Is vertical integration making a comeback?
In the headlines crawling across the screen, you can glimpse vertical integration’s revival, as companies reveal plans to control and own aspects of their business that they were until recently content to let suppliers handle. In November, Ford announced that it would partner with GlobalFoundries to develop and produce computer chips. Last summer, Home Depot chartered its own container ship. Ikea, not to be outdone, is purchasing its own shipping containers.
Vertical integration is one of those concepts taught about in business school, an essential step in the development of industrial capitalism, along with the assembly line and interlocking parts. Its mere mention evokes sepia-toned memories of the great industrialists of a century ago who harnessed steam, steel, and electricity to create truly massive enterprises.
The thinking behind vertical integration was that it made sense for a company to control as many links in the value chain as possible. Each time something moved through a step of production—from commodity source to processor, from part-maker to assembler, from finished good to distribution, from distribution to retail—somebody would shave off some profits. If you were a hypercompetitive, efficiency-seeking machine, vertical integration offered a twofer: you could iron out costs, thus making your product more affordable for more consumers, while hoovering up those profits for yourself.
