A recent spate of "vertical acquisitions" has pundits wondering if corporate America is seeking counsel from the ghosts of Andrew Carnegie and Henry Ford. Whether it's PepsiCo buying the distributors of its products, or Oracle taking over Sun Microsystems to marry software and hardware, it's clear a number of America's largest businesses are betting against the specialize-and-outsource business model that fueled their growth for decades. Now companies are trying to bring all the stages of production under one roof, giving them control over materials, manufacturing and distribution. For his part, Larry Ellison, CEO of Oracle Corp., recently said his gamble can be seen as either "really brilliant, or we're idiots." Online business experts see merits in the strategy:
- It's All About Speed, said Roger Ehrenberg of Information Arbitrage. The former hedge fund manager said that in the past, "verticalization" led companies to sub-optimize by straying from their core competencies. But things have changed recently:
The world has flattened. Supply chains are global and fragmented. Information dissemination happens at lightening speed ... Specialization may, in fact, represent a short option position, as scarce resources can be parceled out by sharp suppliers to the highest bidder, while those with vertical control can respond and react in real-time to changes in the market."
- Stealth No More Chiming in on GM's difficulty with its parts supplier, Delphi, The Big Money's Matthew DeBord isn't convinced vertical integration ever went away. "Vertical integration, with its Paleolithic Ike Era associations, was supposed to have been killed off for the greater good of an advancing manufacturing model that sought to relentlessly rid itself of waste and please Wall Street ... My theory is that vertical integration has simply migrated, stealthily, to other industries. Apple, for example, is basically a very successful, modern-day vertically integrated enterprise."
- Recession Is the Cause, said Peter Galuszka. The veteran journalist believes that "with the downturn, companies no longer can rely on de-verticalization and outsourcing." In this environment, he said, suppliers and producers find themselves short of cash and credit, making it difficult to meet obligations. Galuszka points his readers to Boeing's Dreamliner troubles to illustrate his point. "Boeing has outsourced making parts for the plane through a highly complex and far-flun[g] global network of independent suppliers. These firms haven't made the mark. The Dreamliner has faced delay after delay."
For all the optimism surrounding the "vertical" trend in business, The Economist offered the following text-book warning earlier this year:
Verticalization is a difficult strategy for companies to implement successfully. It is often expensive and hard to reverse. Upstream producers frequently integrate with downstream distributors to secure a market for their output. This is fine when times are good. But many firms have found themselves cutting prices sharply to their downstream distributors when demand has fallen just so they can maintain targeted levels of plant utilization.