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Vertical Integration Among Car Manufacturers

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Mr Orlowski gives us an analysis of the car industry:

That leaves little left to differentiate cars today, except the choice of interior seat trim and their terrible infotainment systems, which are invariably years behind the personal electronics market.

How did this happen? It’s because the bean counters told them to – car bosses were assured by the fashionable organisational theory emanating from business schools and economists that this was the smart thing to do.

The most influential of these was developed by Oliver Williamson, the economist who died last year. He explained how the boundaries of an organisation were defined by the governance costs and the transaction costs. So car companies became porous and incestuous, because they believed it saved them money. But this had a price.

Well, yes and no, yes and no.

Williamson wasn’t in fact telling people that they must adopt the one or t’other model. He was, rather, exploring the implications of Ronald Coase’s original observations about the firm. When should the organisation be simply a contracting nexus and when should it be vertically integrated and producing everything? Like Ford owning its own rubber plantations?

At some point any organisation is going to have to interact, on a contractual basis, with the wider economy outside. Equally, there has to be something the organisation actually does itself otherwise there won;t be an organisation. Could be making the machines that dig up the iron ore to make the steel for a car manufacturer at one end, could be just the brand at the other.

So, what’s the right answer? It depends. Transactions costs – which was Coase’s answer, Williamson then exploring that in detail.

OK, but depends upon what?

At which point to borrow from Darwin – perhaps Haldane – and evolution. It is the environment that sorts gene combinations for that environmental fitness. Strategies change when that environment does.

1000 years ago the strategy to maximise genetic deposition into subsequent generations was, for a man, to be good at wielding a sword and thus using the daughters of enemies as blankets. For women to be the bedmate of one good at wielding swords. The environment has changed. An argument could be made that today that said genetic success is best achieved – for men – by using teenage would be council house tenants as blankets, for women to be such.

Even if that’s going to far as a rhetorical excess it’s still true that the environment has changed, therefore the successful strategy has. For it is the environment which sorts strategies by their success.

OK, car companies. Tesla is vertically integrated in a manner that other car companies are not. We’ll find out whether it works too. But that Tesla is working with an entirely different technology than the other car companies means we should not, perhaps, be surprised that the successful strategy in terms of the boundaries of the organisation has changed as well.

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