The Corporate World in Retreat
European Straits #61
Dear all,
One of the major changes of our time is how the corporation has moved from the center to the periphery of the economy. We’re leaving a world in which the large corporation was the epicenter of our lives. We’re entering one in which more and more shots will be called by an even stronger party: the multitude—another name for the aggregation of networked individuals.
Why were corporations so central until recently? Venkatesh Rao has an interesting take: “In the 1780s, only a small fraction of humanity was employed by corporations, but corporations were shaping the destinies of empires. In the centuries that followed the crash of 1772, the power of the corporation was curtailed significantly, but in terms of sheer reach, they continued to grow, until by around 1980, a significant fraction of humanity was effectively being governed by corporations.”
The reach of the corporate world kept increasing during most of the age of the automobile and mass production. The corporation proved a superior form of organization when it came to delivering certain outcomes. It was more efficient and more effective—so effective, in fact, that the state started to use the corporation as a proxy for implementing the : social insurance was mostly provided through employers; most of labor law was effectively bargained for at the company level; consumer finance relied on corporations providing steady, salaried jobs.
An entire discipline, corporate strategy, was developed to help corporations consolidate their position in the economy. It helped them expand their reach and scale up without becoming overweight. Most people assume that the corporation’s edge is derived from simply being bigger: the bigger the size, the more value it can create and capture. But since we’re so amazed by size, we tend to overlook the fact that scaling up demands difficult trade-offs. In practice, a corporation can grow in size only if it offloads some weight by outsourcing certain assets, functions, and risks to other businesses.
Indeed we’re way past the time when large corporations were vertically integrated. The Standard Oil Co. was probably the last large corporation that was present all along its industry’s value chain, from upstream (extracting crude oil from its vast fields in Ohio) all the way to downstream (selling gas to consumers). Rockefeller’s empire was a precedent suggesting that a large corporation could successfully address large consumer markets while operating each line of business in the industry.
Following the Standard Oil example, Henry Ford designed the Ford Motor Company to be just as integrated, with the assembly lines at the core and the company selling directly to consumers through department stores, mail order, or sales representatives. But then General Motors, Ford’s nemesis, broke with that model. As discovered by its CEO Alfred P. Sloan, it only needed to control a few strong links in the value chain to impose conditions on third parties operating the other links. Owning certain strategic assets, the “one ring to rule them all”, was more than enough for GM to dominate the car industry.
Corporate strategy grew more sophisticated during the following decades, helping corporations such as GM make the many trade-offs that would allow them to scale even more. Following Bruce Henderson’s “Experience Curve” and “Growth/Share Matrix”, corporations started to divest non-core businesses. Then came the time of Michael Porter’s “Strategic Positioning”, with which large firms realized that focusing on one line of business made it very difficult to achieve a competitive advantage.
And so, as a compromise, it became common practice for those firms to pick two or three links in their value chain while leaving the rest to others. Car manufacturers had the assembly lines and the brands that they marketed to the public; the rest (manufacturing parts, selling cars) could be abandoned to weaker links submitted to their willpower. Likewise, McDonald’s had the trademark and, famously, the real estate, while most other assets, functions, and risks were carried out by its franchisees.
Now, the idea that corporations are in retreat may sound odd in a world so obviously dominated by large tech companies. And it's true that the story of the corporate world is still all about scaling up—at least in terms of market capitalization and number of customers served. But something has changed since we left the age of the automobile and mass production and entered the Entrepreneurial Age. With computing and networks, the strategic trade-off of the day is that corporations offload more assets, functions, and risks not to other businesses, but to us—the users.
This leads to major changes. With technology, individuals are not scattered, non-coordinating agents. They’re connected with one another and form the multitude—a networked organization whose exponential power eventually exceeds that of most corporations, however large and tech-savvy. A recent example is how the #DeleteUber hashtag initiated the takedown of Uber’s Travis Kalanick.
That’s because we individuals in our guise as users are more than consumers. As we provide data, capital, and labor to be reintroduced into the supply chain, we’re also an essential resource that large firms need to count on. And so we now have a grip over corporations because we control two points of their value chain: as consumers at the bottom, and as suppliers somewhere at the top. With those two points of support, we individuals within the multitude can begin to apply Porter’s strategic positioning. And this radically changes the balance of power between corporations and individuals, with the former retreating to the periphery while the latter take center stage in value creation.
Conclusions as regards social policy will be drawn in my upcoming book. In the past, the Great Safety Net was built for and around the corporate world. But now that this world is in retreat (even as corporations scale up), today’s has to be arranged around the new central figure of our economy: the networked individual. Here are two graphs explaining the shift from great to greater.
A few articles:
Competition and Business Strategy in Historical Perspective (Pankaj Ghemawat, Spring 2002)
Seven Chapters of Strategic Wisdom (Walter Kiechel, February 2010)
A Brief History of the Corporation: 1600 to 2100 (Venkatesh Rao, June 2011)
The economics of the multitude (Henri Verdier and me, June 2012)
We need a new language for the collaborative age (Nilofer Merchant, March 2013)
The Five Stages of Denial (me, May 2016)
Borges’ Map: Navigating a World of Digital Disruption (Philip Evans and Patrick Forth, June 2015)
Uber Just Put Every Tech Company in Danger (my colleague Kyle Hall, February 2017)
Warm regards (from London, UK),
Nicolas