Platt Perspective on Business and Technology

Considering a cost and benefits analysis of innovation 4: determining what to retain in-house and what to outsource to supply chain and other business to business partners 1

Posted in macroeconomics by Timothy Platt on April 30, 2014

This is my fourth installment in a series on the costs and benefits of innovation as it is tracked and measured through a complete innovation manufacturing cycle – as that is measured and understood from both the supply and demand sides (see Macroeconomics and Business, postings 162 and loosely following for Parts 1-3.)

I stated at the end of Part 3 that I would turn here to at least begin a discussion of innovation and its costs and benefits in a larger supply chain and collaborative business to business context.

• I have already noted in this series, and I add in others that innovation and even disruptively novel innovation can arise in any area or aspect of a business, including in its back-office operations. Innovation is not just a potential for the end-user facing products and services that go out the door and into the consumer marketplace.
• At the same time I have also written about innovation in terms of in-house challenges faced, as change is accommodated with manufacturing retooling, business process reorganization, changes and updates in inventory and supplies management and other business areas, as they need to be adjusted in order to capture value from change. And I have primarily written of this from the context of a single business organization and its systems.

My goal here is to expand that discussion out to consider the wider cost and benefits impacts of change, and of the impact of single company introduced innovation on their supportive supply chain partners and other outside collaborative contexts. And in anticipation of that, note that consistency and constancy, and the development and maintenance of shared processes and procedures across a supply chain or other business to business collaboration, can yield both reduced risk and higher, more consistently reliable business efficiencies that translate directly into reduced costs and greater overall business effectiveness. But if pursuing that goal, this way means stultifying change per se and in any points of contact and connection between partner businesses, that in the long run leads to loss of competitive position and the world evolves on, past and around these businesses, leaving them behind. Change is vitally important too.

So I will be writing here in this series about collaboratively sharing innovative insight, and certainly at a business process level, when working with specific partner businesses and under terms that limit them from also sharing these innovations with other businesses – that might even be direct competitors. And insofar as individual parts and select subassemblies are outsourced for their manufacturing to third party partner businesses, I will write here of protection of product and service-defining intellectual property rights. In anticipation of that, I note that simply invoking patent protection is not sufficient and for fast-paced and rapidly changing industries such as clothing manufacture and for rapidly changing style designs it might not even be realistic.

There is a lot more to this set of issues, but I will leave off this outline of them here at this point as covering enough of that to serve as a point of initial orientation. And I will begin this overall discussion here with business processes that directly connect business to business partners in a supply chain, and the costs and benefits of initiating change and innovation, and then sharing them out of house with other businesses. And I begin that with two fundamental questions:

• If a supply chain partner business develops an innovative new approach for improving one or more critical pathway processes for making their supply chains work, is this a change that they would directly manage for all instances while it is being used, primarily impacting on how other businesses work directly with them? Or is this a process change that would be expected to diffuse out through a supply chain with other partner businesses directly deploying it too?
• And how easy would it be to replicate this innovation as other businesses, including competitors with their own supply chains seek out ways to emulate them? Visibility of innovation is important here. An innovation in a shipped new product line might be obvious and even compellingly visible, while an equally valuable innovation in supporting business processes that help make that business more agile and competitively effective can be very difficult to even see from the outside. But when it significantly serves to facilitate business to business collaborations in a supply chain, then it can become immediately visible to those partners, and its existence and even its core details can become a matter of more common knowledge as a result. Think of this as drawing a distinction between diffusion of an innovation per se, and diffusion of awareness of that innovation existing and of its potential value – here to competing businesses that would want to adapt it and even improve upon it too.

I stated at the end of Part 3 that I would “at least briefly consider Apple and Microsoft and their business models as selectively sketched out case study examples” here. And at this point I at least begin to do so.

Apple is perhaps famously known for seeking to keep everything in-house as far as creative innovation is concerned. They seek to design and build their own hardware and software and even key online networked user content resources (e.g. iTunes), and have developed and implemented, for example, special proprietary hardware interfaces (e.g. FireWire and its successor Thunderbolt) to limit opportunity for their end users to connect in other company’s products. This can be seen as a means of protecting and preserving their intellectual capital, and of not being willing to share potential markets with others through anything like a division of labor, and of specialization expenses. But it could also be argued that if they do not have to deal with or work with other outsider businesses and can keep their entire innovation pool in their own hands, they do not have to deal with learning curve delays or mismatches with their risks and at least indirect costs – so they can innovate and bring New to market that much faster and that much more friction-free.

Microsoft, on the other hand, began as a company that saw defining value in focusing on software, and on operating systems and application program development. They agreed to work with seemingly any hardware developer and manufacturer that was willing to build hardware platforms that their software systems would work on, leveraging this specific business to business collaborative openness to expand out their potential marketplace and their realized market share very rapidly. They did, of course, enter into contractual agreements with their hardware-providing business partners to protect the proprietary software-related information they provided to them for use in their hardware design (e.g. in microprocessor design and optimization) as carefully protected business intelligence, as well as seeking patent protection for their proprietary business intelligence. But Microsoft has also acquired a vast number of smaller companies over the years in order to bring in-house specific software capabilities they would want in order to more rapidly and cost-effectively evolve their own products and systems too.

Apple experimented with allowing and even actively supporting third party hardware manufactures that would produce complete computer Mac clones, as well as seeing a small unlicensed Mac clone industry grow with both full unlicensed computer systems that sought to mimic their products, and software emulators that would let users run Mac software on different hardware platforms. But they then effectively shut down their one-time business partners for their licensed clones, such as Power Computing by ending these contractual agreements with them. So Apple with its closed, in-house approach has at least experimented with more open business to business collaboration too, and like Microsoft they have actively acquired other smaller businesses and their proprietary technologies too. And I have to add that they still buy at least some of their hardware systems components from third party specialist companies too, even if they actively work to limit that and keep as much of everything they do strictly in-house as they realistically can.

Microsoft, with its more generally open collaboration approach, has also actively brought and kept in-house a very wide swath of technology and its innovation too, through business acquisitions and patent purchases. So in both cases, when you look at the details as to when and where and how Apple and Microsoft variously enter into supply chain or other business to business collaborations – or avoid them, more nuanced pictures emerge with differences in where they set acceptable boundaries set by larger overall strategic and business model visions.

I am going to pick up on this overall discussion in a next series installment with a conditional that I raised above, as a starting point and to bring this posting into sharper focus. I wrote of innovations that originate essentially entirely in one business that participates in at least one supply chain, where existence and even direct use of that innovation would shape overall supply chain functioning and efficiency, diffusing out that innovation’s existence and even some of its details and even if it is an otherwise hidden back-office process improvement. I will discuss single source innovations in my next installment but will also look into collaborative innovations: innovation jointly created by business partners in a supply chain for their mutual benefit. And in both contexts I will consider innovation shelf life and long-term versus transient innovation advantages. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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