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Trainers and Consultants
Training & Meeting
Supply, or Die
By: Dr. Roger Selbert
most powerful companies of the 20th century were vertically integrated,
controlling every state of production of every component and product they made.
The most powerful companies of the 21st century will be vertically
disintegrated, or virtual, companies, those that subcontract or outsource all
functions not directly related to core competencies.
By acting only as assemblers of components made by subcontractors,
or sometimes as no more than coordinators of the production process, such
companies are able to devote full attention and resources to the most important
factors of success
in the new economy: product design and development, building customer
relationships, branding, marketing, positioning, communication, and selling.
the outsourcing trend has long been underway, the current pace and degree of its
progress - propelled by new economy demands and characteristics - is worth
noting. Recent articles in Forbes
magazine and Financial Times of London examine the trend,
and a recently published study confirms the efficaciousness of sticking to core
of the world's best-known consumer product brands are no longer produced by the
famous names themselves (including, for example, Sara Lee, Baskin-Robins, Samuel
Adams, the Gap, Mattel, Hasbro, Coca-Cola, Dove, Calvin Klein and Hain
Celestial). In manufacturing, many
high-tech giants outsource or subcontract for major portions of their output,
including Gateway, Dell, Compaq, Kodak, Lucent, Sun, Apple, Cisco, Motorola,
Hewlett-Packard, Ericsson and Handspring. At
the service end, Verizon, Sprint and AT&T now use contract help to deploy
and manage their cellular phone networks. And in the pharmaceutical industry, according to consulting
firm Arthur D. Little, outsourcing totals $30 billion a year.
are several other major trends that underpin and reinforce the outsourcing/core
competency trend (thereby suggesting it is a long-lasting, structural change).
The just-in-time phenomenon (companies seeking to increase efficiency
by having only needed resources at hand, and by reducing spending on
fixed assets and inventory);
need for speed to market and for flexibility (heightened competition
and changing markets, consumer preferences, technologies, etc. require
nimble business responsiveness);
(large companies need to outsource components and
functions from most rational sources, and to service global markets);
The ascendancy of intangible factors such as brand recognition in
value (the ratio of stock price to tangible book value for companies in
Standard & Poor's 500 is 7:1, six times the level of twenty years ago);
rise of a subcontracting industry composed of new-breed companies
whose own core competencies are supplying high quality fulfillment of
brand companies' specifications.
result is a shift in the basic business model paradigm, from the old economy's
"do-it-all," to the new economy's
to Chris Zook, director of worldwide strategy practice for consulting firm
Bain & Co. and author of Profit From the Core (2001), 85% of companies that
achieve sustained growth do so through the mastery of only one or two dominant,
well-defined cores. Vertical
disintegration is happening even in car manufacturing, historically one of the
most vertically integrated of industries:
Ford Motor out sources 25% of component assembly on it Explorer
SUV, uses the capital saved to buy such intangible assets as the
and Volvo names, and is rewarded handsomely by an appreciating
General Motors will soon be making just the outside and underbodies
of its cars and trucks; it is putting various auto supply companies in
charge of the interiors of each of its vehicles.
Workers assembling the Mercedes M-class in Vance, Ala. Build just
20% of the sport utility vehicle. The
rests comes in big pieces ready-made
by suppliers and trucked to the assembly line, where they are bolted on.
Former Chrysler vice chairman Bob Lutz is launching Cunningham Motor,
a new luxury car company which will outsource everything: design,
engineering, parts production, assembly, even most retailing -
as a true virtual company.
all industries that practice outsourcing, electronics component manufacturing
companies are arguably the largest and most important subcontractors.
Technology Forecasters expects the sector to continue to expand at
20%-25% a year on average
in the next 5 years (although growth this year will be lower).
Deutsche Bank Alex. Brown project that globally, the ration of
electronics output that is outsourced will
double to 30% over the next few years, and eventually to 50%.
According to Lehman Brothers, the value of outsourced electronics goods
will more than double within the
next 3 years to reach $280 billion.
Subcontractors aren't immune from adversity - those in the electronics sector
are taking deep hits due to the tech industry slowdown.
But the long-term trend toward outsourcing is inexorable, so compelling
are the economics for vertically integrated companies to shed factories and
shift manufacturing from a fixed-cost to a variable-cost structure.
Roger Selbert is one of the country's best-known and most respected trend
watchers, consultant and professional speaker. He is a Principal of The Growth Strategies Group, a
consulting firm that uses trend research to help companies pursue their vision
for growth. Dr. Selbert is also the
editor and publisher of Growth Strategies, a four-page, biweekly newsletter that
since 1981 has been accurately anticipating and analyzing economic, social,
political, technological, demographic, lifestyle, consumer, business,
management, workforce and marketing trends.
For subscription information and more about The Growth Strategies Group
contact him at Ph:
310-451-2990 Fax: 310-828-0427
email: [email protected]
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