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|I||The Genetics of Business: Learning from the Fruit Flies||1|
|Ch. 1||Evolution or Extinction: Competition in the Age of Temporary Advantage||3|
|Ch. 2||What Fruit Flies Teach us about Business: The Insights of Clockspeed||17|
|Ch. 3||Survival of the Fittest: The Temporary Nature of Advantage||29|
|Ch. 4||The Secret of Life: Harnessing the Power of the Double Helix||43|
|II||Supply Chain Design: The Ultimate Core Capability||69|
|Ch. 5||The Primacy of Chains: Capability Chains Make a Business||71|
|Ch. 6||Laws of Nature: The Dynamics of the Extended Enterprise||89|
|Ch. 7||DNA Mapping: Strategic Assessment of the Chain||105|
|III||Executing Strategy in the Age of Temporary Advantage: Three-Dimensional Concurrent Engineering||125|
|Ch. 8||Cloning in Three Dimensions: Simultaneous Design: Product, Process, Supply Chain||127|
|Ch. 9||Enriching the Gene Pool: What to Make, What to Buy||155|
|Ch. 10||Molecular Manipulation: The Engineer's Toolkit||175|
|Ch. 11||Genetic Engineering in a Fast-Clockspeed World: Building Capabilities through Dynamic 3-D Concurrent Engineering||197|
|Ch. 12||Back to the Fruit Flies: Evolutionary Pressures Spawn New Hybrids||215|
|Epilogue||When Fruit Flies Inherit the Earth: The Clockspeeds of Public Institutions and Humans||225|
Competition in the Age of
In the natural world, species evolve--that is, they change to meet new challenges--or they die. The same genetic imperative operates in business.
In 1995, two Americans and a German won the Nobel Prize in medicine for their work on the process whereby embryos develop from a single cell into complex adults. Their research shed light on how the various parts of the body develop from that single cell, which itself merges the genetic codes from two parents. The work was hailed as a breakthrough in explaining the formation of birth defects. In pursuit of that goal, these three scientists spent years painstakingly examining hundreds of mutations in thousands of fruit flies (Drosophila). They are not alone. Around the world, several thousand scientists devote their lives to the study of the seemingly insignificant fruit fly.
Why fruit flies? That question changed the course of my research. Biologists study fruit flies because their genetic structure is similar to that of humans, because hundreds of them can be kept in a small milk bottle, and because, despite their genetic complexity, they evolve rapidly: They go from egghood to parenthood to death in under two weeks.
Fruit flies enable a manifold increase in research productivity. In a 40-year career in genetics, a scientist studying humans can barely gather data from a single generation or two before he or she is forced by age to retire. The life span of the fecund fruit fly, however, is so short that scientists can study genetic changes in hundreds of generations during a decade.
Fruit flies are what I call a fast-clockspeed species. That is, they have an extremely brief life cycle. Mammals, such as elephants and humans, live by much slower clockspeeds. They measure their lives in decades, not days. Even slower are the reptiles. The hardy sea turtle, whose life span can exceed a century, has evolved little since its terrestrial cousins, the dinosaurs, roamed the earth.
The Fruit Flies of Business
In the fall of 1995, I was four years into a seven-year research project on a challenging topic: the strategic impact of supply chain strategy on competitive advantage. But my work, focused primarily on the dinosaur-like metal-bending industries, was proceeding slowly--painfully so.
I had begun with a hypothesis contrary to the prevailing train of thought. Reengineering was then all the rage, and business theorists sang the praises of outsourcing and downsizing. Corporate leaders were farming out their manufacturing--and engineering--in the relentless pursuit of cost reductions. I suspected, however, that this practice could seriously backfire, that the outsourcing company could lose capabilities essential to its future. So I began an investigation of the strategies behind the design of supply chains, those networks of companies from the final consumer downstream in the chain all the way upstream to the basic research and mineral extraction that support and supply a business. I wanted to learn how choices in supply chain design affected company performance.
I was making little headway in this research because the supply chains in the three industries I had chosen to explore--automobiles, machine tools, and semiconductor equipment--evolve rather slowly. Many of the customer-supplier relationships in Detroit dated back to the 1950s. The few companies left in the American machine-tool industry had stable, long-term arrangements with their heavy-industry customers.
Intel, the semiconductor company I had focused on, was growing its capacity at exponential rates by utilizing its innovative "copy exactly" manufacturing strategy, which emphasized maximum stability in its relationship with semiconductor equipment suppliers. For all the supply chain dynamics on view, I might as well have been watching glaciers advance.
When I read of the Nobel Prizes in medicine for that research built around the study of fruit flies, I started thinking in a new direction: Instead of monitoring the supply chains of corporate slowpokes, why not speed things up by studying the industrial equivalents of fruit flies? If biologists could accelerate their research productivity one hundred-fold by studying Drosophila, could I speed up my research by finding and studying industrial fruit flies? Here was an intriguing possibility. But where could I find such specimens?
I looked again at Intel, the fastest evolving company in my study, and realized that I had been studying Intel's supply chain from the wrong end. The fruit flies were not Intel's equipment suppliers, who labored long and hard to develop robust technological solutions for multiple semiconductor generations. The fruit flies were Intel's customers--personal computer dynamos such as Compaq and Dell, whose products were outmoded within months of their launch and whose corporate lives seemed at risk on an almost daily basis.
From that insight came another, even more basic idea--that fruit fly companies might actually be able to serve the same function for a business researcher that the lowly Drosophila serves for geneticists. If so, it meant that lessons learned from observing the rapid evolution of supply chains in a Compaq or a Dell could be applied to benefit organizations in other industries.
The Clockspeed Concept
I began to look at other industries, seeking to understand their various rates of evolution. I came to think of these rates as industry clockspeeds. Each industry evolved at a different rate, depending in some way on its product clockspeed, process clockspeed, and organization clockspeed.
The information-entertainment industry, for instance, is one of the fastest-clockspeed fruit flies of the business world. Its products--motion pictures, for example--can have half-lives measured in hours, if not days. The biggest returns, for instance, often come from launching a successful product during the Christmas season when the number of viewers is greatest and when a movie can make an impression just before members of the Academy of Motion Picture Arts and Sciences nominate films for their annual award fest. In December 1997 for example, the major U.S. movie studios and many of the most luminous American directors collectively launched almost $400 million worth of movies on a single Friday evening, with "their fates [to be] a settled issue by Saturday night," according to one commentator."
Process clockspeeds in the information-entertainment industry are similarly breathtaking. We learn almost daily of new processes and services for delivering information content to the home, office, or mobile workstation. Organizational dynamics are turbulent as well. Relationships among such media giants as Disney, Viacom, Time Warner, Inc., and Rupert Murdoch's News Corporation are routinely negotiated, signed, sealed, and renegotiated in hardly more time than it takes a fruit fly to become a grandparent.
Somewhat slower, semiconductors have a clockspeed measured in years rather than months. An Intel microprocessor product family such as the Pentium II has a market life of two to four years. As for its process clockspeeds, each time Intel sinks a billion dollars into building yet another microprocessor superfactory, it expects much of that investment to be obsolete in little more than four years. That gives Intel a four-year window to recoup its outlay of billions of dollars in capital, plus achieve a return on that investment.
Moving at an even slower clockspeed, the automobile companies typically refresh their car and truck models every 4 to 8 years. In the process domain, they expect that a billion dollars invested in an engine or assembly plant will remain vibrant for 20 years or more.
At the slowest end of the clockspeed scale--up there with the sea turtles and the California redwoods--are the manufacturers of aircraft. The Boeing Company, for instance, measures its products' clockspeeds in decades. Mega-profits still flow from sales of its venerable 747 jumbo jet 30 years after its launch. The 747s produced in the 1990s rely on the same basic design and the same manufacturing plant that rolled out the first of these aircraft almost three decades ago. Elsewhere in the slow-clockspeed aircraft industry, Lockheed-Martin was working diligently in 1997 to design a warplane that was not expected to go into production before 2008.
The First Lesson of the Fruit Flies
Observers often note that some industries--telecommunications, computers, and the like--undergo changes with astonishing rapidity, whereas others seem to mosey along at a leisurely pace, scarcely bothered by changes elsewhere in the business environment. This book, however, seeks to examine the experiences of companies in fast-clockspeed industries and draw from them lessons to apply to others, much as biologists learn about human beings from the research they conduct on fruit flies. In short, the insights that the corporate fruit flies offer can be illustrative and useful to all companies, even those with medium or slow clockspeeds.
Every student of industrial competition knows the story of one of the most information-rich fruit flies of the late twentieth century--namely, the computer industry. Specifically, this is the story of the famous--one might say, infamous--turning point that occurred when IBM made its fateful decision to outsource its personal computers' microprocessing needs to Intel and its operating system to Microsoft. Back in the early 1980s, when IBM launched its first personal computer (PC), the company pretty much was the entire computer industry. IBM had always prided itself on the technologically deep organization that designed and produced its super-sophisticated mainframe products. But the PC presented IBM with a special "three-dimensional" design challenge: The company needed to create a new product, a new process to manufacture it, and a new supply chain to feed that process and distribute the product.
The business and technical design IBM selected was a departure from the company's tradition of doing everything in-house, from product design and prototyping to manufacturing and distribution. To keep costs low and increase speed to market, IBM chose a modular product design, built around major components furnished by suppliers such as Intel and Microsoft.
By 1998, the personal computer had gone through seven microprocessor generations: 8088, 286, 386, 486, Pentium, Pentium-Pro, and Pentium II. Still a powerful, profitable, and influential company by the standards of the computer industry, IBM had nonetheless been far outdistanced by its two hand-picked suppliers, who had taken the lion's share of the profits and industry clout that flowed from IBM's standard-setting product. IBM's suppliers also won the allegiance of millions of customers who came to care far more about the supplier's logo--"Intel Inside" or "Windows 95"--than about the brand name of the company that assembled the components and shipped the final product. The power in the chain had shifted, as had the financial rewards.
IBM's decision to outsource its PCs' microprocessor and operating system determined the contours of the entire industry for years to come. In terms of its effect on IBM, the PC decision represents a powerful cautionary tale, a lesson from the sad experiences of a fruit fly company: When designing your supply chain, whatever your industry, beware of "Intel Inside."
That lesson applies equally well to slower clockspeed industries such as automobiles. The role of electronics subsystems, for example, has evolved in the automotive industry from the early years through the 1960s when the electrical systems--those controlling a vehicle's lights, radio, windshield wipers, starter motor, and so on--were little more than an afterthought. In those years, the core subsystem of the automobile was its steel body, which not only defined the car's styling, a critical factor in its market reception (Ford's Edsel comes to mind), but also determined the vehicle's structural integrity, ride, handling, and manufacturability. In contrast, the electrical components had little impact on design, manufacture, costs, or sales.
Today, the dollar value of a car's electronics is overtaking the value of its steel body, and the electronic system rivals the steel body as one of the most important subsystems: Car companies design their vehicles with a customer profile in mind, and virtually all the features that affect customers' perceptions of the vehicle are--or soon will be--mediated by electronics. Those features include acceleration, braking, steering, handling, and seating, as well as the communication, information, and entertainment systems.
Now consider the situation of Toyota, the third-largest automobile company in the world, and arguably the most formidable competitor in a no-longer-cozy oligopoly. Although the company maintains a virtually unassailable set of competitive advantages, it has traditionally been far less vertically integrated in electronics than some of its competitors, including Ford and General Motors. In fact, Toyota has become dependent on one company--Denso (formerly Nippondenso)--for many of its electronic components and systems. The question arises whether Toyota will stay the course, risking the fate of IBM relative to Intel, or adjust its supply chain strategy and assert greater internal control over electronics.
The relatively slow clockspeed of the auto industry gives Toyota some time for deliberation and choice, but there may come a day when customers choose automobiles based on whether they say "Denso Inside" or "Bosch Inside" rather than by the name of the company that stamped and welded the sheet metal. As might be expected of the world's most benchmarked company, Toyota is not waiting around. It understands the dynamics of the fruit flies and has already begun increasing its investment in its own electronics capability.
Boeing and Its Suppliers
To emphasize the contrast between fast- and slow-clockspeed industries, consider the Boeing Corporation's commercial aircraft business, which in recent decades has focused on the remarkable series of jets denoted the 747, 757, 767, and 777. Although Boeing has designed and built each one, suppliers from all over the world have made their contributions. By the late 1990s, outsourcing accounted for close to 50 percent of an airplane's total value. In fact, four Japanese aircraft manufacturers--Mitsubishi Heavy Industries, Kawasaki Heavy Industries, Ishikawajima-Harima Heavy Industries, and Fuji Heavy Industries--contribute approximately 40 percent of the value in airframes of wide-body models, applying specialized skills and tooling that in many cases are unique in the world.
To understand the relationship between Boeing and these Japanese suppliers, you have to go back several decades to a time when the company made its first efforts to sell aircraft in Japan. In order to win sales to Japanese airlines, Boeing needed to give Japanese companies some of the manufacturing work involved. Boeing's managers accepted those terms, setting into motion a dynamic process that has led to an important interdependency.
Both sides of the partnership have been big winners. The Japanese bought scores of aircraft, helping Boeing to become the dominant commercial aircraft company in the world. At the same time, the Boeing relationship has enabled the Japanese manufacturers to improve their technological capabilities, thereby increasing their appeal to Boeing and other manufacturers worldwide. Although Boeing depends greatly on its suppliers, the company's management believes that its systems-design and integration skills will prevent any supplier or set of suppliers from wresting away industry control.
In this turtle of an industry, upheavals and reversals of fortune do not take place overnight. Yet the examples of fruit fly industries in this book should raise a warning flag to Boeing that "Mitsubishi Inside" represents a clear if not present danger. Because of the slow clockspeeds typical of the aircraft industry, it is especially difficult to get executives in such industries to focus on the potential penalties for outsourcing key competencies--the results typically would not come to roost during the tenure of any currently active manager. This condition suggests that companies in slow-clockspeed industries should set clear guidelines as to who in the organization takes responsibility for monitoring those relationships, lest time lull the firms into a false sense of security.
Competition in the Age of Temporary Advantage
Part I of this book lays out the basic concepts and insights of business genetics. It focuses on case studies from fruit fly industries such as personal computers and information-entertainment. Beginning with the observations that industry clockspeeds vary and that faster learning may come from studying the fruit flies, chapter 2 draws out a number of rich lessons from the information-entertainment industry. Chapter 3 focuses on the implications of a single observation--that all advantage is temporary. No capability is unassailable, no lead is uncatchable, no kingdom is unbreachable. Indeed, the faster the clockspeed, the shorter the reign. Sustainable advantage is a slow-clockspeed concept; temporary advantage is a fast-clockspeed concept. And, clockspeeds are increasing almost everywhere.
By observing the fruit flies, we can see several patterns emerging in industry structure dynamics. Understanding these dynamic processes helps us develop principles to guide choices in the value chain--what I call supply chain design. In addition, by observing (in chapter 4) dynamic processes in the evolution of industry structures, we can develop insights to understand how an industry's future may unfold. Of course, no one has a crystal ball to gaze into the future. However, I believe that observing the fruit fly industries gives us the next best thing: an opportunity to see how one's future might play out based on the experiences of others--who happen to be traveling in a faster lane of traffic.
Part II of the book focuses on concepts to support the design of one's supply chain of capabilities. In this age of temporary advantage, the ultimate core competency is the ability to choose capabilities well. A company may have a core competence in product design, brand marketing, custom manufacturing, or high-volume distribution. Each of these may be important capabilities in its competitive environment. But the overriding competency is the ability to determine which of those capabilities are going to be the high-value-added capabilities and which will be the commodity abilities--and for how long. Lasting success will go neither to the company that manages to find a great business opportunity nor to the firm that develops the best proprietary technology. Rather, we will see (in chapter 5) that the greatest rewards go to the companies that can anticipate, time after time, which capabilities are worth investing in and which should be outsourced; which should be cultivated and which should be discarded; which will be the levers of value chain control and which will be controlled by others.
Observing the fruit flies leads us to another lesson: No company is an island. You may think of your company as a solitary, stand-alone entity served by subsidiary organizations, the collection of which is conveniently called the supply chain. That view, however, vastly underestimates the importance of the chain as a whole and fails to capture its true essence. Even the example of IBM, Intel, and Microsoft, briefly recounted above, illustrates how power and value can migrate up and down the chain. In fact, one sees in Bill Gates's search for Microsoft's encore to PC operating system dominance the instinct that future control of the information industry probably lies somewhere else in the chain. Winning with Windows is only a brief stop in a perpetually evolving competitive process.
Supply chain design is too important to leave to chance. Just as genetic engineering has begun to shortcut the process of species evolution, proactive chain design will shortcut and forever make obsolete the slow, incremental processes of industrial evolution. Chapter 6 examines this concept in greater detail. Analyzing fruit fly industries and individual companies enables us to see with greater clarity and accuracy the technology and market forces that will affect future needs. Understanding those needs makes it more likely that one can design superior capability chains.
Properly viewed, the company and its supply chain are joined at the hip, a single organic unit engaged in a joint enterprise. I propose (in chapter 7) that we view this extended enterprise as consisting of three strands: a chain of organizations, a chain of technologies, and a chain of capabilities. Strategic analysis must consider all three. Individual core capabilities, therefore, can be assessed only in the context of their capability chains.
Part III of the book focuses on implementation. Integrating new concepts into existing business processes can be harrowing. It sometimes requires tearing up the whole organizational chart. But the principles proposed here do not demand that kind of radical organizational surgery.
Instead, I urge in chapters 8-11 that companies expand on a well-developed organizational process usually called concurrent engineering or integrated product development. Ultimately organizations should undertake what I call three-dimensional concurrent engineering (3-DCE), the simultaneous development of products, processes, and supply chains. In companies that now practice two-dimensional concurrent engineering (product and process only), supply chain development tends to be haphazard. Chain design decisions are not fully integrated into the development processes, and the strategic implications of supply chain design are typically not recognized in the same way as are those of the product decisions. Within the three dimensions of development, I propose (in chapter 8) analyzing strategic choices at the "architectural" level, assessing opportunities for crafting simultaneously product architectures, process architectures, and supply chain architectures.
Within 3-DCE lies the essence of supply chain design--the make/buy decision. Managers are called upon to determine which capabilities are core and which are ancillary. It is tempting to think that THE answer to the make/buy issue exists and is simple. Indeed, many business leaders advocate the buy-anything-you-can principle and articulate this position at every opportunity. Equally persuasive arguments exist for expanding widely the set of things considered as important competencies that can lead to a policy of make-as-much-as-you-can. Business situations rarely offer such either-or choices, and neither extreme strategy can stand the test of time and competition. Chapter 9, therefore, uses the clockspeed concept to expand our set of tools for evaluating and acting on critical make/buy decisions. Chapter 10 follows with instructions on how supply chain decisions can enhance other concurrent engineering methodologies. Chapter 11 offers two detailed case studies to illustrate the thinking and tools of 3-DCE--one each from medical information systems and communications satellite development. Chapter 12 revisits the PC industry in the late 1990s to observe the new insights from this robust industrial fruit fly and to sum up the ideas and methodologies presented.
The Epilogue concludes with ideas and illustrations on applying clockspeed ideas in the public sector--in university administration and regional economic development, as examples.
In the pages that follow, I offer not just a theory of industry clockspeed and business genetics, but a wealth of case histories that illustrate its principles. Moreover, I present concrete, practical tools of analysis and implementation. The objective throughout this book is to help managers and business leaders understand industrial evolutionary processes and to guide investment in evolving capability chains. As we will see, the dynamics of fruit fly evolution can lead to insights about how individual companies and entire industries evolve and adapt, as well as what dangers they face if they do not adapt quickly enough.
Myriad forces at work in the business world--economic, financial, political, social, environmental--make it impossible to prescribe a single solution for every problem. But it is neither impossible nor impractical to draw reasonable inferences about future behavior--that of companies, industries, and human beings--and to consider the implications of the increasing clockspeeds in the world in which we all live and do business. Some of those implications may surprise you. I hope that they will be useful in provoking ideas that will inspire new ways to think about designing and managing the extended enterprise.
In his engaging new book, Clockspeed: Winning Industry Control in the Age of Temporary Advantage, Charles Fine maintains that each industry has its own evolutionary life cycle (or "clockspeed") measured by the rate at which it introduces new products, processes, and organizational structures. Managers in any industry, he says, can learn from such industrial "fruit flies" as Internet services, personal computers, and multimedia entertainment.
Business Editor Laurie Petersen talked to Fine about his new book and his premise that the ultimate core competency is supply-chain design: choosing which components and capabilities to keep in-house and which to purchase from outside the company.
barnesandnoble.com: Why did you write this book?
Charles Fine: I felt like I came across some important ideas that I hadn't seen before in business. I began to get a positive reaction as I talked about them in the business community. By observing fast-evolving industries (the fruit flies), you can often observe dynamics that will affect your own industry. In the same way that biologists study fruit flies to observe many generations of evolution, you can observe many generations of industry if you look at a fruit-fly industry.
Barnes & Noble.com: What's a fruit-fly industry?
CF: The personal-computer industry is a fast-evolving one. IBM made some fairly fateful decisions by choosing to outsource to Intel and Microsoft the key components; they essentially changed the entire dynamic of who controlled the industry. The first lesson here is that supply-chain design is the ultimate core competency to keep under control.
bn.com: How do you think most companies are doing at that?
CF: Not very well. Usually supply-side decisions are relegated to purchasing and are not strategic, yet they can have very strategic implications for the rest of the company.
bn.com: Your book is very laudatory of Michael Dell and Dell Computer. What has Dell done right?
CF: The thing that excites me the most about Dell is that their supply-chain design is specifically engineered for a fast clockspeed world. All their policies are aligned so that the faster their clockspeed, the better the inventories, and the better their competitive advantage is. I hold them up as an example of how a company can really use supply-chain design to take advantage of fast clockspeeds instead of just fretting about them.
bn.com: If you're working at a company that frets, how do you start changing things?
CF: The last chapter of my book is devoted to this. The first and most important step is to do some broad environmental scans. Look at other fast-moving organizations and try to see what is happening at these companies that you can relate to your situation.
Next you should try to do supply-chain maps for your organizational chain, your capability chain, and your technology chains. Then look at the clockspeeds of the different pieces of the chain and figure out which are at the fastest speeds. These are the ones that can upset the balance.
bn.com: Which companies do you think are in danger?
CF: I think the auto industry is ripe for a change because of their increasing reliance on suppliers, but I've given that talk to a lot of auto-industry executives, and they say, "What happened to IBM could never happen to us."
bn.com: What companies are the best bets for career-building?
CF: Companies to stay away from are those that only look inside or only look at their immediate industry. Companies that are broader are willing to look at the possibilities of what can be transferred from other industries.
bn.com: What do you hope to accomplish by writing this book?
CF: The organizational change I would hope to see is that the people responsible for supply-chain design be integrated into the more strategic parts of the company.
bn.com: What are you reading now?
CF: The Innovator's Dilemma by Clayton Christensen. I'm also planning to read Information Rules by Varian and Shapiro.
About the Author
Charles Fine is professor of management at M.I.T's Sloan School of Management and codirector of the M.I.T. International Motor Vehicle Program. He is a recognized authority on the dynamics of technology management, supply-chain design, and industrial competitiveness.
Posted May 13, 2012
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