“SCA”?
Competition is not only meant to exist towards end consumers but towards every layer of society and business. It does not become more efficient per sé. It merely eliminates all instances of profit but also competition in the lower layers. It excludes itself from the market of the supply chain and if enough do it there will be no market of the supply chain.
Markets are what make capitalism work.
When i comes to them owning their own supermarkets and putting their own products in them they end up controlling the end-market. As they conquer each other and independent operators that can not compete because they also own the wholesale market also and put up higher prices for their competitors than for their own supermarkets.
In the end the market is destroyed overall.
Wouldn’t an actual communist society be, by definition, this? If everything is owned by the state, then it would, by it’s very nature, be perfectly vertically integrated.
(Not that this has ever worked in practice.)
You’re still confusing vertical integration with monopoly. They are two independent traits. It’s like the traits “blonde hair” and “male gender.” I can be one or the other, or both, or neither.
Society for Creative Anachronism. Ren Faire types.
No I’m not, it’s greating congestion and market manipulation. It is the path to monopoly but from the vertical instead of the horizontal line.
If large businesses own their entire chains and dominate their markets then there is no room for anyone to come anywhere in-between those chains and develop.
Vertical integration is the preferred business model in intensive agriculture particularly meat poultry and pigs.
From the breeding stock, hatchery to the growing sheds, will provide the stockfeed from their own mill (less commonly they produce their own grain), sell or consume their own by-products, provide the veterinary & nutritional services, operate their own slaughter & processing operations, the refrigerated transport services, they commonly distribute produce under their own brand name, may have retail outlets and sell value added products.
It’s the preferred model for almost any field…?
No it’s not. Unless that was a pun on the agriculture reference.
It was but it still stands.
How isn’t it preferred? Tell me one field where it isn’t and that isn’t some obscure one like diamond trading.
Also regulatory measures shouldn’t be an issue because we can always find different regulations elsewhere.
Automaking. We use lots of steel sheet metal all over the world. Consequently we could open steel foundries and mills all over the world and supply ourselves, or we could buy steel from companies that already are in the steel business (decades and decades ago, we were very highly vertically integrated).
We specialize in automaking, though, and not running foundries and mills. If there’s a disruption in our steel supply, we would be screwed, but with suppliers we can spot buy. If demand goes up, we can engage additional suppliers. If demand goes down, we would be stuck with a lot of very expensive overcapacity.
Maybe we could deal with overcapacity issues by also selling steel to other users. But the steel industry focuses on long term contracts, and by selling to others would expose us to antitrust, i.e., we wouldn’t be able to favor our auto plants over others that we held contracts with. Essentially our steel business would be forced to be fair and equitable to everyone else, which effectively means we would no longer be vertically integrated.
Steel foundries and mills are huge, and to be competitive they require huge capital investments. A single steel mill can produce enough steel in a year (perhaps not at the right mix of grades, though) for everything we build globally, with enough to spare for lots of other consumers, too. It’s not possible to build a “small” foundry that meets only our needs, and do it cheaply enough that it’s cost effective. We can get 1% of a supplier’s output much cheaper than 95% of our own output from a mini-plant.
Tata was mentioned up-thread. We are a Tata customer. Outside of India Tata is probably better known as an automaker. Tata is not vertically integrated for most of the reasons that I used as examples above. Tata is a conglomerate, and cars and steel are different businesses, and Tata Automotive and Tata Steel are subject to the same commercial regulations as anyone else in the country. For example, Tata Steel is prohibited from giving any type of favoritism to Tata Automotive (and for practical purposes, Tata Automotive will also buy from other steelmakers such as JSW in India because mills typically produce only a limited range of grades, whereas a modern car has a very large range of grades).
Makes sense.
SpaceX is pretty vertically integrated, especially in comparison to their competition. They make their own propellant tanks, engines, flight control computers, fairings, and every other major component. While it’s not quite true that “rolls of aluminum go in one end and rockets come out the other”, it’s not a completely absurd approximation either. 3D printing has helped out as well.
They tell a story of a particular valve that they needed for an engine; the vendor priced it at hundreds of thousands of dollars each and 1.5 years of development. Aerospace pricing, basically. So they built it in-house for far less in both dollars and time. Custom, short-run components like that are difficult, especially in the communication department, so it makes sense to do those things in-house when possible. That fits in with your statement.
The mystery is why their competitors don’t do this. None of their competitors manufacture engines in-house, and it’s caused massive problems for them: Orbital because their engine exploded and they had no real control over the vendor; and ULA because they buy their engines from Russia and the Feds aren’t too happy about that state of affairs.
The aforementioned civil works. Many companies have a design deparment and a project-management department but the actual “make a hole, fill it up” work is done by subcontractors; they also subcontract specific types of aspects of design.
In utilities, a related sector, again many of the companies have the designers and the project managers, but the sweat is subcontracted. Other companies don’t even bother have the designers and subcontract completely to the companies of the first paragraph.
Even in sectors with a lot of integration, freights are often done externally and (at least in Western Europe, I’m sure it’s different in other places) the tendency is to get rid of internal fleets unless your business is transportation.
There is one major problem with vertical integration: You lose competitiveness. If you don’t integrate, but rather subcontract specific activities out to a different company with cost advantages in that field, then you’re going to be more expensive than you’d otherwise be. It is unlikely that the same company is the cheapest in a wide range of different fields; in a highly diverse economy, the most efficient actor in a given activity is usually the one focussing specifically on it. That’s why vertical integration usually comes into play only where there are strong economies of scale, which is not true everywhere.
In the 1960’s-1970’s, every Bell System installer/repairman truck had a cardboard box in back into which they threw all the leftover scraps of wire from their work. Periodically, those were emptied into a bigger box at their headquarters. I think that was intended to keep customers happy by not leaving any mess behind, but it meant AT&T got into recycling pretty early, because they had all this copper wire to get rid of.
Before they broke themself up, AT&T was said to be the largest source of copper in the USA, producing more from their recycling than any US mine. (I heard that, but I’m not sure of the accuracy.)
I don’t know if AT&T or Western Electric actually produced their own wire, but they produced/recycled a lot of copper that went into wires. So that’s one more step into vertical integration.
Chelsea Milling Company (producer of “Jiffy” Baking mix)
The mill their own wheat, corn, etc. (they also mill for others including Kellogg’s), make the mix, make the box and the interior packaging packet, and package the mix, all in their Chelsea, MI factory. They’re about 30% cheaper than every competing product; they the market share leader in muffin mix; they have never advertised.
Computer and electronics technology are a great example of a lack of vertical integration (with good reasons why). As technology developed more and more, it became way too incredibly complicated for any one company to produce all the specialized components. Your desktop, laptop, smartphone, or even integrated device can easily have a dozen primary suppliers, and each of them could have a dozen each. The company whose label appears on the device is probably responsible for only one aspect of the finished machine and its assembly.
Ford Motor Company…under Henry Ford.
http://atomictoasters.com/2011/03/vertical-integration-the-ford-rouge-complex/
I’m tempted to Pit you for citing Yahoo Answers in GQ.
You remind me now that in fact it was Weyerhauser in my head when I wrote OP–for some reason I think that company was the usual go-to cite when the topic came up–which is why I concocted/conflated the NYTimes example from the forgotten memory:
Ital added.
Is ludicrous, false.