Moving Into the 3rd Dimension of Vertical Integration

Vertical integration is not a new business model. Companies such as Ikea and Sony have been improving the synchronization of their manufacturing and retail operations for decades. At the same time, other companies such as Apple and LEGO, which began as manufacturers, have rediscovered the competitive advantage that vertical integration can bring when this approach is advantageously combined with other retail strategies. For these companies, extending from manufacturing into retail has become an opportunity to bring the brand promise and the customer experience together in an ongoing dance between customer expectations and new business models.

The basic principle behind any vertical integration strategy is the ability to control the beginning and the end of the supply chain, from raw goods to finished product. The most obvious benefit of a well-executed vertically integrated strategy is the ability to increase profit margins and reduce prices for customers without affecting the quality of the product. But there’s also an advantage from a customer-service standpoint. When a company takes care of manufacturing, transporting, marketing and retailing its products, it has the opportunity to differentiate itself by also transforming the customer's experience.

In recent years, innovative online brands such as Frank & Oak and Shoedazzle have embraced vertical integration from day one. By bringing their products directly to consumers, many web-only brands can offer high-quality products at significantly lower prices than their retail competitors. Even Amazon, the pioneer of online retail, has made an unlikely foray into vertical integration territory by introducing Amazon Lockers as a convenient way for customers to receive and pick up their purchased items with the same immediacy that a bricks-and-mortar retail store can offer.

Ironically, many vertically integrated retailers have adapted this strategy to avoid head-to-head competition with Amazon. These companies use vertical integration as a strategy to transform the customer experience into an effortless, inexpensive and pleasant solution compared to what their competitors can offer. By maintaining control over the design, manufacture and market of their own products, they can eliminate annoyances and improve weak links all along the supply chain.

We only need to think about how Apple has managed to transform the digital music industry in the past decade to understand how important it is to pay attention to the part of the business that revolves around customer experience. Or we can look at how Amazon is currently trying to accomplish a similar feat in the digital books business by exclusively publishing books aimed at its Kindle platform. The company’s goal is to handle every step of a book’s life cycle after it has been written: editing, producing the e-book itself, marketing and selling the finished product and providing the device needed to read it.

The end goal for Amazon is to redefine how customers interact and relate to e-books by facilitating every aspect of the customer’s experience. If Amazon can manage to bring that user experience to a superior level, they have a very good chance of successfully driving the future of e-books commerce. One of Amazon’s most serious competitor, Barnes & Noble, recently reported a 26 percent decline in the fiscal third quarter for the Nook, the equivalent of Amazon’s Kindle. In light of these results, Barnes & Noble intends to move away from the highly competitive tablet and e-reader market and concentrate more on digital content delivery to other devices. This strategic reorientation follows a decision made last year to separate the Nook division from the rest of its retail and online operations. Contrary to Apple, Amazon, Google and, to a lesser degree, Microsoft, Barnes & Noble is slowly moving away from the idea of vertical integration and missing out on an opportunity to create a seamless, omni-channel experience for their customers.

There are many other examples of successful vertically integrated organizations that can help demonstrate how important it is to place all the customer experience-related activities under one authority. While it’s not the only way to build an enjoyable customer experience, vertical integration is certainly a well-traveled path toward that goal. There is no doubt that vertical integration brings as much challenges as it generates benefits. However, it’s more often than not a vector of innovation in the way a company brings its products to the customers.


The Next Level of Vertical Integration


The future of vertical integration could mean eliminating the retail experience altogether, thanks to 3D printing. The decreasing cost of 3D printers has led widespread adoption among the medical, aerospace, automotive, jewelry and apparel industries. 3D printing makes it possible to create solid, three-dimensional objects from a digital model by adding successive layers of material in different shapes. As printing material and printer prices have dropped significantly in recent years, there has been a large growth in their use for manufacturing in many fields.

Even though 3D printers have been around since the early 1980s, they were mostly restricted to rapid prototyping and research purposes for many years. Nowadays, 3D printers and materials have improved to a point where they can be used for rapid and inexpensive manufacturing of finished products. And the next logical step seems to be heading toward “mass customization.”

Companies such as Shapeways, Kraftwurx and Staples are now offering 3D printing services open to consumers and industries. Using these 3D printing services, consumers can customize objects to their liking and order the resulting unique product or pick it up at the store. Thanks to 3D printing, the future of vertical integration might mean eliminating the retail experience altogether or at least profoundly transforming it.

In the past year, we’ve also witnessed the advent of several companies making efforts to develop affordable 3D printers for home desktop use. Much of this work has been driven by hobby enthusiasts and DIY communities, but companies such as MakerBot and Mcor envision an adjacent future where brands will be able to integrate custom manufacturing processes into their offerings and allow their customers to customize the end products in their own homes.

This vision of a future where 3D printing opens the door to the possibility of an infinitely customizable assortment of products can be taken even further when linked with the recent popularity of pop-up shops that remain in a temporary location for a few hours or a few weeks. By carrying a small selection of items carefully assembled and customized to consumers’ tastes, pop-up shops have started to shift our thinking of what a storefront should be. The very nature of pop-up shops is their makeshift ability to use low-cost materials and deliver a small selection of unique, highly desirable items.

When combined with 3D printing, the pop-up shop model can be used to leverage the vertical integration model to its fullest by offering a complete assortment of customizable products. Pop-up retailers could even collect information on customer product preferences and post-purchase feedback in order to turn this data into new products.

Adopting a vertical integration model allow companies to better align the brand promise with the customer experience. Of course, product development and retail are two distinct businesses, and doing both takes a lot of work. However, a successful vertical integration approach can give a company an incredible advantage over its rivals. By creating their own unique products and by controlling the whole supply chain, vertically integrated companies reduce costs significantly and the consumers get high-quality, custom-made products at a fraction of the price.

(Photo: Shapeways)

Further Reading

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The widespread use of smartphones and tablets has created an opportunity for local retailers to attract in-store traffic.

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