A man walks past a painted Google sign in the reception area of the Google Inc. office in Washington, D.C.Andrew Harrer/Bloomberg
KARL MOORE – This is Karl Moore of the Desautels Faculty of Management at McGill University with Talking Management for The Globe and Mail. Today I am delighted to speak to Michael Jacobites from the London Business School.
Michael, tell us about value migration.
MICHAEL JACOBITES – Value migration is part of what I have been looking at recently, and there is a couple of interesting questions. First of all, if you think about where value is created and captured it is much less in a sector but it is in an ecosystem. How it is that firms like Google and like Apple are trying to capture value not only from their own segment but from their sector as a whole? We are starting to get a crack at understanding some of the tactics that explain who keeps the value, when, how and why.
KARL MOORE – What are some of those tactics?
MICHAEL JACOBIDES – First of all, it is important to understand what the setting looks like. What we have done is to think about places where value does migrate – places like the computer sector where we all know that value flowed from the OEM's [original equiment manufacturers], the big integrated firms like the IBM's, to the specialized people and other parts of the value chain like Microsoft and Intel, and say not only how is it that you can create the bottle necks, how is it that firms strategically manage the architecture of the sector, but how that differs from settings where by the OEM's, the big guys, were able to still maintain the industry under their control.
What is really an interesting study is this recent work that I have done that looks at the way that the automobile manufactures, perhaps the most difficult industry, still were able to keep most of the value in this very difficult sector.
KARL MOORE – So Michael, how did the auto manufacturers manage to do this?
MICHAEL JACOBIDES – Well, partly they were lucky, and here is where the research starts getting really interesting. The first thing that we see, and we see that in automobiles, but I think it happens in many other sectors of the economy, is that the incumbents don't conform to this image that we have of the flat-footed giants. See, quite often, we think about the incumbents as these slow to respond, slow to innovate, slow to move companies that do not understand where the sector is going. It is a very different story when you start looking at what is going on and when you look at the automobile sector you understand that the big trends, the trends toward modularization and vertical disintegration were things that were driven by the OEM's. If you think about Delphi and Visteon, these were born out of the bowels of the integrated firms that said, "Hey guys, there's a new way we should structure the sector."
So the first lesson is that in many sectors the incumbents are the ones that are reshaping it. The second, and that is where it gets more interesting, they quite often get it wrong and they waste shareholder value and the possibility of making more money. That is part of the story, part of the story is that they drive that change.
The second part of that story is that they were lucky when they understood that it didn't make sense to come back. Think about what happened with BIT guys – Chrysler, Fiat – they started thinking that they will focus on narrow slivers of the value chain and they will control it. Well, they understood that is not going to work but they then had the luxury of being able to call the shots and change the structure of the sector again to something that made more sense to them.