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 / Fourth Quarter 2001 / Issue 25(originally published by Booz & Company)


Clayton M. Christensen, The Thought Leader Interview

S+B: Companies themselves seem to be in a transition from integrated structures to modular structures, and the rallying cry has become, “Focus on what you do best, outsource the rest” — outsource HR, outsource manufacturing, and so forth. Why is that?

CHRISTENSEN: The outsourcing gurus have been driving the theory, and they are saying everybody ought always to do this. But it is really contingent on where you are on the spectrum from “not good enough” to “more than good enough,” relative to each tier of the market.
It is when the product is not good enough that proprietary integration gives you a competitive edge. You cannot outsource and be competitively successful in this situation. But at the other end, where standard components assembled in standard ways can yield acceptable performance, you must outsource.

S+B: Are we at a place in corporate development where dis-integrating firms makes sense on a generic basis?

CHRISTENSEN: Absolutely not. As I mentioned, when product performance outstrips the ability of customers to use that performance in an industry, the competitive game changes. Under those circumstances you have to decouple components businesses from assembly businesses.

But I’d rather decouple than divest because the money shifts to the place where nonstandard integration next needs to occur. Compaq, even though its computers are more than good enough for what the mainstream needs, still has to offer the very best microprocessor inside its machines. So the money shifts to where Intel has been. It’s like when Wayne Gretzky said, “You should skate to where the puck is going to be.”

GM had to spin off Delphi, and Ford had to spin off Visteon, because the basis of competition in autos is changing. They need to flexibly source the best subsystems from the best Tier 1 suppliers. But in divesting these businesses, they did just what IBM did when it put Intel and Microsoft into business. They stayed where the money used to be and put into business the companies that are going to play where the money will be in the future.

S+B: So is the real message of “Intel Inside’’ that value inevitably migrates to the component suppliers and contract manufacturers? What’s astonishing in this process is you hollow out the OEM until almost nothing is left but brand.

CHRISTENSEN: That’s often, but not always, right. Because of the disruption phenomenon — technological progress outstripping the ability of customers to utilize it — the general tendency is for the money to migrate toward the subsystems.

But if there’s a change in the performance demanded by customers, then products that once were more than good enough are no longer adequate. Then the process flips, conferring advantage upon integrated manufacturers of the end-use product.

S+B: Some would say we’ve witnessed the weakness of this practice in Cisco’s recent comeuppance. They spun off everything, and they didn’t have good enough visibility into the market, and they wind up with this immense inventory to write down.

CHRISTENSEN: You have to examine the interface at each stage of value-added. Cisco’s router is a disruptive technology to Lucent’s and Nortel’s circuit-switched equipment, and Cisco is now getting disrupted itself by soft switches and other things.

But the nonintegrated business model is a good way to compete here — what has happened to Cisco is not necessarily an indictment of the nonintegrated model. You can have a nonintegrated business model and not try to automate the interactions in the supply chain that hide the data. I think that when companies try to delegate solutions to complex problems to an automated system, they still find that judgment of managers causes them to either pay attention to or ignore data. I’d bet that this is at the root of Cisco’s huge write-offs. Automated decision making separated managers from data, and they weren’t aware that they needed to intervene with judgmental overrides until it was too late.

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