Is vertical integration the new monopoly?

COVID-19 brought challenges to supply chains that many thought could never happen. Just in time (JIT) supply chain models were crushed when boats stopped sailing, truckers stopped driving, and countries didn’t want to work with one another.

Companies that were vertically integrated, which is the combination of two or more companies within the supply chain, seemed to thrive. Companies that had control over their supplier, over their customer, over their shipping, etc. found ways to continue to work.

Vertical integration has been around a long time with Rockefeller, Ford, and Dupont making their names in modern day history for doing this. However, vertical integration took a pause over the last 30-40 years as companies learned to outsource more and more.

Companies all over the world use to make items but many turned to having another company make their items, creating robust global supply chains. Companies took note of some of the success and learned from it. The days of only being in one market or having different market segments are fading. The days of companies just offering more in their portfolio are changing.

Companies like GE, which used to make everything from batteries to airplanes, from pumps and MRI machines, are changing. This type of behavior was called diversification, which is to own or operate several unrelated businesses. When you do this, it spreads out your risk in case one sector struggles. Companies can no longer reduce their risk this way. Companies that want to succeed need to vertically integrate so that they can control the risk. A few examples of this are BlueScope, a steel company, and AT&T, a media company. You can see looking at two very different business segments that companies are moving in this direction with the sales and acquisitions these companies have made in just the last three years.

Since the beginning of the pandemic, Steel companies like BlueScope, Cleveland Cliffs, Arcelor Mittal, and US Steel have all purchased some of their smaller competitors. They each purchased a scrap company, which provides raw material to steel mills. They each purchased coating lines in order to create a finished product. Where there used to be well over 20 different steel companies in the United States, that has been reduced significantly. The number of scrap companies has been reduced as the larger ones have been purchased by the steel companies. These steel companies have found that the only way to compete and succeed is to vertically integrate.

By purchasing these companies, they now control the raw material out of the ground all the way to erecting a building. When COVID-19 hit, these companies saw the need to do this because, unlike some product lines, blast furnace mills can’t just be shut down. Steel mills have to keep producing in order to prevent their furnace from collapsing. When customers stopped buying and scrap companies stopped working it created a mass problem for these companies. Now they own their customer and they own the scrap company so they can keep the chain moving.

Media companies like AT&T, Verizon, T-Mobile, Walt Disney and Comcast now own a massive amount of what is televised in the United States. AT&T specifically has vertically integrated to the point that it owns the companies that create the content you watch, the companies that air the content, and they stream it on their platforms.

Imagine watching Superman content. It was created by DC comics, televised on HBO and streamed to you via DirectTV – all of which are owned by AT&T.

These large companies now control most of what is developed, displayed, and broadcast to the American people. It is extremely difficult to find a way to get around using one of these services. Many of the very small companies don’t have the ability to reach many in rural America.

So, what does this all mean? Typically, in business there will always be some constricting in the market to which the number of suppliers for a specific product is reduced. The rule of supply and demand drives companies to sustain or die.

The difference this time is that these companies are now vertically integrated to the point that allows them to control the market. These types of companies have created a complete sector to which the barrier to entry now is almost impossible. It would take a tremendous amount of capital to be able to compete at any level in either of these industries.

A monopoly is described as a company or group having exclusive control over a commodity or service. I think the definition should be changed or added to this by saying “a company or group that prevents or limits barrier to entry.” Apple is believed by some to have a monopoly on their iPhone as they don’t allow other companies on there to sell products. What Apple has done is “prevent entry” – at least this is what Epic games and others believe with the current lawsuits that are in process.

The concept is one in the same. Creating an industry in which the only way to compete is to have 3-5 companies that can be your supplier and customers is close to impossible. The barrier to entry is so high, it’s not reachable.

Supply chain vertical integration allows a company to create its own destiny. It doesn’t have to rely on a supplier in Asia or Mexico who can’t ship out product for some reason. It allows the business to control and mitigate its risks.

The No. 1 thing COVID-19 did to our supply chains is highlight just how fragile they are. The best way to handle risk is to control it. Letting a supplier control your risk in today’s environment is a recipe for failure. However, is vertical integration a new monopolistic monster? There are two perspectives to which one can answer this question. That is at the consumer level and the company that is trying to enter into that market segment. I believe that these companies and many like them now have created barriers to entry that are close to impossible to break and thus consumer prices have risen because of this.

About the author:

Daniel Corn has taught business and marketing courses at Southern New Hampshire University since 2016 and is the director of supply chain management at Gulf Coast Supply & Manufacturing, LLC. He is a Certified Supply Chain Professional from the Association for Supply Chain Management and is certified in Production and Inventory Management from the same organization. He earned his MBA in Project Management in 2015 and served in the United States Army for 13 years.

SNHU does not endorse or sponsor any commercial product, service, or activity offered on this website.

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