From Vertical Integration To Horizontal Collaboration

Frank Diana
7 min readMar 20, 2023

I’ve touched on aspects of this topic in a number of earlier writings on ecosystems — which you can explore here. In this post, I focus on the organizational implications of a transition from vertical integration to horizontal collaboration.

We are living through an era of experimentation driven by rapid advances in science and technology, uncertainty across every domain, and the fact that no clear answers exist to the challenges looming before us. As we explore these challenges, they force us out of traditional boundaries. As a result, lines are blurring between industries, sectors, the physical and digital worlds, and the real and the virtual worlds. At the structural level, once distinct Industries and sectors are coming together to address challenges and satisfy human need. Future value creation therefore shifts in orientation from vertical integration to horizontal collaboration.

Our industry construct — born during revolutions that set the standard of living in the western world — will give way to a finite set of horizontal ecosystems (See figure 1). These ecosystems represent networks of connected stakeholders interacting in ways that create and share value for all participants. They are complex and relationship oriented. Many of our grand challenges like food scarcity and waste, health and wellness, climate change, the changing notion of retirement, energy transition, expanded mobility, and more, are ultimately addressed via ecosystems. The future of retirement is a good example of a scenario driving an emerging ecosystem (see figure 2). As we live longer lives, the definition of retirement is likely to change. That change drives an intersection with smart homes, education, health and wellness, wealth management, and more.

The value sharing in this scenario and others becomes a collaborative affair that increasingly involves multiple stakeholders. Managing in this world is more complex, requiring effective collaboration and a community mindset. Over time, established peer-to-peer relationships lead to benefits that accrue to all ecosystem participants. Along the way, value design gets complicated. Value nodes represent both creators of value and those that consume it. These nodes expand beyond the four walls of a business, across industries and sectors. Products, services, and capabilities represent value — and that value must be easy to leverage and consume.

Value design is facilitated by multiple stakeholders coming together in symbiotic relationships that achieve greater value for all, versus what any stakeholder could capture alone. However, organizations typically struggle with silos, collaboration challenges, and legacy environments that do not support the plug-and-play nature of these emerging ecosystems. Given that some estimates have $100 Trillion of economic activity shifting to ecosystems in the coming decades, these organizational challenges are not tenable. A new type of organization is required.

STRUCTURAL CHANGE
These forces and their growing visibility drive a change in how we organize — both as a society and at the organization level. To deal with complexity and uncertainty, organizations must be viewed as composable building blocks with structures that mimic the operating environment (which is increasingly ecosystem-oriented). As the possibility space (disruptors and opportunities) expands, traditional hierarchical and command and control structures become increasingly irrelevant. This fundamental driver challenges the way we organize. How do we operate in an increasingly horizontal world versus the vertical structures of the past? Should organization structure mimic the ecosystems that they will ultimately operate in? Do organizations eventually become platforms?

It’s intuitive how — In presence of a near-zero transaction cost — integrating vertically your organization into functional structures becomes less of a driver of competitive advantage: organizational capabilities such as a particular technology, a process, a certain set of skills can be reorganized quickly around customer-driven opportunities if the organization is “unbundled” enough to let its “building blocks” recombine fast

Boundaryless Team — Converging towards a Common Protocol of Organizing

A model that moves us towards the future state described in the above quote was embraced by Haier. Their Rendanheyi organizational model empowers staff by giving them more freedom and autonomy. The name of the model itself reflects this: “Ren” represents each employee, “Dan” represents the needs of each individual customer, and “HeYi” represents the connection that exists between each employee and the needs of the customer. Haier implements a microenterprise model, which emphasizes small, independent units within a larger organization that provide goods or services related to Haier’s core business. These microenterprises are often run by individuals or families and have a limited number of employees.

This approach has enabled Haier to achieve rapid growth and innovation while maintaining a decentralized structure. Haier’s success can be attributed to the company’s culture of entrepreneurship, with each unit given significant autonomy to make decisions based on local market conditions while still being part of a larger network that provides support and resources. The Haier model has been applied successfully across a range of industries as an enabler of adaptability and resilience. Then CEO Zhang Ruimin was instrumental in this success, leading an effort to build a company where everyone is directly accountable to customers. Haier has established over 10,000 microenterprises worldwide, with a presence in more than 160 countries, creating an open ecosystem of users, inventors, and partners to replace formal hierarchy and enable the company to stay competitive and innovative.

WHY NOW?
It was the scientific revolution of the 16th and 17th centuries that marked the emergence of modern science and transformed the views of society about nature. It also drove the ultimate destruction of the structures and institutions of that era. However, it is considered an intellectual period that did little to advance human development. It wasn’t until the 1870’s and the start of the second industrial revolution that science converged with technology. Most major technological advances since then have been built on the scientific knowledge base of humanity. Knowledge and invention have always been the drivers of human development, and in that regard, the period that followed is still considered the greatest period the world has ever known. There are many similarities between that historical period and our emerging era. The biggest signals to consider are an emerging period of great invention and the likely knowledge explosion on the horizon.

HISTORY IS REPEATING ITSELF
As Winston Churchill once said, “the further backward you look, the further forward you can see.” Fast-forward 150 years and history may be repeating itself. The rapid pace of invention — driven by synergies between the sciences, another more aggressive convergence with technology, and an explosion of knowledge — is likely to usher in the next period of human development, and we are just scratching the surface. Look no further than DeepMind’s success predicting the structure of nearly all proteins known to science; the recent progress in finding cures for cancer; the use of CRISPR to cure high cholesterol; or recent progress in identifying early warning signs of Alzheimer’s. As more breakthroughs emerge, the means to advance human development emerge with it. If we view value through the lens of human need, we begin to understand the connection between the historical period described above, and similar structural implications of this emerging era. While the characteristics of our times have historical precedent, the speed at which change is occurring does not. Enter the ecosystemic organization.

ECOSYSTEMIC ORGANIZATIONS
This emerging era of astounding scientific and technological breakthroughs has positioned the world to focus on our grand challenges. Purpose oriented discussions are now meaningful because of this phenomenon. However, the structural implications of the past resurface as the possibility space expands. The organizing system that has brought us to this point will not survive this transition.

An ecosystemic organization (see figure 3) is focused on human need. In this context, the decades-old notion of jobs to be done is viewed through a different lens, one where jobs increasingly require cross-sector stakeholders to deliver value propositions. This means that success is dependent upon an organizations ability to look across sectors. Once identified, enablement requires a mapping activity that focuses first on ecosystems and then on internal portfolios. This exercise identifies building blocks that an organization can contribute, as well as gaps. It represents a critical shift in mindset that allows an organization to unbundle itself. Composability then drives these propositions by bundling internal assets with ecosystem assets. Internal assets can be customer-facing products and services as well as pieces of a common service platform (HR, Finance, Legal, etc.). Ecosystem assets fill the gaps, which may include capabilities traditionally delivered by internal portfolios.

This internal portfolio versus ecosystem analysis drives the need to better understand the core of a business. The view of what a business does well versus what an ecosystem can do better drives merger, acquisition, and divestiture decisions. Enhancing the core to support value propositions is one side of an ecosystem strategy, everything else is handled by the ecosystem. This represents a hybrid strategy, yet early ecosystem discussions are likely to be viewed through a traditional vertical integration lens. I believe that approach likely falls apart in the future.

Two major elements emerge as decisive to incorporate: first, the need to completely revert the inside-out approach into a decisively outside-in approach. In this setting, the strategy and the shape of the organization are dictated by what happens outside of it, in markets that are extremely more dynamic and complex, and in a societal context that shifts more strongly and in faster cycles. Secondly, the need to make the inner workings of our organizations much more fluid and capable — on one hand- to be more easily reorganized, and on the other to do so in an autonomous and effective manner with little or no top-down guidance.

Simone Cicero — Ecosystem-Driven Organizations

As we look towards an ecosystem future, how we organize becomes a critical focus area. Traditional thinking slows down our ability to address the shifts that are certain to happen. The sooner we embrace these emerging models — the better.

Originally published at http://frankdiana.net on March 20, 2023.

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Frank Diana

TCS Executive focused on the rapid evolution of society and business. Fascinated by the view of the world in the next decade and beyond https://frankdiana.net/