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Why Business Strategy Depends on Productive Friction and Dynamic Specialisation

By John Hagel III and John Seely Brown
Harvard University Press, $25, May 2005

In a publishing world awash with eye-catching books such as Freak­onomics, Blink and Everything Bad is Good for You, this one is in trouble. Its title is so baffling and boring that few book-store browsers will be tempted to pick it up. If its authors are experts on business, why are they so bad at marketing?

It is a shame for two reasons. The first is that the cognoscenti know that John Hagel and John Seely Brown – the two often work in tandem – are among the most insightful analysts of trends in management. The second is that it contains some ­compelling ideas about the challenge facing a lot of businesses: the growth in competition caused by lowered trade barriers and technological change.

This not only makes it harder for companies to make high returns but also puts in question their reason for existence. Ronald Coase, the economist and Nobel ­laureate, argued that companies exist because it is cheaper to carry out a range of transactions within one organisation than having to rely on market transactions. But as trade barriers fall, it becomes less obvious that companies are indispensable to wealth creation.

That has led to a lot of – sometimes exaggerated – suggestions that technology is allowing small enterprises to compete on equal terms with industrial corporations. Hagel and Seely Brown suggest an alternative: that large companies can prosper in this new world. To do so, they must concentrate on their areas of expertise while collaborating globally with others specialising in different things.

This may mean redefining both the “core” and the “edge” of the company. Fewer things will be done within the corporation itself – everything from support services to business processes may be outsourced and probably off-shored.

But companies must equally find ways to work more effectively with suppliers, not simply to cut costs but to collaborate on product innovation.

With one difference, this is somewhat reminiscent of the rationale touted in recent years for small companies to operate in clusters – whether in Silicon Valley or in the industrial districts of Italy and Spain. By competing with each other in selected ways while co-operating on other things they were able to share knowledge and obviate some of the costs and disadvantages of being small.

The difference is that it now helps to be big. Small companies in Italy are now under pressure from Chinese competitors and find it hard to maintain manufacturing at home. But some big companies compete by building a global network of suppliers and corporate collaborators. That not only saves them money on labour-intensive activities but helps them
to develop products and ­services.

Hagel and Seely Brown are particularly enamoured of Li & Fung, the Hong Kong-based clothing supplier that they define as a “process orchestrator”. It makes goods for western companies by drawing on a network of 7,500 partners – getting some yarn from Korea, having it dyed in Thailand, woven in Taiwan, cut in Bangladesh and assembled in Mexico with a zipper from Japan.

Of course, the wonders of global supply chains are becoming familiar to all of us, but the authors’ point is not that there is a lot of manufacturing capacity out there for anybody smart enough to use it. They emphasise that these companies are partners to Li & Fung rather than simply suppliers. By operating in a network these partners can help each other to innovate in both design and manufacture. There lies the catch for many western companies that are already struggling to get their heads around the impact of global outsourcing. The most obvious solution for a manufacturing company that can no longer afford to make things in its home country is to devolve all such responsibility to companies in Asia while holding on to higher-end functions such as design and marketing.

As another of their examples – the original design manufacturers of Taiwan – shows, it may not be that simple. Companies such as Hon Hai, Quanta and Compal are not only making goods to order for western companies but taking on the design of these products. In other words, what Thomas Friedman, the New York Times columnist, calls the “flat world” can be a very challenging place.

As it happens, the book is being published at a time when BenQ, another of the Taiwanese original design manufacturers, has just struck a deal to take over the mobile handset arm of Siemens. Despite BenQ’s efforts to export its own branded products to the west, a western brand name still has value. Lenovo, the Chinese maker of personal computers, did a similar deal with IBM for that reason.

So where do companies go from here? By digging into the ramifications of the flat world rather more deeply than Friedman, Hagel and Seely Brown come up with a number of intriguing trends. They also show that companies cannot simply outsource some labour-intensive activities and carry on as before. Instead, they must establish new ways of organising themselves and relating to others.

It is hard to avoid the thought that a lot of companies will simply not be up to doing this. Many are too inward-looking and stuck in their ways to reconsider their very nature. US car manufacturers, for example, have struggled for a long time to remodel their relationships with suppliers along the lines of companies such as Toyota. So far, however, they do not seem to have done so.

Hagel and Seely Brown have a go at providing some practical checklists for companies facing these challenges. But this remains a book of analysis more than a Dummies Guide to Globalisation. That is its weakness – a casual business reader asked to choose between caught between reading The World is Flat and The Only Sustainable Edge will probably go for the easier and more entertaining option.

Whoever does so will, however, miss some thoughtful analysis of probably the biggest business challenge of this age. It is just a pity that the authors could not have marketed themselves more effectively. Never mind productive friction for industrial companies: next time, Hagel and Seely Brown need a bit of productive friction with somebody who knows how to name books.

Copyright The Financial Times Limited 2019. All rights reserved.

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