Managing revolution: Disintermediation cuts both ways - If product design, engineering, manufacture or distribution and sales are handled outside, sooner or later the outsider will start eyeing your fat margins

Managing revolution: Disintermediation cuts both ways - If product design, engineering, manufacture or distribution and sales are handled outside, sooner or later the outsider will start eyeing your fat margins - Whatever happened to the 'virtual corporat

Last Updated: 31 Aug 2010

Whatever happened to the 'virtual corporation'? This state-of-the-art company, the heart of a multi-partner business system, burst into management consciousness in 1992, when William H Davidow and Michael S Malone extolled the virtues of the 'interface between company, supplier and customers, permeable and continuously changing'.

Virtuality has become reality. Company after company is going that way - often unwittingly - outsourcing not just support services but their fundamental activities. They are becoming manufacturers without factories, and include multi-billionaire stock-market cynosures.

Moreover, outsourcing is itself nurturing huge companies. Solectron, an dollars 8.4 billion manufacturer without brands, expects to grow sales by more than 50% next year. Few of its ultimate customers have heard of it, but if you've bought a PC, printer, internet router, telephone switch or handset, this San Francisco corporation may well have made the product - and put some electronic giant's label on the box. It supplies 10% of the world's cellular phones. It is world leader in printed circuit boards.

It runs factories on 30 sites, from Penang to Dumfermline. And its HQ, symbolically, is opposite a closed Ford assembly plant. (Ford has announced its first outsourcing of complete assembly, while its Think electric car is being made by a Norwegian supplier.)

These developments extend trends that antedate the information revolution.

Car makers such as Ford have long been buying in 70% of components, and the move to importing complete sub-assemblies is also well established.

In electronics, most PCs might just as well have been labelled Wintel ever since Microsoft and Intel fastened their hammer-locks on the industry.

The world is dividing between makers and marketers. And digital technology is greatly assisting the split. It enables new age suppliers such as Solectron to control complex operations in real time, while staying in hourly contact with customers. And the customers can shop around the cyberspace mall for supplies in near-total confidence that 100% quality products will arrive 'just in time'.

As Fortune says, electronic manufacturing 'is exploding as hardware companies rush to shed their manufacturing operations, concentrating instead on the development, sales and marketing of their products'. Sun Microsystems has been thriving on this recipe for years; Dell Computer too has a battalion of key suppliers, bound into the business system by digital connections and treated like wholly owned divisions.

Solectron is expanding in the opposite direction, buying complete plants from customers such as IBM. The key is to generate greater efficiencies by supplying many customers (instead of just IBM) and many products. But why should virtuality stop at manufacture? Solectron is expanding into after-sales service and pre-sales design. What's left that's sacred, other than a brand?

Even then, brand ownership could be up for grabs. The businesses most immediately threatened by the web are wholesalers, resellers and other distributors. If the end customer can inspect, choose, specify and order products direct, middlemen become a superfluous expense. The web can offer far more comprehensive, convenient choices than any builder's merchant, for example. The sword of so-called disintermediation hangs over legions of businesses that for decades have thrived on handsome mark-ups.

They have three choices. They can wither away, try to cement relationships by adding value, or create new roles in a revolutionised business system. They can box Intel microprocessors and Microsoft ware as well as anyone else. Why not establish own-brands and cut out the manufacturer, instead of being excised yourself? The first such ventures are already exploiting close customer relationships.

The danger faced by virtual corporations is obvious. If design, engineering, manufacture, distribution and sales are handled by outside parties, sooner or later the outsiders will lust after your much fatter margins. One freight company saw no future in just carting PCs and their components around.

From making components, it has progressed to building entire PCs and even installing them.

In assisting these transitions, it could be that the Frankensteins without factories are creating monsters that could go on a rampage through their territories.

You can disintermediate a mere warehouser without fear, but sacking an integrated manufacturer lets loose a potentially dangerous rival.

Every chunk of virtual outsourcing does likewise. Solectron did dollars 90 billion of business in 1998 and is expected to hit dollars 200 billion in 2001, double the current sales of General Electric. As the virtual march continues, Solectron-style manufacturers are becoming multinational, multi-product, multi-market, full-service, design-to-delivery conglomerates. Which brings us full circle. The old giants are sundering themselves, and surrendering their basic strengths.

Robert Heller was founding editor of Management Today.

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