Vertical integration takes off again
Is the global business model about to be turned on its side? After years of horizontal expansion, Boeing has suddenly rediscovered vertical integration. The planemaker is buying its suppliers.
Vertical integration was once the model for business. Companies like British Shoe Corporation made footwear in its factories and sole them in its high-street stores. The motor industry manufactured the parts it assembled and sold the completed cars. The power industry generated electricity, owned the grid that distributed it, and sold it directly to retail customers, also selling them appliances like cookers through its own shops.
Then vertical integration went out of favour. Companies chose to specialise on making or selling. Outsourcing allowed them to chose their suppliers, playing off one against another and eventually buying from cheap manufacturers abroad. Services from cleaning to consultancy were acquired from companies that fulfilled such roles more efficiently.
Having shed the vertical model of manufacturing-to-retailing, companies dabbled with horizontal expansion, adding related activities in other fields. Sainsbury, for instance, tried to use its supermarket selling and sourcing skills to operate the Homebase DIY stores; Marks & Spencer thought it could use its UK high-street experience to operate US shops.
And some companies moved so far sideways they became conglomerates, operating totally different businesses. Hanson, P&O, Trafalgar House, BAT and Tomkins were the big names of the 1980s until they fell from favour and demerged their diverse operations.
And now Boeing is re-inventing vertical integration. The US company is buying one of the manufacturers of composite sections for its 787 Dreamliner plan from the Carlyle private-equity group. Last year it bought Global Aeronautics, which assembles fuselages.
The Dreamliner has problems. The plane has yet to fly, test flights having been postponed because of quality or design problems. The programme has been delayed repeatedly, not helped by labour disputes. But if production is behind schedule, so are orders: the world’s troubled airlines are cancelling or postponing orders.
But Boeing sees taking production in-house as the solution to those problems. When it owns the component makers itself it will have full control of costs and quality.
Along with other examples of vertical integration - Morrisons, the UK supermarket group, has just bought farms, for instance – we might just be seeing the start of a new (or the revival of an old) business trend.
