What Makes Peloton, Apple, Netflix, and Tesla Successful?

They’re not just smart companies. They’re vertically integrated companies—and it’s a strategy even small startups can consider.

By Leonard Sherman

Peloton announced blowout earnings in September, which helped it join an elite club that includes Apple, Netflix, and Tesla. These companies not only delight their customers and create enormous shareholder value; they’re also rewriting some specific, outdated rules on what drives effective business strategy.

If you want to thrive in today’s market, it’s worth understanding exactly what’s behind these companies’ growth…and how different it is from the way companies used to think.

A quarter-century ago, in their widely acclaimed book Competing for the Future, C.K. Prahalad and Gary Hamel tried to explain why the biggest companies thrive. Their answer: These market leaders identified the part of business they’re best at—be it engineering, product design, manufacturing, supply-chain management, or something else—and they continually reinvest in it. Most everything else is outsourced to third parties.

For example, Walmart exploited its expertise in global sourcing and supply-chain management, but it didn’t bother manufacturing its own products. Toyota, meanwhile, achieved market leadership by excelling in product engineering and manufacturing, but it left its retailing operations to independent car dealers.

This approach gained traction and was echoed by influential business thinkers for decades. It’s why when Apple first announced plans to open company-owned stores and Amazon began designing its own consumer electronics, critical pundits piled on. In 2001, for example, Bloomberg ran a commentary titled “Sorry, Steve [Jobs]: Here’s Why Apple Stores Won’t Work.” And Amazon was often pilloried after launching its first-generation Kindle.

Both the Apple Store and Kindle were huge successes, of course. So what did the critics miss? They were attached to the old “capability-driven strategy”— the idea that companies should focus on what they’re best at. But the idea was flawed and getting old.