From Gary Fields, Territories
of Profit: Communications, Capitalist Development and Innovation at G.F. Swift
and Dell Computer, copyright (c) by
the Board of Trustees of the Leland Stanford Jr. University, forthcoming from
Stanford University Press. All rights
reserved. No reproduction, copy or transmission of this material may be
made without written permission from the publisher, www.sup.org.
Chapter 1
COMMUNICATIONS AND INNOVATION,
BUSINESS ORGANIZATION AND TERRITORY
Economies and technologies are historical creations. The way human beings organize their economic activity, and the technologies available to them for producing, buying, and selling, emerge from historically constructed settings and evolve in conjunction with the historical process. This study tells a comparative story of economic development and technological change that takes place during two historical periods. One period encompasses the early years of the mass production economy in the late nineteenth century. The other focuses on the formative years of the Internet economy at the end of the twentieth century. Two business firms, one from each period, are the central protagonists in this comparison. These two firms reveal parallel stories of innovation and economic transformation with a set of common narrative themes.
The narrative for these two stories
begins by tracing how business users of transport and communications systems
reorient their competitive strategies and operational routines as the
technology of these systems changes.
It goes on to describe how, as businesses alter their strategies and
routines and assume new capabilities, they transform the organizations through
which they compete and seek profit.
What this study compares are the business organizations that get created
as firms use new transport and communications technology to innovate their
competitive activity. At the
center of this comparison is a story of how transformations in business
organization are part of a general process of innovation within the firm, and
how these organizations, described as “innovative enterprises”
(Lazonick, 2002), reshape the geographical territory of profit-making.[1]
The Comparison
This comparison of innovative business organizations is organized around a central research problem: How does technological change in systems of communications and transport enable business users of such systems to recast their profit-making activities, and innovate the organizations through which they produce, buy and sell, and how do such enterprises reshape the development of territory for economic activity? This problem, in turn, seeks to explain the relationship between four phenomena: 1) transport and communications technology; 2) innovation within the firm; 3) the organizational structure of the firm; 4) the geographical territory where the firm operates.
While in formal terms these elements are related as “independent” and “dependent” phenomena, they provide a far more compelling set of analytical threads for the comparison in this study when ordered as a sequence of questions: 1) How does technological change in systems of transport and communications transform opportunities for profit-making by firms? 2) How do changes in profit-making opportunities stemming from new transport and communications systems, enable business users of these systems to innovate their strategies and routines for producing, buying, and selling? 3) How do these innovations in strategies and routines result in the transformation of business organizations through which firms compete and make profit? and 4) How do these business organizations assume territorial characteristics in the way they organize business activity within and across geographical space?
In order to address the central research problem, and the analytical relationships from which this problem is built, this study examines two highly innovative business users of transport and communications systems as case studies. One case is historical and focuses on a user of the rail and telegraph system for producing, buying, and selling during the late nineteenth century. The other case is contemporary and examines a user of the Internet as an infrastructure for procurement, production, and distribution. The two firms in question are the G.F. Swift Company and Dell Computer Corp.
Swift
is the pioneering founder of the mass produced, fresh beef industry during the
late nineteenth century. Dell is
the contemporary developer of custom-built personal computers (PCs). These firms rank among the most
innovative organizations of their respective time periods. They ascended to this shared status,
however, by responding to different communications revolutions in a similar
way. Both companies used
technologies of communications revolutions to create high-volume production and
distribution organizations that redefined competitive practices for business
activity in their own time. These
organizations, in turn, were the basis for the economic exploitation of
extended geographical territories, namely the American market space in the case
of Swift, and the global marketplace in the case of Dell. In effect, both companies created
organizations for producing and marketing goods from new technologies of
transport and communications. In
changing how products were built and distributed, the organizations created by
these two companies redirected the routes by which goods traveled within and
between firms to final customers.
In the process, the innovative enterprises of Swift and Dell
reconfigured territories for the accumulation of profit.
The focus on these two firms, however, is far from a worshipful paean to individual entrepreneurial heroism. This study seeks to tell a more fundamental story about innovation and capitalist development. Within this broad frame, Swift and Dell reveal how business organizations are inherently geographical in the way they occupy territory as they coordinate their competitive activities, and how capitalist development, fueled by innovation and organizational change, is a territorial phenomenon (Walker, 1988: 385). In effect, the experiences of these two firms raise one of the most compelling issues in the study of economic development: how does geographical space for profit-making get (re)configured from the innovative activity of business firms. Swift and Dell are intended to uncover answers to this puzzle.
In addition to the focus on innovation and capitalist development, this study seeks to enter the conversation about issues of current economic relevance by engaging with the economies of both present and past. First and foremost, at a time when economic policymakers throughout the world elevate models of the market as the source of innovation, growth and prosperity, the experiences of Swift and Dell reveal certain important incompatibilities between innovative enterprise and markets in both contemporary and historical settings. As the examples of Swift and Dell make clear, innovative business organizations use power and administrative planning -- not the market -- as the mechanism for generating profit and increasing returns. Consequently, what is suggested from the cases of Swift and Dell is that policies seeking to enhance innovativeness through the creation of more open markets may very well be fatally misguided.
Secondly, this study seeks to clarify some of the mystery in which the contemporary phenomenon known as globalization is shrouded. While the phenomenon has its historically unique elements, the processes of contemporary economic globalization represented by the innovations of Dell, reveal striking symmetry with the continental economic empire building of the late nineteenth century represented by Swift. In this way, the comparison of Swift to Dell has special significance in providing a vantage for understanding the broader meaning of contemporary globalization, and outlining the paths along which the contemporary economy of globalization is being shaped.
Photos of Gustavus Swift and Michael Dell
Gustavus F. Swift ca. 1895
Photo courtesy of Chicago Historical Society
Michael Dell
Photo courtesy of Dell Computer Corporation
Admittedly,
the comparison in this study draws upon a compelling model. Ten years ago, Paul David, in a
provocative and beguiling essay, set up a comparison between the computer and
the electric motor of the late nineteenth century in an effort to explain the
so-called, “productivity paradox” of the 1980s and 1990s (David,
1991). In his piece, David
accounted for the anomaly in the productivity statistics beginning in the 1980s
when computers entered the workplace, by reference to a similar lag in productivity
growth following the introduction of electric dynamos in factories of the late
nineteenth century. By way of the
earlier example, he reasoned that a period of adjustment was necessary
following the introduction of new technology before productivity gains were
possible. David’s theory of
the productivity paradox derived from a specific type of comparative history
described as parallel comparison
(Skocpol and Somers, 1980). As one
of three comparative historical logics, parallel comparative history asserts a
fundamental similarity among cases based upon their conformity to underlying
theoretical propositions. In
employing this logic of similarity between cases, David’s comparison
emerged as a potent example of the use of history to explain contemporary
economic outcomes. By
casting technology and the economy of the late twentieth century into what he
described as “a not-too-distant mirror,” David found answers to
questions about technology in the present that would not have been discernible
from observations taken from the current period alone. In this study, the comparison of Swift
and Dell, the rail and telegraph system and the Internet, fresh beef and
custom-built PCs follows a similar logic and has a similar aim. It uses history to provide insight
about the economy around us.[2]
Findings at a Glance
When applied to the cases of Swift and Dell, this historically-oriented comparative approach to innovation and economic development reveals several critical findings.
Firstly, the two cases reveal communications
revolutions to be control revolutions that act as catalysts for process innovation.
The rail and telegraph revolution, and the Internet revolution enabled
Swift and Dell to elevate the role of distribution and logistics -- the
so-called sphere of circulation --
as sources of value-creation and competitive advantage. These process innovations, in turn, led
to the creation of innovative organizations designed to coordinate the movement
of materials, semi-finished and finished goods from suppliers, to producers, to
customers in new ways. Although
both firms succeeded in using new infrastructure systems to create new products
-- dressed beef shipped long-distance, and PCs configured through Internet
communication represented new commodities -- the process innovations of Swift
and Dell proved as formidable as new products in transforming the economies of
their respective eras. With this
emphasis on distribution and logistics, the organizations of Swift and Dell
reveal striking symmetry in attributes and aims. Dell uses the Internet to link customer order intake with
procurement, production, and delivery of PCs in creating an extremely
innovative “direct-pull,” “just-in-time” production and
distribution network. Swift, however,
succeeded in creating a similar organization from rail and telegraph
technology. It used telegraphy to
link order intake from retail butchers, with procurement of cattle supplies,
(dis)assembly, and final marketing in close to real time. This network of Swift anticipates by a
century Dell’s logistics-oriented, “closed loop” organization
that eliminates intermediaries between the producer and the customer.
Secondly,
research in this study on the logistics-oriented organizations created by Swift
and Dell challenges the belief that the mass production age created wealth from
goods while the Internet age creates wealth from information. Such partial truths ignore the ways in
which Swift and Dell, deploying technologies of communications revolutions,
developed organizations that relied both on the processing of enormous amounts
of real time information, and the manipulation of high-volume flows of
goods. Swift built its network not
only from its rail-transported fresh beef. It created an organization on the basis of telegraphic
information coordinating the movement of this product from its raw material
form as cattle at stockyards, to its finished form as edible beef at retail
butcher shops. Real-time
information exchange between the primary nodes in Swift’s network --
stockyards, slaughtering facilities, and branch distribution houses -- was
fundamental in shaping a process of procurement, production, and sale of fresh
beef that was modulated daily and even hourly in order to balance conditions of
supply and demand in the context of a highly-perishable product (Bureau of
Corporations, 1905: 21).
Information, in effect, proved as critical to Swift in capturing value
from its production and distribution activity as the product itself. Dell in turn, captures value from
its logistics-oriented activity not only by the Internet-based information it
maintains to link the primary nodes in its organization. It makes profit and distinguishes
itself from competitors by the way it links Web-generated information, to the
physical movement of supplies, semi-finished and finished commodities from
supplier factories, to supply logistics centers where components are staged for
assembly, to its own assembly sites.
While information is essential in coordinating these logistics,
executing the movement of physical materials through these organizational nodes
is as critical to Dell’s success as the Internet-generated information
system that underlies how the PCs in this network get assembled and delivered.
Thirdly,
the organizations of Swift and Dell reveal a similar geographical tendency to
spread and concentrate in a pattern characteristic of “industrial
districts.” From the rail
and telegraph system, Swift built a production and distribution organization
extending throughout the entire U.S. that obliterated the formerly localized
markets of beef production and consumption. As it widened routes of distribution across the
entire continent, the Company decentralized slaughtering away from its original
hub in Chicago and re-concentrated this activity in other locations in the
Midwest. The result was a new
system of meat packing ensembles located in the center of the country, serving
a vastly extended set of distribution routes that succeeded in articulating a
national market space. Dell is
building an organization on the basis of Internet technology with a similar
geographical configuration. It has
spread and decentralized PC assembly activity from its original hub in Austin
to locations around the world. At
the same time, it has created concentrations of assembly activity in selected
localities in an effort to build and sell products for the regions where
assembly sites are located. In the
process, Dell is playing a critical role in the development of high technology
industrial districts. In these
place-based concentrations of manufacturing organized by Swift and Dell, both
firms rely on critical relationships of spatial proximity between key nodes in
their networks – stockyards, disassembly facilities, and branch
distribution houses in the case of Swift, supplier factories, supply logistics
centers, and assembly facilities in the case of Dell. The two companies shape these relationships of proximity in
order to manage and control the movement of materials between these nodes, and
execute their direct-pull, real time systems of production and
distribution. In organizing these
relationships of proximity, both firms are acting as the agency in reshaping
territory for profit-making.
Nevertheless, this pattern of elongation and concentration created by
the two firms reveals a clear geographical difference. In the case of Swift, the elongation of
distribution routes and the decentralization of cattle disassembly created a
nationally based set of regionally concentrated production complexes. In the case of Dell, the spread and
decentralization of PC assembly has created a globally based set of regional
production ensembles.
Finally,
in comparing Swift and Dell, this study clears new ground in understanding
firms as business organizations and networks that deploy mechanisms of power,
coordination, and control.
In
the first place, this study seeks to qualify the idea that economic activity
and organizations in the current period are distinguished by the phenomenon of networking. While
such an observation seems incontrovertible, the idea that firms and economic
activity have recently evolved into networks is historically static. What, for example, is the
appropriate designation of the myriad intermediate forms of subcontracting and
trade relationships in existence prior to the current period and observed by
such theorists as G.B. Richardson (1972) and others. Indeed, if there is one fundamental insight revealed in the
history of economic life, it is that that the activities of producing, buying,
and selling have always occurred in networks (Braudel, 1977; 1979). Far more critical in assessing whether
or not the current period is one of networking, is identifying how firms and
individual economic actors in different historical periods organize the
linkages necessary to produce, buy and sell, and uncovering the attributes of
the networks -- local or global, interfirm or intrafirm -- deriving from such
activity. Business
organizations and the networks they embody, have distinct characteristics that
change over time. Furthermore,
networks are not something that replace the hierarchical power relations of
vertically-integrated organizations.
They reorganize relations of power.
[3] The
interfirm global networking phenomenon of the current period that seems to be
driving the idea of the current period as one of networking, is not new but is
simply networking in a new form.
The integrated, intrafirm organization of Swift is no less a network
than the dis-integrated and interfirm organization currently being created by
Dell.
Secondly,
what this comparison reveals most decisively is that while the two
organizations reflect differences in structure, the integrated network of
Swift, and the interfirm network of Dell share the same need for mechanisms of
administrative control to mitigate risk in coordinating adjacent steps of
procurement, production and distribution, and innovate the logistics of these
operations. In the case of Swift,
these control mechanisms, achieved through rail and telegraph technology, are
exercised within the boundaries of the firm through the ownership of assets,
that is, through vertical integration.
In the case of Dell, these mechanisms of control, achieved through
Internet communication, are exercised over other firms that lie outside the
organizational boundaries of Dell but within the network of the PC maker. Dell is compelled to use such control
in achieving what it calls virtual integration with its suppliers and logistic partners in order to
coordinate the high-speed information and material flows needed in managing the
logistics of its just-in-time procurement, production and distribution
system. These controls enable Dell
to interact with other firms in its network not through markets and the price
system. Instead, Dell enforces a
structure of controlled relationships upon its network partners -- and uses the
Internet as a tool to help facilitate this control. Consequently, this study takes issue with prevailing views
of interfirm production networks as the organizational embodiment of ascendant
market forces. In this study is an
alternative view of interfirm networks as organizations also dependent on
mechanisms of power, control, and administrative planning used by vertically
integrated firms such as Swift.
Far from a revolution in production that is reverting to market
coordination within interfirm networks, the experiences of Swift and Dell
emphasize how communications revolutions and their attributes of control, along
with the principle of corporate power, enable firms to create business
organizations with similar non-market mechanisms of administrative coordination
as part of the innovation process and the development of innovative
enterprise. Such similarities, in
turn, establish bridges between the late nineteenth and the late twentieth
centuries.
Theoretical Framework
Three distinct but
often-overlapping sets of literature provide the theoretical context for the
comparison in this study.
Innovation as History
The first set of literature,
traceable to the influence of Karl Marx (1847; 1848), employs a fundamentally
historical approach in examining the phenomenon of technological transformation
and innovation within the firm.[4]
Developed systematically in the work of Joseph Schumpeter (1942; 1947)
and elaborated more recently by theorists influenced by his notion of
“evolutionary” economic change, this literature seeks to uncover
the sources of innovation and its impacts on economic development within and
across historical periods (see chap. 2).
Within this framework, innovation is conceived more broadly than the
accumulation of discrete inventions and new technologies. Innovation is the deployment and
transformation of inventions into commercially viable products and
profit-making activities, and the diffusion of these new products and processes
throughout the economy (Freeman, 1991: 305). It involves what Schumpeter described as the “creative
response” of entrepreneurial firms, and the adaptive response of other
firms who, in trying to compete with innovators, imitate the original
innovation.
In
seeking to explain how this process of invention, innovation, and diffusion
occurs, theorists in this tradition focus on the influence of the profit-making
environment on the process of learning within the firm. This
process of learning to compete differently, and choosing how to implement a new
vision of profit-making, is what leads to the creation of new strategies,
products, routines, and business organizations. These activities of learning about new profit opportunities,
and selecting alternatives for capturing profit in new ways, transform patterns
of competition, and enable firms to create new trajectories of growth and
development in what is commonly termed, economic space.
This body of theory is used to position Swift and Dell as innovative firms.
The Firm As Business Organization and Network
The second set of literature examines how firms, as businesses organizations, coordinate their activity in networks. Theorists within this literature focus on two primary attributes of business organization. One group of theorists examines business enterprise as organizational linkages within and between firms that result from the choices made by firms on how to undertake and divide up the various activities in producing and selling a good or service (Coase, 1937; Williamson, 1975). These choices, in turn, stem from a search by firms for “competitive advantage” (Porter, 1985; Lazonick, 1991; Saxenian, 1994; Borrus et al., 2000). In this way, organizational linkages within and between firms reflect operational decisions on competing. Such linkages establish boundaries between firms and lie at the core of theories on business organization in terms of the degree to which firms internalize various economic activities and are integrated, or the degree to which firms transact with other firms across markets for these activities and are dis-integrated. Business organization, and the networks through which organization becomes operational, whether intrafirm reflecting integration, or interfirm reflecting dis-integration, are thus the outcome of how firms choose to compete in economic space.
A
second group within this tradition extends the idea of organization into the
realm of territory insisting that business organization is inseparable from
geographical organization (Walker, 1988: 385). Using insights from the first group, these theorists seek to
identify how business organizations reflect geographical linkages in the coordination of economic activity thereby
embedding the firm in territory.
This process occurs in the way firms organize the locations of their
assets, and coordinate the flows of activity, material and informational within
and between these assets, and between these assets and those of other firms in
their production and distribution networks. The pivotal concern in the work of these theorists is how
the territory through which business organizations operate, is constructed and
gets reconfigured. While the
starting point of this literature is the structure of the firm as a competitive
unit in economic space, theorists in this tradition also emphasize how forms of
business organization occupy a second analytical realm -- geographical
space. This body of theory is used to position Swift and Dell as
creators of business organizations with attributes that occupy an economic
realm of competition, and a spatial realm of territory.
Communications As Revolution
The final set of literature
focuses on a technological phenomenon pioneered as an historical concept by
Robert Albion, the phenomenon of the communications revolution (Albion, 1932; John, 1994). As
depicted in Albion’s work, this phenomenon represented a new historical
era of “speed” in moving information, goods and people across
space. Although Albion
acknowledged this role of speed as the prelude to the “Machine Age”
and “Big Business,” his work on the communications revolution
focused more on the independent emergence of this phenomenon (Albion, 1932:
718-719). Nevertheless, his
fundamental insight on the catalytic role of new transport and communications
systems as the precondition to transformation in economy and society
established an enduring legacy.
Echoes of his approach can be found in theorists ranging from Alfred
Chandler to Manuel Castells (John, 1994, 1997). This notion of the communications revolution as
“catalyst” is the foundation for the connections in this study
between the profit-making environment, the process of innovation in the firm
and organizational change, and territorial transformation. It is what ultimately links the
experiences of Swift and Dell.
The Argument
From a synthesis of these
literatures, this study seeks to explain how firms, in confronting revolutions
in transport and communications technology, reshape the development of
territory for profit-making. Four
key concepts provide the threads for this connection: 1) the communications
revolution; 2) innovation within the firm referring to the creation of new
products, the reorganization of routines to make new products, and the
exploitation of new markets for selling new products and carrying out new
routines; 3) the business organization of the firm consisting of the organizational and geographical linkages
created by the firm to coordinate innovative activity; and 4) territory referring to the geographical pattern of the
informational and material flows coordinated by the innovative business
organization to carry out innovative activity. In this argument, the communications revolution is
connected to territorial transformation through the process of innovation
within the firm, and the changes in business organizations made by firms as
they undertake innovative activity (represented schematically in Figure
I-1). In this study, however,
communications revolutions are not only a route to new products. Revolutions in communications provide a
pathway to innovation in the routes by which products circulate from their
origins as raw materials, through the process of fabrication, to their final
destination. Such innovations in
logistics shape the development of economies as decisively as the introduction
of new products. The reason is
that innovations in logistics merge with transformations in business
organization. What results from
the creation of innovative business organizations are new patterns of territorial
exploitation in the search by these enterprises for profit. It is in this role as catalysts for
innovation in logistics and business organization, that communications
revolutions have a defining impact
in transforming territories for profit-making.
Figure
I-1
From
Communications Revolution
To
Territorial Transformation
Theoretical Contours
From these outlines, the argument in this study begins from the concept of the firm framed roughly forty years ago by Edith Penrose. For Penrose, the firm is a profit-seeking repository of human and material resources bound within an administrative framework (Penrose, 1959). The ongoing mission of the firm is to grow by transforming its resources into new profit-making activities, that is, new products, new production processes, and new ways of exploiting the market environment to accumulate wealth. Competition and the profit system compel firms to grow and accumulate in order to survive. Growth occurs when firms compete differently after acquiring new knowledge about profit-making, and adding what they have learned to their base of resources. When firms learn to compete differently, they acquire new sets of capabilities. This enhancement of capabilities is what enables firms to provide the market with new goods and services created in fundamentally new ways, and to exploit new markets in which to undertake this activity. Acquisition of new capabilities changes the organization of the firm and provides the critical link in the process of learning about new profit opportunities, and competing differently. This process of organizational transformation is the complement to the creation of new products, processes, and markets. Consequently, the augmentation of organizational capabilities for producing, buying and selling in new ways is the source of growth in the firm. It represents an actual augmentation in the resource base of the firm, not simply an expansion in resources from a mobilization of more production factors. In this way, innovation based on learning, and organizational change are integral to the growth process lying at the foundation of capitalist development.
Firms are historically-conditioned institutional and organizational entities. They learn to make profit within historically-created environments that establish the basic parameters – technical, legal, political, and social -- for capital accumulation. In these environments, firms make strategic, operational, organizational and territorial choices for generating profit. These choices, in turn, are what create products, routines, business organizations and market structures. Although at any given point in time these environments establish the basic parameters for the competitive choices of firms, they are at the same time constantly evolving, and constantly creating new opportunities for organizational learning. Consequently, within historically constructed profit-making environments, the strategic, operational, organizational and territorial choices of firms are at all times open-ended and contingent. Learning in such environments, and the innovation resulting from the learning process, is an ongoing possibility.
Among
the most disruptive historical forces affecting the learning environment of
profit-making and competitive choice, and igniting the process of innovation
through learning, is the process of technological change in systems of
transport and communications, and deployment of such new systems. The railroad and telegraph
system, and the Internet represent different manifestations of this
phenomenon. While
acknowledging the distinct character of these two historical phenomena, this
study uncovers common attributes of the rail and telegraph and the Internet
revolutions in launching the comparison of the business organizations created
by Swift and Dell.
Two
distinct, though often overlapping groups of firms participate in the creation
of communications revolutions.
Spearheading
this phenomenon are builders of
transport and communications systems.
This group encompasses an array of actors including inventor
entrepreneurs, investors, and firms that undertake the actual build-out of
infrastructure. Invariably aided
by government, this group succeeds in constructing new transport and
communications systems that, in turn, create new systems of market access
across and within space. Such new
systems of access enable people, merchandise and information to circulate over
distance, and within distances of close proximity, in new ways. These new systems of circulation and
access, in turn, alter conditions for accumulation and profit-making, and in
the process beckon to a second more numerous group in the economy.
This
second group consists of business users of transport and communications systems. It is this group that completes a more widespread set of
transformations in the economy by deploying new infrastructure in their
organizations for producing, buying, and selling. As business users learn to deploy new infrastructure in
their business models, and exploit the new systems of access and circulation
created by such technologies, they innovate how they compete and make
profit. This activity of
innovation through learning, is marked most decisively by a process of
transformation in the strategy and structure of the business enterprise (Chandler, 1962). Swift and Dell represent two such users
that exploit the environment of profit-making opportunities created by
communications revolutions, and learn to create new standards for competing on
the basis of strategic vision and innovative organization.
Communications
revolutions change the profit-making environment for transport and
communications users by transforming one of the most fundamental elements in
the economic system -- the geographical structure of markets. Systems of transport and communications
influence the geographical configuration of markets in two ways.
In the first place, technologies of transport and
communications act to delimit market boundaries by influencing the costs to economic actors of
producing and trading across distance (Irwin and Kasarda, 1994: 342;
Christaller, 1933: 72). Markets
become fixed where “costs of transfer” -- the costs of moving goods
or securing information in a timely manner across space -- drive the prices of
goods and services beyond their original value (Ohlin, 1933: 100). Related to the issue of costs is the
issue of capabilities. Market
boundaries also emerge from the capabilities of available transport and
communications technology to overcome geographical barriers in moving materials
and disseminating information. The
size of markets is thus dependent on the costs to, and capacity of market
actors to produce and exchange goods and services over distance, and communicate
information needed to organize these activities (Du Boff, 1980: 478). Market boundaries, in effect,
correspond to territorial systems of economic access. These systems consist of an upper territorial range in which
individuals and firms are able to engage profitably in economic activity. This range becomes established in large
part by technologies of transport and communications. Secondly, in addition to delimiting market boundaries and
establishing systems of access to economic activity, technologies of transport
and communications influence the costs and routines of producing, buying and
selling within the boundaries of
markets between economic actors and activities located in close proximity. In this way, new technologies of
transport and communications (re)shape systems of market access across and within geographical space. [5]
What
is embedded most fundamentally in the geography of markets are relationships
between economic actors and economic activities structured around the elements
of time and space. As
communications revolutions shift the geography of markets, the profit
environment changes as a result of transformations in the time and space
relationships in economic activity.
In recalibrating the costs of moving goods and securing information over
distance and within areas of proximity, communications revolutions provide
firms with new ways to control time and space in economic activity. Breakthroughs in transport and
communications in effect, provide firms with new pathways to profit-making by
enabling them to secure the capabilities for controlling time and space
differently in their business operations.
Control over time and space is in all periods of capitalist development a centrally important strategic, operational, and organizational problem for the firm (Schoenberger, 1997: 12; Harvey, 1996: 240). Businesses are constantly engaged in reshaping their strategies, routines, and organizations in an effort to overcome the temporal and geographical barriers to accumulating profit. The new forms of control over time and space available to firms from communications revolutions create new opportunities for profit-making by redefining pathways for efficiency in the economy. As a result of breakthroughs in communications, and the resultant reconfiguration of markets and restructuring of time and space in economic activity, what is inefficient or even impossible as a business model for producing, buying, and selling at one point in time, is viable as a profit-making venture in another historical moment.
Communications
revolutions, in effect, are control revolutions (Beniger, 1986; Yates, 1989; Mulgan, 1990). They change the environment of profit
opportunities by reshaping markets, and providing firms in such reconfigured
territories with new routes to efficiency through greater levels of control
over space and time. What firms
gain from this newly achieved control in economic activity is twofold. They gain the capacity to accelerate
the turnover of goods. Secondly,
they gain the capacity to overcome the geographical constraints to disposing of
the increased levels of product deriving from the accelerated cycle times of
production and sale.
Communications revolutions, in effect, enable firms to recalibrate time
in the annihilation of space as they search for more profitable modes of
business activity (Harvey, 1996: 240-241).
Not all business firms are equally successful in learning about new profit opportunities in economic environments modified by new transport and communications systems. As communications revolutions reshape markets and enhance systems of control over space and time in business activity, only a small number of firms are able to grasp how to profit in new ways from the new economic environment. Such variation stems from the fact that the choices of strategies, routines and business organizations made by firms do not derive from so-called perfect information of the most profit-optimizing pathway available in the market as assumed in rational choice models of human action. The information available to firms for making choices about competing is at all times incomplete (Dosi, 1997: 1531; Lamoreaux et al., 1999: 6-8). Such incomplete and imperfect understanding of the market gives rise to heterogeneity in the choices firms make regarding strategies, routines, and structure. Variations even persist among firms confronting identical information and notions of profit opportunities (Dosi, 1997: 1531; Metcalfe, 1998: 35). While most businesses adapt to the innovations of others, a few firms succeed in making choices that result in what Schumpeter described as creative responses in economic history. Swift and Dell are two such firms.
Empirical Outlines
Communications revolutions
enabled Swift and Dell to develop process innovations as the basis for
profit-making. While they used new
transport and communications systems in conceiving new products --
mass-produced fresh beef in the case of Swift, mass-produced PCs individually
configured through Internet communication in the case of Dell -- the innovative
advance of both firms was the creation of organizations not only for producing,
but more importantly for distributing these products. These companies learned to use the technology of
communications revolutions in essentially becoming innovative logistics firms.
In
both cases, transformation into logistics-oriented enterprises was driven by a
strategic vision of profit opportunities existing in a more direct relationship to the final customer. Such a shift in outlook, in turn,
derived from an understanding, however initially vague, of the potential for
new communications systems to help forge this more direct route to the
customer, and the possibility of bypassing intermediaries entrenched in the two
industries. The direct systems of
marketing eventually created by both companies from this strategic vision were
their primary source of value-creation and accumulation of profit.
This direct route, however, posed
enormous logistical and organizational challenges for the two firms. In order to solve the problems of making
and marketing mass-produced fresh beef, and Internet-customized, mass-produced
PCs, and reaching the final customer in a more direct way, Swift and Dell had
to reinvent logistics systems for the entire circuit of procurement,
production, and distribution for these two products. This process of discovery occurred in both cases through
much experimentation, trial and error, and learning by doing in which
resolution of one problem invariably uncovered numerous other logistical
difficulties that both firms had to overcome in moving toward a final and
workable organizational design.[6]
The outcome of this learning process was an enhancement of
organizational capabilities and creation of enormously innovative logistics
systems for mass producing and mass distributing their products directly to
buyers in which the rail and telegraph and the Internet played decisive
roles. These process-oriented
organizational innovations succeeded in establishing new standards of
competition and new pathways of profit-making not only in the meatpacking and
PC industries. The innovations of
both companies diffused across sectors and in the process, promoted new
patterns of growth and development throughout the economy.
Organizationally,
this direct path to the customer assumed two different outcomes. As they created high volume direct
organizations, Swift and Dell faced critical choices with respect to the
systems of coordination and control over adjacent steps in procurement, production,
and selling. These choices centered
on the degree to which firms absorb sequential operations in procurement,
production, and selling, and the degree to which they contract with other
businesses in allocating these tasks.
In the case of Swift, the route to a more direct relationship with the
customer occurred through a process of vertical integration. In the case of Dell, this route
occurred through a dis-integrated interfirm structure of organization but one
with a level of functional and operational integration sufficient for Dell itself
to refer to its own organization as virtual integration.
Nevertheless, in spite of these structural differences, the two
innovative enterprises share a fundamental attribute of coordination and
governance. In both organizations,
the market is not the mechanism of coordination for organizing adjacent steps
of procurement, production, and selling.
Instead, both firms used forms of corporate power, and the power of
administrative planning to coordinate the activities within their innovative
enterprises.
Territorially,
the high-volume, direct production and distribution organizations that emerged
from the innovative process at the two firms, reveal a similar tendency to
extend and concentrate circuits of procurement, production and marketing in new
ways. This pattern of spread and
concentration is the fundamental geographical tendency of the innovation
process, and the process of capitalist development. As firms seek innovative modes of accumulation and acquire
the organizational capabilities to implement these innovations, they reshape
the territorial theatres in which the accumulation process takes place,
spreading and concentrating economic activity in new ways. This pattern of spread and
concentration links the experiences of Swift and Dell across time. Nevertheless, the two organizations and
the territories they exploit, reveal an obvious and paramount difference. The vertically integrated
organization of Swift spreads and concentrates its innovative logistics
activity over a fundamentally continental market space. The interfirm organization of Dell
extends and concentrates its innovative logistics activity over a global market
space. Whereas Swift played a
central role in helping to articulate a unified national market, Dell is
creating production complexes helping articulate the emerging system of
globalization.
The
organization of Swift consisted of three primary nodes: 1) stockyard facilities where cattle
supplies were stored and where Swift secured its cattle raw materials; 2)
(dis)assembly facilities located immediately adjacent to the stockyard sources
of supply; and 3) branch distribution houses located throughout the country
where the firm shipped its product in order to supply retail butchers with
fresh beef. In learning to
coordinate the activity between these nodes and reach the customer directly,
Swift created an early type of just-in-time, high-volume, direct-pull system of
production and distribution.
Orders taken at branch houses from retail butchers were telegraphed
daily to Swift and were the source of demand for procurement of cattle
supplies. Stockyards served as
warehouses for inventories of cattle supplies that Swift would purchase and
“pull” into slaughtering plants for disassembly in accordance with
orders received. In this way,
Swift created an early, if rudimentary form of product customization on the
basis of different cattle grades, and different types of cuts. Cattle pulled into slaughtering
factories on the basis of order demand was butchered and sent to branch houses
where the various cuts and grades requested by retail butchers were
distributed. One of the most
critical core capabilities of this direct pull system mastered by Swift was the
balancing of supply and demand in close to real time. This supply and demand balancing was possible as a result of
the railroad and telegraph.
Slaughtering
facilities were located adjacent to stockyards in a pattern of proximity
between cattle supplies and cattle disassembly that was essential to the high
volume, direct pull system of production and distribution. These slaughtering facilities, opened
by Swift at other stockyard sites in the Midwest, represented new points of
concentration in beef production and distribution. Branch houses, on the other hand dispersed the product over
a wide territory. In this way,
territorial spread and concentration co-existed as part of Swift’s
profit-making enterprise.
As
it built this national network of slaughterhouses and branch houses, Swift
integrated into its own organization virtually all of the steps from production
to final marketing of fresh beef, and coordinated these steps through internal
systems of administrative planning.
In assuming ownership of these various functions, Swift eliminated --
disintermediated -- a large layer of the traditional wholesalers in the beef
trade enabling it to forge its more direct path to the buyers of beef. This system of disintermediation is
what provided the direct path to the customer. It was also the source of the Company’s competitive
advantage. The railroad and
telegraph, in turn, provided the basic infrastructure for coordinating this
production and distribution process of high volumes and disintermediation,
territorial spread and concentration.
Dell’s
production and distribution organization also consists of three primary
nodes: 1) assembly plants where
Dell configures finished PC systems; 2) supplier factories where PC components
are manufactured; and 3) supply logistics centers located next to assembly
plants where PC components are stored as inventory. In learning to coordinate the activity between these three
nodes and reach the customer directly, Dell has created what is arguably the
most innovative and efficient just-in-time, direct-pull system of production
and distribution existing in the world today. This organization fuses two concepts once thought to be
incompatible – high volume production and customization. Customer orders processed through the
Web initiate a process of pulling only those components from supply logistics
centers into Dell assembly sites needed for configuration into finished PCs to
fulfill orders received. Supply
and demand balancing, and the “closed loop” direct relationship to
the customer, are the foundations of this just-in-time pull system and the
source of the Company’s competitive advantage over other PC firms. The Internet is what enables the
Company to forge this direct relationship, and undertake the extremely complex
core capability of balancing supply and demand in real time.
Similar
to Swift, Dell is compelled to organize critical relationships of territorial
proximity between its assembly operations, and its sources of component supply
in order to coordinate the logistics of its just-in-time, direct-pull system.[7] As a
consequence, Dell has established supply logistics centers where components are
stored as inventory within twenty minutes driving time of assembly facilities
at each of its six different computer assembly locations. In these warehouses, components
originating from supplier factories located throughout the world get stored and
“pulled” into Dell’s assembly plants as they are needed on a
just-in-time basis, while suppliers, through third parties, operate these
warehouses and assume the inventory carrying costs.
What
enables Dell to establish these relationships of proximity is its
organizational structure of virtual integration. Although formally separated from the suppliers in its
network, and dependent on the external capabilities of other firms to help produce and deliver its
products (Langlois, 1990; 1992), Dell is nevertheless compelled to enforce
certain types of control over these other companies to ensure that its
just-in-time system operates efficiently.
As a consequence, Dell establishes these relationships of proximity
organizationally, through mechanisms of administrative control with its
suppliers and network partners.
Territorial relationships of proximity, created through the power of
virtual integration, are among the most critical value-creating assets in the
Dell organization.
Dell
has spread and decentralized this direct-pull, just-in-time production and
distribution system across four continents. At the same time, the PC maker has chosen six regional
locales in which to concentrate these operations. Patterns of global spread, regional concentration, and
relationships of proximity are thus part of a just-in-time production and
distribution system fused together by Dell through Internet communication.
This
study argues that the parallels in the organizations created by Swift and Dell
are neither imaginary nor accidental.
Firms from different historical periods confront similar problems
related to issues of time, space, and control in the search for profit. Communications revolutions enable firms
to seek solutions to these problems through the creation of organizations that
recast time, space, and control in similar ways. Swift and Dell represent unique historical responses to this
challenge. Nevertheless, this
study seizes upon patterns in the route from communications revolutions to
innovation taken by both firms, and the similarities in the organizations they
created in effort to uncover underlying rhythms in capitalist development.
Why Swift and Dell?
Despite
the years that separate them, and the different products that define them, both
firms reveal stories with striking symmetries that link communications
revolutions and business innovation across time.
In
the first place, Swift and Dell are comparable as two of the most innovative firms
in their respective time periods.
Both began as small upstarts in industries with much larger,
well-established companies. Both
succeeded in out-competing their older rivals and transforming existing
business practices in their respective industries. Both used breakthroughs in transport and communications to
create process innovations linking procurement and manufacturing to
distribution systems for reaching the final customer directly. These innovations redefined standards
of competition in the meatpacking and PC industries as well as other industries
in the economy of their respective periods. The organizations pioneered by Swift and Dell are, in
effect, paragons of innovation deriving from communications revolutions, one
born with rail and telegraph economy, the other the progeny of the Internet
economy.
Other
similarities also link the innovations of these two companies. While dressed beef and personal
computers may appear oddly-matched, they actually share a common status as new
products. Although dressed beef
and personal computers had already emerged as new products when Swift and Dell
began to do business, both firms succeeded in transforming these products
through new systems of distribution.
As a result of the innovations in production and distribution networks
created by these two firms, dressed beef and personal computers became
accessible, affordable, and mass consumed. Perhaps most importantly, however, dressed beef and
custom-created personal computers share a fundamental attribute as
“perishable” goods.
They both have a limited shelf life before they start to devalue and
essentially spoil. This shared
quality of perishability played a decisive role in motivating both Swift and
Dell to transform the channels of distribution in the beef and PC industry, and
develop their innovative networks for making and selling these products.
The
Swift case covers the initial years of the Company from 1875 to roughly
1903. These dates cover two
significant developments in the American economy. In the first place, this period witnesses the completion of
a nationally integrated and standardized rail and telegraph infrastructure in
the U.S. Secondly, this period
marks the appearance of the mass production economy and the large-scale,
integrated industrial corporation connected to new production and distribution
systems pioneered by firms such as Swift.
Infrastructure, firm structure, and market structure evolve together
during this period. The year 1903 as an end point is also not arbitrary. As the culmination of the first great
merger wave in American history, this date, in most accounts of the period,
brings the initial heroic period of the mass production economy to a
close. Whether by chance or fate,
it also marks the date when Swift surpasses all of its competitors and becomes
the largest meat packing firm in the country and even the entire world.
The
Dell case, much like the case of Swift, covers the firm from its founding in
1984 and carries the story forward to the late 2001. These dates also frame two critical developments. In the first place, this period
witnesses the creation of a mass market for the personal computer. Perhaps more significantly, the latter
years of this period mark the development of the Internet as a communications
and commerce system. Similar to
the advent and expansion of the rail and telegraph, the Internet as a commerce
system has enabled business firms to use the new infrastructure for producing
and selling goods and services and coordinating business operations in entirely
new ways. Dell has managed to
reorganize its business model for producing and selling PCs in responding to
the opportunities presented by the Internet. Much like Swift, Dell has used the Internet to assume a
position of first rank in the personal computer industry. The end point in this story of Dell is
also not arbitrary. Much like
Swift, it was in 2001 that Dell ascended to position of the largest PC firm in
the world – just as its main competitor Compaq was in the midst of being
absorbed by Hewlett Packard.
Finally,
the choice of Swift and Dell as case studies is the result of unique research
opportunities presented by the two firms.
Surprisingly,
while there are a number of studies on meat packing in the late nineteenth century,
notably the work of Mary Yeager (1981), Margaret Walsh (1982), and Louise
Carroll Wade (1987), and numerous references to the innovations of Swift in
both general and specialized economic histories of the period (Chandler, 1977;
Cronon, 1991), there is only one scholarly work on the firm of Swift itself, a
dissertation written fifty years ago (Unfer, 1950).[8] The
present study revisits these works along with archival material on Swift in an
effort to uncover how the Company created its pioneering dressed beef network
from the rail and telegraph, and the economic development impacts of this
innovation.
Dell
on the other hand, presents a different type of opportunity. With its modest beginnings and meteoric
rise within the PC ranks, Dell has generated a type of modern business
folklore. As a consequence, the
company has garnered a large following in the business and trade press during
the past five years. CEO Michael
Dell added to his firm’s reputation with his own book about Dell and the
business model he created (Dell and Fredman, 1999). A plethora of “how-to” books on “Business
the Dell Way,” mostly repeating insights from Dell’s own book, have
followed (Saunders, 2000). There
is, in effect, an abundance of available information on the firm. Nevertheless, there are actually few
scholarly studies of Dell (i.e. Kenney and Curry, 1999; 2000; Kraemer et al.,
1999; Albers, 2000; Kraemer and Dedrick, 2001). With the exception of the study by Albers who worked as in
intern at Dell, these works reveal limited access to sources inside the
company. As a consequence, much
remains unknown about the specific mechanisms of Dell’s logistics
oriented business organization.
Through interviews with Dell managers in supply chain operations and
logistics, the present study aims to overcome this gap.
This
study uses both familiar, and new facts to position the two firms within an
historically-comparative theory of the communications revolution and innovation
in networks of production and trade.
The aim of the comparison that follows is to reveal new insights about
the two firms, the transport and communications systems they used, the
innovations they created, and the economies of both past and present that they
helped transform.
Plan for the Study
This study consists of three
Parts that follow this Introduction.
Part
I, consisting of Chapter 2, establishes the theoretical framework for the
study. This chapter
critiques literature on innovation, business organization, and communications
revolutions and from this critique, sets out a taxonomy of the route from
communications revolutions, to innovation within the firm, to organizational
change, to territorial transformation.
This taxonomy informs the comparison of Swift and Dell.
Part II focuses on the railroad and telegraph and the case of the G.F. Swift Company. Chapter 3 provides the set-up for this Section by examining how the impacts of rails and telegraphy created preconditions for Swift’s innovative enterprise in terms of the geography of markets, and the pattern of urbanization during the mid- to late-nineteenth century. It outlines how the rail and telegraph system opened markets for more long-distance, interregional trade, and created a system of cities in which manufacturing and the consumption of manufactured goods became concentrated in large urban areas. Swift, in effect, relied on the rail and telegraph not only for the operation of its innovative organization. The Company built its network from the interregional markets and entrepots of consumption concentrated in cities that the rail and telegraph system helped to establish. Chapter 4 examines the story of how Swift used the rail and telegraph infrastructure to create a mass production and mass distribution organization for fresh beef that revolutionized the meat industry. It analyzes how this innovation established new patterns of territorial development in the economy of the late nineteenth century that spread business activity nationally, while at the same time concentrating development in new places, notably Chicago and other cities in the American Midwest. This chapter also examines how Swift was forced to confront the politics of interstate commerce in order to protect the far-flung market for beef it had engineered.
Part III focuses on the Internet and the case of Dell
Computer Corporation. Chapter 5 is
a mirror image of Chapter 3. It
sets up this section by outlining how the Internet evolved from a
communications system to an infrastructure for commerce, and how the phenomenon
of Internet commerce established the foundations for Dell’s innovative
advance. Chapter 6 is the parallel
of Chapter 4. It examines how Dell
is using the Internet to organize what is arguably the most innovative
production and distribution network of any current manufacturing firm. The research for this chapter focuses
on the operational and organizational mechanisms used by Dell to create its
direct pull, procurement, production and distribution network, and the role of
Internet communication in enabling this network to function. This chapter also describes the
territorial outcomes of Dell’s network, and how it has emerged as a
paradigm of economic globalization.
The concluding chapter to this study subjects the two cases to comparative scrutiny. It examines the innovations of Swift and Dell as uniquely tied to the two periods in question. At the same time, this chapter searches for common meaning in the innovations and the innovative enterprises created by the two firms. This concluding chapter also seeks to intervene in several current, cross-disciplinary debates on the meaning of the so-called information society, the nature of the firm and its relationship to innovation and economic development, the role of business organization in the modern economy, and the role of logistics or more broadly, the so-called sphere of circulation, in production innovation and economic growth.
In intervening in these debates and framing conclusions about the two cases of Swift and Dell, this chapter also aims to uncover the meaning of the communications revolution from past and present. At the core of this revolution is a story of what occurs when the journey traveled by commodities from production to consumption assumes a different character and takes a different route. How fresh beef becomes mass produced, travels across a continent in breaking the boundaries of localized markets, and in the end takes a more direct path in arriving at the butcher, and how the personal computer is custom-assembled in large volumes and travels across the globe in arriving on the desktop, and the economic development consequences of these routes, are the themes of the story that follows.
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