4/17/2024

ILRID 1531: Introduction to the

Sociology of Organizations
Lecture 8: Organizations in the New Economy
Professor Ben A. Rissing
Office: Ives Hall, Room 393
Email: rissing@cornell.edu
Office Hours: Wednesday 2:30‐4:30pm, by appointment

Today’s Agenda
 Topic Context:
 “Core” capabilities
 Virtual organizations
 Subcontracting, offshoring, supply chains
 Platform capitalism
 Next Class

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Organizational Specialization
 In modern economies, organizations are increasingly specialized
 For a proxy of specialization, we can look to firm size (Davis 2016)
1972 1982 1992 2002 2012 2022
Firm Emps Firm Emps Firm Emps Firm Emps Firm Emps Firm Emps
AT&T 778K AT&T 822K AT&T 313K Exxon 93K Apple 76K Apple 164K
Kodak 115K Exxon 173K Exxon 95K GE 315K Exxon 77K Microsoft 221K
Exxon 141K GE 367K GE 231K Microsoft 51K Google 54K Google 140K
GM 760K GM 657K Philip M. 161K Pfizer 98K Microsoft 94K Amazon
We’ll950K
come
back to 2022 later
in the lecture…
 For many organizations, this involves asking the question:
“What is core?”
 Specifically, which organizational practices or products are essential to success?

What Organizational
Activities are “Core?”
 The answer to this question differs across organizations
 Even within the same industry a variety of successful strategies may
exist for competitors to achieve profitability
 Michael Porter argued that an organization should seek to identify a
competitive advantage (something it can do better than competitors)
 This generally involves offering product/service at a lower price or of
higher quality

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Firms’ Competitive Advantage (Porter 1985)

Porter (1985) suggests that there are 3 forms of competitive strategy:
1. Cost Leadership: The organization offers a product/service at a
lower price than competitors
2. Differentiation: The organization offers a product/service that is
dissimilar relative to competitor offerings. Unique offerings allow
an organization to stand out form competitors
3. Focus (also termed segmentation strategy):
The organization targets a market
niche rather than seeking to engage all
possible customers (Exp: demographic,
or geographic focus)
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Examples of Firm‐level Competitive Advantage

 “Always Low Prices” through economies
of Scale (Cost Leadership)

 Videogames that emphasize fun over

realism; portability (Differentiation)

 Organic foods for health conscious

consumers (Segmentation)

 Of note, it is difficult to sustain a competitive advantage over time 6

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Virtual Organizations
 An extreme focus on core activities has led many
organizations to form relationships with key external partners
 Virtual organizations are “a temporary network of independent
companies—suppliers, customers, even erstwhile rivals—linked by
information technology to share skills, costs, and access one another’s
markets” (Byrne 1993; Davis 2016)
 Organizational strategies contributing to a rise in virtual organizations:
1. Subcontracting
2. Offshoring
3. Supply chains
4. Platform capitalism

Means of Externalization

1. Subcontracting 2. Offshoring

3. Supply Chains 4. Platform Capitalism

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1. Subcontracting
 Sub‐contracting (also termed
Outsourcing): Hiring other
organizations to complete certain
“non‐essential” business operations
 This often involves the externalization of specific jobs and/or work
functions
 Central to this distinction the delineation of firm boundaries
 See Vertical Disintegration and Horizontal Disintegration

An Example of Vertical Disintegration

Vertical disintegration
occurs when business
functions are moved to
an external firm rather
than keeping
production in‐house

(Zatz 2008)
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An Example of Horizontal Disintegration

Horizontal disintegration occurs

when business functions are moved
to an external firm, but reporting
relationships are preserved (Zatz 2008)
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Jobs at High Risk of Subcontracting / Outsourcing

1. Jobs that don’t require firm‐specific human capital

2. Jobs/industries with little government regulation or oversight from
professional associations
3. Routine Tasks, defined as duties that must be completed on a
regular basis, often with little variation
4. Certain manual tasks, defined as work accomplished through
physical processes

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Means of Externalization

1. Subcontracting 2. Offshoring

3. Supply Chains 4. Platform Capitalism

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2. Offshoring
 Offshoring: Sending business
operations to a different country.
This may be with the same or a different
company. Often done for reasons of:
 Cost‐ arbitrage
 Market access
 Talent acquisition
 Extended work days across multiple time zones
 Country offset quotas

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Country Offsets shaped Production Location for

Boeing’s 787

(Rosello and Steenhuis 2018)

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Prominent Offshoring Destinations

(Deloitte 2014; 2022) 16

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Means of Externalization

1. Subcontracting 2. Offshoring

3. Supply Chains 4. Platform Capitalism

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3. Supply Chains
 A Supply Chain is covers the various
steps of the manufacturing and delivery of
a product or service when those steps
span multiple intermediate firms
 Such exchange relationships are frequently global for major products
 Typically large power imbalances exist between lead firms (those
entities that coordinate production and typically control intellectual
property) and suppliers

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Who Profits Most in these Supplier Relationships?

 Example: Classic Apple iPod
(Dedrick et al. 2010)
 Retail: $299
 400+ parts
 Assembled in China
 350 million sold as of
September 2012

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Classic iPod Teardown – Who Profits?

Component Supplier Input Price Est. Profit
Hard Drive Toshiba $73.39 $19.45
Display Assembly Toshiba‐Mats. $23.27 $6.68
Processor Broadcom $8.36 $4.39
Controller Chip PortalPlayer $4.94 $2.21
Battery Unknown $2.89 $0.87
Memory Multiple $5.06 $1.22
All other parts Many $22.79
Est. Assembly and Test Multiple $3.86
Est. Factory, Logistics Cost $144.56
Wholesale Cost Apple $224 $80.00

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iPod Costs and Margins by Country

Factory Cost $144
Apple Profit $80
Wholesale Price $224
Retailer Markup $45
Distributor Markup $30
Retail Price $299

So who profits the most from

these supplier relationships…?

Lead firms
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Though Lead Firm Cost‐to‐retail‐price

Ratios have increased with time…

(Matsumoto et al. 2021)

Apple iPhone Model 22

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Externalization through Contracting, Outsourcing,

and Global Supply Chains introduces Risks

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Recent Factors Reducing Organizations’

Externalization of Activities
 Labor arbitrage declines
 Supply chain disruptions are costly
 Covid‐19 and the rise of nationalism
 New virtual communication tools
 Substantial risks (IP loss, reputational liabilities)

(Economist 2013; Deloitte 2022) 24

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Organizational Specialization
 In modern economies, organizations are increasingly specialized
 For a proxy of specialization, we can look to firm size (Davis 2016)
1972 1982 1992 2002 2012 2022
Firm Emps Firm Emps Firm Emps Firm Emps Firm Emps Firm Emps
AT&T 778K AT&T 822K AT&T 313K Exxon 93K Apple 76K Apple 164K
Kodak 115K Exxon 173K Exxon 95K GE 315K Exxon 77K Microsoft 221K
Exxon 141K GE 367K GE 231K Microsoft 51K Google 54K Google 140K
GM 760K GM 657K Philip M. 161K Pfizer 98K Microsoft 94K Amazon 950K

In the last decade, we’ve seen greater awareness of the risks associated
with rampant externalization (Fishman 2012; Power 2013)
 Re‐integration: Moving externalized organizational activities back in house
 Reshoring: Moving organizational activities located abroad back in house
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Means of Externalization

1. Subcontracting 2. Offshoring

3. Supply Chains 4. Platform Capitalism

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4. Platform Capitalism/
Sharing Economies
What is a sharing economy?
 An economic system where assets or services are exchanged
between private individuals, frequently through a facilitating
platform
 Products or services are often delivered through the renting
or exchanging of resources or labor
 Also termed “peer economies,” “collaborative consumption,”
and “collaborative economies”
[More]
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Scope of the Sharing Economy

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The Sharing Economy: What’s New?

 Advancements in internet and communication technologies have
generally reduced coordination costs
 As a result, it is now possible for more complex tasks to be performed outside
the boundaries of the firm
 The concept of sharing isn’t particularly new, rather, the introduction
of technology has allowed such systems to achieve substantial scale
 The organizations controlling such platforms generally externalize
much of the workforce, risk, task knowledge, and even products/
services associated with their industry

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Sharing Economy Platforms:

What items are in most demand?
 Two primary dimensions exist, which should be considered
when assessing sharing economy demand:

1) How valuable is the

item (cost)
2) How intensively is the
item used by the owner?
(frequency of use)

Low use, high‐value items typically

experience the greatest demand 30

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Summary and Key Lessons

 There has been a shift in the modern era for organizations to focus
on “core” activities, while externalizing non‐core functions
 What are sources of firm’s competitive advantage?
 Cost leadership; differentiation; market segmentation
 Virtual organizations are a temporary network of independent
companies, linked to achieve certain goals. Achieved through:
 Subcontracting Supply chains
 Offshoring Platform capitalism
 In the last decade, we’ve seen a modest reversal in externalization
trends
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Readings for Next Class:

 Battilana, Julie, Lakshmi Ramarajan, and James Weber. 2012.
“Claude Grunitzky.” Harvard Business School Case 412065‐
PDF‐ENG.

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References:
 Bostman, Rachel. 2013. “The Sharing Economy Lacks a Shared Definition: Giving Meaning to the Terms.” Creative Lab Presentation.
 Davis, Gerald F. 2016. The Vanishing American Corporation: Navigating the Hazards of a New Economy. Berrett‐Koehler Publishers.
 Dedrick, Jason, Kenneth L. Kraemer, and Greg Linden. 2010. “Who Profits from Innovation in Global Value Chains? A Study of the iPod and Notebook
PCs.” Industrial and Corporate Change.
 Deloitte. 2014. “Deloitte’s 2014 Offshoring and Inshoring Survey.” http://www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us‐2014‐
global‐outsourcing‐insourcing‐survey‐report‐123114.pdf
 Deloitte. 2022. “Global Outsourcing Survey: 2022.” Deloitte Analysis. https://www2.deloitte.com/us/en/pages/operations/articles/global‐outsourcing‐
survey.html
 Dahlman, Carl J. 1979. "The Problem of Externality". Journal of Law and Economics 22: 141‐162
 Economist. 2013. “Here, There and Everywhere.” The Economist. http://www.economist.com/blogs/schumpeter/2013/01/special‐report‐outsourcing‐
and‐offshoring.
 Economist. 2013. “The Rise of the Sharing Economy: On the Internet, Everything is for Hire.” The Economist.
http://www.economist.com/news/leaders/21573104‐internet‐everything‐hire‐rise‐sharing‐economy
 Economist. 2013. “All Eyes on the Sharing Economy.” Economist.
 Fishman, Charles. 2012. “The Insourcing Boom.” The Atlantic. http://www.theatlantic.com/magazine/archive/2012/12/the‐insourcing‐boom/309166/
 Leo Burnett Company. 2014. “The Sharing Economy: Where We Go From Here.” Leo Burnett Company Report.
 Matsumoto, Norio, Naoki Watanabe, and Patrick McGee. 2021. “iPhone 13 Teardown.” https://vdata.nikkei.com/en/newsgraphics/iphone‐teardown/
 Porter, Michael. E. 1985. The Competitive Advantage: Creating and Sustaining Superior Performance. NY: Free Press.
 Power, Brad. 2013. “Insourcing at GE: The Real Story.” Harvard Business Review.
 Rosello, Anna Campany and Harm‐Jan Steenhuis. 2018. “Offset Agreements in Aerospace.” International Association for Management of Technology
Conference Proceedings.
 Time Staff. 2015. “5 Things You Never Knew About the Sharing Economy.” Time Magazine, 30: 27.

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