Article 9 of 200
The Strategist
Imagine a car company that makes no cars
James Abraham
01/19/99
Business Standard
Page 2
Copyright (c) Business Standard
Imagine a bookstore that has no stores. Imagine a shoe company that makes
no shoes. Amazon .com is one of the largest booksellers in the US yet owns
no stores. Nike is a leading athletic shoe company yet manufactures no shoes.
These business models were unthinkable a few years ago. Once, companies
did everything from the ground up to deliver a product to the customer.
They designed it, made all the pieces that went into it, assembled it,
distributed it, sold it, and took care of the customer. They had integrated all
these steps of the value chain into a single firm. Today, those integrated
value chains are deconstructing. For example, consider the computer
industry. Once, IBM was the undisputed leader of the industry dominating
everything from processor design, computer manufacturing and software
development to distribution and customer service. This integration was a
barrier to competition. Until now. Today, the steps in the value chain are
independent businesses. Competitors have assailed IBM at each step. Today,
Intel has displaced IBM in microprocessors; Microsoft has displaced IBM in
software; and Dell has displaced IBM in delivery and customer service. What
happened to IBM is waiting to happen to other integrated firms. Where
integration itself was a raison-d'tre, firms now need new concepts of strategy
and organisation to survive. Logic of deconstruction
Integrated value chains were driven by the assumption that ownership was
the best way to co-ordinate the steps in the chain. Many forces are attacking
this assumption. Globalisation, deregulation, and capital markets have, over
time, increased the flow of physical goods and the flow of ideas across
national and company borders. A more recent, and dramatic, force is a
change in the economics of information.
Traditionally, information exchange involved a compromise between
richness and reach. Either you could reach a few people with very rich
information or you could reach a dispersed group with a simple message.
Costs prevented exchanging rich information with a dispersed group. Since
co-ordination required rich information, it was necessary to keep the group
"close". Hence the drive to integration.
New communication technologies are breaking this compromise. Universal
connectivity and common standards are championing robust and virtually
cost-free communications. Now, rich information can reach a dispersed
group. Hence the
drive to deconstruction.
Beyond traditional outsourcing
Outsourcing is an early example of deconstruction. It allowed companies
access to steps in a chain without owning the associated assets. Yet traditional
outsourcing demanded only simple interactions between firms such as an
exchange of orders/invoices, exchange of goods, and exchange of payments.
New outsourcing opportunities are possible with very sophisticated
relationships between firms. For example, Nike's relationship with its
suppliers involves co-ordination in design, manufacturing, and delivery. It
has allowed Nike to build a superior brand in athletic footwear with constant
innovations and high quality. All without owning the capital-intensive assets
of production.
These relationships, however, pose several dangers. In a deconstructed
world, outsourcing relationships are based on common standards and are
accessible to the common market. They are therefore easy to imitate. That is
what happened to Nike. Competitors sourced shoes from the same network
on basically the same terms. Now the market is rife with competitors.
Also, as common markets develop, the power in a relationship can quickly
shift. The classic example is IBM. When it outsourced the microprocessor
and software for the PC, it created powerful competitors in Intel and
Microsoft who then re-defined the industry and subverted
IBM's position.
Bringing in the third party
Once upon a time, car manufacturers (OEMs Original Equipment
Manufacturers) did everything themselves from design, component
manufacturing, and assembly to distribution and customer service. Today,
that is no longer true. Both the supply and distribution ends of the chain are
populated with third parties.
At one end, suppliers manufacture components, create subassemblies, and
influence design. They have even begun to produce whole systems to capture
more of the manufacturing activities from OEMs. One day, maybe even
assembly will be outsourced, as has happened in Malaysia. There, Associated
Motors Industries (AMI) assembles cars for BMW, Land Rover, Ford, and
soon Mahindra & Mahindra. Leading component firms, such as Delphi,
Visteon, Denso and TACO, have become independent of their OEMs. Today,
they supply multiple OEMs and compete with each other for their
parent-OEM's business. Their
mission has shifted from supplying their parent to dominating the component
industry.
At the other end, independent dealers distribute and service automobiles.
They are building the scale, experience and capabilities necessary to offer
low-costs and high quality.
Both ends of the chain have broken off and are evolving independently based
on the value and economics of each. With little manufacturing and no
distribution, what is left for the OEM?
OEMs are recognising their true value is in their brand and the promise it
holds for customers. Brands allow an OEM to wield power over other parts
of the chain and so co-ordinate a final product for
consumers.
What is happening in the automotive industry illustrates the new roles for
companies in a deconstructed world. Suppliers and dealers have focused on a
step in the value chain to become layer masters. Meanwhile, OEM's have
focused on co-ordinating the value chain to become orchestrators.
Layer masters and orchestrators
Deconstruction offers several new roles for firms: layer masters,
orchestrators, market managers, and disintermediators. Our discussion will
focus on the first two. Just as few great conductors are also great soloists,
few great orchestrators will also be great layer masters. The capabilities
required for each are different. While layer masters require scale and
experience, orchestrators require a unique asset, such as brand or
information.
Layer masters seek to dominate a step in the value chain. To do so, they need
to offer low costs that often come from scale and experience.
Alternatively, orchestrators co-ordinate the activities of different layers in a
value chain. They have, or can build, a unique resource that delivers value to
consumers. ConsiderAmazon.com. They have built unique resources such as
their powerful brand, robust customer database and high-traffic website.
They use these to co-ordinate access to catalogues from different publishers
and to co-ordinate delivery by different firms from FedEx to the Post.
Opportunity for Indian corporates
The forces of deconstruction are all prevalent in India. It is time for Indian
corporates to decide how they will compete in a deconstructed world.
The first challenge is to de-average the economics across all firms in a
corporate. At times, one firm's economics are sacrificed to buoy another.
This economic averaging handicaps all firms from understanding their
capabilities and considering the most appropriate options
A second challenge is to distinguish the activities across the corporation and
identify those most appropriate to be layer masters and those most
appropriate to be orchestrators.
Orchestrators must give up their layer businesses to other firms while layer
masters must give up their orchestration function. Neither will be willing to
do this. A third challenge is to invest in the capabilities necessary to be a
layer master and the unique assets necessary to be an orchestrator. Here,
ambition may cloud reality and waste resources in unfettered
investments.
A fourth challenge is to guard against the inherent dangers of imitation and
subversion discussed earlier.
Remember, every industry will be affected in varying degrees, at varying
speeds. Imagine yourself at the crossroads IBM was 20 years ago.
Imagine a car company that makes no cars. |
