Platt Perspective on Business and Technology

Rethinking vertical integration for the 21st century context 17

Posted in business and convergent technologies, strategy and planning by Timothy Platt on July 23, 2017

This is my 17th installment to a series on what goes into an effectively organized and run, lean and agile business, and how that is changing in the increasingly ubiquitously connected context that all businesses, and that all individuals operate in (see Business Strategy and Operations – 3 and its Page 4 continuation, postings 577 and loosely following for Parts 1-16.)

I focused on symmetrical and asymmetrical power and control relationships between businesses in supply chain and related collaborative systems in Part 14, Part 15 and Part 16 of this series. And I have build that flow of discussion around three case in point examples: FedEx (in Part 14), Eastman Kodak (in Part 15) and Apple, Inc (which I have recurringly turned to and discussed throughout this series.) Those three business enterprises serve as the leading and even dominating participants in the business-to-business collaborations that they have entered into, and essentially without exception throughout their histories.

Then at the end of Part 16 I stated that I would conclude this series here, with a discussion of:

• Alignment and divergence in what participating businesses seek to achieve in business-to-business collaborations, and in how they would pursue their perhaps diverging goals there.

I also stated that I would reconsider Apple, Inc. in this context too and I will do so. But before I do that, I want to reconsider a point that I raised and then questioned in Part 16, readdressing it here in an explicitly international context.

Certainly for long-term collaborations and ones that have proven mutually beneficial and to all businesses concerned, you would most generally expect all partner businesses involved to see value in continuing these arrangements, as proven sources of value to them. Decisions and actions that would challenge these relationships by reducing their value to trusted and reliable partner businesses there, would create risk, and risk that would probably not be off-set by a compensatory gain in value received. And with this, I postulate a stable win-win game theory scenario as a path towards maximized value received and all around, and minimized risk created and once again for all businesses involved in these systems.

I then at least briefly made note of how a more within-collaboration, win-lose or at least win-indifference strategy might arise. Rethinking these business-to-business arrangements in the more general terms that I offer in my series: Some Thoughts Concerning a General Theory of Business, starting with its Part 12, these less mutually supportive strategic and operational approaches can arise for a variety of reasons, including time limitations for how long a collaboration can continue and a variety of other sources of uncertainty (see Section VI of Reexamining the Fundamentals for that series as a whole.

What are some of the specific forces that can lead participating businesses away from a more entirely win-win approach, and particularly in an international and transnational context? And I add to that: when alignment of aims and goals among business-to-business collaborative partners gives way to divergence and a more win-lose approach, is it always the overly larger and most dominant business in these systems that drives that? I begin addressing these two questions with a set of concluding remarks that I will then go back to explain.

• Outside governmental forces and the agendas that shape and drive them, as an increasing important source of this divergence, can create overt disjunction of goals and aims between collaborating businesses, and can create what in key respects can become win-lose scenarios, for businesses that those governments can see as foreign. I write here of protectionism when this is carried out in order to help home-based businesses in general, but this type of government policy and practice approach can also serve to advance overall national economic goals as well as promote specific business enterprises.
• And yes, a business that would seem to qualify as being more subordinate in a business-to-business collaboration and according to all three criteria offered in Part 16, can find itself driving these win-lose disjunctions from how they conceive mutual long term benefit, and even when all businesses involved seek to maintain these collaborations very long-term.

One of the governments that I have in mind here is that of the People’s Republic of China, the (seemingly) dominant collaborative partner business in this is Apple, Inc., and the smaller and (seemingly) more subordinate businesses involved here are China and otherwise foreign-based enterprises that provide parts and subassemblies and even significant production capabilities to Apple as that company seeks to manufacture its marketable, Apple-branded products as economically as possible. Apple in fact primarily manufactures both its iPhones and iPads in China in factories such as a Pegatron Corp. facility located just outside of Shanghai. Note that Pegatron is headquartered in Taiwan, but they do a lot of their manufacturing in mainland China, and particularly just outside of Shanghai, so a second government in this story is the “breakaway” government of the Republic of China (Taiwan).

Just considering the People’s Republic of China in this narrative, one of their primary requirements that they impose on foreign companies that operate in China, is that they must partner with a Chinese company for all that they do there. And a second requirement that they just as adamantly insist upon is that these foreign companies transfer technical knowledge to their Chinese partner business, (and through them to Chinese government and Communist Party owned and controlled enterprises as well, as the Chinese government sees fit.) Basically, China takes a long-term perspective here and with a goal of requiring that foreign businesses that seek advantage now, only gain it at the long-term cost of creating what can become their most challenging next generation competitors.

I picked a controversial and I add extremely complex example here, intentionally. The allure of China’s cheap labor and the allure of its massive marketplace with its sales potential have proven to be more than enough as a source of incentive, to bring foreign businesses and even strategically well run ones to enter into these agreements. Some of them have come to see the longer-term consequences of this for their potential downside as they have in fact created profoundly challenging competitors out of what had started out as “simple” collaborative partnerships. And to take that out of the abstract, I cite what is currently the largest railroad rolling stock manufacturer in the world now: the Chinese manufacturer CRRC Corporation, LTD. They and their immediate predecessors in China entered into business-to-business collaborations with a number of foreign rolling stock manufacturers and acquired best of breed technology solutions from all of them. Then CRRC combined the best of all of this under one roof and in ways that these technology providers could not do directly and to their own advantage, and still avoid antitrust action in their court systems. And CRRC grew and grew and is now the biggest and most dominating business in this entire industry.

With that cautionary note and the always-present potential for at least smaller scale variations on it, I turn back to the initial core area of discussion of this entire series, which I reconsider in the light of this and the preceding 16 installments to it: vertical and I add horizontal integration as it is and can be developed towards in-house, and the risk and benefits dynamics of that. And I reconsider Apple Inc. again in this: the case study that I began this series with and that I have in large part built this series around.

• Are Apple and I add other smart phones and related ubiquitously connectable devices in the process of creating what might become their very own next generation CRRC, as Chinese businesses, operating under China’s skewed copyright and patent protection laws, decide how the technology they acquire from their foreign business partners can be repurposed?

And this brings me to a final thought that I will end this posting with, and this series as well. International trade agreements are currently coming under intense fire and particularly from more technologically developed countries such as the United States. And one of the clarion calls leading the charge against them is the prospect of “foreign interference” in national legal systems. The focus there is on how a foreign business from a signatory nation with less stringent environmental protection or worker’s rights laws, might force their partner nations’ governments to pay hefty fines for imposing protective laws that are “in restraint of trade,” and that cause treaty violating avoidable loss of income and profitability from that. But the one area of law where challenges would in fact most likely arise would be in how foreign governments do or do not protect intellectual property and trade secrets and related sources of business-defining value – of a type directly challenged in my above-cited rolling stock example.

• As long as businesses see risk and uncertainty from entering into collaborative relationships with other businesses, and particularly in foreign countries where adequate safeguards are not in place, the pressure will be on to do more and more in-house and through in-house vertically integrated systems, horizontally integrated ones or both in order to safeguard business defining sources of value.

This is becoming increasingly important in our increasingly interconnected global community and marketplace.

I am ending this series here but I will definitely return to this set of issues in postings and series to come. Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 4, and also at Page 1, Page 2 and Page 3 of that directory. And see also Ubiquitous Computing and Communications – everywhere all the time and its Page 2 continuation.

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