It Is Time to Consider Vertical Integration

It Is Time to Consider Vertical Integration

How to grow and strengthen your company through strategic acquisition of your suppliers.

Core competency. Vertical integration. Over time, the strategy pendulum swings between those two concepts, with the really big boys tossing in conglomerate once in a while. Core competency has been the favored blueprint for the past decade or so. But it’s time for business owners to consider strategic purchase of key suppliers.

Why?

Small to medium size deals are closing in droves. Despite socio-political-economic global uncertainty, there is abundant cash, low interest rates, and banks are lending again. Baby boomer owners want to cash out and retire, and often don’t have internal succession options.  

If you have a sole source component or material, verifying the long term viability in support of meeting your needs may suggest you acquire them.

A defensive opportunity may be to buy a supplier that also suppliers your competitors.

If you’ve been frustrated by the large minimum lot sizes and setup charges of your primary printer of customized packaging, it might be time to consider insourcing that business. Clearly all due diligence must be performed, but this strategic buy may improve your capabilities.

Certainly small competitors may provide strategic opportunities to expand your markets and market penetration, but don’t overlook the supply chain partners that contribute to your success.

...take the time to analyze your supply base for potential acquisitions that can propel your profitability for years to come.

Additionally, customers may be strategic acquisition targets -– whether they be distributors or users of your product. Going into competition with your customers can’t be taken lightly, so while this is a potential opportunity, now is a great time to look the other direction -– at your suppliers.

Perhaps a Chinese or Asian supplier has a geographically closer competitor you could develop into the best supplier. Perhaps a supplier is struggling with your growth requirements. Consider those businesses as well.

A warning: While financial factors support vertical integration and other strategic buys right now, if you don’t have the management team in place to make it successful, stop. Fix that weakness first, or ensure that the target organization can effectively run itself with existing management.

If vertical integration was not a good strategy last year, for reasons other than financing, it may not be a good idea now. But I encourage you to take the time to analyze your supply base for potential acquisitions that can propel your profitability for years to come.

There is no benefit in waiting for others to swing the pendulum all the way back.

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