The theory underlying this was not developed until after the second world war, by Ronald Coase, an Anglo-American economist, who argued that bringing together activities into one company lowers “transactional costs”, and especially the cost of communications (for which theory he received the 1991 Nobel prize in economics). But the concept itself was discovered and put into practice 70 or 80 years earlier by John D. Rockefeller. He saw that to put exploration, production, transport, refining and selling into one corporate structure resulted in the most efficient and lowest-cost petroleum operation. On this insight he built the Standard Oil Trust, probably the most profitable large enterprise in business history. The concept was carried to an extreme by Henry Ford in the early 1920s. The Ford Motor Company not only produced all parts of the automobile and assembled it, but it also made its own steel, its own glass and its own tyres. It owned the plantations in the Amazon that grew the rubber trees, owned and ran the railroad that carried supplies to the plant and carried the finished cars from it, and planned eventually to sell and service Ford cars too (though it never did).
• Suppliers and especially manufacturers have market power because they have information about a product or a service that the customer does not and cannot have, and does not need if he can trust the brand. This explains the profitability of brands.
• To any one particular technology pertains one and only one industry, and conversely, to any one particular industry pertains one and only one technology. This means that all technology needed to make steel is peculiar to the steel industry; and conversely, that whatever technology is being used to make steel comes out of the steel industry itself. The same applies to the paper industry, to agriculture or to banking and commerce.
On this assumption were founded the industrial research labs, beginning with Siemens’s, started in Germany in 1869, and ending with IBM’s, the last of the great traditional labs, founded in America in 1952. Each of them concentrated on the technology needed for a single industry, and each assumed that its discoveries would be applied only in that industry.
Everything in Its Place
Similarly, everybody took it for granted that every product or service had a specific application, and that for every application there was a specific product or material. So beer and milk were sold only in glass bottles; car bodies were made only from steel; working capital for a business was supplied by a commercial bank through a commercial loan; and so on. Competition therefore took place mainly within an industry. By and large, it was obvious what the business of a given company was and what its markets were.
Every one of these assumptions remained valid for a whole century, but from 1970 onwards every one of them has been turned upside down. The list now reads as follows: