Archive for February, 2010

The Disintegration of Companies: The Art of Alliance

DisintegrationIn part 1 of this series I talked about how more and more startup and emerging growth entrepreneurs are disintegrating their companies by outsourcing one or more of their three core business processes (product innovation/infrastructure/customer relationship).  Even corporate giants are outsourcing subsets of one or more of these processes.  Companies, who in the past would never consider entrusting any portion of the company’s customer relationship process to outsiders, have entered into agreements with outsiders to handle many of their customer sales, support and service processes.

In my last blog, I also wrote about the conflicts inherent in vertically integrated companies that can be minimized through disintegration. I would like to offer two more arguments in support of company disintegration through alliance.

The first is expedience.  In a world where technology cycles are measured in weeks or months and competition is truly global, speed to market has become increasingly important.  As mature companies attempt to grow, by entering new markets or expanding product lines, it is often more expedient to do this through acquisition or partnering.  Large pharmaceutical companies, who in the past have differentiated themselves through R&D, now allocate a higher percentage of their R&D budgets to acquiring technologies rather than developing them in-house.  This usually comes in the form of company acquisition or technology licenses.

For start-ups entering an existing market, the most viable protection from being crushed by incumbents is to get to market, reach scale and build brand equity quickly. eBay acquired Half.com in 2000 not because they were unable to build the same product but because Half.com had already owned the brand in the eyes of the consumers.  In order for start-ups to enter markets and reach scale quickly it is often necessary to partner with others to handle one or more of the core business processes.  One entrepreneurial company I worked with developed, manufactured, and sold fashionable compression garments aimed at women suffering from lymphedema—a condition that often accompanies breast cancer patients and survivors. In order to build the company they created an alliance with the company that produces LYRCA® and Coolmax® to develop the product.  They also used a toll manufacturer to handle production.  In other words, they disintegrated their company to the point where significant parts of their product innovation and infrastructure were handled through alliances.  What they kept in-house was what they saw as their points of differentiation (POD), print design and customer relationships.

The second good reason for company disintegration through alliance is economics.  For mature companies the decision to outsource is typically driven by income statement considerations.  While a solid balance sheet is always important, most large successful companies have sufficient access to capital.  They also have a healthy appetite for profit.  With increased specialization and advancements in technology come two economic principles, absolute advantage and comparative advantage.  Absolute advantage refers to the ability of a firm to produce a particular good at a lower absolute cost than another.  In this case a company may outsource the manufacture of the product it sells to an alliance partner who can produce the product at a lower absolute price. Comparative advantage speaks to one firm’s ability to produce a particular good or service at a lower opportunity cost than another.  In this case a firm may outsource one or more of their business processes to an alliance partner in order to focus their finite attention on those processes in which they are most efficient.

For start-ups the economics of disintegration tend to be driven by the balance sheet.  Unlike established companies, access to capital is difficult for new ventures.  As such, a start-up venture may choose to ally with a partner in order to enter markets and grow the business while conserving cash.  This often comes at the detriment of profit margins, but high margins on zero revenue still equals zero profit.

While alliances can help you build and scale your company quickly, they frequently fail.  When they fail, the results can be fatal.  It is important to:

  1. choose your partners wisely,
  2. implement the alliance carefully and,
  3. nurture the ongoing partnership diligently.{a

©Mark P. Loschiavo

The Disintegration of Companies: Resolving Inherent Conflict

Salvador-Dali-The-disintegration-of-the-persistence-of-memory--1952-83836Ever since the industrial revolution there has been an inherent problem for companies.  A problem stemming from the nature of being vertically integrated—where research, development, operations, sales and support were all managed under the same roof.  While vertical integration has its benefits—centralized control of information, complete ownership of the customer experience to name two—it creates motivational conflicts throughout the organization.

Most business ventures can be broken down into three core processes—product innovation, infrastructure and customer relationships.  The inherent problem comes from the conflicting objectives associated with these three processes.

Successful product innovation requires speed-to-market and differentiation.  By contrast, economies of scale and standardization are watchwords for companies trying to maximize infrastructure efficiencies.  In the words of Henry Ford, “Any customer can have a car painted in any color that he wants so long as it is black.”  It doesn’t take long for conflict to arise when product developers are striving to frequently and rapidly introduce completely redesigned products, which require variations in infrastructure like tooling, molds, presses, automation equipment and assembly line alterations.

If that doesn’t create enough conflict, those involved with the customer relationship process care mostly about scope, wanting to satisfy each and every customer’s needs.  “What do you mean it only comes in black?  My customer is a Kentucky Wildcat fan, and wants his in UK blue!”

Until recently, companies have learned to live with these conflicts in order to ensure effective information flow and quality control regarding customer solutions and interactions. Rapid changes in information technology over the past two decades, however, have allowed for the disintegration of companies, where companies are becoming less vertically integrated.

In Corporate America this shift is happening at glacial speed, but in the new and emerging venture space it is becoming more the rule than the exception.  Over the past five years I have reviewed hundreds of business plans.  Virtually all of them employ a business model that is disintegrated, where one or more of the three core business processes are outsourced to vendors or alliance partners.

In this hyper-competitive business environment, the astute entrepreneur understands the need to focus attention on the company’s points of differentiation (POD) rather than trying to build a vertically integrated company.  The dichotomy is that new venture creation is not a linear process.  Often, discerning a company’s POD is an iterative process, making it important early in the strategic planning process to protect core business activities that may be critical to maintaining competitive advantage.  After all, we don’t want to throw out the proverbial baby with the bath water.

©Mark P. Loschiavo

Heads In The Cloud

At the intersection of business and technology there is a cloud forming that represents a new paradigm for collaboration and decision-making, which will encourage invention and innovation to flourish.  This cloud will make it possible for entrepreneurial ventures to scale like never before.  We are soaring into world of Cloud Computing.

It is possible that The Cloud is talked about as much, and is as misunderstood, as the Internet in the early ‘90s.  Like any new venture it is often explained using analogy. “The Cloud is like a Utility Grid.”  The Cloud is like the early days of computing where organizations rented computing power from IT service bureau companies like IBM or University Computing Corporation.  Much like the Gold Rush of 1849 or the Dot Com boom of the 1990s, few know exactly what it is or what it can become, but many want to be a part of it.

A look at the following definitions might explain some of the confusion.

Cloud computing is Internet- based development and use of computer technology (“computing”). In concept, it is a paradigm shift whereby details are abstracted from the users who no longer have need of, expertise in, or control over the technology infrastructure “in the cloud” that supports them. Cloud computing describes a new supplement, consumption and delivery model for IT services based on the Internet, and it typically involves the provision of dynamically scalable and often virtualized resources as a service over the Internet.” (Wikipedia)

Maybe a more technical definition would help.

“[Cloud computing] is “a computing capability that provides an abstraction between the computing resource and its underlying technical architecture (e.g., servers, storage, networks), enabling convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released with minimal management effort or service provider interaction.”  This definition states that clouds have five essential characteristics: on-demand self-service, broad network access, resource pooling, rapid elasticity, and measured service.” (Wikipedia)

In his book Dot.Cloud, Peter Finger offers this definition:

“For geeks, Cloud Computing means grid computing, utility computing, software as a service, virtualization, Internet-based applications, autonomic computing, peer-to-peer computing, on-demand and remote processing—and various combinations of these terms.  For non-geeks, Cloud Computing is simply a platform where individuals and companies us the Internet to access endless hardware, software and data resources for most of their computing needs, leaving the mess to their Cloud Service Providers.”

As with any disruptive technology the Cloud is seeing its share of controversy.   A CNET article published in October of 2008 had this to say.  “IBM argued that cloud computing is a way for businesses to draw more value from their existing IT infrastructures, since much of the work is offloaded onto remote servers, but the cloud-computing concept has received sharp criticism recently from the likes of Oracle CEO Larry Ellison and Free Software Foundation President Richard Stallman.

In an interview with The Guardian last week, free software pioneer Stallman said cloud computing is “worse than stupidity” because it leaves users vulnerable.  “If you use a proprietary program or somebody else’s Web server, you’re defenseless. You’re putty in the hands of whoever developed that software,” he said.

During Oracle’s annual financial analyst meeting in September, Ellison also criticized the companies rushing to roll out cloud services, saying the trend is “fashion-driven.”  “It’s complete gibberish. It’s insane. When is this idiocy going to stop?” Ellison said.

Microsoft Chief Executive Steve Ballmer, speaking to delegates at a Microsoft-sponsored developer conference in London last week, said the company will launch an operating system for the cloud in four weeks.  Tentatively titled “Windows Cloud,” although Ballmer suggested it would have a “snazzier name” at launch, the product is designed to make it possible to “just…write an application and…push it to the cloud, Ballmer said.”

In essence the Cloud means different things for different people.  For likely Cloud Service Providers like IBM, Amazon, Microsoft, Google and Yahoo it means opportunity to get IT hardware, software, data resources and services to a much broader audience.  To Venture Capitalist it may minimize the need for their investment dollars going toward data centers for their portfolio companies.  For entrepreneurs it eliminates barriers to entry into scalable business opportunities that previously required large capital investments in server farms and software applications.

Just a few questions to consider:

  1. Is Cloud Computing mostly real or mostly hype?
  2. Is Cloud Computing likely to be a game changer for entrepreneurs that will level the playing field and break down barriers to entry?
  3. What, if any, issues should entrepreneurs be concerned with before launching their new ventures into the Cloud (eg. data security, over-dependence, scalability)?

©Mark P. Loschiavo

The Importance of Design

Ipad photoIn an interview with Ted Koppel, Dave Kelley, founder and CEO of the Palo Alto, California product design firm, Ideo, said, “Look around.  The only thing that is not designed by someone is nature.”  While this has been true since the beginning of time, the importance of design for the products and services we consume has not always been paramount.

Prior to the 21st Century the demand for one product over another was largely driven by utility and price.  Terms like “price performance” were coined to indicate the importance of the price/utility relationship.  Typically, the product with the most functionality at an affordable price carried the highest competitive advantage.  Recognizable slogans like, “the quicker picker-upper”, “the ultimate driving machine”, “we bring good things to life”, “like a rock”, and “don’t leave home without it”, speak to the importance consumers and advertising firms assigned to function and utility.

As developed countries become more affluent—particularly the U.S.—consumers are demanding more than just utility in the products they purchase.  They want beauty, elegance and significance.  In short, they want good design.

Author Daniel Pink, in his book A Whole New Mind, writes, “While Harvard’s MBA program admits about 10 percent of its applicants, UCLA’s fine arts graduate school admits only 3 percent.  Why?  A master of fine arts, an MFA, is now one of the hottest credentials in the world where even General Motors is in the art business.”  Pink argues that product design has become a vital ingredient for competitive advantage, creating the need for a whole new mind in business.  Business leaders, who have traditionally valued left-brain thinking, need to embrace the importance the right hemisphere of the brain plays in building competitive advantage.

Think for a moment about the hottest new products of the last decade.  What were they, and what distinguished them from their competitors?  What role did design play in the product’s success, and what do we know about the companies that designed them?  They are usually viewed as innovative, but are they also viewed as entrepreneurial?  This begs the question.  As we move into the creative economy, will entrepreneurial firms have an advantage over established corporate giants and why?

©Mark P. Loschiavo

Re-engaging the Right Hemisphere

Brain PhotoThroughout modern history the movers and shakers of developed countries have celebrated left-brain thinking.  Success is pre-ordained based on the mastery of standardized tests (PSAT, SAT, GMAT, LSAT, MCAT) that measure an individual’s aptitude for analytical, logical and linear thought. The ability to acquire and disseminate knowledge is valued.  After all, mastery of analytics, logic and linear thought put a man on the moon and returned him safely in the 1960s, and launched us headlong into the high technology world of the knowledge era.   Knowledge is power.

In 1997 left-brain engineers and scientists from IBM developed a computer program powerful enough to beat world champion Garry Kasparov in the quintessential left-brain competition, chess.  In so doing, is it possible they marked the beginning of the end of the knowledge era?  If technology can beat a world champion chess master at his game, what’s to keep technology from rendering a world-class disease diagnostician—think Dr. Gregory House—obsolete?   Isn’t a diagnostician’s skill derived from a comprehensive knowledge of known diseases, and the possible combination of related symptoms:  knowledge that can be stored in databases, and retrieved and processed at speeds far greater than the capability of the human mind.

While computers have the ability to handle left-brain activity with ease, they have difficulty with context. Discerning joy, fear, anger or anxiety from the expression on someone’s face requires the ability to instantaneously see individual parts of the face in the context of the whole.  In order for innovators and entrepreneurs to develop solutions for today’s complex needs, they need to understand those needs within the context of people’s lives, and/or the whole of society.  This ability to understand context comes from the right hemisphere of the human brain.

In his book, A Whole New Mind, Daniel Pink suggests that we are moving from a knowledge economy to a creative economy, requiring a renaissance of right brain thinking.  Is it time to re-engage the often-maligned right hemisphere of the brain?  Are we in an era where competitive advantage will be determined more by creativity, design and context than by knowledge, analytics and logic?

I welcome your thoughts,

©Mark P. Loschiavo

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