Read an Excerpt
Chapter One
EVOLUTION OR
EXTINCTION
Competition in the Age of
Temporary Advantage
In the natural world, species evolve--that is, they
change to meet new challenges--or they die. The
same genetic imperative operates in business.
In 1995, two Americans and a German won the
Nobel Prize in medicine for their work on the process
whereby embryos develop from a single cell into complex
adults. Their research shed light on how the various
parts of the body develop from that single cell,
which itself merges the genetic codes from two parents.
The work was hailed as a breakthrough in explaining
the formation of birth defects. In pursuit of that goal,
these three scientists spent years painstakingly examining
hundreds of mutations in thousands of fruit flies
(Drosophila). They are not alone. Around the world,
several thousand scientists devote their lives to the study
of the seemingly insignificant fruit fly.
Why fruit flies? That question changed the course of
my research. Biologists study fruit flies because their genetic
structure is similar to that of humans, because
hundreds of them can be kept in a small milk bottle, and
because, despite their genetic complexity, they evolve
rapidly: They go from egghood to parenthood to death
in under two weeks.
Fruit flies enable a manifold increase in research productivity. In a
40-year career in genetics, a scientist studying humans can barely
gather data from a single generation or two before he or she is forced
by age to retire. The life span of the fecund fruit fly, however, is so
short that scientists can study genetic changes in hundreds of generations
during a decade.
Fruit flies are what I call a fast-clockspeed species. That is, they
have an extremely brief life cycle. Mammals, such as elephants and
humans, live by much slower clockspeeds. They measure their lives in
decades, not days. Even slower are the reptiles. The hardy sea turtle,
whose life span can exceed a century, has evolved little since its terrestrial
cousins, the dinosaurs, roamed the earth.
The Fruit Flies of Business
In the fall of 1995, I was four years into a seven-year research project
on a challenging topic: the strategic impact of supply chain strategy on
competitive advantage. But my work, focused primarily on the
dinosaur-like metal-bending industries, was proceeding slowly--painfully
so.
I had begun with a hypothesis contrary to the prevailing train of
thought. Reengineering was then all the rage, and business theorists
sang the praises of outsourcing and downsizing. Corporate leaders
were farming out their manufacturing--and engineering--in the relentless
pursuit of cost reductions. I suspected, however, that this practice
could seriously backfire, that the outsourcing company could lose
capabilities essential to its future. So I began an investigation of the
strategies behind the design of supply chains, those networks of companies
from the final consumer downstream in the chain all the way
upstream to the basic research and mineral extraction that support
and supply a business. I wanted to learn how choices in supply chain
design affected company performance.
I was making little headway in this research because the supply
chains in the three industries I had chosen to explore--automobiles,
machine tools, and semiconductor equipment--evolve rather slowly.
Many of the customer-supplier relationships in Detroit dated back to
the 1950s. The few companies left in the American machine-tool industry
had stable, long-term arrangements with their heavy-industry
customers.
Intel, the semiconductor company I had focused on, was growing
its capacity at exponential rates by utilizing its innovative "copy exactly"
manufacturing strategy, which emphasized maximum stability
in its relationship with semiconductor equipment suppliers. For all
the supply chain dynamics on view, I might as well have been watching
glaciers advance.
When I read of the Nobel Prizes in medicine for that research built
around the study of fruit flies, I started thinking in a new direction:
Instead of monitoring the supply chains of corporate slowpokes, why
not speed things up by studying the industrial equivalents of fruit
flies? If biologists could accelerate their research productivity one
hundred-fold by studying Drosophila, could I speed up my research by
finding and studying industrial fruit flies? Here was an intriguing
possibility. But where could I find such specimens?
I looked again at Intel, the fastest evolving company in my study,
and realized that I had been studying Intel's supply chain from the
wrong end. The fruit flies were not Intel's equipment suppliers, who labored
long and hard to develop robust technological solutions for multiple
semiconductor generations. The fruit flies were Intel's
customers--personal computer dynamos such as Compaq and Dell,
whose products were outmoded within months of their launch and
whose corporate lives seemed at risk on an almost daily basis.
From that insight came another, even more basic idea--that fruit fly
companies might actually be able to serve the same function for a
business researcher that the lowly Drosophila serves for geneticists.
If so, it meant that lessons learned from observing the rapid evolution of
supply chains in a Compaq or a Dell could be applied to benefit organizations
in other industries.
The Clockspeed Concept
I began to look at other industries, seeking to understand their various
rates of evolution. I came to think of these rates as industry
clockspeeds. Each industry evolved at a different rate, depending in
some way on its product clockspeed, process clockspeed, and organization
clockspeed.
The information-entertainment industry, for instance, is one of the
fastest-clockspeed fruit flies of the business world. Its products--motion
pictures, for example--can have half-lives measured in hours,
if not days. The biggest returns, for instance, often come from launching
a successful product during the Christmas season when the number
of viewers is greatest and when a movie can make an impression just
before members of the Academy of Motion Picture Arts and Sciences
nominate films for their annual award fest. In December 1997 for example,
the major U.S. movie studios and many of the most luminous
American directors collectively launched almost $400 million worth of
movies on a single Friday evening, with "their fates [to be] a settled
issue by Saturday night," according to one commentator."
Process clockspeeds in the information-entertainment industry are
similarly breathtaking. We learn almost daily of new processes and
services for delivering information content to the home, office, or mobile
workstation. Organizational dynamics are turbulent as well.
Relationships among such media giants as Disney, Viacom, Time
Warner, Inc., and Rupert Murdoch's News Corporation are routinely
negotiated, signed, sealed, and renegotiated in hardly more time than
it takes a fruit fly to become a grandparent.
Somewhat slower, semiconductors have a clockspeed measured in
years rather than months. An Intel microprocessor product family
such as the Pentium II has a market life of two to four years. As for
its process clockspeeds, each time Intel sinks a billion dollars into
building yet another microprocessor superfactory, it expects much of
that investment to be obsolete in little more than four years. That
gives Intel a four-year window to recoup its outlay of billions of dollars
in capital, plus achieve a return on that investment.
Moving at an even slower clockspeed, the automobile companies
typically refresh their car and truck models every 4 to 8 years. In the
process domain, they expect that a billion dollars invested in an engine
or assembly plant will remain vibrant for 20 years or more.
At the slowest end of the clockspeed scale--up there with the sea
turtles and the California redwoods--are the manufacturers of aircraft.
The Boeing Company, for instance, measures its products' clockspeeds
in decades. Mega-profits still flow from sales of its venerable
747 jumbo jet 30 years after its launch. The 747s produced in the
1990s rely on the same basic design and the same manufacturing plant
that rolled out the first of these aircraft almost three decades ago.
Elsewhere in the slow-clockspeed aircraft industry, Lockheed-Martin
was working diligently in 1997 to design a warplane that was not expected
to go into production before 2008.
The First Lesson of the Fruit Flies
Observers often note that some industries--telecommunications, computers,
and the like--undergo changes with astonishing rapidity,
whereas others seem to mosey along at a leisurely pace, scarcely bothered
by changes elsewhere in the business environment. This book,
however, seeks to examine the experiences of companies in fast-clockspeed
industries and draw from them lessons to apply to others,
much as biologists learn about human beings from the research they
conduct on fruit flies. In short, the insights that the corporate fruit
flies offer can be illustrative and useful to all companies, even those
with medium or slow clockspeeds.
Every student of industrial competition knows the story of one of
the most information-rich fruit flies of the late twentieth century--namely,
the computer industry. Specifically, this is the story of the
famous--one might say, infamous--turning point that occurred when
IBM made its fateful decision to outsource its personal computers'
microprocessing needs to Intel and its operating system to Microsoft.
Back in the early 1980s, when IBM launched its first personal
computer (PC), the company pretty much was the entire computer
industry. IBM had always prided itself on the technologically deep
organization that designed and produced its super-sophisticated mainframe
products. But the PC presented IBM with a special "three-dimensional"
design challenge: The company needed to create a new
product, a new process to manufacture it, and a new supply chain to
feed that process and distribute the product.
The business and technical design IBM selected was a departure
from the company's tradition of doing everything in-house, from
product design and prototyping to manufacturing and distribution. To
keep costs low and increase speed to market, IBM chose a modular
product design, built around major components furnished by suppliers
such as Intel and Microsoft.
By 1998, the personal computer had gone through seven microprocessor
generations: 8088, 286, 386, 486, Pentium, Pentium-Pro,
and Pentium II. Still a powerful, profitable, and influential company
by the standards of the computer industry, IBM had nonetheless been
far outdistanced by its two hand-picked suppliers, who had taken the
lion's share of the profits and industry clout that flowed from IBM's
standard-setting product. IBM's suppliers also won the allegiance of
millions of customers who came to care far more about the supplier's
logo--"Intel Inside" or "Windows 95"--than about the brand name
of the company that assembled the components and shipped the final
product. The power in the chain had shifted, as had the financial
rewards.
IBM's decision to outsource its PCs' microprocessor and operating
system determined the contours of the entire industry for years to
come. In terms of its effect on IBM, the PC decision represents a powerful
cautionary tale, a lesson from the sad experiences of a fruit fly
company: When designing your supply chain, whatever your industry,
beware of "Intel Inside."
That lesson applies equally well to slower clockspeed industries
such as automobiles. The role of electronics subsystems, for example,
has evolved in the automotive industry from the early years through
the 1960s when the electrical systems--those controlling a vehicle's
lights, radio, windshield wipers, starter motor, and so on--were little
more than an afterthought. In those years, the core subsystem of the
automobile was its steel body, which not only defined the car's styling,
a critical factor in its market reception (Ford's Edsel comes to mind),
but also determined the vehicle's structural integrity, ride, handling,
and manufacturability. In contrast, the electrical components had little
impact on design, manufacture, costs, or sales.
Today, the dollar value of a car's electronics is overtaking the value
of its steel body, and the electronic system rivals the steel body as one
of the most important subsystems: Car companies design their vehicles
with a customer profile in mind, and virtually all the features that affect
customers' perceptions of the vehicle are--or soon will be--mediated
by electronics. Those features include acceleration, braking,
steering, handling, and seating, as well as the communication, information,
and entertainment systems.
Now consider the situation of Toyota, the third-largest automobile
company in the world, and arguably the most formidable competitor in
a no-longer-cozy oligopoly. Although the company maintains a virtually
unassailable set of competitive advantages, it has traditionally been far
less vertically integrated in electronics than some of its
competitors, including Ford and General Motors. In fact, Toyota has
become dependent on one company--Denso (formerly Nippondenso)--for
many of its electronic components and systems. The question arises
whether Toyota will stay the course, risking the fate of IBM relative to
Intel, or adjust its supply chain strategy and assert greater internal
control over electronics.
The relatively slow clockspeed of the auto industry gives Toyota
some time for deliberation and choice, but there may come a day when
customers choose automobiles based on whether they say "Denso
Inside" or "Bosch Inside" rather than by the name of the company that
stamped and welded the sheet metal. As might be expected of the
world's most benchmarked company, Toyota is not waiting around. It
understands the dynamics of the fruit flies and has already begun increasing
its investment in its own electronics capability.
Boeing and Its Suppliers
To emphasize the contrast between fast- and slow-clockspeed industries,
consider the Boeing Corporation's commercial aircraft business,
which in recent decades has focused on the remarkable series of jets denoted
the 747, 757, 767, and 777. Although Boeing has designed and
built each one, suppliers from all over the world have made their
contributions. By the late 1990s, outsourcing accounted for close to 50
percent of an airplane's total value. In fact, four Japanese aircraft
manufacturers--Mitsubishi Heavy Industries, Kawasaki Heavy Industries,
Ishikawajima-Harima Heavy Industries, and Fuji Heavy Industries--contribute
approximately 40 percent of the value in airframes of wide-body
models, applying specialized skills and tooling that in many cases
are unique in the world.
To understand the relationship between Boeing and these Japanese
suppliers, you have to go back several decades to a time when the
company made its first efforts to sell aircraft in Japan. In order to win
sales to Japanese airlines, Boeing needed to give Japanese companies
some of the manufacturing work involved. Boeing's managers accepted
those terms, setting into motion a dynamic process that has led
to an important interdependency.
Both sides of the partnership have been big winners. The Japanese
bought scores of aircraft, helping Boeing to become the dominant
commercial aircraft company in the world. At the same time, the
Boeing relationship has enabled the Japanese manufacturers to improve
their technological capabilities, thereby increasing their appeal
to Boeing and other manufacturers worldwide. Although Boeing depends
greatly on its suppliers, the company's management believes
that its systems-design and integration skills will prevent any supplier
or set of suppliers from wresting away industry control.
In this turtle of an industry, upheavals and reversals of fortune do
not take place overnight. Yet the examples of fruit fly industries in this
book should raise a warning flag to Boeing that "Mitsubishi Inside"
represents a clear if not present danger. Because of the slow clockspeeds
typical of the aircraft industry, it is especially difficult to get executives
in such industries to focus on the potential penalties for outsourcing
key competencies--the results typically would not come to
roost during the tenure of any currently active manager. This condition
suggests that companies in slow-clockspeed industries should set
clear guidelines as to who in the organization takes responsibility for
monitoring those relationships, lest time lull the firms into a false
sense of security.
Competition in the Age of Temporary Advantage
Part I of this book lays out the basic concepts and insights of business
genetics. It focuses on case studies from fruit fly industries such as personal
computers and information-entertainment. Beginning with the
observations that industry clockspeeds vary and that faster learning
may come from studying the fruit flies, chapter 2 draws out a number
of rich lessons from the information-entertainment industry. Chapter
3 focuses on the implications of a single observation--that all advantage
is temporary. No capability is unassailable, no lead is uncatchable,
no kingdom is unbreachable. Indeed, the faster the clockspeed,
the shorter the reign. Sustainable advantage is a slow-clockspeed concept;
temporary advantage is a fast-clockspeed concept. And, clockspeeds
are increasing almost everywhere.
By observing the fruit flies, we can see several patterns emerging in
industry structure dynamics. Understanding these dynamic processes
helps us develop principles to guide choices in the value chain--what
I call supply chain design. In addition, by observing (in chapter 4) dynamic
processes in the evolution of industry structures, we can develop
insights to understand how an industry's future may unfold. Of
course, no one has a crystal ball to gaze into the future. However, I believe
that observing the fruit fly industries gives us the next best thing:
an opportunity to see how one's future might play out based on the
experiences of others--who happen to be traveling in a faster lane of
traffic.
Part II of the book focuses on concepts to support the design of
one's supply chain of capabilities. In this age of temporary advantage,
the ultimate core competency is the ability to choose capabilities
well. A company may have a core competence in product design,
brand marketing, custom manufacturing, or high-volume distribution.
Each of these may be important capabilities in its competitive environment.
But the overriding competency is the ability to determine
which of those capabilities are going to be the high-value-added capabilities
and which will be the commodity abilities--and for how long.
Lasting success will go neither to the company that manages to find a
great business opportunity nor to the firm that develops the best proprietary
technology. Rather, we will see (in chapter 5) that the greatest
rewards go to the companies that can anticipate, time after time,
which capabilities are worth investing in and which should be outsourced;
which should be cultivated and which should be discarded;
which will be the levers of value chain control and which will be controlled
by others.
Observing the fruit flies leads us to another lesson: No company is
an island. You may think of your company as a solitary, stand-alone
entity served by subsidiary organizations, the collection of which is
conveniently called the supply chain. That view, however, vastly
underestimates the importance of the chain as a whole and fails to capture
its true essence. Even the example of IBM, Intel, and Microsoft,
briefly recounted above, illustrates how power and value can migrate
up and down the chain. In fact, one sees in Bill Gates's search for
Microsoft's encore to PC operating system dominance the instinct that
future control of the information industry probably lies somewhere
else in the chain. Winning with Windows is only a brief stop in a perpetually
evolving competitive process.
Supply chain design is too important to leave to chance. Just as genetic
engineering has begun to shortcut the process of species evolution,
proactive chain design will shortcut and forever make obsolete
the slow, incremental processes of industrial evolution. Chapter 6 examines
this concept in greater detail. Analyzing fruit fly industries and
individual companies enables us to see with greater clarity and accuracy
the technology and market forces that will affect future needs.
Understanding those needs makes it more likely that one can design
superior capability chains.
Properly viewed, the company and its supply chain are joined at the
hip, a single organic unit engaged in a joint enterprise. I propose (in
chapter 7) that we view this extended enterprise as consisting of three
strands: a chain of organizations, a chain of technologies, and a chain
of capabilities. Strategic analysis must consider all three. Individual
core capabilities, therefore, can be assessed only in the context of their
capability chains.
Part III of the book focuses on implementation. Integrating new
concepts into existing business processes can be harrowing. It sometimes
requires tearing up the whole organizational chart. But the
principles proposed here do not demand that kind of radical organizational
surgery.
Instead, I urge in chapters 8-11 that companies expand on a well-developed
organizational process usually called concurrent engineering
or integrated product development. Ultimately organizations
should undertake what I call three-dimensional concurrent engineering
(3-DCE), the simultaneous development of products, processes,
and supply chains. In companies that now practice two-dimensional
concurrent engineering (product and process only), supply chain development
tends to be haphazard. Chain design decisions are not fully
integrated into the development processes, and the strategic implications
of supply chain design are typically not recognized in the same
way as are those of the product decisions. Within the three dimensions
of development, I propose (in chapter 8) analyzing strategic choices at
the "architectural" level, assessing opportunities for crafting simultaneously
product architectures, process architectures, and supply chain
architectures.
Within 3-DCE lies the essence of supply chain design--the make/buy
decision. Managers are called upon to determine which capabilities are
core and which are ancillary. It is tempting to think that THE answer
to the make/buy issue exists and is simple. Indeed, many business leaders
advocate the buy-anything-you-can principle and articulate this
position at every opportunity. Equally persuasive arguments exist for
expanding widely the set of things considered as important competencies
that can lead to a policy of make-as-much-as-you-can. Business situations
rarely offer such either-or choices, and neither extreme strategy
can stand the test of time and competition. Chapter 9, therefore, uses
the clockspeed concept to expand our set of tools for evaluating and
acting on critical make/buy decisions. Chapter 10 follows with instructions
on how supply chain decisions can enhance other concurrent engineering
methodologies. Chapter 11 offers two detailed case studies
to illustrate the thinking and tools of 3-DCE--one each from medical
information systems and communications satellite development.
Chapter 12 revisits the PC industry in the late 1990s to observe the
new insights from this robust industrial fruit fly and to sum up the
ideas and methodologies presented.
The Epilogue concludes with ideas and illustrations on applying
clockspeed ideas in the public sector--in university administration
and regional economic development, as examples.
In the pages that follow, I offer not just a theory of industry clockspeed
and business genetics, but a wealth of case histories that illustrate
its principles. Moreover, I present concrete, practical tools of analysis
and implementation. The objective throughout this book is to help
managers and business leaders understand industrial evolutionary
processes and to guide investment in evolving capability chains. As we
will see, the dynamics of fruit fly evolution can lead to insights about
how individual companies and entire industries evolve and adapt, as
well as what dangers they face if they do not adapt quickly enough.
Myriad forces at work in the business world--economic, financial,
political, social, environmental--make it impossible to prescribe a
single solution for every problem. But it is neither impossible nor impractical
to draw reasonable inferences about future behavior--that
of companies, industries, and human beings--and to consider the implications
of the increasing clockspeeds in the world in which we all
live and do business. Some of those implications may surprise you. I
hope that they will be useful in provoking ideas that will inspire new
ways to think about designing and managing the extended enterprise.
