BUSINESSWEEK ONLINE : AUGUST 28, 2000 ISSUE
THE 21ST CENTURY CORPORATION -- THE CORPORATE ECOSYSTEM Perspectives: Limits of the New Corporation The strength of the virtual organization is in outsourcing and paring down to core activities--until the game changes Everywhere we turn, it seems, management gurus are penning obituaries for the traditional corporate organization. Visionaries say today's integrated companies are lumbering dinosaurs that soon will be displaced by focused, fast, flexible companies--virtual corporations. We're told that such entities, by concentrating on best-in-class core capabilities and outsourcing slices of their activities that others do better, can integrate across the ether and disband painlessly when the job is finished. But beware of one-size-fits-all proclamations. Companies can only outsource and play virtual games when the performance of their products is more than adequate for what customers need, so that some of their activities can be standardized. However, when companies have to push the frontiers of performance, managerial coordination is essential. That's right--virtual operations won't work on the bleeding edge. The challenge for those who hope to successfully manage in the 21st century will be to understand when and why traditional organizations will persist, and what causes the ground to shift. Every product or service is created via a chain of value-added activities. I can outsource a piece of that to a supplier if three conditions are met. I must know which attributes need to be specified. The technology to measure those attributes must be reliably accessible. And, if there is any variation in what a supplier delivers, I need to know how it will interact with other elements of my system, so that I can plug what I procure into my value-added chain with a predictable effect. Economists have a less technical term for this condition: perfect information. The flexible, virtual organizations that visionaries see dominating 21st century markets will, in fact, do so--but only when there is necessary and sufficient information to allow markets to work. However, there are innumerable situations where that's not the case--particularly when truly new technologies emerge. Take IBM's (IBM) development of magneto-resistive (MR) disk-drive recording heads. MR heads can increase a disk drive's data-storage capacity by a factor of 10, but achieving that increase is not an easy feat. A drive maker cannot simply outsource these heads and then plug them into a conventionally designed product. The disk and dozens of other elements must be modified as the heads are incorporated. MR technology isn't understood well enough for engineers to specify to a supplier which attributes of the head are most critical. Also, engineers don't yet understand how changes in design affect manufacturability or how subtle changes in manufacturing methods affect performance. So IBM has to build these devices in-house. PENDULUM. On the other hand, machines not meant for the frontiers of performance can be made more effectively in a nonintegrated model, such as the system made popular by Dell Computer Corp. (DELL). Cisco Systems Inc. (CSCO), which exploited the modular architecture of its routers to disrupt the telecommunications-switching business from the low end, established for many the standard for a New Economy company. Cisco has efficiently outsourced much of its manufacturing to suppliers as well as much new-product development to startups it acquires. But as Cisco has moved into the most-performance-demanding tiers of its markets--particularly optical networks--it is being forced to integrate, performing many product-design and manufacturing activities internally. Cisco's competitors are finding that they have to become less virtual in order to compete. Likewise, in the 1980s, the personal-computer software business was populated by specialized companies cranking out products that cleanly plugged into the standard interfaces defined by Microsoft Corp.'s (MSFT) MS-DOS. When customers' ambitions shifted--hoping to insert graphics files into text documents, for example--the pendulum of competitive advantage swung toward integration. There were no standards at the interfaces among these programs that defined how it could be done. Microsoft responded to this shift by integrating its Windows operating system into its Office suite of applications. The result: Narrowly focused companies, such as WordPerfect, Lotus, and Harvard Graphics, vaporized. Now that Microsoft's products pack more functions than customers can utilize, however, we sense the pendulum of competitive advantage swinging back toward companies focused on those narrower, non-integrated niches. Managing as the pendulum of competitive advantage swings between integration and non-integration is tough. But when good managers accurately frame what needs to be done, they can be very effective. Neither the proclamations of management gurus nor the Justice Dept. dictates will determine how corporations should be organized. That will be hashed out as technological progress interacts with the evolving needs of customers. When product or service performance is more than good enough--so that companies must compete on the basis of speed, flexibility, and cost--less integrated companies will have the upper hand. But when performance does not yet satisfy customers' needs, integrated companies will have the advantage--even in the 21st century. By CLAYTON M. CHRISTENSEN Christensen is a professor at the Harvard Business School and the author of The Innovator's Dilemma _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Ecosystem And Now, the Just-in-Time Employee TABLE: Of Those Who Define Themselves as Free Agents Perspectives: The New Wired World of Work The Barons of Outsourcing CHART: The Boom in Outsourcing Perspectives: Limits of the New Corporation Different Countries, Adjoining Cubicles TABLE: Where White-Collar Jobs Are Going Commerce Reweaves the Social Fabric High School Will Never Be the Same Watching over the World Wide Web TABLE: The New World Order INTERACT E-Mail to Business Week Online

Copyright 2000-2009, by The McGraw-Hill Companies Inc. All rights reserved. Terms of Use   Privacy Notice