Good Strategy/Bad Strategy: The difference and why it matters

by Richard P. Rumelt

Joe Santos’s comments imply that incumbents had difficulty understanding Starbucks because it was vertically integrated—because it roasted, branded, and served its own coffee in its own company restaurants. Starbucks did not vertically integrate to purposefully confuse the competition. It did so in order to be able to mutually adjust multiple elements of its business and to capture the information generated by each element of its business operations. Integration is not always a good idea. When a company can buy perfectly good products and services from outside suppliers, it is usually wasteful to go through the expense and trouble of mastering a new set of business operations. However, when the core of a business strategy requires the mutual adjustment of multiple elements, and especially when there is important learning to be captured about interactions across business elements, then it may be vital to own and control these elements of the business mix.