You think these guys would have learned after the previous USC fraternity rooftop incident.
More USC Rooftop shenanigans?
March 29, 2011
February 10, 2010
7 more examples of vertical integration gone wrong
If you have read any of my other posts, you would know that as a technology consultant and adviser to businesses, I don’t like vertical integration.
1) Apple’s refusal to work with Adobe (specifically Flash) despite Flash’s 99% market adoption and a huge existing investment by developers and companies. (Also, Apple’s focus on short-term wealth creation over long-term societal…and possibly shareholder value…through more open and extensible products/services).
2) Oracle’s belief that they can provide all IT to all companies (and now ditching their partners to also provide the hardware as well…after buying Sun). Additionally, it should be noted that Oracle picked up MySQL, the leading open source database in this acquisition…I have not heard many annoucements for Oracle’s plans to improve MySQL.
3) Mobile phone operators’ refusal to unlock phones, invest in customer service or improve the mobile data speeds (the US has some of the worst and slowest download speeds). I would bet that mobile phone operators have more employees working on blocking illegal traffic and apps than they have researching ways to increase internet access speeds.
4) Amazon, Google, Microsoft, IBM and dozens of other companies all moving forward with proprietary cloud computing platforms.
5) Google buying every company under the sun and trying to compete in all markets…possibly doing so successfully because for the past 10 years Yahoo, AOL, Microsoft and a handful of other incumbents lacked leadership and vision in terms of the internet. (Not to forget the effect the post internet bubble had in terms of no available VC or IPO funding. Without 2nd and 3rd round VC funding, companies saw an exit to Google as a preferred alternative to trying to build a standalone great company).
6) Banks attempting to grow through use of complex financial instruments and leverage instead of improving the consumer experience.
7) Walmart moving into groceries, digital music, electronics, banking and generic drugs…instead of continuing to focus. My main gripe with retail is that all companies are focused on boxing out competition instead of trying to improve people’s lives by automating the process of shopping…is there a reason we still go to stores? Yes, the online experience is inferior.
If you disagree with any of these viewpoints, take a step back and look at the entire forest. Still disagree? If so, I welcome comments, emails or even phone discussion from individuals looking to persuade me otherwise.
February 5, 2010
Has Apple changed our view on vertical integration?
For it’s entire history, Apple has essentially stuck with the approach of vertical integration, increasingly controlling every aspect of the value chain. Recently, this model has been hugely successful, encouraging the company to broaden their control to include ownership of chip manufacturers, control over manufacturing, extremely strict software standards, a nearly closed ecosystem and proprietary retail stores.
Historically, vertical integration has been typically bad for companies, and definitely bad for consumers (think of how powerful companies have killed innovation and driven up prices):
- Standard Oil – broken up as a result of anti-competitive practices and price controls achieved through their vertically integrated monopoly
- AT&T – broken into baby bells, allowing Sprint and MCI to enter the market and drive down long distance prices
- Current oil companies – controlling prices and discouraging alternative energy investment
- Cable providers – local monopolies have contributed to the US having one of the slowest broadband speeds in the modern world…not to mention my $120/month cable bill
- Apple – for years their vertical approach and refusal to just detach the OS from their hardware almost drove them out of business
- Microsoft – leveraged their natural monopoly to arguably hurt software innovation for years and delay the potential of the internet
- Mobile phone providers – through vertical integration they delayed the adoption of smartphones, stifled phone operating system innovation and continue to focus on customer lockin rather than on what customers really want…really fast mobile broadband and the freedom to use devices from any manufacturer
In a tandem post, I discuss how the business world has recently shunned conglomerates (once again), but is vertical integration something that finally works? I think that as more companies move toward vertical integration, they are charting a crash course that will eventually end with failure. This belief is entirely unpopular now as a result of tremendous success by Apple, Walmart and the vertically integrated oil companies, but I believe that we are reaching a point where weaknesses are visible in even the “shining examples” of vertical integration.
An impetus for this post and a related post on the failure of conglomerates was Bill George’s article on how the past decade is a lost decade because of an absence of leadership. Bill pointed out some grim statistics and briefly touched on the need for businesses to strive for long-term value. Dead on, but a little vague…immediately I felt like I had something to add in terms of diagnosing this “lost decade”. Simply put, its cause can be attributed to a return to vertical integration and overemphasis on scale (as was common in the 1800s, and most recently in the late 1960s and early 1970s).
It seems like this past decade was plagued by an overemphasis on blocking competitors instead of differentiating through innovation. While these techniques can be effective for optimizing profits in the short-term, it is not surprising that the US is now struggling to maintain its worldwide leadership and create jobs. When companies place too much emphasis on blocking competition (through vertical integration, local monopolies or other non-innovative techniques) they create a hostile environment where the entire industry fights amongst themselves rather than looking to the future. In the short-term, there certainly will be some winners…like Apple, but in the long-term everyone loses…hence a 10 year period with no real economic growth for the United States.
Not convinced that vertical integration is a second rate strategy? Check out a detailed look at Microsoft’s trend toward vertical integration as well as 7 more examples of vertical integration gone wrong.
There are literally hundreds of examples to show us why a strategy of vertical integration will ultimately will be bad for most businesses and society. As far as the decade being “lost”, it is my belief that poor leadership results in management’s decision to focus on the “strategy de jour” which seems to be to provide a complete vertical experience that is slightly less expensive. In the short-term this gains market share, but is very unlikely to change the world, improve our lives or spawn the next “unknown” industry. In fact, it seems like a focus on breadth instead of depth actually results in much slower innovation. Would we have been better off if Zappos and Mint stayed independent and continued to innovate with retail and personal finance…I think so. Consumers would benefit more if Quicken and Amazon had viable competitors. Do I blame those entrepreneurs for selling? Maybe a little, but it would be nice if late stage VC firms could have provided some liquidity and encouraged them to build standalone businesses.
We’re already seeing a lot of failed efforts and disintegration, but perhaps led by Apple’s relatively recent success as a “total closed system”, I think we will have several more years before this mindset breaks down and true innovation is unleashed. Do I know what will drive the next phase of growth? No, but if Microsoft had their way back in 1998, the internet would have been used only for allowing customers to download windows applications.
In another post, I advise companies to ignore Apple’s unlikely success and point out several companies that I hope stay focused on just what they are doing.
In summary, working with partners is scary and unpredictable. The allure of boxing everyone out and doing everything yourself continues to grow as Apple and others find success with this strategy. If as consumers we can see the benefit of “companies doing less well”, then we should trust history and expect focused companies to win out in the end. Realistically, innovative companies will probably find a way to leverage partnerships and truly “open platform” strategies will prevail…I do trust markets. The question, is how long will it take and at what cost to shareholder value and society at large. Perhaps somehow we can wake up consumers to reward smaller, more focused companies…or MAYBE, the government can empower focused, open and highly innovative companies to thrive faster.
Ironically, if we all put down our iphones and support platforms like Android (and hopefully other new open platforms as they emerge), we’ll actually get better phones a few years down the road.
Have all my business efforts been a waste of time?
Bill George writes that the last ten years (2000-2010) will historically represent a “lost decade” for business (same post, wsj). I’m 27 years old, so between internships, 2 startups and a lot of technology consulting, I’ve been active in the business world for about 10 years. Does that mean all of my efforts have been “lost” as well? Upon personal introspection I have concluded that my personal efforts have been productive–likewise, there have been some standout large companies in this lost decade. As a whole, unfortunately I agree that this decade has been lost and our economy has dragged its feet…the question we are all asking now is why?
For statistics and a broad stroke view, check out Bill’s article, its concise and a good intro to my posts here which dive into more detail and provide some specific reasons for the lost decade. I’ve broken my ideas into 2 separate posts, perhaps after another 30 years running companies and making billions, I will figure out how to be as succinct as Bill George. The best summary of his article is a regurgitation of the first paragraph where Bill writes,
“Consider the ugly facts:
- At decade’s end, about 25 million Americans – 17.3% of the workforce – are searching for full-time work but cannot find jobs.
- In the past decade, the U.S. lost fully one-third of its manufacturing workforce.
- Information technology jobs – the bright spot of job growth in the 1990s – were down 21%.
- The only growing sectors – education (up 32%), health care (up 30%), and government (up 9%) – are all funded primarily with taxpayer dollars. As the U.S. continues to shift away from the private sector, government deficits mount.
- The stock market began the decade with the S&P 500 index at 1,469 and ended at 1,115 – down 24%. This marked the first decade of declining stock prices, even after the S&P turned in a 24% gain in 2009.
- Real wages declined for the first decade since the Great Depression.”
I generally agree with Bill’s overall assessment that the decade suffered as a result of a lack of leadership, but where did our leaders go wrong? A key assertion of his article is that our economy experienced a net loss in non-taxpayer funded jobs, specifically pointing out that health care and education (both heavily funded by the government) were the only 2 major sectors that had a net increase in U.S. employment…oh yeah, we also saw a growth in government jobs. Other industries that we would have expected growth in–such as IT and communications– employ fewer people today than they did 10 years ago (in the United States). The above statistics are clearly grim, and surprising, but these numbers alone do not confirm for me that the decade was “lost”. Assuming these facts are accurate, I immediately wonder how the net growth in IT, communications and manufacturing related jobs would look if we took a global measurement. I would think (without researching) that the growth in jobs in countries like India, Vietnam, China, Brazil, etc… has more than offset the jobs that were lost in the US. Contrary to many protectionists, I don’t think the decade’s failure was related at all to our failure to protect jobs from going overseas (specifically manufacturing), but rather a failure of business leaders and our government to identify and create (or invest in) new rapidly growing industries.
My primary motivation for writing this article is the fact that Bill did not attribute the lack of value creation over the past decade to some failed philosophies that businesses continue support–vertical integration and a return to the belief that conglomerates can deliver value through diversification and management synergies. The late 1960s and early 1970s are infamous for the erroneous excitement over conglomeration. Not many non-business majors remember this period for the disastrous conglomerates that were formed…but the logic at the time proved to be horrible and it seems like every company except for GE disintegrated and returned to the belief that “focus” was ideal. Through incredible discipline GE has continued to do OK, but that is a post for another time.
Despite business schools teaching (to those who are awake) of the failed logic of conglomeration, in recent years we have had many self serving executives (and bankers) convince us that we were now much smarter and could avoid the issues that occurred “last time”.
We have recently, during the lost decade, seen many failed conglomerates. Ironically, every CEO studied the last time period where conglomerates failed…and most of the companies did not even get nearly as diverse as the prior generation before hitting debilitating competition from more focused companies:
Let’s reflect:
- Banking – Apparently participating in retail banking, investment banking, financial services, insurance, private equity, hedge fund management, venture capital and creating complicated derivatives to tie everything together does not actually reduce the overall volatility or risk of the firm.
- Auto Industry – GM and practically every other car company got involved with financing, while simultaneously growing their workforce by purchasing suppliers and trying to run many brands that have nothing to do with each other. Does it make sense for Rolex to be associated with Casio? Hint: the answer is no. Car companies thought they could successfully manage high end brands alongside low-end counterparts. The lack of brand clarity in the car industry dragged down the high end brands and prevented companies from focusing on their lower end models…causing both brands to suffer. Focused companies like Toyota and BMW did well while the American conglomerates (and Daimsler Chrysler) suffered.
- Media Conglomerates: AOL/Time Warner is often called the worst merger ever. Yahoo, with Terry Semel in charge, thought “media” was critical to being an internet company. Shockingly, being good at the internet was actually the key to being an internet company. Google focused on technology, Yahoo diverted their attention to media…Yahoo struggled.
- True Conglomerates: Tyco, WorldCom, Enron…not surprisingly these companies that grew for the sake of growing (possibly so that management could justify greater compensation) ultimately blew up when the executive’s created accounting fraud…enabled by how complex the companies had become.
So conglomerates do not work…
Being reminded of how the concepts of “corporate diversification” and “conglomeration” fail to create shareholder value seems to now resonate again within management teams. This idea for several years has become more mainstream, but please check out my post about vertical integration since that trend has not really been criticized much at all.
In conclusion, I believe for our economy to grow and for jobs to be created:
- consumers need to embrace companies that are focused and not trying to over diversify
- investors and private equity groups should verbally and financially support smaller focused companies
- venture capitalists and the government should encourage and support smaller and medium sized businesses that are competing through innovation (as opposed to scale)
- executives and leaders should recognize a lack of focus as the cause of our troubles, and
- everyone should start actively thinking about and discussing the lack of innovation that is occuring through companies that are placing too much emphasis on vertical integration