“Strategic outsourcing” is not an oxymoron …

April 23, 2010 //
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The term “strategic outsourcing” may sound like an oxymoron since the central dogma of outsourcing calls for companies to sequester strategic capabilities in-house and only source non-core activities from 3rd parties to drive efficiency.  The situation becomes more complex in a dynamic context since what may be deemed a core competency today may become peripheral tomorrow. One key strategic consideration in outsourcing is to recognize and anticipate the underlying industry structural trends (consumer, technology, macro-economic) that can sway a set of value chain capabilities from its current strategic role to a more peripheral role down the horizon.

The key benefits of outsourcing stem from 3rd party’s ability to pool cross-firm and even cross-sector volume and experience on a given set of capabilities to achieve economies of scale (e.g. 3PL warehousing for CPGs; credit assessment for credit card companies) and economies of scope (e.g. product bundling in contract sale force) without compromising competitive advantage.  However structural barriers can prevent capabilities from realizing cross-firm economies of scale and scope. For example, manufacturing in the food sector, early stage R&D in the pharma sector and sales force in the med device sector are capabilities facing structural barriers to realizing cross-firm economies of scale and scope. As such, a third party “capabilities supply market” never develops and companies must continue to pursue  in-house options on these “strategic” competencies.  Broadly, 4 key structural barriers can prevent an outsourcing option from materializing:

  1. Process non-modularity: the ease of decomposing key activities and processes into modular sub-components for outsourcing. For example software testing is amenable to divide and conquer due to standardized, object oriented architecture. In contrast, early stage drug discovery is less modular since conducting biochemical experiments require tacit knowledge that varies from person to person and lab to lab.
  2. Long capital payback: the capital investment intensity and risk required to install and establish 3rd party capacity. To illustrate, building microelectronics fabrication and assembly plants requires a large initial capital outlay that no one OEM was willing to commit to.  The subsequent pace and adoption of contract manufacturing for the global consumer electronics industry was catalyzed by significant  government subsidy and investment programs in the 60′s/70′s by Singapore and Taiwan as an economic growth platform.
  3. Regional or fragmented consumer needs: A highly fragmented set of consumer needs or consumption pattern may limit the benefits from economies of scale and scope. For example, advertising in the used car sales industry enjoys modest economies of scale, compare to say marketing household consumer products, as most customers still search and shop for used cars using localized media.
  4. IP appropriation risk: The ease by which differentiated assets or know-how can be protected through patents and other contractual IP mechanisms if they are exposed to 3rd parties. For example, outsourcing i-Phone manufacturing has low appropriation risk due to a strong thicket of technology patents. Outsourcing sales force for med-device OEMs has strong appropriation concerns since key physician (customer) relationships with sales reps is much less amenable to IP securitization.

Executives faced with making  decisions on the future direction and investment thesis for the firm must assess and anticipate trends (e.g. disruptive technologies, regulatory policies, changing or new customer needs) along the above four structural drivers in determining the outsourcing vs. develop in-house equation. The future identity of the firm depends on it.

Categories Uncategorized

CNN and the “House of Brands” strategy …

February 22, 2009 //
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Take a look at some of the key shows on CNN and one cannot but notice the network’s recent adoption of an explicit “House of Brands” strategy in an effort to better wage the battle for “viewer eyeballs”. The collage below shows some of CNN’s major shows and their distinct “brands” (e.g. AC360, Fareed Zakaria GPS, John King’s State of the Union, etc.).

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By expanding away from the core umbrella “CNN” brand to a portfolio of brands for individual “products”, CNN is trying to form deeper association and identification with its viewers through a sub-segmentation approach. By forming show-specific brands (represented by a distinct anchor along with a catchy tagline reflecting the show’s underlying theme), CNN has increased flexibility to target and reach sub segments of the viewer pool by enabling a more tailored messaging and content theme. In effect, each show (or brand) has the ability to fight its own battle against other networks’ shows targeting the same viewer sub-segments. For example:

- Wolf Blitzer (Tagline: Situation Room – Target viewers who want to get the latest critical and heated news of the day)
- Campbell Brown (Tagline: No Bias, No Bull – Target viewers with the differentiated message that the show is all about keeping the government and businesses straight by calling out mis-information and broken promises)
- Fareed Zakaria (Tagline: GPS or Global Public Square – Target wonky viewers interested in foreign policy and globalization issues)

Although an effective strategy, the “House of Brands” focus could also backfire in the long run: in particular it can potentially weaken the mothership “CNN” brand in the minds of viewers. In addition, the adopted strategy will continue to strenghen the “cult of personality” in U.S media and shift market power away from the network to the individual anchors.

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Categories Business, Marketing, Uncategorized

The More Things Change, The More They Stay the Same …

January 25, 2009 //
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The mortgage CDO initiated market crash of 2008 has surprising similarities with the rail road induced market crash of 1873.  Both are driven by greed induced risk taking in a rapidly changing market, with banks issuing mis-priced securities and bonds on top of risky and faulty assets that resulted in defaults and deflation which in turn triggered a multi-year recession. In the following passage from Ron Chernow’s House of Morgan, if one replaces the railroad concerns (Credit Mobilier,  Northern Pacific) with (Freddie, Fannie, AIG), storied banking institutions such as (Jay Cooke) with (Lehman or Merrill) and there you go …

“Financial markets were at first unsettled by the scandal of the Credit Mobilier, builder of the Union Pacific Railroad … then debilitated by the Northern Pacific, the mighty house of Jay Cooke failed on Black Thursday, Sept 18, 1873. The failure ignited a full blown Wall Street panic … Affairs continue unprecedentedly bad. Five thousand commerical firms and fifty-seven stock exchange firms were dragged down …” [Ron Chernow, House of Morgan]

If nothing else, the repeat of history and the trends in between suggests the following: 

i) In the non-ending Red Queen race, the financial innovations, technologies and policies  will be insufficient to predict and manage the combination of human factors & secular market transformations that beget periodic market crashes.

ii)  Due to the acceleration of secular transformations  driven partly by globalization and technology, disruptions and  market crashes will become more frequent.

Going forward, volatility will be our ally.

Categories Business, Investment & Finance, Uncategorized

Obama, Hillary and a case of Innovator’s Dilemma

October 25, 2008 //
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Like so many favored incumbents, Hillary Clinton could not escape the Innovator’s Dilemma in a competitive bid for the market place (the democratic primary in this case)

Coined by Harvard business professor Clayton Christensen, the Innovator’s Dilemma states that often it is the very strength and core offering of the established incumbent that ultimately lead to their fall.

The favored incumbent (Hillary) spend most of her resources and focus on her core offering (i.e. Experience & Judgement) since this is what her customers (know hereafter as voters) both expect and demand. When a competing new-comer enters the market (Obama) he tends to bring a differentiated set of offerings (Change); having fewer resources and reputation with the voters, the new-comer typically cannot be competitive along the core offerings (Obama claiming he can match Hillary on Experience & Judgement). At first, voters are not willing to trade off the incumbent’s core offering for the new-comer’s new offering (i.e. choose Obama’s message of Change over Hillary’s message of Experience during the early primary days). Lulled by a false sense of security, the incumbent underestimates the new-comer and gives him breathing room to find a niche haven (Hillary not identifying and attacking Obama as the key threat during the early primary days). From his beach-head, the new-comer, over time, continues to refine and improve along both the new and core offering (campaigning on the key message of Change but also selling voters on his Experience & Judgement). As the gap along the Experience & Judgement dimension narrows between the incumbent and new-comer, voters all of a sudden place more value on the new offering dimension (i.e. Obama’s score of 100 on Change + 30 on Experience is more attractive than Hillary’s score of 100 on Experience alone). By the time the incumbent realizes her lagging position across the new offering dimension, it is often too late. Voters now want a mixed offering which the new-comer is more favorably positioned to provide.

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Categories Business, Innovation, Marketing, Misc

Not all off-shorings are created equal …

August 18, 2008 //
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One major branch of the Globalization movement is off-shoring, whereby companies outsource some aspect of their business process (software testing & development, customer call center, etc.) to another country. For companies based in developed nations, off-shoring can not only bring significant cost savings but also provide a beach head opportunity to build the experience curve and develop assets to enter emerging markets to capture growth. This opportunity however is not created equal for everyone.

In particular, knowledge based firms from non-English speaking G7 nations will lose out. Qualified knowledge based talent pool from off-shoring destination countries often pursue English over other developed nation languages. In effect, English on the global stage has achieved significant supply side externalities, making it harder for other languages to rapidly diffuse across the white collar segment of the populace of the emerging economies such as BRIC.

All else equal, English speaking services firms will be able to more efficiently “dis-assemble” its supply chain and configure its scope of the firm compared to non-English speaking firms. This will translate to not only cost side advantages but also to being more aligned with a global market.

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Categories Business, Globalization, Operations & Supply Chain

The illusion of fast pace in the high tech industry

May 12, 2007 //
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Many have characterized the high technology industry, in particular software, as one of rapid change where one must be ever vigilant and paranoid, constantly scanning the horizon for emerging threats from competitors and partners alike. However, this mental model of the high tech industry is too broad in its analysis. If we focused our attention on those sub segments of the industry that are the most profitable, have the least number of substitutes and enjoy the highest level of consumer lock-in, namely those sectors that are build on standards and/or exhibit network externalities, a different pattern emerges.

Technologies that benefit from being a standard setter or exhibit externalities often enjoy consumer lock-in (demand side externalities) and channel partner lock-in (supply side externalities). Such technologies spawn an ecosystem of product offerings, partner complementary products and consumer preferences. Once such an ecosystem becomes a dominant player, they operate in a relatively low competitive environment and enjoy high margins. These ecosystems are hard to topple and thus industry change along that venue will necessarily be slow and innovation will likely be evolutionary rather than revolutionary (think MS OS or Adobe pdf viewer). Moreover, as these technology eco-systems grow larger in size (i.e. competitive value offering relies on multiple partners or consortia rather than a single firm), the pace of change/innovation will decrease further due to more complexity in coordination, incentives and goal alignment.

The high tech industry is not fast paced. It is characterized by a steady, perhaps rapid, background noise of evolutionary improvements and ecosystem adjustments, interrupted once in a while by a disruptive and loud eco-system crash and replacement. This is necessary for sustained profitability.

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Categories Business, Innovation

Root cause(s) of pharma’s R&D woes and possible fixes …

March 29, 2007 //
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The Innovation Gap in Pharmaceutical Drug Discovery & New Models for R & D Success

In the past decade the pharma industry has experienced an innovation gap crisis characterized by relatively flat growth rate in new drug approval rates and a steady growth of over 2.5X in cost. Big pharma has tried to tackle the innovation gap with a series of strategic solutions: throwing money at internal R&D, horizontal consolidation, and increased in-licensing from the biotech sector, all with limited success. In our whitepaper, we survey the literature to pinpoint the fundamental root causes of the innovation gap and explore some of the emerging business models and solutions on the horizon and assess their opportunities and challenges in addressing the R&D crisis.

 

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read online from “Kellogg on Biotech”

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Categories Biotech & Healthcare, Business, Innovation