Hi Geoff,
Very interesting concept, but one that makes a lot of sense. Remember the craze for conglomerates in the 60's? I suppose the argument for them was that it afforded investors a kind of built-in mutual fund. But an investor could accomplish the same thing by buying a basket of stocks, but that basket could have several advantages over the conglomerate: each company could be more focused, and the acquisition price would be much lower.
It seems to me that vertical disintegration offers certain advantages as well. Primary among them is that it allows a much greater focus, and avoids a common problem with vertically integrated companies: transfer prices. The article points to noncompetitive high pricing at companies like IBM, but a more typical case might be setting unreasonably low costs, which was the case for traditional manufacturing businesses. The amorphous nature of cost accounting allows wide latitude in transfer prices, so when comparing internal costs to the cost of buying a component from an outside vendor, accountants would tend to underestimate internal costs as a result of their natural bias.
Regardless of how costs are shifted, vertical disintegration fosters a focus on market pricing and costs.
This is one of the great strengths of Dell, although many bears mistakenly cite this as a weakness.
TTFN
CTC |
