Going Vertical - Companies More Prone to Go'Vertical By Ben...

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Companies More Prone to Go 'Vertical' By Ben Worthen, Cari Tuna and Justin Scheck Wall Street Journal 30 November 2009 Larry Ellison is known for forward thinking. With his new business model, though, the billionaire chief executive of software maker Oracle Corp. is taking a page from the past. Mr. Ellison plans to buy Sun Microsystems Inc. and transform Oracle into a maker of software, computers, and computer components -- a company more like the U.S. conglomerates of the 1960s than the fragmented technology industry of recent years. "It is back to the future," he told financial analysts in October. Mr. Ellison is among the executives reviving "vertical integration," a 100-year-old strategy in which a company controls materials, manufacturing and distribution. Others moving recently in this direction include ArcelorMittal, PepsiCo Inc., General Motors Co. and Boeing Co. The reasons vary. Arcelor, the world's largest steelmaker, wants more control over its raw materials. Pepsi wants more authority over distribution. GM and Boeing are moving by necessity, to assure quantity and quality of vital parts from troubled suppliers. Some are repurchasing businesses they only recently shed. "The pendulum has shifted from disintegration to integration," says Harold Sirkin, global head of the Boston Consulting Group's operations practice. He attributes the change to volatile commodity prices, financial pressures at suppliers and quests for new revenue -- challenges exacerbated by the recession. Just two years ago, for example, Mr. Ellison said Oracle would stick to its traditional focus on software. Computer hardware isn't "a business we have any ambitions in," he said then. In a September speech, he called that view "fundamentally wrong." Mr. Ellison declined to comment for this article. The moves toward vertical integration are a departure from the past half-century, when companies increasingly specialized, shifting functions like manufacturing and procuring raw materials to others. Steelmakers in the 1980s sold their mining operations; in the 1990s, auto giants spun off their parts suppliers. Tech companies stopped making every piece of a computer system and specialized in chips, data storage or software.
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