Who could object to ‘open innovation’? The term, which has migrated from software development to become a staple of business-management strategy, seems to conjure the most desirable aspects of contemporary American capitalism: freedom, creativity, democratic accessibility, the possibility of new frontiers. The ‘openness’ paradigm promises to combine new production systems, made possible by the technologies of Web 2.0 and the shrunken space of globalization, with novel forms of business organization and value extraction; it offers a powerful weapon in inter-firm competition and a new regime of labour. The paradigm has been promoted by a torrent of books and articles from us business schools over the past decade. In 2003 a Google search for ‘open innovation’ brought up 200 results, according to Henry Chesbrough, one of the gurus of the field and Director of the Centre for Open Innovation at Berkeley’s Hass Business School.footnote1 By 2013, the figure was 672,000,000.
Just as the Fordist organization of production gave way to ‘flexible’ forms in the 1980s, so—its proponents argue—flexibility is now being superseded by the ‘open business model’. Already it is said to have spread from electronics to bio-technology and pharmaceuticals, and is starting to penetrate agribusiness, food processing and the machine-tools sector; a 2013 survey claimed that three quarters of firms in the United States and Europe with sales over $250 million were practicing ‘open innovation’.footnote2 Yet a closer look reveals that, rather than being a strength of American capitalism, the openness paradigm is a symptom of its problems: profit-gouging without sustained investment and squeezing labour to sap already weak, and credit-dependent, demand.
Classical Fordism entailed vertically integrated firms. These had already started to emerge with the monopolies of the late 19th century. Andrew Carnegie developed the us Steel Corporation by buying up operations at all phases of the value chain: iron-ore fields, coal mines, steel mills, rail roads and barges. John D. Rockefeller built up the Standard Oil Corporation to include not just oil refineries—he owned most of the refining capacity in the United States—but pipelines, oil cars, barrel-making plants, retail stores and factories that produced, among other things, asphalt, fertilizer inputs, lubricating grease, heating oil and gasoline. Similarly, flour milling was dominated by Pillsbury, meat packing by Armor, soap products and household goods by Procter & Gamble. The Fordist principle—Henry Ford paying his auto-plant workers just enough for them to be able to buy a Model T—helped boost domestic demand and provided the rationale for high-volume production, ‘just-in-case’ of demand, with little concern for unsold inventories. With anti-trust legislation the monopolies restructured themselves into oligopolies, but the corporate imperative was still focused on internalizing as many activities as possible within giant firms. Surviving the Great Depression, the paradigm was given an enormous boost by the war-time boom. us corporations grew to be hegemonic in the global economy.
By the 1970s, us firms were struggling in the face of increasing competition from Germany and Japan—and soon from Taiwan, South Korea, China and Vietnam—that left the world market burdened with manufacturing overcapacity. In the midst of recession, oil crises and waves of labour militancy, these problems of overcapacity were exacerbated by the cost of warehousing the resulting surplus inventories. Corporations had already begun to cut production costs by shifting to cheaper, non-unionized labour markets, both in the us South and overseas. But as profitability rates continued to fall, large shareholders demanded more incisive action. Amid rounds of aggressive acquisitions and mergers, cost-cutting and asset-stripping resulted in the vertical disintegration of firms’ operations from the 1980s: non-core activities and non-profit-making departments were eliminated, or their functions outsourced to smaller companies, which typically had to compete to offer the cheapest bid, undercutting each other’s labour and development costs. Large firms could order inputs from these suppliers on demand, and thereby ease the burden of over-stocked inventories amid increasing competition in an unstable market.
This new regime of ‘flexible production’ also saw the rise of retailers to the apex of the distribution system, with manufacturers coming to occupy a subordinate tier. The process was exemplified by the changing relationship between the long-established household goods corporation, Procter & Gamble, and the aggressive new discount store, Wal-Mart. Along with food giants Heinz and Kellogg, the Cincinnati soap-maker had been a pioneer of the branded product, transforming generic commodities into company-specific consumer goods—Ivory, Tide, Crest, Pampers—backed by expensive advertising campaigns; the soap opera had been virtually invented as a genre to attract audiences for its radio commercials. With its massive sales force and proven consumer loyalty, p&g could dictate terms to retailers on prices, schedules and display. By the mid-80s, Wal-Mart had perfected its system for laser-scanning product barcodes and beaming the data directly from in-store check-outs to its Arkansas hq via its private satellite; the company’s annual income had reached $15bn, the same as p&g’s.footnote3 In 1987 Sam Walton persuaded p&g to install a direct electronic ordering system, so that a Wal-Mart store computer could automatically order Pampers from a p&g factory when supplies were running low—rendering the p&g sales force redundant at a stroke. By 2005, Wal-Mart’s annual income was five times that of p&g and it could dictate pricing, volume, packaging, delivery schedules and quality to its suppliers.footnote4 It could thereby reduce its own inventory costs while producers increasingly found it necessary to shift to the ‘just-in-time’ approaches that had been developed in the 70s by the leading Japanese auto and electronics firms, who could impose seemingly impossible schedules on their dependent subcontractors.footnote5
The flexible production model saw the externalization and downgrading of manufacturing across a broad range of sectors. In apparel, for example, having built up their brands, Gap and Nike concentrated on design, marketing and retail outlets; the manufacture of their clothes and shoes was reduced to a subordinate link in the supply chain, contracted out to lower-tier suppliers in East Asia, the Subcontinent or Latin America, while prices, quality and schedule were coordinated from above. Wal-Mart was once again a pioneer, purchasing directly from East Asia: from the early 80s its operatives in Hong Kong and Taipei sought out manufacturers in mainland China to produce goods specified from Arkansas, offering gross profit margins of only 10 per cent, but vast orders by volume. To meet the delivery schedules, the first-tier Chinese firms would immediately subcontract a large proportion of the order to dozens of small producers, creating a ‘new universe’ of sweatshops for which Wal-Mart and its ilk would bear no legal responsibility.footnote6
Blue-chip corporations like General Electric and ibm followed the same route. ge stopped manufacturing tvs, radios and electronic goods, and instead franchised the ge brand to Asian makers, who took over r&d, production, marketing and sales—and assumed all the risks—while ge earned a steady royalty.footnote7 Financialization offered another source of income, with higher returns than goods production: by the 90s, ge’s financial arm would be responsible for half its earnings. ibm, which had enjoyed a monopoly position in the mainframe-computer market in the 1960s and 70s, plunged into financial crisis by 1992, its profits undercut by Oracle, Intel and Microsoft. ceo Lou Gerstner imposed large-scale lay-offs and the closure of non-profitmaking sections—including the entire r&d department. ibm was refashioned as a service company, licensing its technology to others. Over half its revenue now comes from ibm Global Services, which supports its clients’ investments in it.footnote8