Vertical integration is the combination of disparate sections of the value chain into one business organization. Instead of using many vendors and suppliers and having an organization that depends on each outside resources a vertically integrated business insources as many business requirements as possible. This strategy has long been applied to large industrial businesses like steel, oil, heavy manufacturing, and telecommunications. Thanks to the scale of the digital economy that we live in today we can apply these same principles within our portfolio of brands.
Following is a list of services that we could outsource but instead build out internally:
Why do we spend the time and money to build out these resources internally? First of all, there is cost savings. There is an infamous quote by Amazon CEO Jeff Bezos that says “your margin is my opportunity”. Every vendor your business has to pay should be earning a profit on what you pay them. If you yourself are that vendor that profit stays on your P/L instead of theirs.
Cost savings, however, is only a part of the equation. Of equal or greater importance to us is the control of the value chain that our customers experience. How committed to customer satisfaction is your call center? Will your 3PL be able to do the custom experiences you want your customers to enjoy? Just how much attention does your Facebook Ads account vs others that your agency works on? If you outsource your Amazon Channel Management will they simply cannibalize your existing customer base? Vertical integration takes all of these questions off the table. Our organization owns the customer experience end to end.
Internally we support this effort through shared services. Many of our employees work across several brands. Sure, a few specialize on a specific brand, but our portfolio benefits from the shared resources of the entire team. Not one of our single portfolio companies can support all of these expenses itself. Only through shared services internally can each of our brands benefit from all of these owned resources of a larger organization. This allows our brands to “punch above their weight” competitively. Our customers enjoy a more consistent and thorough end to end experience with our brands and we retain more margin as a result.
Vertical integration informs part of our business structure. The other factor at play is our holding company model. Traditionally holding companies are very large corporations. The most well known of which is Warren Buffet’s Berkshire Hathaway. While the size and scale of our business is a far cry from Berkshire the approach is similar. We seek to acquire and own for the long term a portfolio of businesses with durable competitive advantages and economic moats.
The diversification of our portfolio ensures that as business trends ebb and flow we have the resources to ensure consistent long term growth and stability. The conglomerate of brands that is 365 today is far more valuable as a group than individually. We are more valuable to our customers and to our employees with this structure that is built on our durable capital base.
Influences: Warren Buffet and Charlie Munger at Berkshire Hathaway, Andrew Wilkinson at Tiny, Jeff Bezos at Amazon, Charles Koch at Koch Industries, Roland Frasier at WarRoom.