Few companies have transformed themselves quite to the extent that high-tech leader IBM has. In the last few years, the Armonk, NY, company has restyled itself from a slow-growth manufacturer of computer hardware to a more nimble provider of services, software, and hardware.
At the forefront of those changes has been Linda S. Sanford, currently IBM's Senior Vice President, Enterprise on Demand Transformation and Information Technology. In her recently-published book, "Let Go to Grow: Escaping the Commodity Trap," Sanford tells how IBM and other companies -- including General Electric, Toyota, and Proctor and Gamble -- have achieved sustained growth. The key, Sanford says, is letting go of old ways of doing business, outsourcing non-value-added functions, and building what she calls "value webs" -- communities of highly collaborative partners.
Sanford recently discussed some of the ideas in her book with Managing Automation.
Q: What do you mean by letting go?
A: I'm suggesting that we all let go of business models and management systems that are not effective in today's ultra-competitive marketplace. The Internet, globalization, and deregulation have given rise to a situation in which many products and services have become commodities.
To compete in this environment, businesses need to find new ways to differentiate themselves. By fostering collaboration both within their firms and with outside business partners, companies will be better equipped to drive growth through increased productivity and innovation.
Q: In your book you say companies must start by componentizing their businesses. What do you mean by componentization?
A: The first step in letting go is identifying the things your business does well and those it could do better, either through process change or partnerships. By breaking an organization into components, the business functions a firm excels at can be shared companywide. If there's no advantage in performing an activity in-house, that business component should be passed to an outside specialist. This allows the company to redirect investments to advance its lead in other areas such as research and development and marketing. IBM has used this approach to improve our supply chain operations.
Until recently, for example, our global logistics operations were asset heavy. We owned warehouses, trucks, and fork-lifts which didn't provide us with the cost flexibility we needed to compete. So we outsourced it all. The end result was much greater flexibility as well as more than a billion dollars in cost savings, which we have invested in other parts of our business.
Q: Are all manufacturing processes suitable for componentization?
A: All processes -- including manufacturing -- should be broken into business components. We're selling in highly competitive, rapidly changing marketplaces, which means that businesses must constantly be looking for the most effective and efficient ways to source and build their products. By breaking manufacturing processes down into components, companies can more easily assess how efficiently their manufacturing operations are working.
Q: Won't further componentization of manufacturing eventually drive most production to low-cost locations?
A: No. The act of breaking a manufacturing process down into components is simply a means of seeing what's working well and what needs improving. If it makes sense from a competitive standpoint, some manufacturing processes should get outsourced or moved to lower-cost locations. But sometimes there's a real advantage to building things yourself. This is especially true for technologically sophisticated products. At IBM, for example, we continue to manufacture our high-end servers in-house in our own facilities in the U.S., France, Ireland, and China.
Q: How can manufacturers protect IP even as they outsource and collaborate more with outside partners?
A: There's no question that solving the tough problems confronting business and society in general requires collaboration. You have to have it. But collaborative innovation and proprietary innovation are not antithetical. In my experience, they are complementary.
For example, IBM's most strategic software product is WebSphere. This is a proprietary offering from IBM's Software Group, but it is built on the Apache Web server, a product of an open source community. We've simply taken that open source base and added tremendous value for customers.
So both collaborative and proprietary innovation models can coexist. The key is to distinguish what should be open and collaborative and what must be proprietary. A strong, global, intellectual property system should encourage both. Governments need to work with the private sector to encourage collaborative innovation and adapt their laws and policies -- including IP policies -- to enable markets and people to engage in cross-organizational, cross-border, cross-disciplinary innovation.
Q: You describe manufacturing and product development as capabilities that companies should acquire as a way to reduce their cost structures. Is manufacturing, then, never a core process?
A: Manufacturing continues to be a core process...Companies have to decide how to manufacture their products on a case by case basis. They have to look at each of their products and ask themselves whether there is a competitive advantage in continuing to manufacture them in-house. Sometimes they'll find that by working with a contract manufacturer, they can improve their cost structure and free up resources to invest in areas like R&D and marketing. In other cases, building things in-house is the better choice.
Q: Is most outsourcing today focused on control and cost-cutting? How often is it a function of "value web" creation?
A: When outsourcing became popular in the early nineties, it was seen primarily as a way of containing costs. Now, businesses realize that [they] can't cut their way to growth. Whether you call them value webs or something else, the most successful outsourcing relationships today are those in which each of the participants profits by doing the work it does best. In IBM's case, we are both an outsourcer and a services provider. We outsource some functions, like the manufacturing of our industry standard Intel processor-based servers and the management of employee benefits in the U.S. This lets us focus on what we are great at, which includes performing services for other companies including things like customer care, procurement, insurance administration, financial management, and, of course, IT operations.
Q: What is the main inhibitor of "letting go"?
A: When you ask people to "let go," the biggest challenge you face, in my opinion, is overcoming entrenched cultural barriers. You're asking people to change their workplace culture and behavior. That's hard to do, but critical to any company that wants to get on the path to growth. The success of the growth strategies in "Let Go to Grow" hinge on management's ability to articulate their company's vision and turn the vision into reality by creating a culture that fosters and rewards collaboration, productivity, and innovation. This is the one area of business transformation that I spend most of my time on, and it's the topic of discussion that takes up more of my client meetings than any other -- regardless of the industry or the size of the customer. The good news is that technology can help foster culture change by making collaboration easier.
Q: Do you see signs of offshore companies such as manufacturers in China "letting go"?
A: Having spent some time in China this year, I can tell you that letting go is a global phenomenon. In my book there are numerous examples of companies outside the U.S. doing this. One of my favorites is Li & Fung, a highly profitable Hong Kong-based firm that supplies apparel to retailers in the U.S. and Europe. What's interesting about Li & Fung is that the company doesn't make anything itself. Instead, Li & Fung draws on a large value web to orchestrate the manufacture and delivery of apparel to meet its customers' specifications quickly. It's the epitome of a componentized business.