I wanted to post a follow-up to my recent Supply Chain Matters commentary regarding whether CEO’s were currently positioning more for market dominance or re-building value-chains for post recession recovery. My initial commentary reflected on contrasting the $38 billion in acquisition activity during just the past three months, and whether such investments were strategically positioned to gain market share or ramp-up value chains. A CEO advisory panel statement lamenting that U.S. job growth is hindered by access to capital was what motivated my posting, and my arguments had context to what was motivating current acquisition vs. hiring activity. You can view the entire posting and share your own views.
Last week however, the Wall Street Journal featured another article (subscription required) providing a somewhat different angle, namely that recent acquisitions amount to “vertical integration” of value-chains. Specific examples cited were Oracle‘s acquisition efforts directed at Sun Microsystems, ArcelorMittal, PepsiCo Inc., General Motors and Boeing, but with varied reasons. They included more control over raw materials (ArcelorMittal), added control of distribution (PepsiCo Inc), or assuring reliable quantity or quality of component supply (GM and Boeing). The premise left for the reader to conclude is that vertical integration has returned in a more nuanced form- acquiring key portions of a value-chain to achieve opportunistic business needs.
I do not subscribe completely that this is a sole vertical integration premise. My view is that actions to date have had more to do with business events and markets vs. overt strategy.
Boeing and GM were compelled to act to ensure reliable supply because each of these companies had major interruptions or snafus in supply, either brought on by the cumulative effects of the global financial crisis or supplier-related and other failures encountered in their original outsourcing strategies. Supply Chain Matters has featured multiple posts regarding the outsourcing breakdowns involving Boeing and others. These were not pre-planned acquisitions, but rather responses to mitigate critical supply risk. Likewise the example cited of Johnson Controls taking a 70% stake in the business of a bankrupt supplier.
The noted example of ArcelorMittal moving deeper into previous raw materials businesses might well meet the criteria of vertical integration. A noted blogger focusing on the metals industry, Lisa Reisman, noted recently in the MetalMiner blog that there is indeed evidence that vertical integration is alive in the metals sector. I respect Lisa’s knowledge of that sector.
The example of Oracle is the most interesting to reflect upon. The article quotes statements from Oracle CEO Larry Ellison as indicating he wants to sell “complete systems” made of chips, computers, storage devices and software, in essence the former IBM business model of T.J. Watson. The WSJ reporters were savvy enough to also point out that Oracle’s original intentions back in March were to just acquire the software aspects of Sun, but when IBM neared a deal to potentially acquire Sun, the deal expanded to all of Sun. Also noted was Sun’s previous reliance on a vertical integrated value-chain and its failure to keep-up with innovation and changes in its market.
Obviously, there is a lot to ponder regarding positioning a value-chain strategy in this post-recessionary environment. Supply Chain Matters and others have raised arguments for firms focusing too much on seizing market share at the expense of value-chain capability, being compelled to mitigate supply risk because of value-chain interruptions or the need for being more strategic in value-chain positioning.Â
What does all of this discourse have to do with your role as supply chain professionals?
It implies that you can no longer view the upcoming era of business from just a functional stovepipe viewpoint. Supply chain capability and performance have indeed become much more critical to the overall success of the brand and the business. Sourcing of suppliers or production must include reliable and consistent supply along with competitive cost. Outsourced design or production must always be grounded in continuous innovation, competency and protection of the brand. Decisions must be made with information capabilities that focus more on what will or can occur vs. what has occurred in the past. Cost and headcount cuts can yield targeted savings for the overall business, but there comes a point where you hit the marrow of the supply chain’s ability to adapt to changed business needs or new business models.
In the “new-normal” of post recession recovery, customer, market ,and industry forces will continue to cause change at a much more rapid pace, and supply chains will be involved in many aspects of these changes, both positive and negative in nature. Roles in the extended supply chain will require more broad based collaboration, with cross-functional, IT, risk management and geographic based knowledge.
CEO’s and senior management will make rational and sometimes non-rational decisions, but hopefully an informed voice of value-chain capability and knowledge will also be at the decision table.Â
Your role and mine is to insure that we become a part of that voice.
I completely agree with your assertion that these acquisitions are not a “sole vertical integration premise” and “that actions to date have had more to do with business events and markets vs. overt strategy.” I can’t believe WSJ would categorize Delphi and Boeing’s actions as vertical integration. The PepsiCo transaction, in which they have been buying the bottlers is the only exception. Dr. Pepper Snapple Group has been quietly buying up bottlers over the past few years as well. Could be evidence of a vertical integration trend in the beverage segment.
Steve,
Thanks for sharing your comments. It really comes down to invidual corporate business needs and how that impacts the current or future value-chain strategy.
Bob Ferrari