GET DOWN OFF THE PLATFORM AND GET YOUR PROCESSES DIRTY.

COOPERATION AND CREATIVE FRICTION WITHIN THE PRODUCTION CHAIN WILL SIGNAL SUCCESS OR FAILURE IN 21st CENTURY MARKETS.

In the book The Only Sustainable Edge: Why Business Strategy Depends on Productive Friction and Dynamic Specialization (Harvard Business School Press, April 2005), Authors John Hagel III and John Seely Brown argue that sustainable competitive advantage in the future will come from a capacity to work closely with other highly specialized companies around the globe to get better faster. Simply using outsourcing to trim costs from processes and components will not provide a sustainable economic advantage for American companies.

The groundwork for these changes is already being put in place in the form of global process networks, an innovative way to flexibly mobilize specialized capabilities on a global scale. These networks take an end-to-end view of business activity that extends well beyond the traditional boundaries of an individual enterprise. For example, most companies today focus on the challenge of coordinating activity with their first-tier suppliers and distribution channels. But few have developed the skills needed to reach beyond this tier and coordinate the sourcing of raw materials to their final delivery..[i]

This mode of manufacturing has also been called “modularization”, where each component of a product or a service delivery is modularized, performed by a partner in the network, and later brought back together in the final product. Modular partners are allowed freedom to innovate and offer lower-cost and/or better quality products or services within broad design and function parameters.

This stands in contrast to traditional supply chain management, where organizations present detailed standards and specifications to a small pool of their vendors. These organizations then attempt to squeeze price, finance term and other concessions from these suppliers. Rather than leverage the comparative knowledge advantages of these suppliers, the large organizations lose much of the comparative knowledge advantages through inflexible product standards.

BACK ON THE BIKES.

Hegel and Brown illustrate their argument with the example of the Chinese motorcycle manufacturers centralized around Chongqing, China.

To imagine how Western companies may need to adapt to emerging markets, consider the way motorcycles are designed and built in China. Since the mid-1990s Chongqing—and its 32 million people—has been home to a vibrant business ecosystem built around incremental innovation in motorcycle design and manufacturing. This growth is being driven by several process networks focused on product innovation and commercialization. The orchestrators of these process networks are entrepreneurial Chinese companies that few Westerners have heard of, such as Dachangjiang, Longxin, and Zongshen…

Within Chongqing, substantial incremental innovation occurs at the level of product architecture, redesign of components, and savings in sourcing. Many Japanese motorcycle manufacturers would challenge this assertion, arguing that these companies are imitating Japanese products and violating their intellectual-property rights. Ge Dongsheng and Takahiro Fujimoto, two economists at Tokyo University, have studied the experience of Chongqing's motorcycle design-process networks in some depth. They document a new approach to product development, which they describe as "localized modularization."

The economists note that Chongqing's privately owned motorcycle assemblers serve as design orchestrators. They first define the key modules of the product, specifying broad performance parameters, such as weight and size, in rough design blueprints. Then they work with major suppliers for more detailed designs of components and subsystems. The key to this approach lies in the partners' ability to redefine the product architecture within relatively independent functional modules. They've moved to a loosely coupled product architecture.

With this architecture, companies in a process network can deliver lower-cost components with satisfactory quality much more quickly than with conventional, top-down product design. They can also harness the power of what we call "productive friction"—what happens when people with diverse backgrounds, experience, and skill sets engage one another on real problems, especially across enterprise boundaries. When the right conditions are in place, the exchange generates not only negative friction [Author’s Note: “Negative Friction” is an oxymoron if there ever was one] but also a creative resolution of the issue. The participants also deepen their own capabilities.[ii]

LEVERAGING “COMPARTIVE ADVANTAGES” CREATES GREATER VALUE FOR EVERYONE. CONSUMERS, ASSEMBLERS, SUPPLIERS, FINANCIERS.

The Author is using “comparative advantage” in the sense of comparative advantages among and between economic actors, not in its more classic sense of comparative advantages between countries as a rational for free trade. In the context of international trade, and to support the concept of free and open international markets, economists describe some countries as having “comparative advantages” over others in the production of certain types of products.

For example, Honduras grows excellent bananas. Its climate and soil is adapted to banana growing. Iceland could develop an internal banana growing industry with greenhouses and artificial light in the winter. But the cost of growing bananas would be extremely expensive; far more that Iceland would spend by importing bananas. Similarly, Iceland can raise and/or catch fish like Arctic Char and Salmon at a competitive cost and sell them to Honduras for a far lower price than Honduras could raise similar fish in refrigerated tanks.

A similar situation exists amongst economic participants. Ford could make its own shock absorbers, but finds it is cheaper to buy them from a shock absorber manufacturer. So the concept of comparative advantage works in both contexts.

TAKE “COMPARATIVE ADVANTAGE” OUT ONE MORE STEP
OR ONE MORE DERIVATIVE

Let’s imagine we manufacture headlights for motorcycles, ATVs and snowmobiles. Our customers send us specifications for bulb headlamps, even though we have developed an LED (Light-emitting diode) headlight that is actually cheaper than a sealed beam headlamp. We can of course go to the motorcycle, ATV or snowmobile company and advise them of our better alternative. But this would require an expenditure of time and effort by all parties and require people to actually make and justify decisions. An uphill fight. And as those who have worked in large organizations know, you have to pick and choose your fights carefully.

BRIGHT LIGHTS. BIG SAVINGS.

However, if our customers just tell us that they want a headlight of a certain size, luminosity, ECT., and we are in a modular development model, we simply deliver our LED model We make more money, the assembler gets a lower cost and better headlight, and the rider, of course, gets a better headlight. Everyone in the value chain gets more value.

This is admittedly a simplified example. But it is an example of real world scenarios where value can be added to a chain of events or sucked out of a chain of events.

ADD VALUE AND YOU WILL FIND A WARM WELCOME IN THE DESERT OF THE REAL!



[i] “The Shifting Industrial Landscape, Hagel and Brown, Optimize, April 2005.
[ii] “The Shifting Industrial Landscape, Hagel and Brown, Optimize, April 2005.