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BLOGDigital Transformation Strategy: Vertical Integration

by Randall CraigFiled in: Digital Strategy, Blog, Make It Happen Tipsheet

Think about your business: every process or activity that exists adds value (or should add value). In manufacturing, raw materials are received, transformed into an end product, then shipped. Specific systems exist to allow this to happen. Specially trained personnel operate the machinery, do the logistics, sell, and support the product. Each of these add value.

Digital Transformation Strategy: Vertical Integration

In service-based businesses, the same is true: every person either adds value, or adds value to someone (or to a process) that adds value, all in service to creating a deliverable for an end client. Welcome to Michael Porter’s Value Chain.

Traditional transformation strategy often looks internally at the processes and systems, for transformational opportunity. It seeks to understand the steps or processes within the value chain that can be removed, re-formed, or changed. Squeezing out low-value steps, and using technology to enable higher-value alternatives makes sense.

But this is not where the real opportunity may actually be found. Consider that some of the value to your clientele is actually added BEFORE you start your work. Or that some of the value is added AFTER you deliver it.

For automotive manufacturers, a “before” example would be parts that arrive at the factory pre-assembled. An “after” example would be a third-party logistics supplier (or a dealership) – they are integral steps in the value chain between your factory and the customer driving the car off the lot.

For consultants, an example of “before” value are statistics and analysis performed by 3rd parties. “After” value might be another organization that implements your recommendations, or a software vendor who has built portal software that showcases your work.

The Vertical Integration Digital Transformation Strategy examines the Value Chain beyond your organization. Some questions to consider:

  • Are there steps/activities/processes that are more effectively handled by us?
  • Can we improve service quality by owning more of the value chain? (eg through vertical integration.)
  • Will vertical integration help us capture increased margins?
  • Can we reduce costs to the end client, and therefore be more competitive in the marketplace?
  • Will vertical integration – eg a one-stop shop – reduce friction to the end client?
  • Can we reduce business risk by not relying on external partners?
  • If we follow this strategy, are we at a competitive disadvantage because we become “locked” to use the (new) internal capability?

Once these questions are fully explored, then the “digital dimension” can be addressed: How might technology enable this vertical integration, and build sustainable competitive advantage? And is there an element of technology that might make vertical integration possible, maybe for the very time? (AI comes to mind…)

This week’s action plan:

Bring the seven questions (above) to your next management meeting: whether you embark on a vertical integration transformation strategy or not, this discussion will yield important insights.

Transformation Insight #1: Look over your shoulder at your competitors. Are they making moves to integrate vertically? If so, how will your business be affected? While their decisions may (or may not) change your strategy in any way, making a decision to integrate vertically has downsides, that you can exploit. Their decision can help you clarify your competitive advantage.

Transformation Insight #2: At the highest level, this strategy may seem at odds with another transformation strategy – Debundling. And it may seem like a variation of the Direct-to-Consumer strategy. Both true – this is why the idea of “strategy first” is so important: what makes sense for one organization might be the exact opposite of what makes sense for another.

Does this topic resonate? Reach out to Randall: he can present it to your group.  (More presentation topics)
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