Yesterday’s brief piece on IBM noted that Big Blue’s success is due to its intangible assets. One of those intangible assets is it close relations with its customer base. As a recent story in the Economist (“IBM: 1100100 and counting”) points out, that close relationship was part of the company’s culture from the beginning. It allowed the company to understand the demand for “electronic calculating machines” (aka computers) as a replacement for mechanical devices. According to some, IBM got in trouble in the 1980s when it stopped paying attention to that customer feedback.
The closeness has helped the company make the next switch — from a producer of things to a supplier of solutions. Economist story explains:
From the beginning, as a maker of complex machines IBM had no choice but to explain its products to its customers and thus to develop a strong understanding of their business requirements. From that followed close relationships between customers and supplier.
Over time these relationships became IBM’s most important platform–and the main reason for its longevity. Customers were happy to buy electric “calculating machines”, as Thomas Watson senior insisted on calling them, from the same firm that had sold them their electromechanical predecessors. They hoped that their trusted supplier would survive in the early 1990s. And they are now willing to let IBM’s services division tell them how to organise their businesses better.
The result is a company that embodies the structural shift in the I-Cubed Economy from a sharp division between goods and services to a fusion of the two. As the Economist notes:
“IBM is not a technology company, but a company solving business problems using technology,” says George Colony, chief executive of Forrester Research, a consultancy.
IBM is, of course, not the only company to realize this shift. According to a recent story in the Wall Street Journal, Xerox is looking toward services:
For Xerox Corp. Chief Executive Ursula Burns, the future of the venerable printer and photo-copy machine maker isn’t in making copies.
Ms. Burns has spent the nearly two years since she took on the CEO role trying to transform Xerox into a services-based business, as the rise of digital technology has cut into the company’s traditional hardware line. In three years, two-thirds of company revenue will likely come from “services,” or contracts to manage other companies’ back office operations such as printing, human-resources and other areas of their business, she says.
I’m not sure from reading the story, however, that Xerox truly understands the nature of the shift. Conspicuously absent from the interview was any discussion about the customer, customer needs and solving customer problems. She notes the “managed print services that are really close to the document technology” which would be an extension of Xerox’s current intangible assets. But the strategy seems to focus on acquisition of companies already in business process outsourcing, which appears to have little to do with Xerox’s existing strengths. This seems to be a continuation of the mindset of services as something separate.
That mindset is one of the major traps that, I believe, both company executives and public policymakers continually fall into. An example of a counter to that mindset is the recent work of Henry Chesbrough. A recent interview in Strategy+Business notes:
Economists debate whether a service-based economy can be truly robust — or whether prosperity depends on having enough of a manufacturing base to support service businesses. But what if this turned out to be a false dichotomy? That’s the question raised by innovation expert Henry Chesbrough. All successful manufacturers, in Chesbrough’s view, need to come to terms with a fundamental change: the accelerating flows of knowledge and information that are shortening product cycles and commoditizing their products. They can do this, he says, only by reinventing themselves, not as pure manufacturers or service providers, but as hybrid product-service companies that design their business models around creating more meaningful experiences for their customers.
I would argue that these hybrids ae the core of the I-Cubed Economy. Just a companies who mastered the complexities of the economies of scale and scope dominated in the industrial age, companies that understand the amalgamation of manufacturing and services will prosper in this new economy.
The public policy question, which we articulated years ago in our paper Info Age: Recast Issues Demand New Solutions and reiterated more recently in a previous posting, remains: what are the policies needed to foster and harness these new economic structures for the benefit of the society as a whole.
On that note, let me repeat what I’ve said before. Manufacturing is in the process of being transformed into a much more knowledge-intensive activity. The process is analogous to the transformation of agriculture. Agriculture did not disappear from the US, to be shifted to some other nation that continued to do things the way it had always been done. Agriculture was transformed; it mechanized (industrialized, if you prefer).
The key is not the output (“agriculture,” “manufacturing,” “service”). It is the production process that is important. During the industrial revolution, machine power replaced human and animal power. The key input was energy. Today, knowledge has become the key input (factor of production). Thus, we should not abandon “manufacturing” as an activity but embed it in the new economic structure.
Transforming manufacturing will take more than restructuring a couple of companies. It will take restructuring the entire production process. One of transformations is through a “high road” strategy that puts its emphasis on all upgrading of the inputs to the production process: technology, worker skills and cooperative/collaborative organizational structures (see previous posting).
It also means changing the manufacturing mindset. While the line between manufacturing and services has blurred, many companies are still fixed in the industrial age mentality of turning out a large volume of a commoditized product. The very nature of the supply chain forces 3rd and 4th tier suppliers in to this mode. These companies are not involved in product design and innovation; they simply respond to specs and price. Changing that structure will be painful and disruptive. Trying to revive that structure will be futile.
Thus, one of the major tasks for our new manufacturing policy needs to be focused on the lower tiers. How does the policy help these small companies re-orient themselves to the 21st Century?
It will take a multi-fold approach. Let me suggest one set of activities–by no means a complete list, but some ideas. We need more research on the service-manufacturing linkage to understand the transformation. That would be an excellent part of the “services sciences” agenda. We also need to find creative ways that the smaller supplier can move up the value-chain to take advantage of this shift. We then need to instill this notion of the fusion of manufacturing and services into the Manufacturing Extension Partnerships. The MEPs were on the front lines helping small and medium size companies during the quality revolution. They need to be on the front lines of the innovation and “customer solution” revolution.
These are but a couple of steps we could begin to take. As IBM illustrates, the transformation is already happening. Our public policy needs to catch up.