commentary

Illusions of Control

Forward integrate into owning your distribution or not? For many CEOs and their corporate strategy chiefs, consolidation, in-house distribution units, and scale conversations are dominating their strategy debates. But what they worry about most is that no matter the strategy, you can’t hide from the market. They face a single dominant strategic question: What distribution choices do end customers have as they evaluate alternatives, and are they most likely to choose?

Create Market-Focus in Distribution

Designing and executing business systems to consistently and profitably win over these picky end customers is at once straight-forward and maddeningly complex. Even though strategists are as prone to confirmation bias as anyone (“the ‘don’t confuse me with facts’ problem), customers easily and willingly, and often quite forcefully, express the desired outcomes they seek as they make decisions about what to buy and how to buy it. That holds for both consumer and business buyers.

As a result, understanding what any company’s “ideal” growth strategy should be is the straight-forward part. It should be squarely focused on delivering the full range of what and how outcomes end customers seek, and delivering them profitably and better than any other alternatives available.

But the complex part comes barging in as companies intensely debate, across often warring internal functional factions, how to design, build, fund, and manage business system that will, at the end of the day, deliver better than any competitor those winning outcomes to customers. This brings us to the vertical integration question. And understanding it fully is as much a study of CEO psychology as it is of hard-edged financial and strategic analysis.

Erase Confirmation Bias

After years of unsuccessful efforts to stem erosion in market share and customer retention, frustrated CEOs of once-strong legacy brands often show signs of siege mentality, especially when tough questions are met with blank stares. Are we offering the right value proposition (outcome for customers)? Are we delivering it? What’s standing in our way? When answers prove elusive, either internally or from outside partners, these CEOs often make the fateful decision to “take control of their destiny” and vertically integrate.

The question is – what destiny? And is it one that leads to greater numbers of customers choosing their offerings at acceptable prices? Public rationales for most vertical integration moves are usually more about cost savings, efficiency, lower prices, and greater control. They typically make only vague allusions to the messy business of customers and new ways of winning them over. Let’s look at a recent example.

 

Reinvent Distribution for End-Customers

At the end of the day the best business model reinventions deliver better results to end customers, not protection of the provider’s status quo. Practically, that raises tough questions about how to forge alliances and work collaboratively with common end-customers. At times, such collaboration is simply not possible, and complete ownership is essential to success. But such times are few and far between. And Apple aside, these attempts rarely succeed.

We suspect the vertical integration we see today stems from mistrust of market forces. This is likely a result of tough economic conditions and fast-changing industries. But don’t be fooled. Customers will still have the final vote.

When it comes to vertical integration, Buyer Beware.