Adam Smith explained the gains from workers in a pin factory specialising in their tasks. Specialisation today looks very different, with many businesses focused on just a single link in the global supply chain.
Adam Smith famously described the productivity gains from division of labour. The central insight is that specialisation by workers and organisations can promote greater efficiency – with the benefits limited only by the size of the market.
But Smith could not have imagined how by the 21st century, the market would have expanded both geographically and structurally. Rather than being defined by capital and labour – once the core features of firms – markets are now driven by specialist services bought from other businesses.
The idea of the hollow corporation seems to have been first introduced by Norman Jonas writing in BusinessWeek in 1986. He described how firms were outsourcing more and more of their activities to independent, specialist suppliers – a development that he thought would gather pace.
Apple is currently the most valuable company in the world, with a market capitalisation of around $2.75 trillion. Assets on its balance sheet account for around $330 billion. These are mostly cash and investments – property, plant and inventories total about $45 billion. Your Mac and iPhone were designed in California, but they were not made there. Apple has outsourced manufacturing to businesses like Foxconn, a Chinese subsidiary of the Taiwanese Hon Hai group. The Apple-designed processors now used to power Mac computers are manufactured by TSMC, another Taiwanese company.
You have certainly driven past an Amazon warehouse. But it is unlikely that Amazon owns it. Most of their warehouses belong to Prologis, the world’s biggest real estate company. Equinix is one of several large data centre companies that provide server space for large corporations, including Amazon. Phone masts are mostly owned by specialist companies such as American Tower or, in Europe, Connex.
When you fly, it is unlikely that the plane belongs to the airline whose logo is on the fuselage. There are several large aviation leasing companies that own aircraft bodies, the largest being AerCap. But they don’t own the engines. The supply and service of these are contracted from a manufacturer like Rolls-Royce, which in turn has transferred ownership of the engines to a business such as GATX, which also leases railway carriages.
Modern businesses buy parts, buildings and technology (capital) as a service. Increasingly, they also buy routine labour as a service, especially for tasks such as cleaning, security and catering.
Compass and G4S (both British) and ISS (Danish) each have around 500,000 staff. These businesses specialise in low-paid activities – such as catering, security and facilities management – but other firms offer more sophisticated specialisations. IBM, once known for dominance of the mainframe computer business, is today the largest global consultancy company. Not only does it sell software as a service: it also sells labour as a service.
The Speedee Service System devised at McDonald’s and promoted by Ray Kroc was imitated by other fast food chains and in many service businesses – from print shops to pharmacies to hotels. Today, franchising even extends to global accounting firms, with country-specific operations trading under one worldwide brand.
The customers of platforms such as Facebook, Twitter and YouTube are also these companies’ suppliers. And much the same is true of eBay and Google. Airbnb and Uber are both platforms and franchises. As platforms, they link hosts with guests, passengers with taxis; as franchises, they try to monitor the quality of their lodgings and the reliability of their drivers.
The division of labour in today's hollow corporations pares down the activities undertaken by businesses to a single link in the chain of production at which the corporation enjoys a competitive advantage. We have come a long way from the pin factory.
Where can I find out more?
- The age of the hollow company: Article from The Sunday Times.
- The concept of the corporation: Article by John Kay for Business History.
Who are experts on this question?
- John Kay
- Thomas Sampson
- Beata Javorcik
- Richard Baldwin
- Amar Bhide