Vertical Integration An Obsolete Idea

"Vertically integrated companies can’t compete! The oxymoron of “internal customers” is poison to a competitive culture. That is the lesson of the computer industry and it is a lesson the telecommunications industry apparently has not learned yet...

A horizontal company has a high surface to volume ratio. It sells all of its outputs in a competitive market. It is free to buy all its inputs in a competitive market. Its managers are not isolated from the markets they compete in. A vertical company spends most of its time and energy dealing with itself rather than the external market. Meetings are dominated by esoterica like transfer pricing between divisions because this is what determines internal success.

The real marketplace is distant from most of the managers trapped inside the vertical structure. Buy vs. build and capital allocation decisions inside a vertical company are made by office politics in a vain attempt to optimize across the whole vertical organization. Horizontal competitors optimize only for the layer they are competing in and so end up being superior to the vertically integrated company layer by layer."

From this post from Fractals of Change