On Excellence: About turn on integration

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DU PONT bought the oil company Conoco in 1981 as one of the last-gasp attempts by industry to control a supply chain. Fearing another oil embargo, it wanted to ensure a constant supply of raw material to fuel the insatiable appetite of its downstream chemical products operation. But today the old-fashioned idea of backward integration (owning a steel mill if you are a car maker, or a forest if you publish newspapers) is fading. Welcome the latest form: forward integration.

'Services form an envelope round a product; companies make markets by pushing the envelope,' wrote Joseph Fuller, James O'Conor and Richard Rawlinson in the May-June Harvard Business Review. Consider, then, nine elements of forward integration:

The product (or service) itself. Begin with the basic offering - a textile or a mortgage loan. Whether or not it is well made and exciting remains the heart of long-term vitality.

Friendliness. A little more than a dozen years ago Apple re-invented computing with its Apple II; everything, from the company logo to the operating-system software, promised ease of use.

The Macintosh, with its mouse and comfy icons, added to the Apple tradition. The Newton, despite its harsh reception, is another daring effort of the same sort. In general, making a fetish of friendliness can pay big dividends.

Embedded intelligence. Many products are getting smarter. Otis Elevators and Xerox copiers use arrays of microprocessors to diagnose (and sometimes treat) their own ills. I sometimes think my Minolta 9xi camera would cut the grass if I asked it nicely.

Joint product development. More and more companies are intimately involving suppliers, distributors and customers in product development from the start. The power tool division of Ingersoll Rand is master of this discipline, and the result is a recent deluge of friendly (and profitable) products.

Have it your way. At Boeing, the customers wanted an aircraft in which the galleys and lavatories - pipes and all - could be relocated almost anywhere in the cabin 'within hours', according to Business Week magazine. So, in May 1995, when the first Boeing 777 rolls off the production line, the owners will be able to rearrange the aircraft 'within hours, configuring it with one, two or three passenger classes to fit the market at the time'.

Wraparound services. Starkist, the fish processing company, has an innovative tin of tuna called Charlie's Lunch Kit. Inside you get, along with 3.25 ounces of Charlie the tuna, a packet of mayonnaise, a packet of low-calorie mayonnaise, a packet of pickle relish, six wheat crackers and a plastic spoon to mix your own tuna salad spread.

Draeger's, a high-end food shop in Menlo Park, California, offers customers a Culinary Centre that recently had a calendar of 70 classes and events over a 90-day period.

Both Starkist and Draeger's have transformed basic offering with additional services.

Continuous joint problem- solving. Nypro of Clinton, Massachusetts, is in the mundane business of moulded plastic parts. With a quality programme that equals the famous one at Motorola it has left competitors in the dust. But for Nypro, matchless quality is just the starting point.

Most of its factories are within spitting distance of its big accounts, and customer teams work side by side on every aspect of the relationship. Several Nypro factories even have customers on their boards.

Creative distribution. Merck has just bought Medco, the mail-order drug distributor. The unabashed objective is to gain direct access to (and detailed information about) several million Medco customers.

EDS and Hughes, both subsidiaries of General Motors, offer GM's 10,000 dealers a Dealer Satellite Network and a Dealerline. These sophisticated telecommunications and software systems link all departments in the dealership and provide direct access to GM's consumer financing arm, parts distribution plants, factories, zone offices and fellow dealers.

Turnkey packages. Federal Express has a fast-growing division, Federal Express Business Logistics Services, that manages distribution for customers on a turnkey basis - providing a complete set-up from one outside source.

Baxter International's ValueLink does roughly the same thing for hospital supply management.

Add up all these enhancements and you are a long way from the 'one size fits all' approach to products and services that has long marked mass manufacturing and service provision.

The connective tissue between suppliers and customers is becoming increasingly dense, and is literally redefining whole industries. Figuring out which activities to shuck (outsource) and which to extend and link forward directly into customer operations are perhaps today's primary strategic tasks.

TPG Communications