Daily Archives: September 15, 2015

Economic Damnation #6: Mega Global Corps & the continued M&A Frenzy

While the general consensus from a sourcing perspective is bigger is better as it allows for volume discounts from economies of scale, this is not always the case, as recently pointed out in our post on Economies of Anti-Scale. Sometimes it is not only the case that bigger is not better, but also that bigger takes a bigger bite out of the limited butt that you have to work with.

Let’s start by going back to two of the big examples of anti-scale in our post from a couple of weeks back: Energy and Short-Term Contingent Labour.

With respect to energy, as per our post, most energy platens still rely on coal, oil, and natural gas, and, as a result, energy costs are dependent on the somewhat unpredictable prices for these limited natural resources. And since the energy companies can always extract the maximum prices for their energy produced from these limited resources from consumers and small businesses with no negotiation power, they are not overly interested in negotiating with you unless they are not close to their maximum production potential and you will guarantee enough annual usage that it’s worth their time to even talk to you. And even then, unless you have a couple of other energy companies that are also willing to talk, they aren’t going to give you great deals. In any given area, there aren’t that many energy companies, so if a merger or acquisition happens and your options drop to 2, or 1, you are, as they say, up the creek without a paddle and your prices will go from bad to worse.

The situation is similar in contingent labour. If the resources you need are scarce, in demand, and their are only a few providers, the last thing you want is a merger or acquisition. This gives the provider all the power, and your cost is as much as any competitor is willing to pay. Don’t even bother to negotiate. Just sign the offer, thank them endlessly for even thinking of you, kiss the ring, and go on your way. The best you’re going to get is a bit of spit on the pitchfork.

If economies of anti-scale were the only thing one had to worry about when Mega-Corps entered the picture, all would be manageable, but Mega-Corps take you out of the frying pan and dump you in the lava pit when negotiation time comes and categories that were once in your favour all of a sudden shift very fast to their favour.

Buyer power depends on a number of things, but always depends on two critical market conditions being in the buyer’s favour:

  1. Supply exceeding demand.
  2. Multiple vendors competing for the business.

When a Mega-Corp swoops in and buys up one or more suppliers in a category which only had a few suppliers to start with, or multiple supplies merge into a Mega-Corp, the number of vendors competing for your business decreases, and with the smaller guys only being able to support a smaller customer base, more and more companies are forced to go the big guys, like it or not, and these big guys can essentially dictate the prices across the critical goods and services you need for your supply chain. Previously low cost electronics, CPG, MRO, and services categories in some regions can jump double digit percentages overnight and there’s nothing you can do.

But this isn’t the worth. Let’s say two suppliers merge, and one had an exclusive mega deal with your direct competitor which became null and void if that company serviced you. Guess what? Your contract is getting dropped faster than a hot potato covered in scalding oil. And your primary supply source goes up in smoke.

Besides the fact that these Corporations Will Soon Rule the World thanks to the likes of politicians like the Harperman (who makes Chicago politicians look good!), which will bring with it a new level of damnation to the entire world, they are a damnation unto themselves and generally hurt our supply chains at least as much as they help.