Vertical integration: how important for PC makers? - personal computers

Tomorrow's PC markets will be characterized by a higher degree of end-user segmentation. Specialized chips and systems will be sold for specific applications: spreadsheets, graphics and Windows accelerators, database management, desktop publishers, file servers, and communications to name a few.

The challenge for PC companies today is to identify which value-add model makes most sense in tomorrow's PC markets. One portion of that process involves examining the benefits and drawbacks of vertical integration, up and down the value chain.

Ownership of all phases of upstream manufacturing (upstream vertical integration) is generally good for quality and delivery, but it's financially risky. Within the broad standards of the Intel PC market, the benefits that accrue to highly integrated PC companies are incremental advantages in product features. But, incremental product features alone are not enough. Unless features can be translated into sales almost immediately (by communicating their benefits to customers) they do nothing for the company.

In tomorrow's more specialized PC markets, the ability to translate features into benefits is even more important (because of the frantic turnover of new technology). As a result, upstream-integrated PC companies might be better suited for the new markets. PC companies that focus on assembling (not designing or manufacturing) outsourced components face more of the same: tighter margins, faster product cycles, more complex systems.

On the other hand are companies integrating in the other direction, downstream. The advantages of proximity to customers are undeniable. Knowing what end users want, and making it easy for customers to buy (downstream vertical integration), are universal ideals.

In tomorrow's specialized markets, gaining tactical information about customers and potential customers is one way of making the sales process more efficient. However, it is still only tactical information. There's an important distinction between knowing what function a customer wants to perform (and knowing who she is) and building a great product to perform it. The former in no way predisposes the latter.

Which model makes more sense in tomorrow's PC markets? Upstream-integrated suppliers are probably building more of the key competencies than are the downstreamers. No company can ignore the marketing and distribution portions of its business. But owning each portion may not be critical to success.

On the other hand, competitiveness in tomorrow's PC markets will demand the ability to deliver products with rich, specialized features within broad standards. Successful companies will be able to juggle product innovation deftly without stepping over the standards bounds, and then deliver benefits rooted in technical advances. Simply knowing what innovation is required will not, very likely, be enough. Companies need also the ability to deliver it.

PC companies might be drawing a lesson from the old consumer electronics business. RCA used to slap its label on Japanese-built VCRs for sale in the United States. RCA figured that knowing the customers and the local market would enable it to sell the products as if they were RCA's own. It didn't. The only loyalty RCA engendered was with American consumers who mistakenly thought the products were built in the United States. Score one for upstream integrators.

COPYRIGHT 1992 International Data Corporation
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