Amazon, the pioneer of horizontal and vertical integration

Amazon has pioneered a dual strategy of both horizontal and vertical integration. The next Amazon will need a different approach.

Amazon is many things to many people, just like a classical physical warehouse. But Amazon is more than that, due to its peculiar, dual strategy of both horizontal and vertical integration. This is the force behind its famous flywheel, propelling the company to ever greater heights. Amazon expands both up and down its value chain and into new markets. It competes with virtually everyone.

Let’s have a look at my definition of horizontal and vertical integration:

Vertical integration is the combination of different links in the value chain, from raw materials to the consumer. Companies with a high degree of vertical integration control almost every part of their value chain.

Horizontal integration is the expansion on the same level of the value chain. It’s about increasing market share, possibly through mergers and acquisitions. This can lead to oligopolies or monopolies.

Soon after its launch as a bookseller, Amazon ventured into all kinds of other markets, both geographically and in its product ranges. Today, the retail giant doesn’t yet serve every country in the world, leaving room for further expansion. But it sells pretty much everything that fits into a cardboard box and can be delivered via physical mail. What Amazon doesn’t sell itself is still available from other merchants selling via the Amazon marketplace.

So much for horizontal integration. The Amazon marketplace is not only about horizontal integration, but also about vertical integration. With it, the Bezos company sells access to its customer base. Amazon’s customers are the product here, and Amazon sells them to its vendors and competitors. In theory, that’s nothing new. Retailers have done this for ages, one way or the other. But Amazon has become a master of this art and brought it up to date — and up to scale.

The Amazon flywheel

This approach creates efficiency – the same platform gets used for more volume – and increases consumer choice, which in turn makes the platform more attractive to more customers. With more customers, the marketplace becomes even more attractive to sellers. Amazon leverages efficiency through lower costs and lower prices, thus improving the customer experience. In a nutshell, that’s the flywheel. But this isn’t the whole story.

Wherever Amazon spots inefficiencies in the value chain, it is up to the task of addressing them. The company’s warehouses are highly efficient and increasingly automated. Amazon’s logistics services are continuously growing and increasingly available to third parties as well. Amazon Web Services (AWS) started out as a way to resell the company’s IT infrastructure and has grown into a huge, lucrative business on its own. Amazon sources and develops its own private-label products (AmazonBasics, Kindle) and develops services like Prime or, again, Kindle.

These are all examples of vertical integration. There’s no other company at this scale with a similar approach of both horizontal and vertical integration. Apple has always maintained a high level of vertical integration, but its product range remains limited. Tesla is vertically integrated to a high degree, but – again – its product range is small. The recent boom of direct-to-consumer (DTC) brands brought up a bunch of vertically integrated companies, but horizontal integration is pretty rare among them. Why is that?

A different strategic approach

It took Amazon 27 years to grow into the dominant position it has today. Given today’s internet penetration, technology, and know-how, it might be possible to grow faster. But it will still take time. And to compete with Amazon requires a different strategic approach. For example, Shopify doesn’t directly compete with Amazon, but it enables competitors. At some point, Shopify may end up with a high level of both vertical and horizontal integration, comparable to Amazon.

Similarly, Netflix already has a decent level of vertical and horizontal integration, and it competes with Amazon Prime. But it’s neither a tech company nor is it going to compete with Amazon in, say, the retail or cloud businesses. Netflix is successful in its own right, but it’s not outcompeting Amazon. To find a company that may do that, we need to look elsewhere.

Amazon has some serious problems regarding ESG criteria. Its retail business has taken the industrial “take – make – waste” linear model to the extreme, thus amplifying the problem. What will the Amazon of the circular economy look like? In broad strokes, it will be more about services than products. It will be about serving customer needs in new, different ways. It will be about closing the loop.

A new breed of companies

Again, a high level of vertical integration may be the result – or even the prerequisite – of this quest. Like successful digital services do, the warehouse of the circular economy needs to integrate consumers into the loop. They will return many products after use, and the seller will remanufacture, reuse, or recycle them. Of course, Amazon itself is keen on stepping into the circular economy as well. (Apple already is on the bandwagon, too.)

As the digital revolution did, the sustainability revolution will probably bring forth a new breed of companies that will change the world. Sooner or later, these companies will climb to the top of the global economy, competing with today’s big tech companies. Ecosystems as the upcoming economic paradigm will be a powerful driving force, bringing vertical and horizontal integration to a whole different level.

It’s not easy to spot these companies today, but I suspect they are there. Here are a few examples. DTC models (and thus vertical integration) will be the modus operandi first, and horizontal integration will come later, to accelerate growth. This is quite the opposite of Amazon’s history, which began with horizontal integration and introduced vertical integration later in the game.

Photo by Jilbert Ebrahimi on Unsplash