4: Skyscraper Businesses

There are a few accounts of the use of mobile technology in the restaurant business, enabling customers to find restaurants and book their own reservations via their iPhone, which is a great convenience to customers. From the business's perspective, it's been highly successful, more efficient and effective than making reservations by telephone, which required staff to man the phones and either manage reservations on paper or input them into the restaurant's system manually.

The same capability was possible via the Internet - the Open Table site annually seated some 15.4 million diners. The drawback to the system was that users needed to book from home or office, they could not make or change plans dynamically, so it was limited in its success. For restaurant owners, it was not cost-effective: Open Table was a closed system, and required relatively high fees of restaurants to participate - they paid a set-up fee, a maintenance fee, and a per-booking fee, even if the customers didn't turn up at the appointed time. Even if diners turned up, the $1 fee consumed considerable margin - profit in the business is 5% and the average meal costs $40 - total profit of $2, so the $1 fee is half their profit. (EN: More details and testimonials are given, but it's clearly an inefficient model).

In general, business makes more profit if it is vertically integrated - in this instance, if the restaurant were able to make a one-time investment in its own system, and at the same time reach a significant number of users at negligible variable cost. The integration of reservation systems with Google Maps does so efficiently, and the accessibility of the same database by apps that access Google's essentially-free data source eliminates a tremendous expense of dealing with a proprietary system such as Open Table.

How Starbucks Ground Its Way to the Top

(EN: There is no shortage of case-studies of Starbucks' rise to success, so I'm going to skip a lot of detail the author provides and make a very brief synopsis.)

The Starbucks' chain of coffee shops became a massive success in the 1990's, primarily by means of vertical integration: to offer a superior product, the owners avoided the typical practice of buying through wholesalers, but instead sought out suppliers in as direct a manner possible, negotiating with the growers of high-quality beans. This resulted in a superior-quality product that was a significant competitive advantage over other chains that, essentially, sold the exact same coffee, as well as an accounting advantage in paying lower prices by cutting out the middlemen of the logistics industry.

In recent years, their star has fallen. In part, it was a loss of control of its product quality, as the company sought to cut costs by buying cheaper, lower quality beans. In part, it was loss of their prestige, in that Starbucks outlets proliferated and consuming the product no longer gave customers the sense of being "higher class" than others . And in part, it was the economy, which made a $4 cup of coffee a luxury that fewer people could afford. Profits dropped by 77% in 2009 alone, and the price of its shares fell by an almost equal margin, from nearly $40 to less than $10.

Apple's Vertical Comeback

A similar story is told of Apple Computer, which struggled for over a decade with its line of Macintosh personal computers, largely because of its rigid control over its product. The PC market was almost entirely disintegrated - with the exception of the Windows operating system, machines could be built by any manufacturer, software written by virtually any development studio - whereas Apple maintained tight control over every aspect of its platform.

But what was for a decade or so a losing strategy for personal computers turned out to be Apple's competitive advantage for other consumer goods: the iPod was its first huge success, and it was noted that their strict control over their product and the quality of experience is what made the iPod sell to more customers, and create a higher level of customer satisfaction, than the array of MP3 plays that followed the PC model and failed miserably. The same is currently evident in their iPhone, which maintains market dominance and fierce customer loyalty in the smart phone market. Users who desire an iPhone but cannot afford the product fall to the competition, but it is unheard of for an iPhone user to switch to another brand of smart phone.

The author refers to Apple as being "the most vertically integrated corporation in the world." It engineers its product from the ground up rather than utilizing whatever technology is available in the market. "Every single aspect about ... is designed by Apple."

Another turning point in Apple's success was expansion into the retail industry. Even in the early days of personal computers, you couldn't buy a Macintosh at just any store, but the company was selective about its retailers. And while the company does allow certain models of its computers, as well as popular gadgets (such as the iPod and iPhone) to be sold elsewhere, its focus is presently on the growth of the "Apple Store" retail model to maximize its own profit and provide a controlled and exclusive experience to its customers.

Some reference is given to the "Spindler years", after Jobs was ousted from Apple due to a power struggle and Micheal Spindler took over the role of CEO. Spindler attempted to shift more toward the PC model, allowing the platform to be "cloned" by other manufacturers and seeking to expand the retail presence of Macintosh computers. By attempting to correct all the things that critics claimed the company was doing wrong, Spindler nearly bankrupted Apple.

Jobs returned to the wounded Apple in 1996, and immediately reversed course. His introduction of the iMac, a more affordable all-in-one machine for the lower end of the market, revitalized sales and profitability. By introducing the iPod in a similar fashion, tightly-controlled manufacturing and supply, the iPod quickly gained a 90% market share and the market for the iPod, as the first usable MP3 player, expanded. And then came the iPhone and iPad.

(EN: The author continues for quite some time, gushing about the success of the company. However, his point is made, and the remainder merely echoes what is commonly promulgated by the brigades of Apple/Jobs fanboys.)

Microsoft's Windows Phone Reboot

As far back as 1996, Windows has experimented with developing an operating system for mobile devices, but met with limited success. The problem with adoption by the consumer market, and even user acceptance in the corporate world, was that there were many other devices and carriers, whose product was designed to be a mobile phone, not a computer modified to "also" be a phone, the latter of which was unacceptable to the average user.

Microsoft targeted primarily the corporate market, where it had a foothold with corporate buyers and tech support departments, focusing on offering a solution that was cheap to purchase and easy to maintain with the skills of existing staff, and being dismissive of user experience. The same approach had been successful in desktop computers, but failed miserably for mobile phones.

After struggling for over a decade, it became plainly evident this approach would not be successful for mobile, and the company acknowledged the need to "reboot" their effort - in effect, to stop operations, scrap plans, and start completely over.

In effect, the new strategy was a complete reversal, to total vertical integration. The company adopted Apple's strategy of focusing on the user experience and exercising rigorous control over the design process, managing the hardware, software, applications, and services of the device. While the company would continue its strategy of licensing its OW to other manufacturers, it would be far more insistent on the kinds of devices on which it would allow its system to be installed, and provide extensive guidance to software developers who wished to provide applications for use on its platform, recognizing that software performance could degrade the overall experience.

A Vertical Future

A common theme among veritcal businesses is the recognition that "they are not product designers, rather they are experience designers." They must begin by seekign to understand what the prospective customers want and expect, and work to meet those desires, rather than determining what is most efficient, cost-effective, or comfortable for them to produce and expecting the customer to accept it. Companies that fail to grasp this, and act accordingly, will be abandoned by consumers in favor of those who do.

The notion of vertical integration has waxed and waned over time. During the indsutrial revolution, industrialists such as Henry Ford sought to be vertically intergrated as possible - to consume as much of their operations as possible. The Ford Motor corporation owned the dealership, the factory, and even the mines. In taht way, they could control quality and, more importantly, retain all the profit for themselves.

Some years later, companies began to outsource operations - manufacturers found it cheaper to buy than make certain components, and the logical decision was to send out any part of the manufacture that could be more cheaply done outside an organization. Some pushed this to the extreme, seeing to build an entire company whose whole operations were done piecemeal, by other companies.

Recently, the pendulum is swinging back in the opposite direction, though the general reason is a concern for quality than for cost-effectiveness. The cheapest parts, put together by the cheapest labor, do not result in the highest quality of product, and customers are increasingly willing to pay a premium price for a product that is well-made. Those who lead the market for each good are no longer the ones who can produce most cheaply, but who deliver the most value to the consumer.

It's also suggested that companies are increasingly lerned the downside of oursourcing. The quality of their product is married to the quality of a component part, over which hthey have no direct control. To make matters worse, companies that rely overmuch on suppliers find themselves "held hostage" - once a company outsoruces and operation entirely, and is no longer able to provide for itself a service essential to its own success, the provider gaisn considerable power over them - and wields this power to their own profit in a parasitic relationship.

The author provides numerous examples: Oracle is getting into the ahrdware business, Pepsi is opening its own bottling plants, GM and Boeing are buying back parts of hteir business they previouslty spun off, hardware manufacturers are developing in-house capabilities to develop the operating systems for their mobile phones and tablets, and so on. While it's not happining all at once, companies seem to be identifying those parts of the business that contribute to their competitive advantage, the quality of user experience, and seeking to gain control over them.