The New Normal of Vertical Integration in Tech Sector

The New Normal of Vertical Integration in Tech Sector

They taught us in economics that companies have to specialize and build core competencies.  They need to do things really well and be the best possible in the specific domains. But today, things go a little more. For technology companies, everyone is doing everything, even at a top-level. Alphabet, Google parent company, is a car company, a search company, a medical company, an advertising juggernaut, etc. Amazon is an e-commerce firm, a publisher, a movie producer, a drone maker, and a car maker (with expected closure on Zoox acquisition).

What is happening is the efficiencies in technology firms: you have this massive fixed cost investment, and once that is done, you can keep adding things on top of it. So, unlike in the old industrial age empires, one core technology can be re-used across many sectors. Due to that possibility, most times, it does not make sense outsourcing those extra services.

The big news is that Apple will make its Mac chips, taking the business from Intel. You may wonder why do that? Technically, Apple has been making chips for the iPhone and it has done the core investments in chip making. Those investments include CAD, testing, FA/QA systems, etc. So, bringing the chip design for Mac in-house is never going to be the same as someone who is just starting a chip business.

Of course, this is not to say that Apple will start growing carrots to supply restaurants. My point is that vertical integration – “the combination in one company of two or more stages of production normally operated by separate companies”-  has become easy in markets and anytime you are serving customers, there is a possibility you can be disintermediated. So, be prepared to avoid surprises in your company.

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2 thoughts on “The New Normal of Vertical Integration in Tech Sector

  1. Okechukwu Onuchukwu · Edit

    When a Tech company starts acting like a conglomerate, we can coin a new term for them – ‘Techlomerate’.
    Vertical integration of this sort enables them to have a high degree of control over components that would normally be sourced externally. Over time this would improve their margins. We might wake up someday to find Apple has entered the mining business. When you consider that Delta Airlines acquired a Refinery, nothing should surprise us.

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  2. For big tech companies, they benefit in two major ways, the initial investment in tech, and the second one is brand equity. It’s actually the second one that gives them more confidence to play around, because once you are known and accepted, many things become easier; you do not need to introduce yourself each time you raise your hand to speak.

    So, with technology as the operating system, the lines on specialised areas have been obliterated; just storm in and start capturing market share, even without industry experience. And by the time we are done training AI and its constituents, we could make lots of professionals look ordinary; that’s where we are headed next.

    The competition is no longer direct, even sectors that you initially had no relationship with are now decimating your market, telling your customers they understand them better than you do; while you question their inexperience and certifications…

    The good thing is that tech is levelling the ground, lowering the entry barrier for everyone, and we could get to where the only differentiating factor among companies is EXPERIENCE, because it’s personal, other things can be modelled and codified.

    The rollercoaster continues…

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