Competing Through Vertical Integration

Digital Marketing - Study Notes:

According to Lane (2018), vertical integration is one of the most powerful ways to compete. It provides a business with many advantages such as the following:

• Vertical integration can lower costs and increase the stability of supply of an important input.
• Products and services can improve as a result of the talent from the different workforces, shared ideas, and closer collaboration. Collaboration can lead to the development of new products and innovation.
• A merger of companies with different structures can share their strengths and cover each other’s weaknesses.
• Vertical integration can eliminate double marginalization, which is a harmful situation that occurs when multiple companies in a supply chain have market power. In this situation, each company prices too high. Combining these companies actually lowers prices because it reduces the number of times that a company tries to price above the market along a supply chain.
• Vertical integration provides ways to increase the control on how products are delivered and improve the overall customer experience.

A good example of vertical competition is the martech sector. Martech is the blending of marketing and technology (Martechtoday, 2018). Virtually anyone involved with digital marketing is dealing with martech since digital, by its very nature, is technology-based. Martech especially applies to major initiatives, efforts, and tools that harness technology to achieve marketing goals and objectives.

In the martech sector, there is a ‘channel’ of multiple different software stages (or layers) that marketers must work through to engage their audience (Brinker, 2016):

• Marketing software: The on-premise and SaaS (software as a service) applications that marketers buy and use to internally create and manage their campaigns, programmes, and capabilities
• Internet services: The ‘destinations’ on the web where millions of end-users converge, often as explicitly identified and authenticated subscribers
• Client software: The devices, operating systems, browsers, and apps that end-users use to access the web and Internet services

Interactions between marketers and customers must pass through these stages, creating two kinds of competition:

• Horizontal competition occurs among companies within the same stage of the channel. For instance, Adobe and Oracle are horizontal competitors in marketing software; Google Search and Bing are competitors in Internet services, and Google Android and Apple iOS are competitors in client software.
• Vertical competition occurs between companies at different stages of the channel. In vertical competition, Adobe competes with Facebook, and Google Search competes with Apple iPhones.

The most powerful companies in marketing’s digital channel are arguably those who are fully vertically connected: Alphabet (Google’s holding company), Microsoft, Facebook, and Amazon. They have strong positions in all stages: marketing software, Internet services, and client software.

• Marketing software vendors who offer ecommerce platforms, such as Hybris (SAP) and Demandware (Salesforce), are essentially competing with Amazon to provide merchant marketers with the best solution for selling products online.
• Marketing software vendors who offer products to manage search and social media advertising, like Marin Software and WordStream, build on top of Facebook and Google. However, they also compete with the direct advertising products offered by those services, such as Google AdWords and Facebook Atlas.
• Many Internet services, such as Facebook and LinkedIn, offer native apps as client software to compete with other client software, especially web browsers like Chrome, Firefox, Internet Explorer, or Safari. This gives them more control over the experience, including advertising, and greater visibility into users’ client-side behaviors.