Wednesday, July 01, 2020

Microsoft vs. Apple: Vertical Integration

In a matter of days, we saw two contrasting announcements by tech giants Apple and Microsoft.  First, Apple announces that it will be making its ARM-based processors for Mac laptops and desktop computers.   The firm will no longer be using Intel chips.   Second, Microsoft announces it will close all 83 of its retail stores.  What's happening here? Apple is deepening its vertical integration, while Microsoft is backing off.  

Both strategies make sense.  Vertical integration has always made more sense for Apple than for Microsoft.  Apple has used vertical integration, backward and forward, to control product quality, enhance brand experience and product differentiation, and stay close to its customers.  Microsoft has operated in the portion of the industry that has relied far less on vertical integration.  Microsoft made the operating system, Intel made the microprocessors, Dell, Lenovo, HP and others assembled the PCs, and a variety of players helped distribute and retail the computers.   

What, then, was Microsoft doing in the retail store business?  I'm not sure.  It never made as much sense as it did for Apple to operate stores.   The genius bar, product demonstrations, computer classes, and other activities that occur within an Apple store are all part of the rationale for vertical integration at the company.   These activities deepen Apple's relationship with its customers, enable it to collect valuable information directly from its most ardent fans, help the firm create a powerful brand experience, and provide an opportunity to enhance product differentiation.   Microsoft doesn't sell the same type of products, nor does it have the same type of image.  Moreover, its customers are different.  Microsoft has incredibly satisfied, loyal customers; Apple has fans.  Remember the word fan comes from the word fanatics.  Apple's customer base is just different, and it fits more with a vertical integration strategy.  

Vertical integration, of course, has many drawbacks.   I often discuss these limitations and risks at length in my strategy courses.  However, in some cases, it can make a great deal of sense.  Apple may be one of those cases; Zara may be another.  Microsoft's competitive positioning doesn't appear to be as conducive to vertical integration.  

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