Hadn't thought of or heard about the horizontal/vertical corporate approach (if that is what it's called?) before. Can see how a horizontal approach would be very unsettling for a vertically structured business.
I’m going to expound on this one more time because my first post may not have been as clear as it should, the principle is key to understanding current industry dynamics and, besides, it’s a slow afternoon for work.
A vertically integrated firm is one which controls (or owns) upstream suppliers and downstream buyers. The classic example is Carnegie Steel. They didn’t just own the steel mills, they also controlled the mines and the ships and railroads to transport the goods.
Horizontal integration is when a firm sells a certain kind of product into a variety of markets. Classic example is The Gap. They sell clothes into different markets through their brands such as Banana Republic, Forthe and Towne, Old Navy and Gap. QCOM does this too; it sells chips to many customers in different segments, everything from the low price phones for India to the cutting edge high speed data chips. It is a specialist in this business.
Previously, when GSM was the best thing since sliced bread, all the big players (Nokia, Motorola, Siemens, Ericsson) were vertically integrated businesses (research, chips, phones). It was, for all practical purposes, impossible to become a phone manufacturer unless integrated like these companies. A huge barrier to entry, without even counting the IP issues.
So what’s happening? By
1) developing a new technology where it is the leading specialist;
2) holding the controlling IP to this technology;
3) having such technology adopted as the standard; and
4) lowering the barrier to entry (through uniform licensing and supply of chips) for firms to become specialist phone builders,
QCOM has enabled a swarm of specialist phone builders enter the market and has positioned itself as a leader in a) technology development and b) supplying chips. These two pieces of the value chain are arguably the most critical and highest value-add pieces of the path to a finished phone.
Friggin’ brilliant. Turned the industry on its head.
Vertically integrated companies have a competitive advantage only when they can compete effectively against specialist firms at each level (research, chips, assembly, etc). Very importantly, this kind of structure is generally only competitive in static industries – it is disadvantaged when the rate of change in an industry is not under its control. Then specialists at each stage have the advantage. QCOM has done this for CDMA/WCDMA phones.
So what has happened to the vertically integrated leaders in GSM listed above? Motorola sheds Freescale. Siemens and Ericsson…you get the idea. Nokia is the last man standing.
The only hope Nokia has of preserving their current business model is to have as strong an influence at the high value-add research/chip part of the equation - to control the pace of development and extract royalty money - as QCOM does. That’s why they’re fighting as they are. If they can’t do this they will have to face some painful changes. |
