Why do companies collapse?
Risk can be defined in many ways. The most relevant and difficult definition is “The probability of an undesired outcome.” (Chicken 1996) The most obvious undesired outcome is going out of business. The history of business shows many examples of bad strategic decisions. Some brought about by hubris and some by the inability to accurately judge the impact of disruptive technology. Two more subtle problems are the subjects of three books: Producing Prosperity (Pisano and Shih, 2012), Restoring The Innovative Edge (Hage2011), and Inventing the Electronic Century (Chandler, 2001).
A common theme in all three is that the erosion of a company’s knowledge base and the failure to stay connected to the manufacturing process creates circumstances that have resulted in a company’s collapse.
These problems need to be evaluated independently. However, because of their often subtle long term impacts, they are interrelated. A company’s knowledge base is the accumulated expertise residing in the talent, products and processes. This includes the ability to conceive, improve, engineer, manufacture and market the company’s product(s). Consequently, a close relationship with the company’s manufacturing arm is essential. In fact, Pisano and Shih argue that it is the decoupling of manufacturing from many American companies has led to America’s steady economic decline.
Chandler and Hage make the point that even in areas closely related to science and technology; American companies are no longer secure. Foreign competitors are improving their knowledge bases and often over taking American firms and driving them out of the market, as the Japanese did in the consumer electronics industry and memory chips.
ASSESSING COMPANY’S COMPETITIVE RISK
Given a company’s limited resources and the fact not all companies operate in the same type of competitive environment, how does one assess a company’s risk in these areas?
One way is to break the competitive/product environment into four gradients. The ones Pisano and Shih use are; process-embedded innovation, pure product innovation, process-driven innovation and pure process innovation. I’ll focus on pure product innovation and process-embedded innovation. In the former, the product is mature and the outsourcing of manufacturing is likely to be low risk. An example is TVs and other consumer electronics. In the later, small changes in the process can substantively affect the nature of the product or its quality. Examples are high end wines, specialty chemicals and advanced material fabrication. In this quadrant, the risk of separating research and development and engineering from manufacturing is high.
Regardless of the quadrant, a company’s knowledge base remains an important factor. Equally important is how this knowledge base was developed and how it is utilized. Xerox’ Palo Alto Research Center (PARC) developed the personal computer and graphical interface. These were ideas Xerox management passed on and Apple Computers adopted. The reason Xerox Management passes was they did not see them as being important to their primary products. This disconnect was the result of a conscious decision not to integrate PARC into the Xerox manufacturing process. Had Xerox management been more aware of the implications of these innovations, or PARC been better integrated into Xerox’s manufacturing process, the history of the computer industry might have been different.
Where Xerox failed to take advantage of PARC’s innovation, RCA blew it lead in color TV’s and consumer electronics by diverting resources and dissipating it knowledge base in a vain attempt to challenge IBM in the main frame field and seeking to become a conglomerate. The diversion of talent away from its core of consumer electronics to an area with little opportunity for cross pollination, main frame computers, and the diversion of resources from R&D to acquisition meant that RCA was late in converting from transistors to integrated circuits and had no product which could compete effectively with VHS recorders.
BASIC QUESTIONS
The relative importance of a company’s knowledge base can be accessed in numerous in ways. Regard of the measures used, two basic questions should be asked. What is the competitive environment like? How was the knowledge base developed? If the competitive environment is one of short product cycles and disruptive technology, a substantive knowledge base is required. If the knowledge base has been developed over time and is well integrated throughout the organization, the risk of failure in this area is low. If on the other hand, the knowledge base had been partially acquired through acquisition, is not well integrated, information flows are constricted, R&D funds dissipated or declining, or key people are leaving, then the probability of risk in this area is high.
References:
Risk Handbook, John C. Chicken, International Thomson Business Press, 1996
Inventing the Electronic Century, Alfred D Chandler Jr.,The Free Press, 2001
Restoring The Innovative Edge, Jerald Hage, Stanford Business Books, 2011
Producing Prosperity: Why American Needs A Manufacturing Renaissance, Gray P. Pisano and Willy C. Shih, Harvard Business Review Press, 2012.
Bio:
James Kline is completing his Ph.D. The emphasis is the impact of innovation and destructive technology on local economies and organizations. He has written numerous articles on quality in government, and conducted economic, policy and risk analysis studies for local and state government. He is an ASQ certified Six Sigma Green Belt and Manager of Quality/Organizational Excellence.