Currently there is a tendency for cooperation between companies, organizations, work groups and individuals. The historical development of the production process begins with the division of labor that tends to specialize individuals and groups, and later, the production units with the consequent increase in the level of labor productivity and productive results. Classical economists conceptually developed these processes from observed reality. From the very moment that the division of labor occurs, its complementary process, that is, cooperation, takes place. In today's world, cooperation is spoken of as an expression of the accelerated development of strategic alliances between independent organizations and of strategic relationships between partners.
This article is part of a trilogy on the subject of productive chains, industrial networks and clusters that correspond to a research project that unites the conceptual framework and its application to Cuban organizations.
These elements are developed conceptually below considering that a conceptual framework would facilitate the development of their practical applications.
Division of labour
Adam Smith, in 1776 created the fundamental work of liberal market economy thinking, "The Wealth of Nations", and in its first chapter, reflects the foundations of his conception, in addition to developing a broad exposition of the division of labor.
"The most important progress in the productive faculties of labor, and much of the aptitude, skill and good sense with which it is applied or directed everywhere, seem to be a consequence of the division of labor"
Adam Smith bases the changes in the economic system on the development of the productive forces from the feudal mode of production to the capitalist mode of production, and this based on the division of labor, and specifically on the technical division of labor.
To divide means to separate in time, if it can be separated in time, this makes it possible to separate in space. In other words, the necessary condition to be able to manipulate the space-territory will be to be able to disaggregate in time. As soon as a process can be decomposed, in what involves temporal fractionation, the possibility of separating these stages opens up. From a geographical point of view, the idea of division has a very important scope, insofar as it is going to be a manipulable spatial mechanism, which will be widely exploited.
As Smith notes: “The great advantage of division of labor is that, by dividing the total task into small, simple, individual operations in which each worker can specialize, total productivity is geometrically multiplied. Therefore, the division of labor is nothing more than: The disaggregation of a complex activity into components, so that individuals are responsible for a limited set of activities and not for the activity as a whole. ”
Why does division of labor increase productivity to such an extent? The answer is that no person is physically or psychologically capable of performing all the operations that make up most complex activities, even assuming that one person could acquire all the specialized skills to do it. In contrast, division of labor creates simplified activities that can be learned and completed relatively quickly. It also creates a variety of jobs, allowing you to choose or be assigned to positions that match people's talents and interests.
The foregoing, which is valid for the manufacturing system, constitutes a condition for the era of services since what is valid for the operator at the current stage is valid for each organization, since it is a specialist in what it knows how to do well. and requires the assistance of other organizations to develop a comprehensive offer that meets the needs and expectations of its customers.
Specialization
Specialization is an objective result of the division of labor and is expressed in the formation of new branches, industries, services, and even in the interrelation between them that causes new activities. In the economy, sectorial and business specialization is constantly deepening, which is expressed in the adaptation of a sector, organization or division to the lasting provision of a product or service that is constantly repeated, with a determined economic destiny to satisfy social demands and organizational.
Specialization consists of limiting the field of activity of an organization and can be defined on the supply side, taking into account the technological process or processes that result from the domain of the company (by resources, Know How and the products obtained) and on the demand side, by the functions served and the groups of clients that are satisfied.
The more traditional vision of specialization is based fundamentally on the set of products or processes that the organization develops, while a broader and market-based approach defines the field of activity from three dimensions: the functions served, the groups of customers served, and the technologies used to do so. The first definition can be included in the last one considering that the products can be described by the functions they cover and by the technology used, while the markets are described based on the functions satisfied and the clients served.
Regardless of the different conceptions, reality determines that the deeper the level of specialization, the greater the need to create an industrial fabric of interrelationships between companies that allows satisfying complex needs. And in practice, since the eighties, outsourcing has become fashionable, "… the action of resorting to an outside agency to operate a function that was previously performed within a company", as a result of the deepening of the specialization process where companies focus on activities, processes and products, in which they have a superior performance and, therefore, in the market they have competitive advantages and hire other companies with the necessary elements for their work, always and when your offers are competitive.
For White and James, Outsourcing is "… a contractual relationship between an external seller and a company in which the seller assumes responsibility for one or more functions that belong to the company."
When production specialization is deepened, cooperation is expanded and organizations complement each other in the same process of organizing industrial production.
Cooperation
According to Fernández, cooperation can be defined as “an agreement between two or more independent companies that, joining or sharing part of their capacities and / or resources, without actually merging, establish a certain degree of interrelation in order to increase their competitive advantages".
Cooperation is located between the market and the company itself as a way of organizing the allocation of resources, and the latter can be left to the market, which, with the price mechanism, will carry out such allocation through the commercial transactions carried out within it. This would be the situation of no integration, nor external growth.
But this allocation of resources can also be carried out in the company by replacing commercial transactions with internal organization, which would be the opposite of what was previously formulated.
In cooperation, market characteristics are presented through transactions between cooperating companies and the company itself, always maintaining a certain mode of organization.
For certain activities in the value chain, one company may be less efficient than another or too large, however, it could be comparatively small for others. There may be other reasons that determine that the company is more or less efficient in carrying out some of the activities in its value chain.
In the latter case, the company could outsource these activities in the value chain to others that are more efficient. However, this outsourcing seeking greater efficiency would not in itself ensure that the total cost of the product was less. This would only happen if the external costs plus those of the transactions were lower than the internal ones.
This is the condition for cooperation to be efficient, that is, the costs of cooperating companies operating separately to be lower than those of an integrated one. This will only happen if the external costs plus those of the transactions are lower than the internal ones.
In this way, cooperation is explained based on transaction costs and it is justified why cooperation is an intermediate route between the market and the internal organization for the allocation of resources. Cooperation involves a compromise between flexibility and efficiency.
From the reasons that induce companies to establish cooperation strategies, the main advantages that they entail can be deduced with relative ease. Perhaps, it could be said that the combination of operational efficiency, through the multiple possibilities mentioned above, with the flexibility of a mere agreement between the parties, is one of the most significant.
This constitutes an important source of competitive advantages by combining operational efficiency with the possibility of simply dissolving the contract in the event that the cooperation does not work properly.
For cooperation to be efficient, it must be based on mutual reciprocity between the partners, so that all achieve the benefits they hoped to obtain from the cooperative process itself and in a balanced way. In order for cooperation to be stable and to be maintained over time, it is necessary to extrapolate the previous idea to the expectations of benefits that are expected to be obtained in the future.
"Cooperation between companies" is a concept defined in the "horizon" of relevance-problems. In this “horizon”, different forms of collaboration or joint work are differentiated between different legally independent companies, which are established in order to improve (through a certain coordination of tasks) the fulfillment of their objectives (Rotering 1990, Scharader 1993).
Among the open advantages in a “cooperation between companies” are usually considered: improvements in the dimension “time” (time-to-market; shortening of “lead times”; greater speed of reaction to demand; etc.), in the dimension "knowledge" (transfers of "know-how", possibility of concentrating on "core competences", etc.), economy of scale, risk reduction, access and entry into new markets (Bronder 1993, Vizjak 1990, Porter / Fuller 1989, Rupprecht-Däullary 1994, Picot / Reichwald / Wigand 1996)
Industry cooperation is reduced to the establishment of lasting production links between sectors, companies and units engaged in the joint production of certain products. It is distinguished by the duration and stability of the links and the regularity of the supplies and demands that the technical-productive orders of the consumer be taken into account.
Companies that establish ties of cooperation maintain their economic autonomy. In the cooperation process, related companies supply each other with finished or semi-manufactured products that are mounted directly on the finished product or undergo additional treatment at the pilot company or consecutive operations in various specialized factories as well as the different services they provide.
Cooperation in industry takes place in two fundamental ways. First, by establishing close links between the companies (branches) that, due to the nature of their specialization, depend on each other on the production side. The economic significance of this type of cooperation is that, together with specialization, it contributes to shortening the time to market of complexes and new types of products, ensures the full and regular use of high-performance special equipment, improves the use of production capacities and contributes to the wide application of advanced production organization methods.
Secondly, by establishing links between specialized companies, which do not depend directly on the other in terms of production, but rather organize it in order to more effectively use the available production capacities of one of them. Such cooperation also has the advantage of contributing to the more comprehensive use of the potential of the companies, although in several cases it may decrease the indexes of the level of specialization due to the expansion of the nomenclature of production.
Vertical integration
By vertical integration is understood, “a system is vertically integrated when the administrative processes, meaning by this the production, transport or distribution and sale of a certain product, are carried out by the same company. The integration of two companies can take place indistinctly forward, incorporating distribution and sales functions of the product or backwards, developing production methods within the industry ”.
The degree of dominance that a company chooses to exercise over the activities that comprise a related sector or sectors will determine the breadth and extent of its vertical integration. To decide this organization, the company must analyze the economic, administrative and strategic benefits against the costs of an eventual vertical integration. Deciding a vertical integration does not only go through the economic analysis of benefits versus costs, but also includes questions of flexibility, balance, organization, market incentives and management capacity of the resulting company.
According to Porter, “Vertical integration is the combination of a different production technology, distribution, sale or other economic processes within the scope of a single company. …. ”
On the other hand, Menguzzato considers that vertical integration is really the oldest form of economic organization of a society, since it is the fundamental principle of a survival economy. A fully vertically integrated company is a company that carries out all the activities corresponding to the different levels of the row of production of a certain good, from obtaining raw materials to delivering the finished product to the consumer.
When economists study vertical integration, they logically start from the industrial structures provided by the industrial revolution and mass production, where mechanization and specialization precisely caused a vertical disintegration of economic processes. The integration of large-scale production and distribution processes within a company is shaping the modern industrial company; the visible hand of management replacing the invisible hand of market forces in coordinating the flow of goods, from suppliers of raw materials and semi-finished products to the retailer and the final consumer.
The classic reasons for vertical integration are found in the search for cost advantages, which should lead integrated companies to increase their profitability and / or strategic advantages that should allow the company to improve its position vis-à-vis consumers.
Diversification or vertical integration involves the entry of a company into activities related to the complete production cycle of a product or service, thus making the company its own supplier or customer. If the company becomes its own supplier, the integration is said to be backward or upstream. If the company becomes its own customer, the integration is said to be forward or downstream.
Although the vertical integration strategy has very particular and specific connotations, it can be considered as a particular case of related diversification, since the company enters into different businesses or activities than the usual ones although they are related to them due to the entire production process. This requires the development of new competences, knowledge or skills by the company.
It should be noted that vertical integration always exists in any company. Every company produces part of its product itself and purchases another part from suppliers abroad. In the same way, every company commercializes or sells to some degree, its products or services.
In summary, it can be said that vertical integration is the linking of small and medium-sized companies to production chains through the development of suppliers or the subcontracting of industrial processes. It is a form of business organization that consists of several successive phases of a production process being carried out by the same company or by several closely related companies.
Vertical integration features
In order to measure the degree to which a company is vertically integrated, four indicators are used:
- Vertical integration has a direction of integration, which can be backward or forward. Given the characteristics of a company, a vertical backward integration consists of approaching, a company, towards its suppliers, incorporating them into its value chain. This implies taking control of companies that supply their inputs. A forward integration implies a greater approximation to its clients, being the company itself, as a whole, in charge of providing the client with the final product; regardless of external companies to carry out this work. There are different degrees of vertical integration and dominance of a company against the value chain of its products. These different grades can be classified into the following types:
- Full integration Quasi - integration Partial integration No integration
The degree of backward integration can be measured through the percentage of requirements of a particular input from which the company ensures its supply internally. Similarly, the degree of forward integration for a specific product can be measured through the percentage of it that is carried out in a specific unit of the company. The extent of integration indicates the degree to which a company depends on its own resources. internal to meet your input needs or to market your products. This amplitude can be measured as the fraction of the value provided by the internal inputs or products of the company with respect to the total value of its transactions, both internal and external, for a unit of the company.The extent of vertical integration refers to the length of the value chain that a company owns. This chain may consist of only a few stages or fully cover the production process. One way to measure the extent of integration is through the fraction of the final value of a product or service added by the company.
The characteristics of market power allow us to see how corporate strategies could be an attack on free competition in a market.
However, companies also face costs when deciding to integrate vertically, such as taking on a more complex organization. Exit barriers are higher, and managing worker incentives becomes difficult.
Today, companies are developing more and more frequently, focusing on their core businesses (specialization) or on the restructuring of their business portfolio to improve their profitability by creating value.
Horizontal integration
Porter in his book "Competitive Advantages" dedicates one of its chapters to explaining fundamental elements related to horizontal strategy. According to Porter, “The horizontal strategy coordinates the goals and strategies of the related business units. It covers both the existing business units and the selection of new industrial sectors to enter, based on the interrelationships with the existing groups ”. The horizontal strategy can and should exist at the group, sector or corporation level. However, some companies have nothing more than a very informal horizontal strategy, no matter how deeply they formulate their strategies for individual business units.
“Tangible interrelationships therefore constitute a major potential source of competitive advantage. An explicit horizontal strategy must be at the center of the group, sector or corporation strategy ”. Therefore, regarding the need for an explicit horizontal strategy, Porter criticizes that most organizations work against achieving interrelationships.
However, organizational constraints not only explain why related business units that proceed independently will seldom optimize the competitive position of the company as a whole.
The transfer of knowledge between generically similar business units will not occur: “The transfer of knowledge that supports intangible interrelations does not occur naturally. Business units will want to develop their own strategies and believe that they know their industrial sectors as the best, they are rarely expected to seek knowledge elsewhere in the company. ”
As one of the forms of horizontal strategy that organizations can apply has horizontal integration, this is a form of business organization that consists of several companies with the same ownership or closely related to the same activities of the production process that could be purchases, marketing, investment and / or joint production.
The design of organizational structures that facilitate creative environments and adaptable to the requirements of change constitute systems of relationships and flexible forms of organization that promote cooperation and enhance integration by means of well-defined obligations and benefits for its different components, which favor motivation and commitment to increasing competitiveness.
These elements must be considered when making decisions, since at present isolated companies do not compete, but business networks of which some are only the “visible head”. In the network organization, the weaknesses of some companies are significantly reduced as the competitive advantages of each one develop, specializing in what they do best in order to enhance the strengths of each one, and therefore, develop synergies that enhance the strengths of the whole.
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