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The Rise of Home Grown Vertically Integrated Hard Tech

I’m a total western Gen X kid. I’ve lived all over the west and the only time I’ve been east is when I’ve went to the opposite coast. I’ve never been in the midwest. Growing up during the 80′s, and as you know if you read my blog, I’m totally caught up in tech, and not just any tech, but software. Despite growing up in Boise, ID, home of Micron, the last large, US based computer chip manufacturer and home of the HP LaserJet printer (most profitable IT product ever) I’ve always stayed away from any startups that require a physical location or production coast. Why deal with all the overhead?

But the tides that shifted so drastically in the 80′s might be turning.

Earlier this month I happened to be visiting my brother in Milwaukee, WI the same weekend the Green Bay Packers were playing the Pittsburgh Steelers in the Super Bowl. My brother lives right outside Milwaukee in a town called Wauwatosa. Wauwatosa is like a town that just decided to skip the last 50 years. There has been almost no new construction in the last 50 years and there are very few chain stores or restaurants. Having spent the majority of the last 15 years in high growth areas like Phoenix, AZ, Las Vegas, NV and Seattle, WA, this was very different for me. I was visiting part of America I had only read about or seen in movies. I felt somewhat nostalgic even though it was completely foreign to me.

There was a great video promo late in the first half of the Super Bowl, right before halftime I think, that was done by Sam Elliot talking about the history of Green Bay and Pittsburgh and the working class heritage that these two teams had. It was a great spot and I really wish I could find it. Then in the second half this great Chrysler ad ran with Eminem that struck the same chord.

Go Home or Go Big

Despite my MBA and my aversion to a lot of startup overhead even I can’t continue to ignore that the benefits of off shoring aren’t as great as they once were. This isn’t just limited to manufacturing either but cheap labor isn’t as cheap as it once was. For small and medium businesses the costs of over seas production can actually do more harm than good. This month’s Wired is all about the dangers of over seas production. Pointing out the challenges Apple is having and spotlighting multiple medium sized businesses that have moved production back to the US and are seeing big benefits because of it. (I’d link to the Wired article but of course they don’t post the online version until their print version gets first showing.)

The biggest benefit Wired points out to bringing production home is control and nimbleness. For small and medium businesses, even if production costs aren’t quite equal at home the time to market and agility it affords are proving a huge competitive advantage for many. This extends beyond manufacturing and I also see it happening in areas like customer support and programming.

(This is not to say there aren’t many other reasons and benefits of having facilities overseas. For some companies having a local, global presence is critical to service your global customers. This isn’t what I’m talking about here though.)

The homeward shift of production is a big trend I’ve been watching out of my peripheral vision for the last several years. Things were heading in this direction until the recession hit and stopped all progress. But as the economy begins to turn this seems to be one of the more promising trends. But that’s not it.

Integration Matters

The 80′s gave rise to two behemoths in business besides IT: the supply chain and the channel. The distributed supply chain allowed companies to price competitively and source parts from hundreds of partners. The channel was the distributed means for selling your product through hundreds or thousands of partners. Take a company like HP (former employer) with their PC’s and printers. HP designs and markets their products but vendors manufacture and assemble their products and then the channel sells everything for them. And if we go back to that design and market piece, they also rely on vendors for a significant portion of this.

Now look at Apple. They use very few vendors and do most things in house. They are too big to do their own production but they are big enough to (mostly) get their way with overseas manufacturers. Then they sell a significant portion of their product through their own channels. As another Wired article points out (this one is online) in talking about why on earth, Apple - a company notorious for being more expensive - can sell their iPad cheaper than the Android versions:

Apple is the most vertically integrated company in the world. In addition to operating its own retail chains, all Apple hardware and software are designed in-house, and Apple also runs its own digital content store, iTunes.

Designing in-house means Apple doesn’t have to pay licensing fees to third parties to use their intellectual property. For instance, the A4 chip inside the iPad is based on technology developed and owned by Apple (not Intel, AMD or Nvidia). The operating system is Apple’s own, not something licensed from Microsoft or Google.

Don’t Take Anything For Granted

Apple weathered the storm and when everyone was specializing in software OR hardware, they stuck to doing both and are now reaping the reward. You are now starting to see companies like Microsoft (client) open retail stores and HP just bought Palm so that they could have their own OS. This is not a coincidence. Things are changing again.

I don’t think things will ever go back to the way they were but all of our assumptions about outsourcing, supply chains and distribution are and will be challenged.  Look at Groupon. Instead of being web based or finding national or local partners to sell to they built their own local sales channel from scratch, something that is not easy to do and very costly, but now they have a huge competitive advantage that is proving resistant to the competition and is a huge competitive advantage against the, literally, *hundreds* of knockoff sites.

Where once I only cared about globally, distributed networks of Web based technology, I’m starting to find home grown, vertically integrated, niche, hard tech very cool again. As long as it’s still a connected device of course.

Photo credit by Balakov

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About Tac

Social media anthropologist. Communications strategist. Business model junkie. Chief blogger here at New Comm Biz.

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  • http://www.sharelomer.com SharelOmer

    Hi Tac,

    gr8 post, and loved the movie… what happend to your amazing pictures of lego?

    “integration matters” but its hard to perform…especially integrated good when outsourcing…

    How do you see the outsourcing approach towards social media marketing ?

  • http://www.newcommbiz.com tacanderson

    I think it will be crucial for companies to decide what their core differentiators are. What must be kept in-house and what should be outsourced. Workflow tools will always be licensed, not built in-house, but services, like community management… that’s up for debate.

    What happened to the Lego pics? What do you mean Sharel? This post has a Lego pic? I don’t use them every time and I don’t always use Star Wars themes but I thought this one was appropriate :)

  • http://www.sharelomer.com SharelOmer

    thanks tac. i agree, i think that business who are online should have in house social media presence…its like companies who are focused on internet products should have in house designer/ product manager who is very UI oriented..

    And i just LOVE you lego and star wars themes… make you the unique person you are :)

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