Hi Geoff Nunn; About the difference between conglomerations
and vertically integrated companies...
Conglomerations were never a success. Vertically integrated
companies have been and will continue to be the market
dominating companies in most markets dominated by stable
technology and price competition.
Right now, IBM has 6 times the sales of DELL. Profits are
about the same as DELL, as a percentage of sales.
You say that IBM is dis-integrating vertically. I agree that there
have been some trends in the personal computer market over
the last 20 years that have caused this. Particularly, the fast
movement of technology makes it harder for a vertically
integrated company to be in possession of efficient manufacturing
for all the components to its product. I suggest that this trend
is turning.
Where the trend is most important is in the processor. The
processor is currently the most expensive part of the computer.
Incidentally, you mentioned that IBM used to manufacture its
own memory chips. It still does, I've used them:
(LINK TO BE PROVIDED LATER)
It is the integration of processors and memory that will finally
reduce the personal computer market to a pocket calculator
market. This will not happen for 10 years or so, but by that
time the vertically integrated companies will be the only ones
that will still be selling a product.
But the comparison is inherently unfair to the vertically integrated
company. Vertically integrated companies, by definition, have
reached a stage in their corporate life where they are no
longer growing as quickly. There are no more suppliers to
replace. IBM is a lot more than a box maker. Because of
this, IBM is much better placed to handle the coming changes
to the way that computers are built.
When DELL reaches the point where it can gain no more
market share, (certainly well below 100%,) it will be forced
to expand business by going vertical. Vertical integration is
the sign of a business that has been successful, and it is how
highly successful businesses are able to compete with smaller
competition.
Conglomerates are a completely different story. The idea,
(if I remember correctly) was that you could combine two
or more completely different companies into a single company
that would be more efficient than the parts. The assumption
was that the "dishwasher soap" part of the company would
have sales that were more stable, while the "automobile
brake systems" part of the company would be more cyclical.
The combination, would, supposedly, provide sort of a mutual
fund reduction in risk to the investors.
The problem with conglomerates was that they didn't bring any
improvements to the efficiencies of the businesses, and the
investor could avoid non-market risk by diversification anyway.
So there were no advantages, but they had the extra expense
and inefficiency of an extra layer of management.
Vertically integrated companies have had problems associated
with the tendency to require internal units to preference the
company's own products. But vertical integration does provide
efficiency, as it is much easier to control the process of
production. Sometimes those suppliers that a "virtually
integrated" company uses just don't supply. They go out of
business, start up competing businesses, go to court and
sue, etc. I'll post some accounts of businesses that are
currently in trouble for not vertically integrating their production...
Like all management techniques, vertical integration, etc.,
is not a panacea. There are advantages and disadvantages
for just about all common means of doing business. We are
looking only for small differences, because small differences
are what result in large profit and growth differences.
-- Carl |
