In some of your more recent work, you examine when it's more profitable to be an integrated company doing all the design and manufacturing, and when you'd do better by outsourcing from suppliers and business partners all the other elements of the system that are not your "core competence." See if I understand the reasoning here. The right model depends on how evolved your product is. When you're trying to get an innovation up to snuff, the designers are still tinkering with it to make it better, so it's almost impossible to farm out any important pieces of the system. You need to manage development within one interdependent system. You're just not at the stage where you know enough to have somebody else supply parts. You're still fiddling around with it yourself. And predictable and reliable industry standards don't yet exist.
Yes, when a product isn't good enough for what customers want, with each generation of technology the engineers have to figure out how to put the system together in an even more efficient way. Standard interfaces of the sort that enable others to supply subsystems to you simply can't exist. That means you have to do everything in order to do anything. If you think back to the era of the mainframe computer, you couldn't have existed as an independent contract manufacturer of mainframes because the way they were made depended on the way they were designed. And the way they were going to be designed depended on the way you were going to make them. Similarly, you could not have existed as an independent supplier of operating systems, core memory, or logic circuitry -- because the design of each of those things depended upon the design of the others -- and the interdependence exists when products' functionality is not yet good enough. So at that stage you have to do all of the pieces yourself.
And then when does being an integrated company turn into a disadvantage?
When a company overshoots the market -- that is, when its product or service is even better than what customers want in a given tier of the market -- the way it competes has to change. No longer will making a better product get you traction with customers who are already overserved with functionality. When that happens, the innovations that count with customers are speed to market, customized responsiveness, and convenience. That's what Dell did in the '90s. The modular architecture of its products enabled it to outsource and deliver customized products rapidly. In that situation, being integrated is an albatross. It slows you down.
You started your own consulting company, Innosight, in January 2000. I'm assuming that you're not depending on any disruptive technologies to grow your business. But are you trying to become a disruptive innovator in management consulting?
This has really been fun. There's another construct to think about that's different from the tests we've been discussing. In the most demanding tiers of every market, problems have to be dealt with in an unstructured problem-solving mode. Take the health-care market. If you've got cancer, you go to the best oncologist money can buy, and she'll run a bunch of tests and analyze the data and develop hypotheses about what type it is and what type it isn't. She then embarks on a course of therapy, and the feedback from how you respond confirms or disproves her hypotheses. There are no pat answers to these kinds of unstructured problems. In the middle tiers of a market, many of the problems can be diagnosed and remedied in a pattern-recognition mode. Like type-one diabetes. If you're always thirsty, you urinate frequently, you're losing weight, and your eyesight is blurry, you have diabetes. The pattern is so clear it doesn't take nearly the skill to diagnose and treat conditions in the pattern-recognition area as it did up in the problem-solving mode. And then at the very simplest tiers of the market, things can be diagnosed and treated in a rules-based mode -- like, if the test strip turns blue, you're pregnant. That takes even less skill.
Over time scientific progress transforms issues that formerly needed to be dealt with in the problem-solving mode and pushes them down into pattern-recognition mode and from pattern-recognition mode down into a rules-based regime. That is the disruptive engine that enables people who didn't have the skill to play in the market before to do a better job than the unstructured-problem-solving experts historically could do. That's the role of technological progress, and that's the mechanism by which our lives get better.
And you think the same sort of scientific progress in problem solving can happen in many areas, including the consulting world?
Yes. The really hairy, vexing problems about strategy, human motivation, and organizational design historically have been handled up in the unstructured problem-solving mode. When you got one of those complicated dilemmas or challenges, you hired the folks at a full-service consulting firm and paid them millions of dollars, and they helped you. They're very good at what they do. But I think that our research has taken certain problems that historically could have been wrestled with only in an unstructured problem-solving mode, and has brought them down into the pattern-recognition mode. By understanding these patterns, Innosight can help companies deal with these types of challenges. Consultants in problem-solving mode, just like oncologists, have got to analyze the data, which are available only about the past. They then try to look into the future through the lenses of the past, and it's not very clear. Looking into the future through our models, which are really well grounded theories of cause and effect, helps you see the future a lot more clearly than you could using the tools of unstructured problem solving. This is what Innosight does. Several of my former students are running it.
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