Back to the Future: Companies Go Vertical -- Again
November 30, 2009
Forward-thinking Larry Ellison, CEO of Oracle Corp., recently told financial analysts he is taking a page from history past in creating a new business model for the high-tech company. Oracle is going vertical.
And Ellison is not alone in turning back to the century-old vertical integration strategy whereby a company controls materials, manufacturing and distribution, according to a story on the trend in Monday's Wall Street Journal.
Other companies, including General Motors and Boeing from which Ford CEO Alan Mulally came, are as well.
Don't expect the auto industry to return to the days of when Henry Ford not only built the cars but owned the iron-ore mines, the steel mills, the glass factories and the rubber plantations for tires, the experts say. Instead, expect automakers and big parts companies to outright purchase or buy stakes in makers of major components.
Indeed, GM has returned to vertical integration, in part, to make sure it has the quality and steady stream of parts it needs. But the move is more by default than choice. In October, GM took a minority stake in troubled Delphi Corp., its largest created by the spin-off of former GM parts operations, after four years in bankruptcy. GM also took back four factories and Delphi's steering business to get it out of bankruptcy and to assure an uninterrupted supply of critical parts.
Similarly, Johnson Controls, a major parts maker and one of the world's largest suppliers of car seats, took a 70-percent stake in bankrupt supplier Plastech Engineered Products Inc., to guarantee supply of parts.
Several steelmakers are also embracing the shift, moving deeper into the raw-materials business that earlier steel companies exited, the paper reported.
"The pendulum has shifted from disintegration to integration," Harold Sirkin, global head of the Boston Consulting Group's operations practice, told the Wall Street Journal. He attributes the change to volatile commodity prices, financial pressures at suppliers and quests for new revenue -- challenges exacerbated by the recession.
Posted by Michelle Krebs at 10:22 AM under Analysis , Business , Companies | Comments (0) | digg this | Seed Newsvine
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