Growing a company through networks is not a new idea. The twist these days is the specialized knowledge successful entrepreneurs bring to the table
Michael Treacy, the management guru who addressed this year's Inc. 500 conference, spun out a business scenario that 10 or 20 years ago would have been unthinkable.
Pick one of the big personal-computer companies, he told his audience -- Compaq, say. Any day now, Compaq could decide to become a "hollow" company.
Treacy ticked off the steps that would be required:
· Compaq could contract out its order taking to companies that specialized in providing efficient, well-trained telephone sales representatives.
· It could get its computers built by, say, Solectron, the California-based company that's known for high-quality, high-capacity electronics manufacturing.
· Roadway Logistics could handle distribution, delivery, and inventory management. MasterCard could manage the financial transactions. Other vendors could take on product design or after-sale service.
Compaq as a company would need to bring only one thing to the table: the know-how and expertise to create and manage that network of businesses. The network, in turn, would deliver value to the consumer in the form of a personal computer.
Far-fetched? A little, no doubt. But Treacy's scenario had the ring of truth because so many large companies have already gone so far in that direction. They contract out everything from engineering to maintenance and repair. They establish strategic alliances and give their strategic allies access to information and market turf that would once have been strictly proprietary. Henry Ford, who believed in owning every production step, wouldn't have done well in this new Age of the Network.
But fast-moving entrepreneurial companies can do very well indeed -- provided they understand the one element that's indispensable to success.
Look at some of the ways small companies are already profiting from this trend. One time-honored method is to become the supplier of choice and do for a large company what it can't do so well for itself. A few years ago I wrote an article about a company that was then called Pro Fasteners. An industrial-parts distributor, it had spent its early life as a kind of glorified hardware store. Customers showed up at the door. Pro gave 'em what they wanted.
Then Pro's chief executive, Steve Braccini, realized that Pro could take over the job of managing parts inventories for big customers such as Applied Materials Inc. Presto: pretty soon Pro's people were walking right into Applied's plants, checking the bins against their computerized records, and entering orders on Applied's behalf. Soon, too, they were making suggestions about how Applied could cut its inventory costs. It was a win-win situation all around -- not least for Pro, which saw sales rise 20% to 30% a year even in the sluggish early 1990s.
A second time-honored method of profiting through networks: create your own.
When Treacy outlined his scenario to the conference, I happened to be sitting next to Rhoda Makoff, founder of R&D Laboratories Inc., #304 on last year's Inc. 500. The more Makoff listened, the more excited she got. "That's what we do!" she finally whispered.
Later, the story poured out. Makoff had started her company in 1983. Its mission was to develop specialized vitamin and nutritional-supplement formulations for dialysis patients. Makoff's husband, a kidney specialist, had spotted the niche: the market, he told his wife, was substantial, but it was too small for the big drug companies to care about.
Today R&D Laboratories has 18 products, with more in the pipeline. It did $3.5 million in sales last year, a figure that president and CEO Makoff says will rise substantially before the end of the decade. The company's secret is its network. R&D Laboratories gets qualified pharmaceutical companies to manufacture and package its products. It sells to about 200 drug wholesalers, who handle warehousing and distribution. The network-based system allows quantum leaps in growth: once Makoff has a promising product, she can ramp up production and distribution just by making a few phone calls. Her 1994 sales were 84% higher than 1993's, for example, just because she had two new products.
But the experience of Pro, R&D Laboratories, and a thousand other companies underscores the one essential ingredient of networking: to succeed, you have to know something. You have to know something very, very well.
Take the original hypothetical scenario. Why is Compaq indispensable to the production chain Treacy outlined? The answer: it isn't. Not, that is, unless it knows more about PCs and how people use them than anyone else does. The value it brings is knowledge -- about the product, about the customer, about how to deliver what the market wants in the most efficient possible manner.
It's the same with small companies. I was writing about Pro Fasteners, for example, because it had embarked on a full-scale total quality management program and was encountering all the early-stage mishaps and fiascoes that TQM practitioners have by now come to expect. (See "Quality with Tears," June 1992, [Article link].) But even though Pro was stumbling, it didn't have the option of giving up TQM. It had to be able to deliver on-time-every-time service, with an error rate as close to zero as was humanly possible. That was the knowledge, the expertise, that it could bring to the party. Without it, Pro couldn't have survived as Applied's inventory manager.
At R&D Laboratories, what makes the whole thing work is the knowledge inside the head of founder Makoff. A Ph.D. biochemist, she spent the first part of her career doing research at the University of California at Los Angeles and other top-ranked institutions. When she started her company, she plunged into the subject of kidney patients' vitamin and nutritional needs. Before long she was a recognized expert -- a frequent speaker and published author. That expertise enables her to spot -- or develop -- promising new products. She consults regularly with an informal group of kidney specialists to make sure she doesn't miss anything.
So, yes, this is the age of the network. If it weren't, Treacy's improbable scenario wouldn't have sounded so convincing. But it's also the age of the specialist, of the company whose value is knowledge. To profit in these network-building times, entrepreneurs don't need to be bigger than anybody else or richer than anybody else. They just have to know how to do their part of the job better than anybody else.* * *
John Case is a senior writer at Inc. and the author of Open-Book Management: The Coming Business Revolution (HarperBusiness, 1995).