Transformers and business strategy

I took the 8 year old to see Transformers last weekend. This is a movie about cool toys from outer space that decide to fight their age-old ideological battles on Earth. (Isn’t that always the way?) These toys are able to seamlessly transform from robots into vehicles and back again. If you have ever played with an actual transformer you know that it is not quite as easy as that and the potential to lose a finger in the process is very real.

What does this have to do with business strategy? Well, according to a new paper released this week by Sharon Novak and Scott Stern, in the auto world, some companies are transformers while others are integrators. The reason is this: there are various ways of organising auto production. One way is to make a component yourself and build it into the car. Another way is to buy the component and assemble it into the car. In principle, there is no reason why you can’t build some components and outsource others. But it turns out that, for auto companies, there is little mixing and matching of types. There are those who integrate and those who transform; choosing to integrate one component raises the returns to integrating others. And it is usually no accident as to which type you become; it all relates to critical initial decisions in product design.

So the next time you find yourself fighting Megatron, rather than trying to disassemble him (as they did in the movie), raise tariffs on his outsourced components. That should tip the balance in your favour.

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