Pioneer or Follower

Posted on 1st November 20161st July 2018 by designcontext | No Comments

When looking at a regional strategy for revalue, a reflection on chronological development maybe helpful.

Starting with this question: What’s the difference between a pioneer or a follower, when looking at development strategies for ‘revalue’?

Firstly, this question needs to be broken into (A) the micro-economic view - the view of the firm and its’ value chain, and (B) the macro-economic view - the view of the region, including its’ soft and hard infrastructure and institutions.

A) Looking at a pioneer company, economical historian David S. Landes (2003), suggests that a pioneer company carries the highest economic burden, in two ways:

“…a pioneer in any field incurs additional expense owing to ignorance and inexperience; and in theory those who follow may profit by his mistakes.” [1]

This is also known as the ‘economics of backwardness’, and focuses on the costs of breaking the new path. However, Landes follows with an important tranquilliser for the followers:

“Yet this assumes on the part of the imitators a wisdom that historical experience belies. If the pioneer often sins on the side of excessive modesty, the follower often suffers from excessive ambition; if the one does not quite know where he is going, the other knows too well and undoes himself by his eagerness. There is such a thing… as machines that are too big, engines too powerful, plants that are too capital-intensive.” [1]

Landes, however, goes on to suggest that this reason for the higher economic burden carried by the pioneer is over-cited, and is a lesser factor when compared to the second, which is the adjustments to subsequent changes - known as ‘related costs.’

“…the burdens imposed by interrelatedness, that is, the technical linkage between the component parts of the industrial plant of an enterprise or economy.” [1]

No machine in a factory rests in a vacuum: “…the engine, the machine it drives, and the means by which it transmits power are all built to fit.” [1]

And so, it is rare that the upgrading, removal or addition for example, of machines or processes can be considered in isolation. Changes to machines can also often be influenced (or obliged) by outside actors (i.e., clients, supply chain partners, regulators).

This issue of interrelatedness goes beyond the walls of the factory, and this is even more true when talking about process changes along value chains. An example was Britain in the mid-to-late nineteenth century, who's pioneering steel factories were hemmed into cities that were not designed for them. Integrating backwards, which often requires more space, was not an option, and this prevented many innovations that proceeded from ‘follower’ countries, that had the advantage of foresight to develop in areas with more space.

“The very sight of the spacious arrangements of the Homestead plant in the United States made Windsor Richard wish he ‘could pull down the whole works at Bolckow’s and start afresh.'” [1]

And so, taking in mind that the development gap between the pioneer and the follow must not be too large, then at the micro-economic level the advantage may lie with the latecomer.

B) Looking at the issue from the view of the region - the macro-economy, the answer is not the same: the greatest cost of developing the new industrial activities, from the macro-economical perspective, falls heaviest on the region that is following.

Why is this? Well, large scale mechanised manufacturing and assembling requires not only the value chain shown in the map above (the central column), but it also requires the hard and soft infrastructure and institutions. In terms of revalue, this includes legislations, norms, financial services, transport systems, education and training facilities, R&D labs, access to technology (see the section on hard and soft infrastructure for more details)….

These are all costly, can take a lot of time to develop/build, investments are not regular, and all go beyond the financial capabilities of any one company, and so the burden here is clearly on the regional government. If the following nation is too far behind the pioneer country in question, it can mean that the leap might be too great:

“The much vaunted freedom of the latecomer to choose the latest and best equipment on the basis of the most advanced techniques has become a myth.” (Landes, 2003)

Countries like Sweden, Germany, Scotland and the UK as a whole, as an European example, are all nations that are (or are in the process of) maximising their soft and hard infrastructural and institutional assets to maximise the opportunities for firms at the micro-economic level. All are developing their own strategy, which is based on their own specific hard/soft infrastructural and institutional context - which is already in place.

Conclusion for the Follower

As a follower, the strategy at the micro-economic level maybe to look at ‘revalue’ as a ‘Portfolio of potential Strategies,’ and ‘Business Models’ and develop the most appropriate for the firm (or group of firms) - learning (as much as is possible) from the successes and failures of the many different types of pioneers - whilst not forgetting that context is key, as revalue activities can not be ‘cut-and-paste’ from one company or region to another.

At the same time, as a follower at the macro-economic level, institutions should help to develop a ‘healthier’ context for those companies managing or wanting to develop revalue activities in their region. As mentioned above, this is potentially very expensive, and so a strategy should maximise the the use of existing resources (institutions and infrastructure) where appropriate. And in an ideal situation, develop a road map, similar to the ‘Big Push Theory,’ where policies are selective - targeted to maximise backward and forward linkages along the supply and value chains. The state can also implement complementary indicative investment planning, where the government clearly communicates where it is willing to invest, this then can also encourages private investors to enter directly, and indirectly into complimentary areas, and then firms have the choice to transition their activities towards the government goal, and benefit from these credit and/or subsidy opportunities. The government, with its unique view across the entire state, can also help:

“[identify] the interdependence of investment decisions and sequencing the investments... the state can ensure that risk is reduced as a barrier to investment and that increasing returns are exploited." [2]

Private and State-owned Enterprises

Posted on 8th August 201626th June 2018 by designcontext | No Comments

After the Second World War, many European governments transformed particular enterprises into state-owned enterprises (SOEs) or created new ones (with complete or partial ownership), making them, by far, the largest single employer in the domestic economy. These state-owned enterprises make up a large part of the modern-day hard and soft infrastructure, and are often formed where there are natural monopolies, or where the enterprises are politically sensitive or strategic.

Natural resource extraction, energy production and/or distribution, transport networks, the military, broadcasting, and healthcare are just some of the typical examples of SOEs within infrastructure. These government activities also extend, in some cases, into the value chain, with full or partial state ownership of strategic industries - such as automobile companies ('Integrated Firms' or 'Lead Firms'), and steel works (‘Chemical & Material Suppliers'): - Strategic in the sense that the goods and technologies produced from these sectors can bring many accumulative benefits across industry as a whole, and/or potential payback may be too long or too risky for the private sector to take the initiative for instance.

In other cases, government often bears financial responsibility in some enterprises that are classed as 'public goods' (i.e., lighthouses, flood defences, bridges, roads, and emergency services); in-which the usage/access can not be restricted just to those people who have paid for it (i.e., blocking the light from the lighthouse for those who didn't pay and contribute to its construction and running costs), and so for a private enterprise, it can be difficult to finance. Here, government's normally tax (socialise the cost to) all users (generally everyone in the economy), and use the income to provide the service or pay someone else to provide it.

Transport or communications SOEs and public good SOEs, in particular (i.e., roads, high-speed Internet...), can both increase productivity of industry, increase public services, and create jobs during construction and through their management. Except for the majority of public goods, these enterprises, briefly mentioned above, can be state-owned or run privately; it is really a political choice; hence the many difference stances taken by countries, states, political parties, academics and the public.

Production: A Vertical Splintering of Industry

Posted on 8th July 201626th June 2018 by designcontext | No Comments

Capital goods suppliers, such as the machining-tool industry, produce industrial equipment such as milling machines, grinders and lathes, that are bought by mass-manufacturing firms. It is the capital goods, combined with particular production technologies, such as interchangeable parts and the production-line system (as-well as organisational innovations) that have transformed production into mass-production. According to (Rosenberg, 1982) most of the technological innovation of the past two centuries have occurred within the capital goods industry.

As Adam Smith explains, in the Wealth of Nations, with his famous example of the pin factory, there has been a continuous, progressive division of labour during and since the industrial revolution. Division of labour is essentially, breaking-down the manufacturing process into its' component parts, and applying machinery (Capital Goods) - mechanisation, and logistical management, to assist in the productivity of each process.

Through the division of labour, there is another dynamic which occurs, which is specialisation. Specialisation increases, as a worker develops greater knowledge of their particular job, as they spend more time doing it. Today, specialisation has evolved from ‘learning by doing and using' within the factory, to also much of the higher-education and vocational training system external to industry; and so now a majority of people entering the workplace have a minimum of specific skills in specific disciplines, such as marketing, accounting, computer literacy, or production management for example.

It is exactly the development in the division of labour and specialisation that has been the underpinning for the development of the modern supply chain. As each process becomes more and more specialised, entrepreneurs have taken the opportunity to specialise in specific parts of an industrial process or good - making metal springs for example; that they can then offer as a product or service as an independent company, to different companies, across different industries, in the case of the metal spring. They can then increase their productivity through ever increasing specialisation and through the introduction of mass-production technologies, and combined with the dynamic returns-to-scale (as they have a larger potential market), these companies can now produce the specific part within the supply chain at a fraction of the cost that the original company could just for itself. This process has spread from intermediate components, to services such as accounting, and IT for example.

This process has been described as:

“…a vertical splintering of industry [leading to] each [sequential] layer produc[ing] an intermediate product which becomes an input to the next stage in the production process.” (Argyrous, 2011).

In essence, there are now a vast array and number of 'vertically specialised' companies that are positioned between the lead company and the raw materials. And it is this trade along the upstream supply chain that dominants international trade, and it is estimated that "about 50 percent of the value of international trade in goods and services is in intermediate rather than in final goods and services" (Milberg et al, 2013).

As manufacturing industries have increased in their 'vertically splintering' during the last 20 years or so, the types of firms and their scope of activity within the value chain has changed.

The 'original' mass-production firm was predominately an Integrated Firm. Now, often referred to as the old style of manufacturing (or even a 'dinosaur'), many of these firms went through a process of selling, spinning-off, or closing, some of their vertical activities (such as component manufacturing divisions and/or subsidiaries, and business services like IT for example), and then, contracting or subcontracting these from suppliers.

These Integrated Firms are then transformed into what is called a Lead Firm, which is described in a moment. Examples of Integrated Firms include “old” Ford Motor Company, “old” IBM Corporation, perhaps still Koninklijke Philips N.V, and (at least in 2011) a Chinese company like BYD Auto Co., Ltd for example, that manufacturers/ed nearly all its own components (Day, 2011). Tesla Energy’s ‘Gigafactory’, a battery factory (cell production estimated for commencement in 2017), is a modern-day example of an integrated firm both in a developed country and in the growing area of electric energy storage (linked to growth - and projected growth - in electric transport, mobile technologies, renewable energies). This latest example actual shows a potential reverse in the trend.

Mass-production firms go through (and in many case, continue to go through) this process, for a few reasons: perhaps the sourced good or service is cheaper and/or higher quality than they can make it themselves, or it is a way to free-up cash for investment it in other things. The way in which these contracted companies can make things cheaper, through specialisation, and economies-of-scale is briefly mentioned above, but this only focuses on the micro level. At the macro level, many of these contracted companies potentially also have access to cheaper input costs (access to a large skilled, or cheap low-skilled, labour force for example - as in China and India for example) and cheaper credit, through a difference in domestic laws and norms, and government policy (including, in some cases exchange rates). And this is, in part, made possible by the revolutions in the internet and digital communications, supporting the management of downstream supply chain logistics and the monitoring of inventory for instance; and a global financial system with global financial standards.

This mass-production 'group' of actors are now vertically integrated and specialised in the value chain. And the head of the downstream supply chain, like the Integrated Firm, is the Lead Firm. Also similar to Integrated Firms, Lead Firms also initiate the flow of resources and information through the value chain with the direction of production, and marketing of final goods. They differ, however, from Integrated Firms in that they focus on their ‘core competences’ and 'high value added functions', such as branding, marketing, finance, product strategy and definition, design, assembly of sourced components, and even sales (like Apple Inc. and Dell Inc. for example). And in some cases like Dell, these lead firms have become FABless - they do virtually no manufacturing or assembling themselves anymore.

Increasingly, over the last 10 years, many lead firms have consolidated this vast base of sourced intermediate good suppliers, with examples of lead firms reducing supplier numbers from a thousand to a few hundred (Harrison 2008). In this situation, the old suppliers (i.e. component manufacturers) often remain in the value chain, but now they are contracted via a new group of specialised firms called Turn-key Suppliers, examples include Dana, Delphi, Celestica, and Foxconn; huge companies, relatively unheard of by final consumers/users. And these Suppliers are in some cases ‘single-source’ strategies, in the case of Foxconn, that are contracted by Apple Inc, to assembly it's iPhone. In this example, Foxconn manages all the logistics of the downstream supply chain for the iPhone (Milberg, 2013).

Below the Turn-Key Supplier in the map, are the intermediate goods manufacturers. Again, this often has some hierarchal structure, as component manufacturers have in many cases, also 'vertically splintered', and outsourced parts of the production process can be contracted somewhere else cheaper. And so this hierarchy often goes down, to the companies that are producing the simplest 'widget', at the cheapest possible price. Important to note that the bottom of this hierarchy is, unsurprisingly, predominantly manufacturers in developing countries.

Raw Materials – where do they come from?

Posted on 9th January 201626th June 2018 by designcontext | No Comments

The material outputs from mining activities are not only inputs for the manufacturing value chain, but are also inputs for hard infrastructure and modern agriculture. And like modern Agriculture, both are also enabled by hard infrastructure, making them very much inter-dependent actors within the economy’s technical foundation. Raw materials are the critical inputs to the value chain: without raw material inputs coming from mining and from AFFF - Agriculture, Forestry, Fishing and Foraging (and in some cases coming via hard infrastructure), modern manufacturing industry grinds to a halt.

Today, industrialised countries increasingly depend on raw materials from countries with high natural (both abiotic and biotic) endowments (U.S, Australia, Argentina, Brazil, African Countries, and Russia for example). According to (Bairoch 1993) in:

“...1973 30% of the commercial energy used by the Western developed countries came from the Third World; for Western Europe this share was as high as 58%”… and …“[i]n the case of some metals the developed Western countries obtained as much as 90% of their supplies from Third World countries.”

Contrary to common opinion, however, this is actually a relatively modern phenomenon. Again according to Bairoch, the developed countries were almost self-sufficient (collectively) in energy, as late as the period after WWII. In 1913, the UK was a net exporter of coal - “6% of world production” (Bairoch, 1993), and it was only after the changes in the Middle East, following WWII, that consumption patterns in energy really shifted. Bairoch also argues that this was a very similar story for all major minerals, except perhaps for textile fibres, though dependency was limited.

The Mining Industry (mainly for metals) consists of three main activities: Mine Production, Smelter Production and Refinery Production. And as with the rest of the supply chain, Mining Industry activities also have a form of hierarchy:

“While mining has moved from developed to emerging economies, smelter and refinery production remains located mainly in developed countries, although this balance has already started to change with the quick growth of Chinese production of refined copper and aluminium.” (ICM October 2012)

In Lester Browns book ‘Plan B 4.0’ (Brown, 2009), he highlights this vastly increased dependence on other countries natural resources, and the changing forms of fixing imports. One of the most extreme being the more affluent countries buying or long-term leasing of large Land Areas in other countries. Examples include Libya:

“After more than a year of negotiations it [Libya] reached an agreement to farm 100,000 hectares (250,000 acres) of land in the Ukraine to grow wheat for its own people. Another example is China firm ZTE International that has secured the rights to 2.8 million hectares… in the Democratic Republic of the Congo on which to produce palm oil…” (Brown, 2009)

...which was used for cooking or biodiesel fuel. Other countries that are also following this strategy are Saudi Arabia, South Korea, Kuwait, India, Egypt, Jordan, the United Arab Emirates and Qatar.

Production Inputs: Two main groups

Posted on 26th November 201527th June 2018 by designcontext | No Comments

A) Factors of Production

The first form of inputs, the ‘left leg’ in the main linear value chains map, are the Factors of Production:

Land Space
Entrepreneurship & Management
Specialised Labour
Capital Goods & Technology

These inputs are not consumed within the direct process of manufacturing and delivery of the final good. All businesses need all four of these factors of production to create and run a business to provide products and services. It is often asked "where is 'money' - isn't that a minimum factor for a business?" The answer is no: Money is a means of facilitating trade, it is not in itself a productive resource (like all the rest) - you can't use money to hammer in a nail for example; and it is possible to produce services and products without money (i.e., in the commons), but it is not possible without these four factors of production. See more about this in the blue bar to the upper right entitled 'Factors of Production’ (linear value chains).

Every company and start-up has to be able to bring these four fundamental elements together to deliver a product or service to it’s customers. And just as start-ups often focus on the minimum viable product, that they can get to the market to start making revenues, here the factors of production also highlights a company’s need to also manage a minimum viable space, minimum viable entrepreneur, minimum viable team and or labour, and minimum viable technology (which can also include a process or ‘recipe’).

B) Supply Chain

The second form of inputs, the 'right leg’ in the main linear value chain map, is the Supply Chain, which consists of two main subgroups, Raw Materials and Intermediate Goods:

Raw Materials (shown as the green icon):

Biotic Materials (organic, or living/once living)
Abiotic Materials (minerals and gases)
Air
Water

Intermediate Goods (the three black icons):

Energy
Transformed Materials
Components

These inputs are consumed during the production and delivery of the final product. This 'leg' is an organised network of contracted, and sub-contracted suppliers (B-to-B companies).

Answer to question at the top of this section: The Land Space is the kitchen, and more specifically can be the kitchen work-surface area; the Entrepreneur & Management and the Specialised Labour can be both of the people - unless one of them is the boss (a professional environment or a teacher for instance); the Capital Goods & Technology is the frying pan, the oven, the cooking hob, knives… and the recipe; the Raw Materials includes the vegetables (biotic), the salt (abiotic), air to breath and to take away odours and steam, and water for boiling, washing, and drinking; the Intermediate Goods are the electricity or gas used to power the cooking and lighting equipment for instance (Energy), the wine (Transformed Materials), and the Components are not so obvious in the photo, but this could include a pasta sauce for instance.