There was a fad, a big fad, in business strategy a few years ago that insisted that the way to success lay in discovering your “core competences” and then sticking with them. Seemed reasonable, but I prefer the strategy offered by Philip Kotler (as I recall): Figure out what the market will buy and then get good at that.
If a company were going to adopt a core competence strategy, though, the question arises of what its core competences are. Take Google, for example. It’s a search engine company, of course, that’s also getting into other forms of software, like operating systems (Android) and apps. All software of some form or another, which might give you an idea of where its core competence lies. So you would think that it would buy its computing hardware from outside vendors, possibly leasing time on server farms from companies that maintain such equipment for a living.
Furthermore, you might expect that they would probably shop around and outsource to the lowest-cost vendors around the world. Just good business: We’re a software company, and the less we have to spend on hardware, the more flows to the bottom line. Google execs could even have congratulated themselves on searching for the best talent or value.
You would be wrong:
Most companies buy servers from the likes of Dell, Hewlett-Packard, IBM, or Sun Microsystems. But Google, which has hundreds of thousands of servers and considers running them part of its core expertise, designs and builds its own. "Google uncloaks once-secret server," by Stephen Shankland, http://news.cnet.com/8301-1001_3-10209580-92.html
It’s worth reading that again: “it designs and builds its own.” (my emphasis) They don’t just spec their servers to Dell, HP, etc, but they actually bolt the things together (they do use Intel and AMD chips). Wouldn’t it have been fun to eavesdrop on the strategy sessions when that decision was being made? It would be like Southwest Airlines debating whether to make its own airplanes.
Is this a critical component in Google’s success? I think so, although I’m hard put to explain it. One way to look at it is to see what happened to Google’s early competition, particularly companies like Alta Vista and Lycos. I was somewhat surprised to find out that both of these outfits are still in business; at one time, however, they dominated the industry (Alta Vista was owned by DEC but the brand now belongs to Overture). This is just a guess, but I’ll bet the people running Alta Vista, Lycos, and even Yahoo did not build their own servers.
I first ran across this phenomenon when studying Toyota. They don’t build their own robots, but they buy the basic machines and then heavily modify them for their own use. For years, it was said that they never installed an off-the-shelf robot in their factories (anybody with updated info?)
Obviously you don’t have to build your own servers, machine tools, or airplanes in order to be successful. I’m composing this on my trusty MacBook, which says “Assembled in China” on the back, but there were rumors floating around that Apple would build the aluminum MacBooks and the new MacBook Pros in a highly automated factory in the US. The same article suggests that Apple, like Google, sees the inherent value in being more than just a design and marketing company:
… of a nonpolluting, energy-efficient, wind- or solar-power plant, built in the United States, that would free Apple of its dependence on Chinese manufacturers (and unpleasant Chinese labor conditions) and fulfill Steve Jobs’ long-held dream of moving Apple both up and down the value chain — building a legacy at Apple that could survive and prosper long after he is gone.
The question is not whether in-sourcing manufacturing is necessarily good. Why not “fully leverage global sources of talent and innovation,” as an editorial in InformationWeek recently described outsourcing? Rather, it’s whether, given the current competitive landscape where everybody outsources, in-sourcing — if you could figure out how to do it at a reasonable cost — could strengthen the company over the long run. Sub-optimizing one component of the organization by, for example, outsourcing IT might allow you to save a few bucks and perhaps tap into the best IT talent, but does that translate into a better company as a whole, particularly in the economic situation we face today? Optimizing is often the enemy of robustness, just to raise another point.
Proponents of outsourcing might object: Isn’t in-sourcing a form of focusing inward and isn’t this bad? The answer is no, it’s not bad per se. Any organization has to give a lot of thought to continually improving how it does business, becoming lean, for example, or implementing the FESA* climate. The trick, as Boyd pointed out, is to improve your (internal) operations but determine the value of what you’re doing by looking outside (”You cannot determine the character or nature of a system within itself, and attempts to do so will generate confusion and disorder.”)
The distinction is subtle but crucial. In Google’s case, it requires them to keep up with the state of the art in server and network design and also continually assess how building their own servers affects Google’s customers and competitors. The really great companies all obsess with studying their own systems and cultures, but they also maintain an accurate orientation about what’s going on with customers and competitors.
You might compare this to a true core competence strategy, which is largely an internally-driven exercise and runs a serious risk of crashing into Boyd’s injunction. Consider what often happens — decisions about what is “core” are made through a process of political warfare among the advocates of various hobby horse technologies. In the late 1990s, for example, Motorola hung on to analog cell technology one generation too long, allowing Nokia to leapfrog them, because the proponents of advanced analog phones were politically powerful.
Another way to look at the difference between understanding what’s going on inside your organization and pumping up your own entropy is to consider Deming’s System of Profound Knowledge. Although Deming was all into using powerful statistical tools to examine operations and processes, profound knowledge is external, about how the company is interacting with the world:
A system cannot understand itself. The transformation requires a view from outside. The New Economics for Industry, Government, Education.
(To which Boyd might add, “and a system that attempts to understand itself will become confused and disordered.”) Deming captured this seeming paradox of focusing internally in an external way in Out of the Crisis when he wrote that the customer is the most important part of the assembly line.
For Google, it might be that the customer is the most important part of its array of hundreds of thousands of servers. If so, they’re in-sourcing for the right reasons. If you can improve your company, and here Collins’ hedgehog could provide a useful test, by having other organizations perform functions outside the intersection of the three circles — and if the customer is still the most important part of your company’s operations — then you could be outsourcing for the right reasons.
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*FESA: Fingerspitzengefühl, Einheit, Schwerpunkt, Auftragstaktik. These four German words describe an organizational climate of high mutual trust designed to stoke up initiative and focus it to accomplish the organization’s objectives. More (lots more) in Certain to Win.
http://www.chetrichards.com/c2w/2009/04/03/competences/comment-page-1/
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