Going Vertical


eing a “pro-business” state, Virginia typically follows trends in business. So, it will be interesting indeed if the Old Dominion follows this new trend.

This morning’s Wall Street Journal has an intriguing front page story about how big businesses are retreating from the decentralized, outsourcing model that had been in vogue for a few decades. In its place, big companies are sparking renewed interest in the traditional, vertically-integrated approach in which the firms control the supply, the production, the marketing, the sales, and the planning.
The latest advocate is Larry Ellison, CEO of Oracle who wants to buy Sun Microsystems. He plans to make it “vertically integrated” firm that produces software, computers and computer components.
Other firms retreating to the 100-year-old corporate model include PepsiCo, General Motors, Arcelor Mittal and Boeing. Pepsi wants to buy back a lot of bottlers and Arcelor is moving back into the raw materials business by buying mines in Brazil, Russia and the U.S.
What’s with this return to the Andre Carnegie days? It seems that with the downturn, companies no longer can rely on de-verticalization and outsourcing. Bad times have made it harder for first, second and third tier suppliers and producers to operate. They are very short of cash and credit and can’t meet obligations.
For a prime example, look at Boeing. Its upcoming Dreamliner passenger jet is supposed to set the market for commercial aircraft for years to come. But following management styles du jour, Boeing has outsourced making parts for the plane through a highly complex and far-flung global network of independent suppliers. These firms haven’t made the mark. The Dreamliner has faced delay after delay.
What has all this got to do with Virginia? Mind set, that’s what.
When I returned to the state in 2000 after and 18-year-long departure, I noted that outsourcing, privatizing and minimizing governments roles had become a mantra. It wasn’t a political clan thing. It didn’t matter if you were George Allen or Jim Gilmore or Mark Warner or Tim Kaine. Everything was outsourced, including trimming vegetation on the sides of highways, operating roads, and upgrading and running the state’s IT system. Everything that is, except for operating the state’s ABC stores.
In fact, privatization became a kind of church liturgy that you recite without really thinking about it means. That’s what got us in the VITA/Northrop Grumman mess with huge cost overruns and lousy service.
With its budget woes, the state will be hard-pressed to follow the corporate trend into vertical integration. Another problem is that considering that the state might run things as well or better than private enterprise is political heresy. A lot of the dinosaurs who run the place or write for this b log will harumph and continue their laud of Thomas Jefferson and limited government.
Unfortunately, that’s the way it is. But don’t forget, back in the founding years, had TJ gotten his way we would not be a big, powerful country today. We’d be a nation of small farms and shops, sort of like Holland.
Peter Galuszka

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8 responses to “Going Vertical”

  1. E M Risse Avatar


    One of your best posts!!

    Do not have time to go into details but this trend is an important step toward Regional Import Replacement a key to a sustainable future.

    The next step is creative downsizeing.

    MegaRegional, Regional and SubRegion Really Smart Vehicles, not global Das Autos and what is good for GM is good for the World.


  2. Well.. this is the time for McDonnell and the Republicans to show what they can do for jobs in Virginia and to clearly differentiate themselves from the tax&spend Dems….

    Opportunity awaits McDonnell and the Republicans.

    A chance to shed their "no mo tax" feathers and shine…

    right Groveton?

  3. Anonymous Avatar

    Congress needs to eliminate or at least substantially reduce the economic incentives for short-term trading and speculation. Then reward longer-term investment. If the benefits of arbitrage are eliminated by high taxation, capital investors will start investing in businesses that produce quality products and services that will generate employment at good wages.

    We also need to provide economic incentives for youth to study, learn and master subjects and technology that we need in the future. That can be done by cracking down on the importation of cheap labor from abroad. Again, if we can reduce the allure of short-term management, businesses will start hiring American workers.


  4. Interesting perspective. Flawed logic but an interesting perspective. If there were real vertical integration than United Airlines would make their own planes and Boeing would either be bought by an airline or go out of business. I'd also take a long look at the engines on the next plane you fly. My guess is that you'll see products from either General Electric or Rolls Royce.

    If Larry ellison really wants vertical integration he'll have to buy AMD (SUN offers an Opteron line of computers), Intel (SUN offers Xeon) and about 25 other manufacturers which make SPARC chips under license from SUN.

    If government has been downsizing for decades why aren't government budgets shrinking?

    One thing for sure – cutting / outsourcing government employees is a side show. The real question is a very taboo subject for politicians – limiting entitlements. Entitlements are the poltical heroin of our time. So easy to get addicted, so hard to get straight.

    The Republicans would rather talk about privatizing because it alienates few of the moderate voters they need in order to win. The Democrats would rather talk about social justice because the tab for continuing all the entitlements is beyond comprehension or belief.

    So Bush buys favor (and some Republican votes) with a prescription drug entitlement. And Obama buys favor (and some Democratic votes) with his public option health care.

    In the end, a nation only has so much wealth. We have overspent our aseet base many times over. Our exploding entitlement programs get the current politicians votes at the cost of our country's future.

    Blame Jefferson? Not me. The real villians were Woodrow Wilson and FDR. Sometimes it takes a horrible plague decades to reveal its true rot. Wilson and Roosevelt's self-serving and incompetent policies will ne haunting the United States long after all of us have gone to meet our maker.

  5. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Going Vertical? Great idea! Let's create even more companies that are Too Big To Fail.

    Remember IBM? I do. Back in the late 70's IBM was the big blue dog of computerdom. If you wanted a computer system, it had to be an IBM and you had to buy their software to run on it. Their field engineers were the pin stripe gestapo, with service level agreements that ran on their schedule, not yours.

    Then along came Amdahl and a whole host of third party vendors who offered equipment that was better and cheaper than IBM, and came with nearly instantaneous field support. It was a heady time to work for any Brand X, especially in the non-stop hi viz world of field service.

    That was the beginning of the end for IBM and they weren't alone. What is now Silicon Valley was a wasteland of former big boy electronics firms. They were eventually sucked up by innovative kids whose garages were filled with nifty breadboards and wire, along side their surfboards.

    Natural curiosity helped kill the dinosaur business model. Evolution does not suffer fools lightly.

  6. Anonymous Avatar

    When I cut down a tree, i saw it up and turn it into finished products.

    It is still cheaper to go buy the finished products.


  7. Groveton Avatar

    "That was the beginning of the end for IBM and they weren't alone.".

    I have my reasons for not liking IBM but rumors of their demise are very exaggerated. In their last fiscal year they reported revenue of just over $100B.

  8. Accurate Avatar

    Years ago (and it pains me to think how long ago this was), I worked for Tektronix. For those who don't know, Tek was one of the first to produce ocilliscopes, and they made really nice ones; for years they were one of that industry's bench marks.

    A man named Howard Vollum (could have misspelled the name) started the company and it grew. Like most companies Tek purchased many parts that it needed from others. However, Howard became increasingly dis-satisfied with the quality and delivery time that his suppliers gave him. Slowly but surely Howard developed his own 'plants' right there on his own campus producing the various sub-level products that he needed. He had his own circuit board plant, his own ceramic plant, IC plant, his own designers, etc. Basically, shy of the actual raw materials Tektronix was self-contained and self-sufficient. Yes, he could have bought much of his sub-components outside for a cheaper price, but he'd already been down that road.

    Ultimately after Howard passed, the board of vultures … er, directors saw the profit in buying sub-components for cheaper. They saw the short term profit in selling off all these 'non-core' plants that Howard had built; and they did sell them off.

    What was once a very proud company with an excellent product became just another oscilliscope. Tek use to be the largest employer in the state of Oregon. They gave that title up 30 years ago.

    Howard had a vision and he made it happen. It was a good company to work for and as an employee you felt protected, loved and proud to work there. When he was gone, so too was his vision and so too was the security that you felt as an employee.

    Just lamenting about a company that I once worked for that was quite vertical.

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