The New Integration
In 1981, Du Pont bought oil company Conoco, in one of the last-gasp attempts to control an industry's supply chain. Fearing another oil embargo, the chemicals giant wanted to ensure a constant supply of raw material to fuel the insatiable appetite of its downstream-products operation.
Today, old-fashioned backward integration—the idea of owning a steel mill if you're a carmaker, or a forest if you're a newspaper publisher—is fading away. Now welcome a new form of integration, forward integration.
"Services form an envelope around the product," write Joseph Fuller, James O'Conor, and Richard Rawlinson in the May-June 1993 Harvard Business Review. "Companies make markets by pushing the envelope." Consider, then, nine increasingly encompassing elements of forward integration:
1. The product (or service) itself. Begin with the basic offering, such as the textile or the mortgage loan. Whether or not it's well made—and exciting—remains the heart of long-term vitality.
2. Friendliness. A little more than a dozen years ago, Apple reinvented computing with the Apple II; everything from the company logo to the operating-system software promised ease of use. The Macintosh, with its mouse and comfy icons, added to the Apple tradition. The Newton, despite its harsh reception, is another daring effort of the same sort. In general, making a fetish of friendliness can pay enormous dividends.
3. Embedded intelligence. Products are getting smarter. Otis Elevators, Trumpf machine tools and Xerox copiers use arrays of microprocessors to diagnose (and sometimes medicate) their own ills. I sometimes think my Minolta 9xi camera would cut the grass if I asked it nicely.
4. Joint product development. More and more companies are intimately involving suppliers, distributors and customers in product development from the start. Ingersoll-Rand's power tool division is master of this discipline—and a recent deluge of enormously friendly (and profitable) products is the result.
5. Have it your way. At Boeing, customers "wanted a plane in which the galleys and lavatories, pipes and all, could be relocated almost anywhere in the plane's cabin, within hours," BusinessWeek writes. And in May 1995, when the first Boeing 777 rolls off the production lines, "its owners will be able to rearrange a plane within hours, configuring it with one, two or three classes to fit the market at the time." In Japan, marketing pundits label this a shift from "just-in-time to just-for-you."
6. Wraparound services. Have you seen the new Starkist tuna cans, called "Charlie's Lunch Kit"? Along with 3.25 ounces of tuna, you get "1 packet mayonnaise, 1 packet reduced calorie mayonnaise, 1 packet pickle relish, 6 wheat crackers, 1 mixing spoon." Draeger's, a high-end grocery store in Menlo Park, Calif., now features a Culinary Center—a recent calendar listed 71 classes and events in a 91-day period. Both Starkist and Draeger's transform the basic offering with additional services.
7. Continuous, joint problem solving. Nypro of Clinton, Mass., is in the mundane molded-plastic parts business. With a quality program that equals Motorola's, it's left competitors in the dust. But for Nypro, matchless quality is just the starting point. Most of its factories are literally within spitting distance of major accounts, and Nypro-customer teams work side by side on every aspect of the relationship. Several entrepreneurial Nypro factories even have boards of directors that include customer members.
8. Creative distribution. Merck just bought Medco, the giant mail-order drug distributor. The unabashed objective is to gain direct access to (and detailed information about) several million Medco customers. EDS and Hughes, General Motors subsidiaries, offer GM's 10,000 dealers Dealer Satellite Network and Dealerline. These sophisticated telecommunications-software systems link all departments in the dealership and provides direct access to GM's consumer financing arm, parts distribution centers, parts plants, factories, zone offices, fellow dealers and various outsiders.
9. Turnkey packages. Federal Express' fast-growing division, Federal Express Business Logistics Services, manages distribution for customers on a turnkey basis. Baxter International's ValueLink does about the same thing for hospital supply management.
Add up these product and service enhancements and you're a long way from the one-size-fits-all approach to products and services that has long marked mass manufacturing and service provision. The connective tissue between suppliers and customers is becoming increasingly dense, and is literally redefining whole industries. Figuring out which activities to chuck (outsource) which to extend and link forward directly into customer operations are perhaps today's primary strategic tasks.
(C) 1993 TPG Communications.
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