies focus their investments on specific areas of specialization, thereby achieving unassailable efficiencies and output. These companies then rely on third-parties to perform all other aspects of its operations. For example, an architectural design firm would only hire architects and would contract other companies to perform other tasks such as accounting, marketing, etc.

Again, due to ailing financial health, many companies are divesting unprofitable businesses and laying off workers in an attempt to prune their operations down to the most profitable, highest growth areas. On the surface, this appears to be a low-risk strategy. If your remaining business is highly profitable and has a loyal customer base, what could go wrong? You may or may not be able to grow rapidly, but you won’t go out of business any time, soon. And if your business does start to expand, you can expand the contracts with your suppliers, or grow your supplier base. Perhaps it is this logic that many business scholars, analysts, and consultants such as Charles Handy and Geoffrey Moore have found so compelling?

One example of a company stepping up its virtual integration is Sharp Corp. in Japan. Sharp recently announced it is beginning production in its new $US 11 billion television fabrication plant in Sakai City. According to the Wall Street Journal, “Sharp aims to streamline the costly LCD-panel production process by moving 17 outside suppliers and service providers inside its factory walls to work as “one virtual company.”

Conclusions?

There may or not be conclusive evidence of a trend toward more vertical vs. virtual integration, or vice versa. It appears likely The Great Reboot of 2009 will drive more of both. So what will be the impact on the sales profession?

Vertical integration creates a few very large companies in a given industry. Of course, these companies hope they can achieve more sales with fewer sales people. This is often a false hope, but they will certainly try. Companies would be more successful reducing their cost of sales if they also implement self-service systems, rather than simply asking salespeople to handle more business. The good news, for those salespeople that work for these large companies, is there won’t be a shortage of work to do. Your percentage commission may be lower, but your income should be stable.

Virtually integrated companies create new opportunities for salespeople. Companies that choose to rely on outside suppliers for critical operational tasks will have high expectations for reliable, high-value delivery. Transactional salespeople will not be welcome in these business relationships. Salespeople will have to facilitate highly collaborative business relationships and proactively develop opportunities to create mutual value.

One thing is certain. Whether your industry is consolidating or diverging, becoming an adept change leader will be a valuable skill for years to come.

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