UK: The dangers of deconstruction - OUTSOURCING ELECTRONICS.

UK: The dangers of deconstruction - OUTSOURCING ELECTRONICS. - Farming out non-core needs can produce hollow results for a company.

by Robert Heller.
Last Updated: 31 Aug 2010

Farming out non-core needs can produce hollow results for a company.

The unseemly squabble over the future ownership of Amstrad marks the end of Britain's last white hope in the PC brand wars. But the collapse of Alan Sugar's creation as a serious contender also raises doubts over "hollow" corporations - which make little or nothing of what they sell.

Sir Clive Sinclair, who was hailed for his pioneer hollowing, started with calculators; the business eventually failed in what developed into a Sinclair tradition. Now, piquantly enough, the last relics of the Sinclair computer are in the urn with Amstrad's hopes. But if Amstrad's decline is a portent, that is bad news for bigger and better computer firms: for hollowing-out is in.

Sun Microsystems, the workstations champ, no longer runs its own distribution, makes its own chips, services its own machines, or manufactures its own components. It designs chips, software and workstations, which others make and Sun markets. Sun is not alone. Unisys and ICL are other companies that have retreated massively from manufacturing to concentrate on services and marketing. Both Apple and Compaq's notebook hits depend on Japanese suppliers. Even IBM, which once neither bought from outside makers nor sold to them, now has products bearing nothing of its own save the label. This is part and parcel of a general trend that Business Week calls "deconstruction": the corporation "downsizes", cutting employment and activities, as it concentrates on "core competencies" - farming out all non-core needs.

Sounds great, in theory: does it work, in practice? Just downsizing doesn't; the statistics show that companies which shrink most are outperformed handsomely by those which expand - a glimpse of the obvious as ever was. If a business is growing organically, raising sales and profits, employment will also rise. If it is cutting employment, capabilities are usually being reduced in reaction to ebbing finances and markets.

This can be a deeply depressing exercise in chasing your own tail: depressing not only in terms of workforce morale, but financially. Look at the travails at Philips for a sad saga of European tail-chasing. Among Americans, Eastman Kodak has cut 12,000 jobs: its return on equity (ROE) has collapsed by two-thirds. American Express has seen its ROE halve. Managements have laid off workers instead of tackling the true causes - and created new problems. Zenith Electronics has so savaged its numbers that it cannot meet demand for new flat computer screens. Once it led in quality TVs, an industry which largely abandoned manufacture in face of Japanese competition, and thus committed suicide. Concentrating on "core competencies" must fail if the apple is rotten.

Nor are lean and fit synonymous, as T Quinn Spitzer, Kepner-Tregoe's chief executive, points out. His consultancy's survey of US companies showed that downsizing can become a bad habit. Even among those counting their slashing a success, over a third intended to axe again within 12 months. They were not managing their costs by linking them to effective strategy.

By the same token, a world of difference lies between hollowing-out head office and hollowing-out the whole company. What remaining role does the marketing-only company have in Amstrad's world? Hollow companies can only preserve strength and high profitability so long as they set the pace, either by value or technology.

By definition, though, the technological lead must pass (indeed, has already passed) to component and peripheral makers. Many have stronger franchises than the systems suppliers who are their hosts. For instance, Hewlett-Packard has 43% of a $5.4 billion US market for printers. Its major rivals come from Japan, whose strategy is to achieve in vital technologies, key components and high-selling peripherals the same dominance that swept US and other western companies out of other industries they had created and controlled.

Hollow companies offer no competition to this powerful strategy. The strongest model for the West is the microprocessor sub-industry. There the leader, Intel, is surrounded by aggressive challengers. The rivalry helps to drive the engine of progress, while many-sided competition virtually guarantees that no technological lead or market demand will be missed.

Once much the same could have been said, however, of Zenith's radio and TV industry in America - and, for that matter, in Britain. Rivalry degenerated into complacency, and the greater part of a vast and viable market was lost by abandonment. The hollow company is dangerously close to being an own-label retailer: the danger being that one day the real-life retailer will cut out the hollow middleman.

In an age which has learnt the vital importance of breaking down boundaries between design, engineering, manufacturing and marketing, the hollow corporation not only separates out key functions, but places many outside the firm. Given equal management skill, the integrated competitor must have the advantage - and if deconstruction turns to destruction, the results (like those for Amstrad's shareholders) will be hollow indeed.

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