Vertical integration, globalization and thermodynamics

Like the second law of thermodynamics or gravity vertical integration acts as a sort of a universal drag.

Simple vertical integration

After a nail manufacturer introduces all kinds of products made from iron, like iron bells, needles, and rings, he realizes that hammers could represent perfect addition to his product range since customers buying nails normally need hammers as well. So, he introduces a new functional promise to his brand, a new product. This promise comes from arrangement of additional materials to iron and can be used not only for hammering nails, but also in combination with a chisel in making stone carvings for instance.

Such nail manufacturer integrates his business vertically. Why would he leave an opportunity to serve his customers with hammers to other vendors? Why would not he attract new customers that did not buy his nails so far but could after they find his hammers as meeting their expectations.

Vertical integration follows physical law saying that connected systems with different level of order tend to equalize which is expressed as the second law of thermodynamics.

A drag towards globalization

Equalization in business means integration within one producer. Why? If all industries would be able to follow vertical integration drag, then we would soon have one company only as a supplier of all consumer’s needs. Entropy of such system would be highest possible (highest possible equilibrium). Such state would be a kind of end state of globalization as well. One global totally vertically integrated company serving needs of all global consumers.

Consumers as counteract

As much as life is nothing but constant fight against thermal equilibrium, we should understand a constant fight against vertical integration as a prime example of consumers counteracting a natural drag that forces businesses towards vertical integration. Same conclusion goes for globalization. While it is natural that economy as natural force (!) evolves in the direction of highest possible equilibrium it is also necessary for individual to act against such force. The fact that entropy of the Universe increases (becomes more and more homogeneous with the constant loss of temperature) does not prevent us living creature to act against this natural force. Since we as humans are a part of nature, we then enact a natural force that counteract entropy. As humans we similarly counteract forces towards globalization as much as any unification force.

It should thus not be understood as contradiction to support vertical integration on one hand and oppose it on another; to support globalization and at the same time “Location first” movement. As producers we fight for vertical integration with all possible rights while as consumers we tend to choose local products coming from competing producers. This conflict is in fact the engine of any economy. It is the engine as long as it is not hampered by institutions that have no business there: non-commercial collective entities like states, governmental institutions and all other institutions that pretend to serve as consumer protection entities.

No place for collective non-commercial organizations

Like there is no external force that would help humans to live in the physical world governed by the second law of thermodynamics we as consumers need no external help to fight against vertical integration and globalization tendency. As much as physical world has no power against our localized ability to raise energy, so companies have no power against consumers decision what to buy. For they know that absolute vertical integration, absolute globalization means a death not only for consumers, but for all living structures, brands and companies as well.

Andrej Drapal