The Drivers of Reintegration
The Drivers of Reintegration
Because the trajectory of technological improvement typically outstrips the ability of customers in any given tier of the market to utilize it, the general current flows from interdependent architectures and integrated companies toward modular architectures and nonintegrated companies. But remember, customers’ needs change too. Usually this happens at a relatively slower pace, as suggested by the dotted lines on the disruption diagram. On occasion there can be a discontinuous shift in the functionality that customers demand, essentially shifting the dotted line in figure 5-1 upward. This flips the industry back toward the left side of the diagram and resets the clock into an era in which integration once again is the source of competitive advantage.
For example, in the early 1980s Apple Computer’s products employed a proprietary architecture involving extensive interdependence within the software and across the hardware–software interface. By the mid-1980s, however, a population of specialized firms such as WordPerfect and Lotus, whose products plugged into Microsoft’s DOS operating system through a well-defined interface, had arisen to dethrone Apple’s dominance in software. Then in the early 1990s, the dotted lines of functionality that customers needed in PC software seemed to shift up as customers began demanding to transfer graphics and spreadsheet files into word processing documents, and so on. This created a performance gap, flipping the industry to the not-good-enough side of the world where fitting interdependent pieces of the system together became competitively critical again.
In response, Microsoft interdependently knitted its Office suite of products (and later its Web browser) into its Windows operating system. This helped it stretch so much closer to what customers needed than could the population of focused firms that the nonintegrated software companies, including WordPerfect and Lotus’s 123 spreadsheet, vaporized very quickly. Microsoft’s dominance did not arise from monopolistic malfeasance. Rather, its integrated value chain under not-good-enough conditions enabled it to make products whose performance came closer to what customers needed than could nonintegrated competitors under those conditions.
Today, however, things may be poised to flip again. As computing becomes more Internet-centric, operating systems with modular architectures (such as Linux), and modular programming languages (such as Java) constitute hybrid disruptions relative to Microsoft. This modularity is enabling a population of specialized firms to begin making incursions into this industry.
In a similar way, fifteen years ago in optical telecommunications the bandwidth available over a fiber was more than good enough for voice communication; as a consequence, the industry structure was horizontally stratified, not vertically integrated. Corning made the optical fiber, Siemens cabled it, and other companies made the multiplexers, the amplifiers, and so on. As the screams for more bandwidth intensified in the late 1990s, the dotted line in figure 5-1 shifted up, and the industry flipped into a not-good-enough situation. Corning found that it could not even design its next generation of fiber if it did not interdependently design the amplifier, for example. It had to integrate across this interface in order to compete, and it did so. Within a few years, there was more than enough bandwidth over a fiber, and the rationale for being vertically integrated disappeared again.
The general rule is that companies will prosper when they are integrated across interfaces in the value chain where performance, however it is defined at that point, is not good enough relative to what customers require at the next stage of value addition. There are often several of these points in the complete value-added chain of an industry. This means that an industry will rarely be completely nonintegrated or integrated. Rather, the points at which integration and nonintegration are competitively important will predictably shift over time. We return to this notion in greater detail in chapter 6.
Our conclusions support those of Stan J. Liebowitz and Stephen E. Margolis in Winners, Losers & Microsoft: Competition and Antitrust in High Technology (Oakland, CA: Independent Institute, 1999).
Another good illustration of this is the push being made by Apple Computer, at the time of this writing, to be the gateway to the consumer for multimedia entertainment. Apple’s interdependent integration of the operating system and applications creates convenience, which customers value at this point because convenience is not yet good enough.