Is vertical integration sexy again?

Hot on the heels of my recent posts discussing forward integration, Wall Street Journal is reporting an increase in the incidents of vertical integration.

The article in question cites very prominent recent examples of backward integration (General Motors, Boeing, Apple, Nucor, ArcelorMittal and Oracle) and forward integration (LiveNation and Pepsi), and argues that these moves represent a significant shift in corporate mindset. Perhaps vertical integration is back in favour. If so, this would represent a shift away from four decades or so of de-integration (at least in developed markets).

There are valid qualifiers for this assertion:

“The historical view of vertical integration was that you had complete control of the supply chain and that you could manage it the best,” says Bain & Co. consultant Mark Gottfredson.

Today’s approach is more nuanced. Companies are buying key parts of their supply chains, but most don’t want end-to-end control.

Likewise, there are some strong explanations for specific moves:

GM (who bought into a steering systems supplier) “wanted to assure uninterrupted supply”.

Boeing (who similarly reentered the parts and assembly business) is fighting to regain control of the delayed Dreamliner project.

The steel manufacturers are trying to secure guaranteed supply of ore (and/or scrap) in a period of price uncertainty (where hedging becomes difficult).

Oracle are seeking to offer complete IT solutions (i.e. hardware and software).

Apple’s return to the semiconductor business is explained thus

“By developing its own chips for new mobile devices – a departure from the industry trajectory – Apple hopes to tighten control over a key technology and keep it away from rivals”.

Pepsi’s purchase of several key bottling/distribution partners reportedly reflects greater complexity in the product mix:

“…motivated as consumers flock to noncarbonated beverages, Pepsi is keen to gain more control over the distribution of its growing menu of offerings.”

While the motives for vertical integration would appear to vary considerably, much of these could be viewed as transaction cost issues (i.e. the relative greater costs of contracting effectively with other parties for vital inputs/market access are perceived to outweigh any cost advantages said parties might have). Interestingly. no mention is made of the potential that firms are picking up ‘bargains’ in the GFC-scarred world.

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One Response to “Is vertical integration sexy again?”

  1. Steve Sammartino Says:

    Your examples are good ones…. where there is a specific strategic need. But generally more bad decisions in these areas than good ones.

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