By Kevin Meyer
I was digging through some articles I'd saved and came across a a piece from a week ago in the WSJ on Oracle and Larry Ellison. What's the guy up to thee days? Racing another yacht? Building another villa? Plotting another takeover?
No, he's insourcing. Larry, of all people.
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. "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.
Oracle isn't the only one.
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.
We've been chronicling the Boeing outsourcing adventure for years. What a painful lesson.
In the past two years, Boeing bought a factory and a 50% stake in a
joint venture that make parts for its troubled 787 Dreamliner jet. The
moves partially reversed Boeing's aggressive outsourcing strategy to
assemble the Dreamliner from parts made by hundreds of suppliers.
Supply and assembly problems have knocked the Dreamliner more than two
years behind schedule. Boeing CEO Jim McNerney says the company is
still committed to outsourcing.
So what are companies realizing?
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. The guiding principle was that specialization would boost efficiency and quality.
Pepsi plans to repurchase bottlers it spun off in 1999. Back then,
Pepsi executives wanted to focus on marketing and leave most operating
decisions to the bottlers. Now, as consumers flock to noncarbonated
beverages, Pepsi is keen to gain more control over the distribution of
its growing menu of offerings, says spokeswoman Jenny Schiavone. "The historical view of vertical integration was that you had complete
control of the supply chain and that you could manage it the best,"
says Bain & Co. consultant Mark Gottfredson.
Of course as usual a good thing isn't something the government can stomach.
Some moves may face resistance from regulators. The Federal Trade
Commission, for example, is reviewing Pepsi's plan to buy its two
largest bottlers. At the Justice Department, antitrust chief Christine
Varney has signaled interest in scrutinizing vertical deals.
But let's get back to Oracle.
At Oracle, Mr. Ellison's shift is among the industry's most
pronounced. For 32 years, Mr. Ellison was a big proponent — and
beneficiary — of specialization in what he called the "horizontal
computer industry." Oracle's forte was business software to help
companies run their operations more efficiently. The model generated
big profits for Oracle, which avoided the expense of manufacturing
With the Sun deal, Mr. Ellison scrapped that strategy. Now, he wants
to sell "complete systems" made of chips, computers, storage devices
and software from Oracle. Mr. Ellison is betting that the combination
will appeal to corporate customers tired of assembling technology from
And it's spreading to the notoriously outsource-loving tech sector.
Apple Inc. last year moved to re-enter the semiconductor business after a
two-decade hiatus, buying chip maker P.A. Semi and hiring chip
engineers. By developing its own chips for new mobile devices — a
departure from the industry trajectory — Apple hopes to tighten
control over a key technology and keep it away from rivals, according
to people familiar with the matter.
Perhaps the tide is really changing.