See subject. Eg (I think the first part is true, the rest I made up) The NY Times owns the forest to make the print stock, the chemical supplier for the ink, made by the companies ink factory, the robots that shuffle around the plant – ad almost infinitum in the myriad complex products (and their constituent products) in creation. (Heh. No pun.)
I’m not sure now how I understand even the meaning of “vertical integration” as something distinct from plain old monopoly like Loew’s owning the movie theaters and the studios, before they (who? somebody in the US government) made them sell off one of them.
Vertical integration involves owning your suppliers (forests) and even some of your customers if you make an intermediate product. Horizontal integration involves owning your competitors (eg NY Times buys the Washington Post). Anti-trust attention is directed at both, but more at the latter.
I’m guessing that the highest degree of vertical integration would be in the third world. Buying your suppliers is convenient if they are not reliable for whatever reason. Maybe Tata of India would be an example: they make steel but also autos. They mine ore. They build construction equipment and carry out infrastructure projects.
The zaibatsu in Japan, and their South Korean counterparts, the chaebol, are vastly integrated conglomerates, even though their dominance is arguably lower now than it was in other periods of the post-WW2 era. They are typically groups of companies sharing a common brand name, but without an overarching parent that holds majority shareholdings in other companies; they are usually held together by means of mutual shareholdings of the group members in one another. Their activities often spread across a large number of sectors, so it goes beyond vertical integration, but vertical integration is still a part of it. In many cases they will also comprise a bank that ensures funding for the group.
Fantastic thread! I think that this company known as Axfoods is one of them.
They own supermarkets (such as Willys in Scandinavia, but many others in the world), they own the big warehouse companies that sell the food to the supermarkets, they often own many of the brands that they sell and they own their production facilities. Sometimes they even own the natural resources from which the products are made.
Capitalism is truly destroying its most sensible quality, meaning competition.
The company YKK has a similar arrangement with making zippers. They make every part of the zipper, the machines that make the zippers, the rigid cloth on both sides of the zippers, the dye chemicals for those clothes, and the boxes the zippers ship in. The company is made up of almost 100 other smaller companies that produce a product involved with zippers.
Tennessee Coal, Iron & Railroad Co. has to be near the top of the list. It produced iron and steel to build its own rails and railcars, and coal to power them. There were a number of similar local conglomerates during the 1800s.
I don’t have an answer to the OP’s direct question , but here’s some more food for thought / research.
There was a famous book by an economist back around the 1920s talking about the optimal degree of integration within an enterprise. I tried to hunt it down but don’t remember enough about the guy’s name or his buzzwords to give you a cite. Wiki & Google were both surprisingly unhelpful.
Essentially his theory held that enterprises integrate when the cost of inter-business communication exceeds the cost of integration, and fragment when the cost of integration exceeds the cost of communication.
So businesses with challenging, complex, or very dynamic supply situations or unreliable vendors or customers will tend to absorb them and become more vertically integrated, whereas those with comparatively simple and easy-to-manage relationships will tend to disaggregate.
As more trustworthy legal systems have spread, and as communications, transportation, standardization, and collaborative business techniques and technologies have expanded, the typical optimal degree of integration has declined. IOW, we’ve gone from vertically integrated River Rouge-type plants (Ford River Rouge complex - Wikipedia) to the current fashion for globally out-sourced just-in-time supply chains composed of narrow specialist firms.
At the same time, the post-2008 reductions in the cost of capital have reduced the cost barrier to integration. In IT particularly, where network effects are very strong, this promotes a relatively stronger incentive to buy suppliers and their IP so as to preclude them supplying both you and your competitors with their products.
It’s also obvious from this that even at a single moment in time, different societies will have different mixes of the pro- and anti-consolidation forces. IOW, what makes sense for a white-goods manufacturer in India in 2015 may be different from what makes sense for a white-goods manufacturer in Germany in 2015.
My experience has been that companies integrate vertically if they can make more money doing so, or if they want or need to control their supply chain, or if they do so for power reasons.
Functions and processes are outsourced when it’s cheaper or if there are other non-cost advantages (for access to technology, know-how or subject-matter expertise, geography, management simplification, external resources more capable than internal ones, not worthwhile to bring particular functions in-house, etc).
I’m not sure what the preceding post is trying to express.
I have friends in the SCA who raise their own sheep, so they can shear them, card the wool, spin the thread, dye it, weave their own fabric and make clothes out of it.
How do you want to measure “most vertically integrated?”
A company that manufactures something pretty simple could 100% vertically integrated (like, mulch. You grow your own tree, you shred it. You sell it at your processing site). Or do you want the company that has the most steps in the chain that they own, even if it’s not all?
I don’t have an answer; I just want to understand the question better.
A source for vertical integration has also been the need for something nobody can supply. This happened to many chemical companies throughout the years (and related industries such as pharma): they needed a certain compound in industrial quantities and with reliable specs, there wasn’t anybody who made it even in pocket amounts, they built the facilities to do it themselves.
And sometimes a company grew the other way: they made something for which there were markets, they came up with additional patentable uses and figured that hey, rather than sell the patent, they’d make the new items themselves!
Other times, companies are very focused in a type of product and at some point decide that this makes them vulnerable, so they move into a completely different area.
A pretty extreme example of diversification: Abengoa started life as a civil design office, eventually expanded into managing the works they’d designed, and at one point figured that too much of their market was into civil works, they needed something completely different. So they started Befesa, whose focus is on recycling/waste disposal: most of their locations “turn somebody’s trash into somebody else’s treasure”. The group includes other brands, but those two are about as different in their structure, processes, markets, you name it, as can be.
And sometimes, a company decides that it’s become unmanageably diverse and divests some stuff; one of the reasons to manage different product types under different brands is that it makes divestments easier (less or no rebranding needed).
I’ll nominate Weyerhauser, or at least the Weyerhauser of 10-20 years ago. They owned enormous plots of timber land, cut the timber and do much of the processing into finished wood and paper products. Even home building. More recently, they have spun off a lot of the vertical components.
That’s why every good capitalist system has a functioning antitrust law and enforcement mechanism in place which puts limits on acceptable integration, which are deemed legitimate state interventions even by most libertarians.
I don’t see how any of that is destructive for capitalism or competition. A monopoly could be destructive, but as long as we’re talking vertical integration and not monopoly, the company must still compete with other end-product manufacturers/retailers. If vertical integration makes the company better able to compete, then that’s exactly what capitalism is all about.
The buzzword is “Transactions costs”. That concept is used to think about the scale and scope of the firm and even why a firm should exist.
Coase and others also applied to environmental regulation. If transactions costs were low, we could contract with the local manufacturing plant to stop dumping soot into the air. (The transactions costs include free rider problems I guess.)
Reminds me of the morning cry at Great Western War…
“This mornings cry brought to you by SHEEP. Providing food, warm clothing, and loving companionship for thousands of years… You can always depend on sheep for what you need.”
It is not true any more, but when I worked for AT&T I’d say we were right up there.
We made our own semiconductors. We made our own printed circuit boards. We assembled and tested the boards and made them into systems. We then sold the systems to ourselves (Long Lines and the OpCos.) We serviced the systems. When something failed we diagnosed and repaired the bad components. When we put computers in switches we made the computers and all the software for the computers, right down to the operating system.
We also made optical fiber, (I’m not sure about regular wires) and our own telephone poles.
IBM was pretty close to this level of integration, though I don’t know if they made their own bare boards.
Dunno about forests but they do own:
Paper mills
A buttload of Publishers
Several dedicated retail channels (Book clubs, book fairs, direct mail order)
A couple movie/video production companies
A couple small software developers