A new type of business strategy is taking hold on this economy.

One interesting trend I have been watching during this recession has been corporate America’s renewed commitment to consolidation. Rather than buying competitors to grow, executives are executing the rebirth of vertical integration. This business strategy had fallen by the wayside as disintegration came into vogue.

Corporate moves toward vertical integration are a marked departure from strategic plan theory that has dominated board room actions for the past half-century. Up until now, executives tried to increasingly specialize their holdings. The guiding principle was that specialization would boost efficiency and quality. Corporate managers focused on engineering, sales, and marketing and shifted functions like manufacturing and procuring raw materials to other businesses.

Strategic planners are developing strategies to control more of the product distribution up and down the supply chain, from aggregates to cement, to ready-mixed concrete and related concrete products.

Disintegration happened everywhere. Steelmakers in the 1980s sold their mining operations. In the 1990s, auto manufacturers spun off their parts suppliers, And today, a typical corporate computer system might be assembled by Accenture with data-storage systems from EMC and computers from Hewlett-Packard that use chips from Intel to run Oracle software. The construction materials industry behaved similarly in the 1960s.

Change afoot
Now the move is to become vertically integrated. Look at some recent corporate transactions. Some of these companies are repurchasing businesses they only recently shed.

Pepsi has announced plans to buy bottling companies it had spun off in 1999. Back then, Pepsi sought to focus on marketing and leave most operating decisions to the bottlers. Now, as consumers flock to noncarbonated beverages, Pepsi is anxious to gain more control over the distribution of its growing menu of offerings.

Oracle is planning to acquire Sun Microsystems to integrate hardware and software as part of it new vertical integration strategy. Boeing acquired the Vought Aircraft Industries factory to further control its manufacturing. And Nucor and ArcelorMittal have acquired raw materials suppliers to control the flow of materials into their steelmaking processes.

Even General Motors, having emerged from bankruptcy, is acquiring factories and a stake in Delphi Automotive to assure quantity and quality of vital parts from troubled suppliers.

Why are these corporate trends all across business lines important to our industry? I wrote about this in 2005 and ’06. What is different today is the American financial community’s acceptance of vertical integration will add further impetus to the changes facing the construction materials industry over the next generation.

The financial problems of Heidelberg Cement and Cemex are now long behind them. The current downturn has seemingly leveled.

So strategic planning folks at the majors throughout our industry are back at their computer screens and conference tables. They are developing strategies to control more of the product distribution up and down the supply chain, from aggregates to cement to ready-mixed concrete and related concrete products.

Producers of all types, sizes, and locations will soon have to decide on their own consolidation strategy. Some that are burdened by economic concerns will consider a combination with a major competitor in their market. Some may search for ways to vertically integrate. And added to this will be the challenges of remaining independent against the competitive forces of the vertical integration wave that is moving across our industry.

Pierre Villere is President and Managing Partner of Allen-Villere Partners. Contact Pierre Villere at pvillere@allenvillere.com or telephone 985-727-4310.

© 2010 Hanley Wood, LLC. All Rights Reserved. Republication or dissemination of “Going Vertical” (The Concrete Producer, January 2010) is expressly prohibited without the written permission of Hanley Wood, LLC. Unauthorized use is prohibited. Allen-Villere is publishing “Going Vertical” under license from Hanley Wood, LLC.