Pragmatic Collaborations: Advancing Knowledge While Controlling Opportunism.
ABSTRACT This paper starts from the observation that firms are increasingly engaging in collaborations with their suppliers, even as they are reducing the extent to which they are vertically integrated with those suppliers. This fact seems incompatible with traditional theories of the firm, which argue that integration is necessary to avoid the potential for hold-ups created when non-contractible investments are made. Our view is that pragmatist mechanisms such as benchmarking, simultaneous engineering and "root cause" error detection and correction make possible "learning by monitoring"--a relationship in which firms and their collaborators continuously improve their joint products and processes without the need for a clear division of property rights. We argue that pragmatic collaborations based on "learning by monitoring" both advance knowledge and control opportunism and thus align interests between the collaborators. Copyright 2000 by Oxford University Press.
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Pragmatic Collaborations: Advancing
Knowledge While Controlling Opportunism
SUSAN HELPERa, JOHN PAUL MACDUFFIEband
(aDepartment of Economics, 400 Wickenden Hall, Case Western Reserve
University, Cleveland, OH 44106. Email: email@example.com,
b2000 Steinberg-Dietrich Hall, Wharton School, University of Pennsylvania,
Philadelphia, PA 19104-6370. Email: firstname.lastname@example.org and
cColumbia Law School, 435 West 116th Street, New York, NY 10027, USA.
This paper starts from the observation that firms are increasingly engaging in
collaborations with their suppliers, even as they are reducing the extent to which they
are vertically integrated with those suppliers. This fact seems incompatible with
traditional theories of the firm, which argue that integration is necessary to avoid the
potential for hold-ups created when non-contractible investments are made. Our view is
that pragmatist mechanisms such as benchmarking, simultaneous engineering and ‘root
cause’ error detection and correction make possible ‘learning by monitoring’—a
relationship in which firms and their collaborators continuously improve their joint
products and processes without the need for a clear division of property rights. We argue
that pragmatic collaborations based on ‘learning by monitoring’ both advance
knowledge and control opportunism and thus align interests between the collaborators.
1. On the (Im)Possibility of Collaboration:
Two Views of the Firm
It is now widely observed that firms more and more collaborate with their
suppliers, even as they reduce vertical integration with them. This observation
seems incompatible with the standard theory of the firm, which argues that
integration is necessary to avoid the potential for hold-ups created when
non-contractible investments are made. In this paper, we start with this
apparent paradox (documented with examples both current and historical) in
order to describe a non-standard type of firm—a novel organizational form,
© Oxford University Press 2000
Industrial and Corporate Change
neither market nor hierarchy, that addresses the problem of opportunism
while at the same time advancing learning and innovation. From this
juxtaposition of two views of the firm, we draw theoretical explanations of
the behavior of the non-standard firm, explore the implications for the
governance of such firms and identify the limits of traditional organizational
building blocks such as contract and property.
The standard theory of the firm, albeit a stylized portrait, refines and
generalizes a picture of economic activity sketched by Adam Smith, realized
in the mass production US economy starting in the late 19th century and
rendered as history by Alfred Chandler Jr (Chandler, 1962, 1977) and others.
Its central theme is that the firm, and property in general, exist to reduce the
hazards of collaboration that could not efficiently be overcome in market
exchange. The hazards arise typically whenever (potential) partners can use
their control over resources indispensable to the joint venture to extort
benefits in excess of those provided in the partnership agreement or where
some can play on the ignorance of others to claim the benefits due for having
performed their obligations without actually having done so.
These problems are pervasive because humans are by nature ignorant and
guileful and they use their guile to extract advantage from one another’s
ignorance. At the limit they exchange information only when bargaining over
the distribution of the potential benefits, tainting what they say and the
bargains they strike. Ownership of assets (understood as the exclusive right
to determine their use unless otherwise contracted), combined with the legal
rights linked to asset ownership, provide powerful instruments for limiting
the extortion and deception that daunt cooperation (Holmstrom,
1997).1Examining collaboration across firm boundaries is an indispensable
method for discovering just what these instruments are and when and how
they work, and don’t work. The key is learning how to understand economic
behavior under circumstances when self-interest threatens to trip itself up and
deprive the parties of the gains of cooperation.
The non-standard theory arises from observations of the inherent sociability
of human behavior and the development of reciprocity norms between and
among individuals and groups. Its empirical inspiration is twofold: (i) the
(Japanese-inspired) ‘lean’ firm that successfully challenged the dominance of
mass producers in the automobile and other industries starting in the
mid-1970s; (ii) the (primarily US-based) high tech start-ups in computers,
1By ‘standard’ theories of the firm, we mean to include such works as Williamson, Hart and Chandler
(Chandler, 1977; Williamson, 1985; Hart, 1995). For an analysis of differences between transaction cost
and property rights theories see Whinston (Whinston, 1997). For a discussion of other incentive
mechanisms besides ownership see Baker and co-workers and Holmstrom and Roberts (Baker et al., 1998;
Holmstrom and Roberts, 1999).
semiconductors,softwareand biotechnologythatin thissameperioddeveloped
and provisional nature of all understanding, from the simplest verbal exchange
to the most complex co-development project. As a consequence, interlocutors
and partners must cooperate in pursuit of mutual intelligibility as a condition
for self-understanding. In this view, because of the mutual vulnerability
resulting from their ignorance of the world, humans are by nature at least as
disposed to be cooperative in order to learn as to be guileful. Once the
cooperative exploration of ambiguity begins, the returns to the partners from
further joint discoveries are so great that it pays to keep cooperating.
Certain corporations, of various stripes and drawing on multiple sources of
inspiration, have formalized and developed this potential for learning through
cooperation. They do so by introducing what we call ‘pragmatic mechanisms’:
disciplines that reveal the ambiguities of current product designs, production
processes and organizational boundaries. At the same time, they orchestrate
joint inquiry, among collaborating individuals, groups and organizations, of
these ambiguities. In the process of inquiry, each collaborator can con-
tinuously monitor the performance of the (relevant) others, while learning
from them and acquiring skills that can be redeployed in other joint ventures.
The overall result, which we will call learning by monitoring, becomes the
basis for pragmatic collaborations.2
From the perspective of the non-standard view, the significance of these
pragmatic mechanisms is that they relax constraints of endemic ignorance
(the systematic incapacity to learn enough to be invulnerable in exchange)
that the standard view regards as constitutive of human nature. Firms exist
in this non-standard world because it is necessary to fix the points of view,
expectations and responsibilities of the collaborators in order to evaluate and
revise them through collaboration.3The exploratory results from any one
collaboration become the basis for adjustments as necessary to facilitate the
next joint activity. Put differently, the de facto joint residual control over assets
deployed in the common project becomes the basis for deliberation over the
shape of the next project, rather than a source of unproductive haggling.
The non-standard firm uses a number of pragmatic mechanisms to create
and maintain the conditions under which two or more firms can sustain
collaboration. These mechanisms, including benchmarking, simultaneous
2For related views in the organizational theory literature see Schon and Weick (Schon, 1973; Weick,
1995). The roots of the pragmatist perspective, as we use it here, lie in philosophical writings by von
Humbolt, Hegel and Dewey and in the anthropology of Mauss and the early Bourdieu (Bourdieu, 1977).
Also, see Sabel for an earlier exposition of ‘learning by monitoring’ (Sabel, 1995).
3See Kogut and Zander for more on the firm as a source of identity that guides the coordinated action
of its members (Kogut and Zander, 1996).
engineering and systems of error detection and correction (as described
below), help overcome both the problems of bounded rationality and of
In the rest of this paper, we use the example of the automobile industry to
argue that collaborative development is now (and has been for crucial his-
torical periods) much more central to the activity and organization of firms
than the standard view allows. We then deepen and extend the non-standard
view to account for the institutionalization of ongoing incremental (and
cumulatively radical) innovation among collaborators. Our project is both
positive (we show evidence that firms have in many cases adopted these prac-
tices) and normative (we argue that more firms should adopt these practices).
The argument is organized in four additional sections. The second section
presents three examples of collaborative supplier relations, all drawn from the
automotive industry: (i) Japanese keiretsu from the post-war period to the early
1990s; (ii) current subcontracting trends in the US; (iii) a reinterpretation of
the purchase of Fisher Body by General Motors in 1926, often cited as the
paradigmatic example of the emergence of the modern, vertically integrated
The automotive industry is a logical choice for multiple reasons. First, we
can draw upon our extensive fieldwork in the industry for a detailed account
of collaborative processes and pragmatic mechanisms.4Second, the
make-or-buy decision in this industry has been the locus classicus of empirical
and theoretical work on the nature and boundaries of the firm since Coase
(1937). We believe it is especially powerful to find evidence of collaboration
in the setting where vertical integration is understood as the archetypal
response to the hazards of collaboration.
The third section presents a systematic explanation of such collaborative
innovation by sharpening the contrast between the two types of firms,
standard and non-standard. We emphasize how, for each type, the division of
labor and governance structure are linked to a particular notion of cognitive
possibilities, i.e. a distinct view of the relationship between the context of our
problems and the activities we should undertake to solve them. Put
differently, we contrast a familiar class of (standard) firm that resigns itself to
operate within routines as a condition for efficient action and an unfamiliar
(non-standard) one that achieves efficiency precisely by systematically
questioning routines without vitiating them as guides to action.
This section also explores in more detail the advantages of pragmatic
collaborations. We consider both the efficiency and effectiveness of these
4This paper draws on (but for space reasons does not repeat) extensive field work by the authors in the
auto industry (e.g. Sabel, 1995; MacDuffie, 1997; MacDuffie and Helper, 1999).
collaborative arrangements, particularly with respect to the production of
useful knowledge, and we also describe how the arrangements control
opportunism by aligning the interests of the collaborators.
In the fourth section, we look at issues of dynamics: how a pragmatic
collaboration gets started and what can undermine it. We argue that the claim
that the non-standard firm can thrive only under certain institutional con-
ditions (e.g. manufacturing in Japan) has been undermined by the successful
diffusion of the non-standard approach to a wide variety of contexts. We
conclude that the process of disciplined joint inquiry, using the pragmatist
mechanisms, can actually generate the conditions necessary to maintain and
nourish a collaboration, even where the institutional environment appears
highly prone to concerns about ‘hold-ups’.
In the same section we address open questions in the non-standard view
regarding the boundary of the firm and its determination of strategy.
Notwithstanding the experimental character of the new collaborations, there
are emergent answers to these questions. We find that non-standard firms
make strategic choices using the same disciplined scrutiny of assumptions that
is brought to bear on the choice of products, production processes and
organization design. The non-standard firm develops a series of institutional
devices, ranging from novel metrics connecting the performance of operating
units and corporate wholes to new ways of linking managerial career paths
and corporate reorganization, to support the definition and investigation of
strategic choices though collaborative problem solving. Thus strategy, and
boundaries, can be seen as joint products of the operation of the non-standard
The fifth section provides a summary and conclusion. Note that in this
paper we take the ‘standard’ view of the firm from economic theory as a
starting point. We identify challenges to that view from observations of
current business developments and reinterpretations of business history, and
advance a ‘non-standard’ view of the firm as a better way to explain those
observations. In addressing a central question about bilateral collaboration
between firms, e.g. why don’t concerns about ‘hold-ups’ prevent collab-
oration?, we choose not to address another set of questions, drawn from
economic sociology, about the role of networks of firms in the production of
knowledge and the generation of rents (Powell et al., 1996; Dyer and Singh,
1998; Gulati, 1998; Kogut, 1998). In the concluding paragraphs of the paper
we suggest how our future work could address these latter questions.
2. A Profusion of Surprising Collaborations: Repainting the
Picture of the Firm
In this section we draw on three pieces of evidence of collaboration from the
automotive industry worldwide. The first, Japanese subcontracting in the
post-war period, was the focus of considerable scholarly attention during the
1980s. Collaboration between large firms and their subcontractors was widely
seen as a key source of Japanese competitive strength, yet was often viewed as
culturally and historically idiosyncratic. Yet the same pragmatic mechanisms
are now found in very different cultural settings. Second, we draw on primary
data from the USA and Canada, collected by Helper in 1993, showing that
car manufacturers today collaborate more closely with suppliers than they did
20 years ago. Yet the suppliers not only remain independent but also are able
to reduce their own vulnerability to customers by diversification. These new
relationships represent, in our view, a hybrid form of organization, one where
the ability to participate in learning is at least as important a criterion for
partner selection as low bids on piece price.
Third, we examine the takeover of the Fisher Body company by General
Motors in 1926, arguing that the takeover was unlikely to have been
motivated by standard concerns about the alignment of the interests of
principals and agents. More broadly, we show that the transaction occurred
in a period in which the major automobile producers, especially Chrysler, were
building collaborative relations with suppliers strikingly similar to those
observed currently in the USA and elsewhere. Fisher Body was a pioneer and
master of such relations. This revisionist view confronts the long-held
affection among economists towards Fisher Body as the prototypical example
of vertical integration to overcome problems of hold-ups.5
2.1 Japanese Subcontracting
The literature on the close relationships between Japanese automakers and
their suppliers is extensive (see, for example, Dore, 1983; Smitka, 1991; Sako,
1992; Nishiguchi, 1994) and we will only briefly summarize it here.
Close relationships between automakers (particularly Toyota) and their
suppliers evolved in the post-war period. These suppliers were typically either
financially independent of their customers or had less than 10% ownership by
their customers. These relationships included a number of practices that seem
untenable from the point of view of the standard theory, since they left parties
5For a collection of challenges along similar lines see a special issue of the Journal of Law and Economics,
vulnerable to opportunistic behavior. These practices included: broad, open-
ended contracts; provision by suppliers of detailed cost data to their
customers; heavy investment by suppliers in customer-specific assets (such as
location and the stationing of engineers at customers’ facilities); provision by
customers of free technical assistance to suppliers, assistance which usually
had the effect of improving the parts supplied to other customers; joint
product design efforts in which the contribution of customer and a number
of different suppliers (often rivals) was neither separately identified nor
Yet, these relationships not only proved to be stable, they also led to
excellent performance. Suppliers contributed substantially to Japanese
automakers’ higher quality (Cusumano and Takeishi, 1992), lower inventory
(Nishiguchi, 1994) and more efficient design (faster lead times and fewer total
engineering hours) (Clark, 1989).
The Japanese success at collaboration was initially attributed to factors
unique to Japan. For example, Williamson concluded ‘The hazards of trading
are less severe in Japan than in the United States because of cultural and
institutional checks on opportunism’ (Williamson, 1985, p. 122). Dore
argued that the cultural factor of ‘goodwill’ made opportunism a ‘lesser
danger’ in Japan (Dore, 1987, p. 173). Candidates for institutional checks
included supplier associations, life-time employment for the employees of
large firms and bank monitoring of corporate performance that encouraged
long-term collaboration. These and other scholars believed that economies
that could not count on the loyal workforce and patient capital that this
culture and set of institutions produced could not build the collaborative
institutions that depended on these as foundations. Thus, the prospects
seemed slight for the diffusion of the Japanese system outside its territory of
2.2 US Supplier–Customer Relationships
In the individualistic USA, strict institutional safeguards were held to be
necessary to support investment in specific assets. For example, Monteverde
and Teece argued that assemblers would need to vertically integrate ‘when the
production process, broadly defined, generates specialized, nonpatentable,
know how’ (Monteverde and Teece, 1982, p. 206). The existence of such
knowledge creates the possibilities for hold-ups even when the assembler
holds title to the specialized equipment, for example expensive dies or jigs,
used by the supplier. This hold-up of know-how, they further argue, is most
often generated in connection with the development of new parts. Hence the
greater the design effort associated with part development, the greater the
likelihood that design and production will be accomplished in-house.
Looking at 133 automotive components supplied to Ford and General
Motors in 1976, Monteverde and Teece show that ‘the development effort
associated with the design of any given automotive component is . . .
positively related to the likelihood of vertically integrated production of that
component’ (Monteverde and Teece, 1982, p. 212).
More current investigations of customer–supplier relations in the auto-
mobile industry reveal a different world. We draw on a survey of suppliers,
both independent and vertically integrated, conducted by Helper in 1993. A
questionnaire was sent to the divisional director of sales and marketing of all
firms listed in an industry directory of major first tier suppliers (both domestic
and foreign owned) to manufacturers of cars and light trucks in the USA and
Canada (see Appendix for more on the survey). Although the Helper data
does not permit replication of the Monteverde and Teece study, it does show
that the relation identified in the earlier work no longer exists.
To begin with, vertically integrated6establishments are no more likely to
be engaged in design work in general or design work on technically
demanding parts than independent firms. Fifty percent of the vertically
integrated establishments in the Helper sample did ‘the majority of engin-
eering hours’ on their product design on the current model, whereas 40% of
the independent suppliers did. This difference is not statistically significant.
On the previous model, the shares were 35 and 22%, respectively. Thus
vertical integration is today neither necessary nor sufficient for participation
in design and design participation has been growing faster among
independents than vertically integrated units. A similar picture emerges if the
focus is narrowed to producers of the most technically demanding parts;767%
of all vertically integrated establishments are in this category, as against 48%
We also examine the relation between design capability and integration by
looking at the most successful of the co-designers: what we will call the ‘super
suppliers’. These ‘super suppliers’ have the following characteristics: they do
‘the majority’ of engineering for current model parts; they have won more
than one award for supplier excellence (the first one is today often the
indispensable ticket to participation in the supply chain at all); they have at
least two customers.8
6We defined those firms who reported 30% or greater ownership by an automaker as vertically
7These were parts that respondents scored as 4 or 5 on a 5 point scale of ‘technical complexity’.
More generally, the Helper study reveals an extraordinary increase in
communications between customers and suppliers, independent of formal
status as independent or vertically integrated. The volume of face-to-face, fax,
phone and Email exchanges was huge and increasing. All types of interaction
occurred, on average, between on a daily and weekly basis.
Contacts for the purpose of ‘joint efforts to improve the product or process’
were strikingly frequent. Ford suppliers had such contacts with their customer
once a day for these purposes, while suppliers to the other firms had such
contacts every 2 days or so.
Another sign of more intimate collaboration is the increasing use of resident
engineers. In 1989 only 5% of the independent firms and 23% of the
vertically integrated units reported deploying them; in 1993 the shares had
risen to 17 and 38%, respectively. These engineers spend almost all of their
time at the customer’s design and/or manufacturing facilities, working to
resolve quality problems or to improve designs. These engineers’ salaries are
paid entirely by the suppliers. However, both customer and supplier can
assign tasks. While this ambiguous control of engineering assets would be
thought in the standard theory to lead to unproductive haggling, in practice
the infusion of ideas from multiple sources can lead to faster resolution of
quality problems, particularly those with multiple causes (Nishiguchi, 1994;
author’s interviews at General Motors, 1992).
Collaboration appears to be especially marked among the group of
diversified, award winning designers, the super suppliers. We will see below
that firms in this group expect to get help from the customer in case a
competitor develops a better or cheaper product during the life of the
contract. They learn more from their customers than those who are less
successful (and who presumably would have more to learn). They do this
without reliance on vertical integration or elaborate contracts. Note also how
different these relationships are from the economists’ model of perfect
competition, since a customer is not free to switch instantaneously among
many sellers without losing a partner it has learned how to learn from.
The success of Japanese firms in the US, and the adoption of many
‘Japanese’ practices here, makes it difficult to argue that vertical integration
or detailed contracts are necessary to support collaboration between firms.
Now we want to show that collaboration is not even novel in the US auto
industry. Despite the emphasis in the standard view of the historical
importance of the threat of opportunism in the rise of the modern firm, recent
8This last constraint is surprisingly unbinding; it rules out none of the vertically integrated suppliers
and less than 1% of the independents. While there is no direct evidence in the Helper data that firms with
more customers are more profitable than others, a careful investigation of Japanese auto suppliers did show
that these firms earn higher returns (Nobeoka, 1995).
writing portrays broad segments of the US automobile industry as having
anticipated key elements of the current style of collaborative customer–
supplier relations in the first decades of this century. Thus, it is also hard to
argue that technological factors (such as the diffusion of computers) drove the
development of these organizational forms.
2.3 Retelling the History of Vertical Integration in the US
The takeover by General Motors of the Fisher Body Corporation in 1926 has
become the canonical example of the logic of the standard argument.9In the
version provided by Klein, Crawford and Alchian (Klein et al., 1978), Fisher
refused to build its stamping plants next to GM assembly plants, because it
feared that dedicated plants would have difficulty serving Fisher’s non-GM
customers. Fisher also refused to change a cost-plus pricing agreement in its
original 1919 contract, an arrangement that proved unexpectedly lucrative
due to unforeseen increases in demand for the closed steel bodies made by
Fisher. In this view, the purpose of GM’s purchase was to resolve an agency
problem arising from asset specificity and an insufficiently complete contract.
GM valued control of dedicated resources enough that it was willing to buy
control of Fisher from its owners. Indeed the whole point of the story is that
control is all that mattered: each side was presumed to know the capacities
and intentions of the other and the only question, decided by title of
ownership, was to whose purposes resources and wills would be directed.
But this account is incorrect, regarding both the Fisher–GM relationship
and the larger context of customer–supplier relations in the industry.10Three
corrections are particularly important : (i) Questions of residual control played
at most a subordinate role in the transaction; (ii) Fisher, like many other large
suppliers, met GM’s needs for dedicated resources without abandoning
collaboration with other customers; (iii) in the 1920s and 1930s, US auto
firms were more intent on extending and regularizing collaborative relations
with suppliers than resolving agency problems through vertical integration.
Beyond these corrections, we offer a different interpretation of the history. We
argue that the aim of the Fisher Body transaction was to enlist the aid of the
Fisher brothers in constructing such a collaborative system within GM. From
this perspective, the point of the deal would have been to transfer expertise
9See for example Hart (Hart, 1995), which draws extensively on Klein and co-authors’ account in
describing a ‘property-rights’ theory of the firm.
10We are very grateful to Thomas Marx of General Motors for generously providing us with source
materials from his own research into Fisher Body.
rather than control or, more specifically, to transfer expertise in the
collaborative organization of expertise rather than grant exclusive control as
a substitute for collaboration.
Our revisionist approach begins by noting discrepancies between the
standard account and some facts. First, as Klein, Crawford and Alchian
register in a footnote, GM had owned 60% of Fisher since 1919. From 1919
to 1924, the stock was governed by a trust with two of the trustees repres-
enting GM and two representing Fisher. However, this trust agreement
expired in 1924, 2 years before GM bought 100% of Fisher.11GM’s majority
ownership should have been sufficient to give GM a strong voice in Fisher’s
decision-making after 1924. Indeed, the pricing agreement was revised in
1924, to require that Fisher’s prices be set in the same manner as at GM’s
wholly owned divisions (Chandler and Salisbury, 1971, p. 576; Freeland,
Second, Fisher had already begun to co-locate plants with GM facilities
under the trust arrangement. A 1924 report for stockholders states:
Wherever, in the United States and Canada, there is an important
passenger car plant of Buick, Cadillac, Chevrolet, Oakland, or
Oldsmobile, there is, or will be close by, a plant of Fisher Body, adequate
to meet the demand for closed bodies of high quality.
Much of this plan had already been carried out.
In 1923, GM undertook a major expansion of Chevrolet chassis
production facilities and opened Fisher body plants adjacent to each new
Chevrolet factory. During that year pairs of Chevrolet chassis plants and
Fisher body assembly plants began joint operations in Norwood, Ohio;
Janesville, Wisconsin; and Buffalo, New York.(White, 1991, p. 56)
At this time Fisher also had body plants in Flint (near Chevrolet and Buick),
Oakland (near Pontiac) and Lansing (near Oldsmobile), all in Michigan.12
This building boom resulted from informal discussions, not from installation
of institutional safeguards: The authorized biography of William Knudsen,
the architect of Chevrolet, reports that ‘Early in Knudsen’s career with
General Motors, he persuaded Fisher to build body plants adjacent to
Chevrolet factories’ (Beasley, 1947, p. 141). Knudsen had come to GM in
1921, 5 years before GM bought complete formal control of Fisher.13
11GM board minutes, September 25, 1919 (Chandler and Salisbury, 1971).
12For the locations of Fisher’s plants and their dates of opening see the 1 June 1933 summary of the
Fisher Body Corporation, division of General Motors (Pound, 1934). For location of GM plants at the time,
see the GM annual report, 1920, p. 12.
13Why do Klein, Crawford and Alchian report otherwise? They seemed to have relied on Alfred P .
Third, the advantages of asset specificity in the form of co-location were
sometimes offset by other considerations, as the major automobile makers
routinely continued to have bodies made by outside companies for decades
after GM bought Fisher. Even GM procured some bodies from the Budd
Company (Schwartz, forthcoming). Ford obtained bodies from Budd, Murray
and Midland Steel and made some in-house. About two thirds of the
outsourced total was provided by Briggs. In 1929 it even signed a renewable
5 year lease to make these bodies in Ford facilities. Output from the rented
Ford plant was sold to other manufacturers as well (White, 1991).14
A. O. Smith supplied GM, Ford and other automobile makers with frames
starting in the 1920s, and still provides these customers today. Indeed, Ronald
Coase, the intellectual forebear of the standard theory, visited an A. O. Smith
factory in Milwaukee in the 1930s, drawn by the firm’s reputation as one of
the most efficient manufacturing companies of its day (Coase, 2000). Its
evident success as an independent producer caused him to reject in advance
the idea that vertical integration was the most efficient solution to problems
of interest alignment: the view that later came to dominate the literature on
transaction cost economics. (We will return to this theme below.) There are
many other contemporaneous examples of such dependence of customers
upon independent suppliers for key parts.15
These examples draw attention to larger changes in industrial organization
of the period that transform the context and thence the significance of the
standard account. In the revised picture, we present the pre-1940 auto
industry as an independent discoverer, avant la lettre, of what are now called
Japanese methods by US automobile producers.16Supplier–customer
relations were Japanese-like in the sense that they involved long-term
associations, joint product development and attempts to minimize inventory
while producing a variety of products.17
Sloan’s testimony in US versus du Pont, GM, et al. in 1953. In this testimony, given almost three
decades after the events took place, Sloan does say that ‘the Fisher Body Corporation was unwilling to put
an investment in these [body] assembly plants’, but this statement is (i) contradicted by the facts above
and (ii) only a minor part of Sloan’s explanation of why GM bought Fisher. He gives more weight to
problems with Fisher’s cost-plus contract and to the fact that the Fishers ‘. . . were very capable people
and . . . we needed that kind of talent at General Motors at the time, and needed it badly, and I was very
anxious to have them come in and help us in the broader problems of General Motors’ (US District court
trial transcript no. 49-C-1071, pp. 2908–2909).
14‘Body by Briggs,’ Special-Interest Autos, Nov./Dec. 1973, 24–29. In 1953 Briggs was bought by
15For example, GM bought more than half of its brakes from Bendix (a company in which GM had a
25% ownership) and Bendix sold GM more than half its output. Ford was substantially dependent on out-
siders for rubber, aluminum, wheels, brake shoes, assembled bodies and radiators (Schwartz, 2000, p. 13).
16This account draws on Helper (1991), Hochfelder and Helper (1996) and Schwartz (forthcoming).
17Relationships were different from the Japanese model as it first became known in the West in the
1970s and 1980s in that the subcontractor was not necessarily the junior partner and that the system was
At the turn of the century suppliers were larger and more established than
assemblers; in many cases they had long produced for other industries, such
as carriages and bicycles. These suppliers were important sources of both
innovation and working capital (for details see Helper, 1991). Later, ideas and
financing flowed both ways. For example, at Ford in the 1909–1914 period
‘the Company was not then averse to purchasing virtually all of its materials
and parts from independent producers’. The automobile maker shared its
growing management expertise with its suppliers.18
Joint design was also a feature of this period (although with power relations
reversed to a surprising degree). For example, Timken advertised that
‘Timken axles in your car, no matter what its size or price, were selected and
installed only after many conferences between Timken engineers and the
engineers of the car builder’. Timken admonished these car builders that they
could not include Timken axles ‘merely to furnish a selling point; they must
be built in—not tagged on’; Timken often insisted on modifications in the
car’s design before it would allow the axles to be installed.19
Between 1915 and 1925 there was a shift towards vertical integration, as
Ford built his own parts plants and General Motors acquired a number of part
of new car value. After 1926 there was a return to outsourcing (and no reversal
of thisgeneral strategyuntil after World WarII).Bytheearly1930stwo-thirds
of Ford’s cost of production came from outside suppliers. At GM the share was
lower, but largely because of the acquisition of Fisher Body, which accounted
of total value) from outsiders as of 1938 (Schwartz, 2000).
The return to outsourcing was a response by the established producers,
of independent parts suppliers. The first was new competitors, independent
firms that assembled standard parts in leased facilities to enter the market
cheaply, without the high fixed costs associated with product development and
capital investments. The second threat was used cars, repaired and sometimes
improved with parts provided directly by suppliers and installed by small firms
with low fixed costs. Once the depression started, these threats were joined by
less self-consciously organized, more ‘feral’ as Schwartz describes it (Schwartz, forthcoming, p. 1).
18‘The Ford Motor Company purchased materials for its components-makers, reorganized their
manufacturing processes, supervised their larger policies, and, in some cases, aided them in financing
production. The Company became so dependent upon the production of its specialized suppliers that its
own operations were frequently within thirty minutes of suspension because of tardy deliveries of parts or
materials’ (Seltzer, 1928, pp. 89–90 and 100).
19Advertisements in The Auto Era, February 1916 and August 1917, inside back cover (Hochfelder and
Helper, 1996, pp. 4–6).
an opportunity: automobile makers found attractive prices from outside
suppliers who were desperate to fill their factories.
To counter the threats, established makers increased the pace of innovation.
of used cars compared with new ones. GM led the way with the introduction of
the annual model change in the early 1920s, with Ford, the holdout among the
major producers, finally following suit with the switch to the model A in 1927.
The drive for innovation, however, led to deepening collaboration with the
parts suppliers, not, as the standard account might suggest, their margin-
alization. The costs of development were simply too high for even the richest
of the assemblers to bear alone; hence the efforts to reduce these costs by
co-developing components of all types with suppliers. The suppliers, in turn,
reduced costs by co-developing variants of each product with other major
customers and by drawing on experience gained in the aftermarket.
The upshot was the proliferation of collaborative arrangements that
strikingly anticipate the non-standard customer–suppler relations reflected in
the Helper data reported above (Langlois and Robertson, 1989; Schwartz,
2000). ‘By the mid-1920s,’ Schwartz writes, ‘GM had developed and imple-
mented a policy much like that of Toyota: seeking out more than one source
for all its components, limiting the number of sources to two or three
companies, and establishing long-term relationships with these firms’
(Schwartz, 2000, pp. 72–73). The corporation’s relations with Libbey-Owens-
Ford for glass products and with automobile body makers such as Budd
(despite the amalgamation of Fisher) were instances of this policy.20
Similarly, Hounshell notes that ‘Ford went to outside suppliers more and
more during the early years of the Depression’ (Hounshell, 1984, p. 300). The
resulting collaboration was crucial to the success of such large design changes
as the changeover to the V-8, as well as the solution of the thorny problems of
machine design and production layout typically accompanying introduction of
new components.21Accounts of Ford operations from the mid-1930s portray
such co-development as crucial to the firm’s operating routines.22
The same drive to innovation that led to reliance on outside suppliers also
led to creation of a ‘hand-to-mouth’ inventory system, a precursor of just-in-
time in which almost no stocks of parts were held in reserve against supply
20After selling its internal supplier of glass, National Plate Glass, to Libbey-Owens-Ford, GM sourced
two thirds of its windshields from the new owner.
21Hounshell recounts the co-development of a new gas tank for the model A by Ford and the Gibb
Company. Henry Ford developed a radical new design, but existing equipment could not seal the tank at
production volumes. Gibb, which manufactured welding equipment, sent technicians to the plant.
Together with Ford engineers and production workers they redesigned the tank, welder and the assembly
process concurrently (Hounshell, 1984, pp. 284–285).
22Barcaly, cited in Schwartz (Schwartz, 2000, p. 74).
disruptions.23The switch to hand-to-mouth inventory in turn reinforced the
reliance on inventive collaboration with outsiders.24
The embodiment of these developments was the Chrysler Corporation.
Its founder was Walter Chrysler, who made his name while rising to be
president of Buick-GM, only to quit after falling out with William Durant,
the initial architect of General Motors. Prototypes of the first Chrysler
model were co-developed by a team of three in-house engineers working
with component suppliers, mostly in Detroit, but as far away as Ohio and
Indiana. Every component of that first model was outsourced and assembly
was in a rented facility. The finished product included many features previ-
ously available only on luxury models that cost three times as much as the
Chrysler, suggesting that the co-development efforts achieved remarkable
Chrysler’s second major model innovation, the Plymouth, carried the logic
of collaboration a step closer to the modern system traced above. Again the
design was co-developed with suppliers. However, for the Plymouth the prod-
uct plan called for ongoing and substantial improvements in the efficiency of
the production process after the model was introduced. The Plymouth
entered the market in 1929 in the low-to-mid price range. In the following
three years, joint efforts by suppliers and assembler reduced production costs
by 30% and the well-equipped Plymouth began to compete with entry-level
Ford and Chevrolet models. Here the innovative capacities of collaborative
supply relations were made manifest to a whole industry.
To complete the reinterpretation of the Fisher Body transaction, we note
that Fisher Body was an industry leader in collaborative supply arrangements.
During World War I, Fisher and Hudson had co-developed the first
cost-effective closed automobile body. This development attracted the atten-
tion of General Motors and led to its initial acquisition of 60% of Fisher stock.
But the Fisher–Hudson collaboration continued despite the change in formal
ownership, and with the additional help of machine tool makers the two firms
developed techniques for stamping large body panels from wide sheets of
steel. This so reduced welding and other manufacturing costs that a sedan
could be produced for the price of an open bodied car (Schwartz, 2000, p. 72).
In 1923 Fisher Body collaborated with the Chrysler design team to produce
the curved fenders and bumpers that would eventually come to be associated
with the idea of streamlining.25
23Inventory turns at the Ford River Rouge plant were in the range 35–40 per year in the early 1920s,
comparable with the levels achieved by the best Japanese producers 60 years later. (Schwartz, 2000).
24However, the ‘hand-to-mouth’ system did not include JIT’s link between ever tighter inventories and
25(Schwartz, 2000, p. 71). Fisher also collaborated with competitors: Charles Fisher and Walt Briggs