I remember first learning the term “Orthogonal” in my high school geometry class. I thought it was not only a cool word, but a cool concept as it describes how two lines could be perpendicular but never interest. Wikipedia defines “orthogonal” as:
In mathematics, two vectors are orthogonal if they are perpendicular, i.e., they form a right angle. The word comes from the Greek ὀρθός (orthos), meaning “straight”, and γωνία (gonia), meaning “angle”. For example, a subway and the street above, although they do not physically intersect, are orthogonal if they cross at a right angle.
I thought orthogonal would be an appropriate title for this blog, since I find that while some industries are becoming more vertically integrated others are growing more horizontal. In some cases these two strategies intersect as two perpendiculars line would thereby causing friction between different players. In other cases, the strategies are completely independent, never intersecting – just as two orthogonal lines might co-exist.
Examples of Vertical and Horizontal Strategies
To illustrate the changing market dynamics in different industries consider the automotive and retail industries. The auto sector is extensively outsourcing in a more horizontally oriented model, but the retail sector is growing more vertically integrated.
Automotive Industry – In the early days of the automotive sector, companies such as Ford and GM manufactured every sub-system and component of in the vehicles they produced. From rubber in the tires and the steel used in the chassis, the brand owner owned all manufacturing activities in a vertically integrated value chain. In today’s market, much of the content in a vehicle is sourced from tier 1 suppliers who provide complete sub-systems such as the interior or the heating, ventilation and air conditioning system. In some cases, OEMs outsource final assembly and production of the entire vehicle to other OEMs or suppliers which act as contract manufacturers. Suppliers are changing their strategies as well. The turmoil in the automotive market is leading many Tier 1 part suppliers to diversify their product lines into other sectors such as medical equipment, aerospace and electronics.
Retail Industry – Historically, grocery retailers stocked their shelves with merchandise from leading national brands such as Procter & Gamble, Kimberly Clark and Kraft Foods. Today, retailers pursue a dual merchandising strategy of promoting both their own label products and national brands. In some cases, the private label products are produced by the same competing national brands. A similar phenomenon can be observed in apparel retailing, home improvement and even consumer electronics. Even Best Buy is increasingly promoting its own private label merchandise in the stores. In some cases, the retailers have captive manufacturing or agricultural facilities. In other cases retailers enter into exclusive sourcing relationships with specialized manufacturing organizations. Brand owners are not standing still either. Consumer product companies are making moves of their own. Have you noticed the increasing frequency of stores operated by popular brand owners such as Nestle and Mars in airports recently? And, of course, discount outlet malls have been popular for decades.
In this blog, I will be exploring the past, present and future structures of different vertical industries offering my own unique perspectives and insights on the evolution. I will be exploring a wide variety of industries including, but not limited to automotive, aerospace, retail, consumer products, pharmaceuticals, health care, energy, utilities, technology and telecommunications.Digital technologies are disrupting every industry. Robotics, algorithms, 4D printing, self-driving vehicles, virtual and the Internet of Things – these technologies are fundamentally reshaping the competitive dynamics of every sector. I believe we are just a few years away from a time machine being invented. And just another few years later businesses will begin to incorporate in cyberspace.Digital technologies are disrupting every industry. Robotics, algorithms, 4D printing, self-driving vehicles, virtual and the Internet of Things – these technologies are fundamentally reshaping the competitive dynamics of every sector. I believe we are just a few years away from a time machine being invented. And just another few years later businesses will begin to incorporate in cyberspace.
There must be 10,000 articles online about how to use Twitter; how to sell online; how to start your own business, but there are precious few resources that explain how stocks are cleared/settled; how the US health care system works; or how the retail supply chain is structured.
Yet this type of vertical industry information is in high demand by:
- Wall Street analysts and asset managers trying to understand the fundamentals of the stocks they buy.
- Venture capitalists and private equity firms analyzing the business models of companies they might acquire.
- Software vendors who write specialized applications to automate industry business processes.
- Journalists who report on trends, news and issues in the sectors they cover.
Capital Hill lawyers attempting to write legislation to effectively regulate the industries they oversee.
Each of these professionals has to overcome a painful learning curve, piecing together knowledge in an on-the-job training program that has proved to be a rite of passage for twenty-somethings.
In each industry there are a handful of books and articles that provide an overview of how an industry is structured. But most of these books are out-of-date, written by an academic some 20 years before today’s era of digital disruption. There are a handful of analyst firms and consulting shops that will charge $300 per hour to educate you, but even most of their experts only understand a small piece of the puzzle.
There are very few people that can explain how any one industry works end-to-end. A “financial services expert” may know a lot about mortgages or student loans, but nothing about credit cards or wealth management. Try finding one person in the securities industry who can explain how pension funds, university endowments, hedge funds, custodial banks, broker/dealers and centralized depositories work together to process a stock trade. Or one who can explain all the different players involved in the energy supply chain – from the extraction of crude oil in the North Sea to the refined gasoline product you pump into your car every day. You will have more luck spotting a unicorn.
Knowledge of vertical industries is distributed across hundreds of experts within each industry. Each one knows there little piece with very few understanding the big picture. Most of the experts developed their institutional knowledge over a period of 30+ years. Very little of this expertise is written down. Instead, it is passed on in bits and pieces, over time, like a formal tribal knowledge.
I spent most of my thirties studying the structure and dynamics of vertical industries. I was the VP of Marketing at several software companies who were attempting to build applications to solve industry-specific problems. I found it fascinating to understand issues such as:
- How do goods travel through the supply chain to retailers, automakers and hospitals? What are the roles of contract manufacturers, third party logistics providers and wholesale distributors?
- How does the US health care system work? What are the roles hospitals, physician’s offices, radiology centers, pharmacy benefit managers, group benefits managers and health insurers interact?
What I have learned is that every industry has an unbelievably complex value chain. The company whose brand name is on the car, clothing or computer you own probably did not manufacture (or for that matter may have never taken inventory of) the product before it got sold to you. Movies and television shows are not really made by the company’s who name appears before the credits. They rely on a complex network of specialized providers to fund, produce and distribute the films you see in theatres.
This website, verticalogy, is a study of vertical industries. In these blog posts I will do my best to share my learnings with you in plain English. Since there is no authorative source for how industries work my information may be incomplete (or incorrect) at times.
In 2016, I will be focusing on financial business processes with a deeper look into the Big Four audit firms, commercial real estate models and the US regulatory environment.