The Rise of the Natively Integrated Company

“We just bought a 93-year-old German razor factory.”

It was January 2014. Four months earlier, my now-wife, Puja, and I both left our cushy jobs in finance on the same day to go work for startups. I went to Breather, and she went to Harry’s.

We were wide-eyed and exhilarated to be working on the cutting edge, and to be leaving old-school business behind.

So why would Puja’s cutting-edge, venture-backed razor startup buy a 93-year-old business?

The business world today looks very different than the one that existed when the razor factory that Harry’s bought, Feintechnik, was founded nearly 100 years ago. Power has moved from the companies who control supply to the companies who control demand, due in large part to the internet’s ability to connect companies directly to their customers.

The fastest-growing, most successful companies of the past twenty years didn’t produce anything physical at all. They connected their customers with other people who provide goods and services. Today, however, those companies are leveraging what they have learned from millions of customers to build their own supply in order to control their customers’ experience and their own economics.

Tomorrow’s best companies will be like a child who exhibits each of their parents’ and grandparents’ best attributes. They will be born with a focus on building products and experiences for customers whose problems they were born to solve. They will grow up in close contact with those customers, and their reputations will be built by how dirty they were willing to get their hands to serve them. They will have a digital native’s fluency with technology, and will wield it to smoothly connect the disparate functions necessary to deliver an excellent and personalized experience. In short, tomorrow’s best companies will be Natively Integrated Companies.

Over three acts, we are going to explore these fundamental shifts in the business landscape that ultimately explain why a 1-year-old, venture-backed razor startup would buy a 93-year-old German razor manufacturer.

Act 1: From Linear Businesses to Aggregators and Back

Before the internet, the most successful consumer companies focused on owning the supply chain.
The internet flipped this equation. The biggest breakout successes created in the first two decades of the 2000s - the Aggregators - started by aggregating demand and using that demand to commodify supply.
Recently, Aggregators have been integrating backward and producing their own supply.

Act 2: Why There Won’t Be Any New Aggregators

Aggregators have snatched up the largest consumer spending categories, and their scale makes them hard to beat at their own game.
The window to build massively successful Aggregators via the internet in the US is closed.

Act 3: The Rise of the Natively Integrated Company

These factors set the stage for the rise of Natively Integrated Companies: companies that leverage technology to integrate the customer-impacting components of their value chain, build relationships with customers and are willing to commit capital to build products that resonate with them.

Before we dive in, it is important to go over a few key terms and concepts that will appear repeatedly throughout this post.

Supply Chain vs. Value Chain: The supply chain is the process of the activities involved in creating and delivering a product, the value chain is a set of interrelated activities a company uses to create or add value to a product. The supply chain is a subset of the value chain.

For example, for Q-tips, the supply chain involves buying cotton, bonded paper, and paperboard, manufacturing them to create a cotton swabs, packaging them, and shipping them to stores. Q-tips’ value chain involves its supply chain, plus the branding that makes Q-tips synonymous with cotton swabs, the relationships with stores that sell its cotton swabs, and the customer service that is there to help when a cotton swab gets stuck in your ear.

Commoditization and Modularization vs. Integration: Commoditization means to render a good or service widely available and interchangeable with others in the same category. Modularization occurs when a company uses standardized, commoditized inputs in its value chain. Integration occurs when a company takes complete control over one or more stages in its value chain.

For example, Research in Motion adopted a modular strategy in producing its Blackberry smartphones, using commoditized components such as ARM processors. Apple famously took an integrated approach to making the iPhone, building its own A-Series and M-Series processors. When they opened up the App Store and allowed developers to create apps for iPhone, they modularized the applications that run on its integrated iOS. Extending further into the value chain, Apple integrated its relationship with customers by building Apple Stores where customers can experience and buy Apple products in an Apple-designed environment from trained Apple employees.

Linear Businesses, Aggregators, Platforms, E-commerce, Natively Integrated Companies, Direct-to-Consumer Companies, and Digitally Native Vertical Brands:

Aggregators are businesses who leverage their direct relationships with a critical mass of users to exert power over increasingly modularized suppliers, creating a flywheel as more demand means more supply means more demand and so on, at decreasing unit cost to the business.

Ben Thompson writes that Aggregators have all three of the following characteristics: 1) direct relationships with users, 2) zero marginal costs for serving users, and 3) demand-driven multi-sided networks with decreasing acquisition costs. According to Thompson, “Aggregation is fundamentally about owning the user relationship and being able to scale that relationship.”

Note: I will use the terms Aggregators and platforms throughout this piece. All Aggregators are platforms, but not all platforms are Aggregators.

“Digitally Native Vertical Brands,” or DNVBs, is a term popularized by Bonobos founder Andy Dunn. DNVBs build their own products and engage with and sell to customers through the internet behind the strength of their own brands. For a full definition of DNVBs, check out Andy Dunn’s post here. For our purposes, Direct-to-Consumer (DTC) companies and DNVBs are interchangeable.

E-commerce refers to buying or selling goods or services on the internet. Anyone who sells anything, whether they create it or not, is engaging in e-commerce. E-commerce does not appear anywhere in this piece by name, but Aggregators, DNVBs and DTC companies all engage in e-commerce and are more useful vehicles to discuss the concepts in this post than e-commerce, which is too broad to be clarifying in this context.

I will define Natively Integrated Companies (NICs) in Act 3.

Armed with these concepts, we are ready to begin our journey with Act 1: From Linear Businesses to Aggregators and Back.