Is verticalization equal to innovation? Is this always true?

giugno 24, 2021

In the last months, we often hear about a well-known American automotive company that has based its success on a very enterprising and, at the same time, risky all-vertical business model to pursue innovation and speed. But is all this success a coincidence or is it really only thanks to the verticalization that a company can break through?

But what is meant by vertical organizational structure?

Let's start by defining what we mean when we hear about verticalization. Essentially, when a company chooses a vertical model it means that it has the economic strength to invest in a totally internal production, which does not necessarily mean having to have huge plants and personnel to be trained to be able to produce everything, but it is sufficient to acquire companies that already have the necessary know-how and expertise. To remain standing, a company of this type must necessarily be interconnected, organized and precise, otherwise if you leave something to chance it is easy to lose sight of the goal. The amount of information to be managed is very high because all the compartments involved should communicate with each other in an efficient, streamlined and automatic way. Another advantage is the bargaining strength with suppliers of the few processes that are outsourced, this is because the production volumes are high and therefore attractive for any supplier who will be more inclined to offer an advantageous price. With a totally vertical structure, the risk is very high, because when market conditions are not favorable for the specialization niche, it is complex to change product. Diversifying is at the same time difficult because it is impossible to have 100% of the knowledge necessary internally to make customized products and therefore usable in various markets. So, on the one hand we have innovation and speed with the decrease in the rate of delays and production stops and on the other hand, we have a huge entrepreneurial risk.

And if is it horizontal?

A company that makes a horizontally oriented choice aims to be expert and competent to the maximum in its core business and in the management of the processes necessary for the production of the finished piece. This does not mean having complete knowledge of the processes that are done externally, but having the necessary skills to identify the right suppliers and analyze together the best way to meet the requirements of the end customer. This is undoubtedly an advantage because it is possible to offer tailor-made products and not necessarily based on a pre-established catalog. It goes without saying that a production of this type must be smaller than that proposed by a verticalized company that often has volumes so high to justify the investment in plants, resources and management. Over time, outsourcing has become much easier, moving production to Asia even more profitable in economic terms. All perfect, except that the know-how we have taught to the other part of the world has become our first competitor. Many of the economies that have been considered emerging in the last twenty years have almost totally developed and lately have also experienced an exponential technological acceleration. Let's stay on this subject, because at some point it will be more advantageous to verticalize since the competition will be so strong that not only customers, but also suppliers will have much more bargaining power than they already have.

Industry 4.0 revolution

In this transition perspective, it is interesting to focus on the fact that most Italian companies have always made a choice in the direction of a horizontal rather than a vertical structure, this is because many had and still have traditional and family management. A horizontal choice brings with it, like the vertical one, advantages and disadvantages worthy of evaluation. It all depends on the company objectives and mission; for example, if we look at the case of a well-known US company in the automotive sector, it is rare to find a car manufacturer who decides to verticalize almost all of its production, because it is very expensive, risky, but innovation is slower and more gradual. So if you have decided to base everything on the speed of innovation, such a choice is inevitable.

To achieve such an organization, it is necessary to be technologically advanced to allow each department of the company to exchange information in an interconnected and instantaneous way. This requires constant technological updating for the management of production processes and resources.

So is verticalization always synonymous with innovation?

In G.S.I. we believe that it depends on one's own objective, on the historical moment and on the development you want to give your company. We believe that making customized products with a totally vertical arrangement is not possible, perhaps a hybrid organization could be an interesting approach.

What do you think about it? Do you believe in a black or white approach, or do you prefer to have a more flexible vision?

Is verticalization equal to innovation? Is this always true?

ARCHIVES PAGE

BLOG CATEGORIES