Reasons for success in the machinery industry are changing with astounding speed. Five years ago, factors such as cross-functional development teams, single sourcing and group work differentiated the best performing companies from the weaker ones.1 However, a new McKinsey survey2 of the European and US machinery industry reveals that these factors became standard practice among companies that survived the recession of 1992 to 1994, when markets in the industry shrank by an average of 2.5 percent per annum. What now differentiates the leaders from the laggards is their relationships with their customers and their suppliers.
The leaders in the industry are erasing the traditional corporate boundaries that separate companies from their suppliers and customers, so that suppliers’ economics and customers’ needs are an integral part of their strategy. Managing the complete value chain in this way is what we call virtual vertical integration. Leading companies realize that the more closely they work with both suppliers and customers, the better the benefits are for all concerned. Supply management and customer orientation—the two interfaces between the company and the outside world—therefore represent the new opportunities for differentiation.
Erasing the company-customer boundary
A high level of customer satisfaction manifests itself...