Deverticalisation corresponded with a lot of economic & political changes. The thrust was financial rather than strategic? Govt spending under Reagan (the tax cuts) effectively saw hoarding of business savings rather than R&D spend. This was a fundamental economic shift accompanied by the primacy of shareholder value. The most important aspect of SV was (supposedly) to resolve the principal agent problem of manager led companies by distributing cash to owners to invest as they saw fit. Companies that wanted to maintain R&D & verticalisation (I disagree with the characterisation of labs in modern companies btw) then became prey to junk bond / private equity merchants. While I like this piece, I feel it misrepresents the drivers of change. These decisions were not about competitive advantage or innovation. They were about a switch to speculation driven rather than fundamentals driven capitalism. Once executive pay was tied to stock price, the deal was done. Verticalisation nowadays is again non strategic but political. It remains to be seen where it leads but as demand has dried up in the West, it is hard to see how product innovation will offer competitive advantage in markets selling to over-leveraged, under-waged Americans. You are right to identify the shifts but presenting this is as purely ‘rational’ / strategic market driven behaviour feels unhelpful. The shift was away from fundamentals driven capitalism (lab, product, process, customer) to financialisation (offshoring, market power, de-skilling, stock market).
Thanks for this comment, useful to situate firm strategies in the broader historical context. For this piece, I didn't mean to imply that innovation/competitive advantage was the sole (or even primary) driver for how firms structures changed, but simply that firm structure has an effect innovation outcomes. As to the driving cause for the shift to de-verticalize, I think you're absolutely right- especially in the U.S. context, the shift from capitalist fundamentals to financial speculation was a political project from the 1980/Reagan era. I wrote about this transition from Fordism to shareholder primacy/fragmented firms in this piece (https://www.valueadded.tech/p/from-fordism-to-the-platform-economy/comments) which i think captures some of what you're saying.
Well, I owe you an apology because you beautifully capture all these impacts in the other piece. I mistakenly read this essay as rather a bloodless, hands off treatment that was avoiding the elephant in the room. By the way, Matthew Klein (trade economist) has a chart in one of his recent Substacks that I find mesmerising. It shows net lending/borrowing by sector (household/business/govt) from 1960 to present. The flip between the paradigms just jumps out. You can pretty much see where businesses stop investing & the Govt takes over with the inevitable drop in household savings & current account balance. If I find it, I’ll link. Anyway thanks for polite reply to my comment.
Deverticalisation corresponded with a lot of economic & political changes. The thrust was financial rather than strategic? Govt spending under Reagan (the tax cuts) effectively saw hoarding of business savings rather than R&D spend. This was a fundamental economic shift accompanied by the primacy of shareholder value. The most important aspect of SV was (supposedly) to resolve the principal agent problem of manager led companies by distributing cash to owners to invest as they saw fit. Companies that wanted to maintain R&D & verticalisation (I disagree with the characterisation of labs in modern companies btw) then became prey to junk bond / private equity merchants. While I like this piece, I feel it misrepresents the drivers of change. These decisions were not about competitive advantage or innovation. They were about a switch to speculation driven rather than fundamentals driven capitalism. Once executive pay was tied to stock price, the deal was done. Verticalisation nowadays is again non strategic but political. It remains to be seen where it leads but as demand has dried up in the West, it is hard to see how product innovation will offer competitive advantage in markets selling to over-leveraged, under-waged Americans. You are right to identify the shifts but presenting this is as purely ‘rational’ / strategic market driven behaviour feels unhelpful. The shift was away from fundamentals driven capitalism (lab, product, process, customer) to financialisation (offshoring, market power, de-skilling, stock market).
Thanks for this comment, useful to situate firm strategies in the broader historical context. For this piece, I didn't mean to imply that innovation/competitive advantage was the sole (or even primary) driver for how firms structures changed, but simply that firm structure has an effect innovation outcomes. As to the driving cause for the shift to de-verticalize, I think you're absolutely right- especially in the U.S. context, the shift from capitalist fundamentals to financial speculation was a political project from the 1980/Reagan era. I wrote about this transition from Fordism to shareholder primacy/fragmented firms in this piece (https://www.valueadded.tech/p/from-fordism-to-the-platform-economy/comments) which i think captures some of what you're saying.
Well, I owe you an apology because you beautifully capture all these impacts in the other piece. I mistakenly read this essay as rather a bloodless, hands off treatment that was avoiding the elephant in the room. By the way, Matthew Klein (trade economist) has a chart in one of his recent Substacks that I find mesmerising. It shows net lending/borrowing by sector (household/business/govt) from 1960 to present. The flip between the paradigms just jumps out. You can pretty much see where businesses stop investing & the Govt takes over with the inevitable drop in household savings & current account balance. If I find it, I’ll link. Anyway thanks for polite reply to my comment.