A wave of digitalisation is washing over the global economy and, with it, the obstacles standing in the way of vertical integration are breaking down. A transformation is at hand, and technological advancements have given rise to a host of new opportunities and challenges for businesses, not least with regard to vertical integration. European CEO spoke to Dietmar Müller, founder and CEO of KPS Consulting, about how digital technologies are accelerating the speed at which products are entering the market and fostering a symbiotic relationship between manufacturers and retailers.
How exactly does digitalisation create a symbiotic relationship between manufacturers and retailers?
The boundaries between the traditional roles – manufacturers produce and retailers sell – are starting to blur and, increasingly, the digital revolution is becoming the key to success for both B2B and B2C businesses. It provides the ability to get up-close and personal with consumers and/or users. With e-commerce and omnichannel retail, the roles of manufacturer, retailer and end customer are starting to converge. Each can interact with the others and influence their development.
Today’s consumer products manufacturers no longer confine themselves to the role of pure producer
At this point, it is clearly retailers that are raising the bar for manufacturers, based on the dynamics and speed of digital developments in the retail space. They are putting more and more pressure on manufacturers to digitalise processes and make them more efficient and flexible, opening up opportunities for both sides to venture into new areas of business. It is a continuous process; the next-generation omnichannel infrastructures and the growing trend towards more product personalisation are enabling businesses with flexible workflows and structures to quickly adapt to market trends and developments.
We see potential in three areas: the first is the massive acceleration in time to market that comes with digitalising production processes, the second is automated personalisation all the way to extreme individualisation of products and production runs, and the third is the possibility of a deeper knowledge transfer.
Is digitalisation likely to lead to greater levels of vertical integration?
Vertical integration is not a new business model. However, the potential offered by digitalisation is pushing it even faster and harder. Today’s consumer products manufacturers no longer confine themselves to the role of pure producer. Ikea, for example, the world’s largest furniture retailer, has been extending its operations from manufacturing into retail for decades, bringing its brand and customer experience much closer together. Also, Apple started out as a manufacturer and is now marketing its products and perfectly orchestrating the Apple brand experience through retail outlets.
Readily available e-commerce platforms that are networked with production facilities enable manufacturers to pursue new revenue models – a good example is Nike with its Nike-ID brand, offering customers the ability to personalise their shoes down to the finest detail. Innovative web-only brands have embraced vertical integration from day one – they offer high-quality products on their state-of-the-art online platforms and bring products directly to consumers, often at a lower price than their brick-and-mortar competitors.
Consumers are sharing their opinions, their desires and their recommendations on products and their design online, and companies can almost immediately include this personal input in their planning and production processes. Also, innovations in handling and usability are so quick to implement that we can create new products to meet actual demand enabled by a consistent, comprehensive approach to digitalising and interconnecting manufacturers and retailers – both in the B2C and B2B space.
Adopting a vertical integration model allows companies to better align the brand promise with the customer experience. Of course, product development and retail are two distinct areas, and doing both takes a lot of work. However, a successful vertical integration approach can give a company an incredible advantage over its rivals. By creating their own unique products and by controlling the whole supply chain, vertically integrated companies reduce costs significantly and their consumers get high-quality, custom-made products at a fraction of the price.
What is driving personalisation and how is digitalisation helping business facilitate this demand?
Vertical integration means companies can gain a huge advantage over their competitors. They control the whole supply chain, often reducing their costs, while customers get a high-quality, personalised, custom-made product, for which they are willing to pay a higher price.
Styles and trends are changing faster than ever. Consumers can choose from a huge variety and selection of products. They communicate and collect information through digital channels; they use social media for inspiration, alongside search engines for research and product tests, and blog posts and recommendations to shape their opinions. As a result, companies are fighting more and more for their customers’ brand loyalty. In today’s digitalised environment, offering a unique brand experience and having a customer come back to the brick-and-mortar or online store again and again has become increasingly important for retailers and, respectively, manufacturers.
Customer loyalty is built, at least in part, when the buyer forms an emotional relationship with the brand through the act of thoughtful remembrance. One way to achieve this is to offer customers the possibility to create their very own unique and personal product. Customers who personalise their product engage with the brand and pledge more loyalty to it.
The possibility of ‘ID-ing’ a product helps businesses to differentiate their products from those of their rivals in a very special way. It also gives them insights on their customers’ design choices, which in turn can help fine-tune their standard lines for the next season. The goal is to be with the customer every step of the way and engage them in a meaningful way.
Networking digital production processes with omnichannel infrastructures exploits the combined potential of manufacturing and retail, taking personalisation to the next level. It enables retailers to manufacture on demand, through fluid digital production streams, and enables the customised configuration of consumer products. For example, a customer order placed online triggers a production process in a smart factory, setting a fully automated process in motion that ends with the delivery of a personalised product by drone to wherever the customer happens to be at that moment.
What other trends will emerge as digitalisation continues?
Companies will have to act immediately on changing consumer behaviour, rising or falling product demands, new trends, price points and competitors. Omnichannel infrastructure will be their interface with the market and will play a substantial role in recognising dynamic changes and transmitting those impulses directly to production lines via the digital network. End-to-end – from the omnichannel platform right through to the smart factory – digital process chains will boost flexibility, increase corporate momentum and give companies a competitive edge.
In the B2B area, digital technology such as 3D printing will play a substantial role and may one day result in an infinitely customisable assortment of products. This technology seems to be at a tipping point at the moment, but will soon go mainstream and disrupt conventional manufacturing. It will cut the cost of manufacturing and allow companies to open new market segments: they will be able to control their production volumes more efficiently and flexibly. Smaller production lot sizes based on real-time information will be commissioned directly on B2B platforms, resulting in personalised manufacturing.
Overall, digitalisation will impact every aspect of our lives. It will influence how we work together, how we consume, and even how we interact with governments and community services. In short, it will revolutionise how we live.