Tuesday, May 8, 2012

When Vertical Integration Might Work

Recently, Delta Airlines announced their purchase of a Phillips 66 refinery so that they would have a little better control over jet fuel prices for their planes. What they'll have is control of refining costs and a captive supplier. They won't be controlling the cost of the raw material. Nor does Delta inherently have expertise in running a refinery.

They are becoming vertically integrated. Not to the extent that Henry Ford attempted with his Rouge River factory. Delta isn't buying Boeing or Airbus (yet). Nor have they been procuring food companies because they hardly serve any food on the flights. (Okay, that was a snarky comment.) They might think having some control over jet fuel is a good step into vertical integration.

As mentioned, they don't have expertise in the refinery business. They 'purchased' it, I'm sure, by retaining the staff at the refinery. However, they wouldn't have any sense on what best practices might be, or what extent of improvement is possible. "This is just the way it's done" could be the response of refinery management to Delta execs and the execs would say, "Okay." Delta might have to hire some outside expertise by way of hiring another refinery manager or contracting with industry consultants. Either way, it could be costly expertise to gain.

Could the purchase work? If Delta sets up the kind of culture that helps the refinery staff do their best, and they want to do their best. Delta will need to show how they contribute to Delta's success and their own. They need to engage with the refinery crew in order to gain their engagement in return. Delta should say, "Look, we don't know how to run this business, but here's what we expect. And we'll support you to meet these expectations. Your responsibility is to find ways to meet the expectations that contribute to our mutual success."

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