The recent announcement by Apple regarding the replacement of the Intel CPU with its own ‘Apple Silicon’ chips casts a fresh light on the rise of v-competitors, i.e. vertically integrated players with strong differentiation. Their rise has been most visible in technology centric businesses, and their relevance is now amplified by the search for more competitive and arguably more resilient business models.
Vertical integration has been on the rise in recent decades, notwithstanding its ebb and flow pattern. Backward integration attempts to achieve greater control on the inputs used in the delivery of a product or service; Apple’s decision to produce its own chip duly exemplifies this thinking. On the other end of the spectrum, forward integration aims to achieve greater control on distribution and access to the end-user; the trend among telcos to acquire third party distributors, physical and digital, underscores this path.
My experience in the delivery of technology centric solutions in the five domains (land, sea, air, space, and cyberspace) suggests we are likely to see an acceleration in the formation of v-competitors. While this could be taken as a given in more mature industries, we are also starting to witness the early innings of such integration in newer domains in which technology cycles are markedly shortening.
Notwithstanding the thesis of this post, vertical integration is not a panacea for the competitive positioning of every company. We should continue to expect considerable distribution of competitors and complementors along the value chain of most industries. This will support in return sustained transformation of and innovation from established and less integrated players, ultimately benefiting the end-user.
The drive for vertical integration appears to be motivated by three common themes. First and foremost, v-competitors are seeking to deliver a significantly improved end-user experience. Second, they are relentlessly working at eliminating frictions that are causing inefficiencies along the value chain. And third, they are aiming at building differentiated capabilities that will dynamically evolve over time. Following are three examples of v-competitors.
Apple
As noted earlier, Apple has become a prominent example of vertical integration. Today’s company is far cry from the Apple that was unsuccessfully licensing its operating system to other PC manufacturers and largely relying on third party distribution channels. The “digital hub strategy” launched in 2001 may have ushered the journey we’re now familiar with.
Apple’s backward integration led to the customization, acquisition, and/or development of its components such as chips, lasers and cameras with the objective to deliver better efficiency and performance. Its forward integration has set the stage for a differentiated user experience, upstaging along the way long-standing industries such as entertainment and retail.
This vertical integration model was enabled and motivated all along by Apple’s formidable innovation drive. Its approach is defined in strategic circles as “need seeker”, i.e. innovation that is underpinned by unique end-user insights and is the springboard for launching exceptional products and services.
It is fair to acknowledge that this innovation journey has also been aided by a sustained approach to acquire and integrate differentiated third party capabilities. Over the 2010-2020 (June) period, Apple has executed no less than 90 acquisitions.
Tesla
Tesla’s vertical integration has challenged the structure of the car industry that has prevailed for more than a century. The company, which debuted in 2003, has accomplished the feat of combining three disruptive technologies, namely energy storage, robotics, and artificial intelligence to deliver an unprecedented electric vehicle.
Its high degree of backward integration includes proprietary component production combined to new hardware and central software architecture, which is unparalleled in the industry. This level of integration is rare in the automotive industry, as companies typically outsource 80% of components to suppliers and operate multiple software architectures.
Tesla’s forward integration aims to overcome system-level hurdles for the adoption of electric vehicles, which is why Tesla deploys its own charging network in the markets it enters. It also follows its own retail model, largely relying on on-line sales supported by selected showrooms for experiential brand reinforcement. The company has opposed throughout its journey the long established industry model of third-party franchised dealerships.
This vertical integration model was supported over the years by the selective acquisition of differentiated capabilities. Some of Tesla’s publicly communicated acquisitions covered solutions for energy storage and power delivery, perceptual systems for semi-autonomous and autonomous vehicles, automated manufacturing as well as microprocessors, memory chips and sensors production.
SpaceX – Starlink
We should expect vertical integration in younger technology centric industries, and we’re starting to witness the early stages of this approach in the space industry.
The communication satellite network envisioned by SpaceX was publicly announced in January 2015 and is known today as Starlink. The objective is to “deliver high speed broadband internet to locations where access has been unreliable, expensive, or completely unavailable.”
SpaceX has already received approval to deploy 12,000 satellites in low earth orbit (LEO), with an incremental filing for 30,000 additional Starlink satellites.
To be clear, Elon Musk is not the first entrepreneur to approach the idea of a LEO-based satellite constellation. He has, in fact, acknowledged publicly that there were “zero” similar satellite efforts “that didn’t go bankrupt,” referring to companies that fell short of building networks over the past two decades.
What is unique in the SpaceX approach is the backward and forward integration of the envisaged global high speed broadband internet service. Under a single umbrella, SpaceX is designing and manufacturing thousands of spacecrafts using its proprietary technology; it is deploying in parallel its own ground network; and, it is planning the delivery of the service directly to millions of customers. SpaceX is also using its formidable launch program to put thousands of satellites in orbit, on time and in a cost efficient manner.
SpaceX is ultimately using its innovation capital – earned through the design, manufacturing and launch of advanced rockets and spacecraft – to bring to bear further innovation in the satellite industry under the Starlink venture. To illustrate, it is tackling head-on the end-user terminal question that has challenged the satellite communication industry for decades. In Elon Musk’s own words (in a tweet), the terminal “looks like a thin, flat, round UFO on a stick. Starlink Terminal has motors to self-adjust optimal angle to view sky. Instructions are simply: plug in socket; point at sky. These instructions work in either order. No training required.”
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In conclusion, we are likely to see the steady rise of vertically integrated market players that are innovating and disrupting traditional structures in long-standing industries. The path for these v-competitors is arguably the hardest to follow, but it is one that can lead to unleashing unprecedented market potential and even serving needs that are still unknown at the present time. In their own way, they are making a large contribution to the invention of the future.
Viewpoints for the curious mind 