By Nicolai J Foss
About the author
Professor Nicolai J Foss is Rodolfo Debenedetti Chair of Entrepreneurship at the Bocconi University, Milano. His research interests include organisation design theory (particularly as it applies to strategic management and entrepreneurship issues); organisational economics; microfoundations of management thought; and philosophy of social science. Nicolai is a Fellow of the Strategic Management Society and a member of Academia Europaea.
Much has been written about how the visible hand of industrial capitalism is increasingly “vanishing,” as the boundaries of firms and their corporate hierarchies are breaking down under the impact of the forces of interface standards, lowered transaction costs and increasingly modular production. However, in new research conducted by Jens Schmidt (Aalto University, Finland) and myself which I presented as a Distinguished Speaker lecture at Leeds University Business School on 12 November 2018, we question whether we are really witnessing the visible hand vanishing or whether the hand of corporate hierarchy and managerial authority is rather assuming a new form.
It is probably the case (although hard data are difficult to come by) that the traditional large, vertically integrated firm has receded. However, we also see many industries, such as automobiles, banking, aircraft engine control systems, contract manufacturing, and, obviously, “tech”, where large firms (in fact, some of the world’s largest corporations), continue to play a central role in coordinating economic activities. In fact, these very firms continue to play a large role even in industries with very high degrees of modularity (eg the computing and mobile phone industries), contrary to the theoretical expectation of declining firm size and shrinking firm boundaries.
Jens Schmidt and I argue that many of the new mega-firms are what we call “ecosystem integrators.” Examples are the well known “platform” giants in tech, such as Google, Amazon, Apple and so on, but many industries are increasingly dominated by them. These firms specialise in performing three key middleman or coordinator functions in ecosystems. First, they guarantee that complementary inputs that are necessary for bringing about a focal, potentially customised, value proposition are mutually compatible and fit together. Second, they make sure that inputs are supplied in a sufficient variety to address heterogeneous and changing customer needs. Third, they manage the overall coherence and functionality of the entire ecosystem. Typically, such firms are only moderately vertically integrated. Thus, they don’t control multiple consecutive stages in a value chain by means of ownership. Still, they do lend their customers a highly visible “hand” and they play a crucial controlling role.
After my talk, a number of members from the audience argued that there was nothing new in firms being “integrators.” It is indeed right to say that firms have always integrated inputs from different value chains for customers. However, by “integrators” we have in mind firms that are 1) able to address a variety of (changing) customer preferences; 2) exert considerable control over an ecosystem; and 3) typically not much integrated in the vertical dimension (but possibly in the horizontal dimension).
To get an analytical grip on these firms, Jens Schmidt and I argue that we need to move beyond the typical starting point of much of the economics and management literature: transactional problems within a firm-firm dyad in a value chain to determine optimal vertical scope. Instead, we need to adopt the perspective of marketing of the customer as an indispensable “arbiter of value.” Inputs are “complementary” when combining them meaning that a focal value proposition can be realised. However, often there is an “interface problem”, because the mere availability of two complementary inputs may be insufficient for attaining the level of performance or functionality customers desire. The problem can be solved by means of standards or “design rules,” which has been the focus of most of the research literature. However, when customer preferences and inputs change, standards may not be sufficient to deal with the interface problem. Rather, specialised “integration capabilities” may be required to deal with such “standards failures.”
Based on this latter idea, we identify three ideal types of firms that specialise in handling different aspects of the interface problem. In other words, they create value by specialising in solving interface problems in a particular way.
- Value-chain integrators, for example, in car and aeroplane manufacturing, focus on integration capabilities that maintain the integrity of a given solution to an interface problem by buffering against changes arising from new technologies.
- Value-shop integrators, for example, in the bicycles and personal computer industries, emphasise integration capabilities that effectively deal with situations in which demand heterogeneity requires customisation and adaptation at the level of the interface problem.
- Value-network integrators, for example, in consumer electronics and smartphones, employ proprietary standards in situations where heterogeneous demand is best addressed by enabling mixing and matching heterogeneous inputs.
Our arguments imply that integrator firms will often be large, not only because solutions to the interface problem encompass a large fixed-cost component, but also because there are increasing returns to expanding the market. Industries in which interface problems are prevalent may thus exhibit high levels of concentration, depending on the type of integrator, the nature of environmental change, and heterogeneity in inputs and demand. On the other hand, integrator firms may be less vertically integrated into particular inputs than the traditional industrial firm, giving rise to firms with a broad scope of integration but a narrow vertical scope.
In sum, the purpose of the research I summarised in my Distinguished Speaker talk is to build a conceptual apparatus for understanding a function, namely the integration for specific customers of different inputs in a dynamic ecosystem system context, that we have for long neglected or only analysed in connection with the big “platform” firms in tech. Platform integrators are manifest in many other industries—and is arguably the new way in which the “visible hand” of hierarchy and managerial authority is manifest in a modern economy.
The Leeds University Business School Distinguished Speaker Series invites internationally-recognised speakers to visit the University to talk about specific pieces of research or a topic of research in which they are working. The aim of the series is for academic researchers within the Business School and more widely within the University to hear about specific disciplinary expertise and to join discussion and debate on relevant and innovative research.
You may also be interested in:
- Professor Nicolai J Foss’ Google Scholar page
- Finding out more about The Centre for Technology Innovation and Engagement
- Attending future research events at the Business School