Paul
Masone-business
Virtual keretsu: if you haven't heard that piece of e-speak from
a consultant yet, you soon will. It's a term used to avoid
answering this question: are business-to-business marketplaces
creating huge cartels and driving down margins in the supply
chain?
Keretsu is the Japanese term for the country's massive
conglomerates. These lumbering, debt-heavy giants are often
family-owned and lack the flexibility needed for e-business.
But at a debate organised by the Guardian last week, entitled
"Is anything new in the new economy?" virtual keretsu was the buzz
phrase of the day, closely followed by the term, "ecosystem".
Silicon Valley consultant Geoffrey Moore argued that "new
economies favour virtual integration over vertical integration".
Instead of one company providing the whole product, the Internet
allows an alliance of companies, each providing best-of-breed
components, to collaborate for mutual gain.
The one word nobody wanted to use was "cartel". But all
alliances have to have structure.
The structure being touted today is the business-to-business
marketplace. And some of these look a lot like cartels.
"Virtual keretsu" is a brilliant example of language getting in
the way of rational thought. The only economic justification for a
horizontal conglomerate in real life is to leverage its physical
size as a unified corporation - for example to gain cheap credit,
kill new entrants to the market and maximise economies of scale. A
loose alliance of partners can never do that in the same way as a
single corporation.
And why would you want to create a horizontal alliance
encompassing shipyards, music companies and house-building firms?
It is hard to imagine such a partnership generating any online
synergy.
So virtual keretsu is a meaningless term that should be banned
from your strategy discussions.
But what about "ecosystems"? Cisco has an ecosystem of
technology alliances in the spheres of production it does not want
to be in. It outsources most aspects of manufacturing, so that its
products arrive in your loading bay untouched by the hands of a
Cisco employee. It sees into the operations of its alliance
partners via Web-enabled supply and distribution chains.
This clearly works for Cisco. But what of its partners? Andrew
McAfee of Harvard Business School says: "By virtue of its market
dominance, Cisco was able to compel many, if not all, of its
suppliers to join the digital communities that it established,
thereby creating the equivalent of an e-marketplace."
Covisint
This brings us to what is probably the world's biggest
"ecosystem" - Covisint. This was formed to aggregate the supply
chains of five big auto manufacturers, and started trading on 3
October. It expects to channel $240bn between the car giants and
their supply chain, slashing procurement costs.
Covisint's start date was delayed while the Federal Trade
Commission and its EU equivalent investigated the charge that it is
an e-cartel. Many supplier firms are asking: is it just a way for
auto-giants to gang up and screw down margins?
The commission allowed the exchange to start trading last month,
prompting "Covisint is not a cartel" headlines. But the commission,
in fact, reserved judgement. It said that the lack of detail about
operating rules and terms of access meant a final judgement had to
be reserved.
Few observers question whether the new Internet business
alliances will actually cut production and procurement costs.
But the jury is still out on whether it can do this without
producing cartels that simply distribute existing value upwards to
the big corporations, while driving down the margins of small and
medium-sized enterprises
A McAfee, conference paper entitled Economic Impact of the
Internet Revolution, manufacturing, 9 September 2000, available
from economy.berkeley.edu