When we talk about vertical integration in product production, it tends to be in the context of physical supply chains. We think of a vertically integrated company as one that controls its product from source to distribution. There are, however, other types of supply chains that can benefit from vertical integration, such as the supply of human labor and intellectual capital. To understand how those benefits apply, let’s first take a look at the concept of vertical integration and what it means at a fundamental level.
Vertical Integration, Explained
Vertical integration is not about control for the sake of control. Instead, it is about achieving the most efficient and reliable means of production. It minimizes lateral movement, assembling the flow of resources into as efficient a stream as possible. Perhaps the most famous example of a company embodying this principle is Apple.
From its very inception, Apple has carefully curated the manufacturing and distribution of its products, eventually building its own brick-and-mortar stores to oversee even that last mile of putting products into customers’ hands. The fact that Apple was also the first company to reach a trillion-dollar valuation is probably no coincidence.
Another powerful example of vertical integration lies at the core of Netflix’s story. For the first several years of its existence, Netflix was an innovative company with a disruptive business model but far from the household staple it is today. That transition can largely be credited to the company’s decision to begin making and distributing its own products rather than relying on outside content creators. Netflix’s original content is a vital part of its business model, transforming it into a dominant force in the entertainment media sector.
Extending This to Human Resources
Vertical integration doesn’t always have to strictly involve products, content, or distribution, at least not in a traditional sense. It can also be applied from a talent and capabilities standpoint. This is what we have done at Ally Financial, and it has been instrumental in helping us maintain our standing as the nation’s best online bank for four straight years. Instead of several different departments managing the company’s information systems, we’ve combined data, digitization, security, and design into a single “stack” of human resources.
Another way to think about it is this: The data that gives insight into customer needs, the resources needed to innovate, and the executive power to implement change are all under one roof. This method of managing data and user experience from end to end makes it possible to truly understand and effectively solve for the customer need.
It also allows us to put the spotlight more easily on outcomes rather than outputs. Instead of worrying about project delivery first and results later, our integrated team can focus on customer experience from the beginning through the middle to the end of the process. There are few handoffs to other departments because there are no other departments relevant to the challenges we typically face. And perhaps most important, our high level of collaboration and interaction, working together on the same problems — as opposed to what you observe in a more traditional, segmented structure— inspires our team members to act in service of one another.
Making the Multidiscipline Stack Work
While we are not the first company to vertically integrate our digital, design, and security teams, it’s still not common practice. The fact is most organizations can achieve it if they are willing to do the hard work of disrupting current structures and behaviors. First, the virtual walls between siloed teams need to come down. Second, those teams must see, understand, and agree upon a common vision and shared sense of purpose. Third, everyone involved must feel (and be) empowered to identify, work on, and solve problems. And lastly, leaders who know how to make conflict constructive, as well as stay abreast of details without slowing innovation, are absolutely vital.
These are not easy things to accomplish, but they are well worth the effort. Vertically integrated teams not only give individuals a great opportunity to learn and succeed more than they would otherwise, they also result in bottom-line profitability — one might call that stacking the deck in everyone’s favor.
Sathish Muthukrishnan was named Chief Information, Data and Digital Officer for Ally Financial in December 2019. In this role, Muthukrishnan is responsible for advancing Ally’s technical and digital capabilities, including cybersecurity and infrastructure, and accelerating … View Full Bio