Harvard Business Review on Managing the Value Chain ppt

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Harvard Business Review on Managing the Value Chain THE HARVARD BUSINESS REVIEW PAPERBACK SERIESThe series is designed to bring today's managers and professionals the fundamental information theyneed to stay competitive in a fast-moving world. From the preeminent thinkers whose work hasdefined an entire field to the rising stars who will redefine the way we think about business, here arethe leading minds and landmark ideas that have established the Harvard Business Review as requiredreading for ambitious businesspeople in organizations around the globe.Other books in theseries:Harvard Business Review on Brand ManagementHarvard Business Review on Breakthrough ThinkingHarvard Business Review on Business and the EnvironmentHarvard Business Review on the Business Value of ITHarvard Business Review on ChangeHarvard Business Review on Corporate GovernanceHarvard Business Review on Corporate StrategyHarvard Business Review on Crisis ManagementHarvard Business Review on Effective CommunicationHarvard Business Review on EntrepreneurshipHarvard Business Review on Knowledge ManagementHarvard Business Review on LeadershipHarvard Business Review on Managing High-Tech IndustriesHarvard Business Review on Managing PeopleHarvard Business Review on Managing UncertaintyHarvard Business Review on Measuring Corporate PerformanceHarvard Business Review on Negotiation and Conflict ResolutionHarvard Business Review on NonprofitsHarvard Business Review on Strategies for Growth Copyright 1993, 1994, 1996, 1997, 1998, 2000President and Fellows of Harvard CollegeAll rights reservedPrinted in the United States of America04 03 02 01 00 5 4 3 2 1All rights reserved. No part of this book may be reproduced, stored in a retrieval system, ortransmitted, in any form or by any means, electronic, mechanical, photocopying, recording, orotherwise without the prior written permission of the copyright holder.The Harvard Business Review articles in this collection are available as individual reprints. Discountsapply to quantity purchases. For information and ordering, please contact Customer Service, HarvardBusiness School Publishing, Boston, MA 02163. Telephone: (617) 783-7500 or (800) 988-0886,8A.M. to 6 P.M. Eastern Time, Monday through Friday. Fax: (617) 783-7555, 24 hours a day. E-mail: custserv@hbsp.harvard.edu.Library of Congress Cataloging-in-Publication DataHarvard business review on managing the value chain. p. cm.—(The Harvard business review paperback series) Includes index. ISBN 1-57851-234-4 (alk paper) 1. Business logistics. 2. Distribution of goods—Management. 3. Industrial procurement—Management. I. Harvard business review. II. Title: Managing the value chain. III. Series. HD38.5.H37 2000 658.5—dc21 99-28452 CIPThe paper used in this publication meets the requirements of the American National Standard forPermanence of Paper for Publications and Documents in Libraries and Archives Z39.48-1992. ContentsManaging in an Age of ModularityCarliss Y. Baldwin and Kim B. Clark1Fast, Global, and Entrepreneurial: Supply Chain Management, Hong KongStyleAn Interview with Victor FungJoan Magretta29How Chrysler Created an American KeiretsuJeffrey H. Dyer61The Power of Trust in Manufacturer-Retailer RelationshipsNirmalya Kumar91What is the Right Supply Chain for Your Product?Marshall L. Fisher127Make Your Dealers Your PartnersDonald V. Fites155From Value Chain to Value Constellation: Designing Interactive StrategyRichard Normann and Rafael Ramírez185From Lean Production to the Lean EnterpriseJames P. Womack and Daniel T. Jones221About the Contributors 251Index 257 ...Managing in an Age of ModularityCarliss Y. Baldwin and Kim B. ClarkExecutive SummaryModularity is a familiar principle in the computer industry. Different companies can independently designand produce components, such as disk drives or operating software, and those modules will fit togetherinto a complex and smoothly functioning product because the module makers obey a given set of designrules.Modularity in manufacturing is already common in many companies. But now a number of them arebeginning to extend the approach into the design of their products and services. Modularity in designshould tremendously boost the rate of innovation in many industries as it did in the computer industry.As businesses as diverse as auto manufacturing and financial services move toward modular designs, theauthors say, competitive dynamics will change enormously. No longer will assemblers control the final 1...product: suppliers of key modules will gain leverage and even take on responsibility for design rules.Companies will compete either by specifying the dominant design rules (as Microsoft does) or byproducing excellent modules (as disk drive maker Quantum does).Leaders in a modular industry will control less, so they will have to watch the competitive environmentclosely for opportunities to link up with other module makers. They will also need to know more:engineering details that seemed trivial at the corporate level may now play a large part in strategicdecisions. Leaders will also become knowledge managers internally because they will need to coordinatethe efforts of development groups in order to keep them focused on the modular strategies the company ispursuing.In the Nineteenth century, railroads fundamentally altered the competitive landscape of business. Byproviding fast and cheap transportation, they forced previously protected regional companies intobattles with distant rivals. The railroad companies also devised management practices to deal with theirown complexity and high fixed costs that deeply influenced the second wave of industrialization at theturn of the century.Today the computer industry is in a similar leading position. Not only have computer companiestransformed a wide range of markets by introducing cheap and fast information processing, but theyhave also led the way toward a new industry structure that makes the best use of these processingabilities. At the heart of their remarkable advance is modularity—building a complex product orprocess from smaller subsystems that can be 2...designed independently yet function together as a whole. Through the widespread adoption of modulardesigns, the computer industry has dramatically increased its rate of innovation. Indeed, it ismodularity, more than speedy processing and communication or any other technology, that isresponsible for the heightened pace of change that managers in the computer industry now face. Andstrategies based on modularity are the best way to deal with that change.Many industries have long had a degree of modularity in their production processes. But a growingnumber of them are now poised to extend modularity to the design stage. Although they may havedifficulty taking modularity as far as the computer industry has, managers in many industries stand tolearn much about ways to employ this new approach from the experiences of their counterparts incomputers.A growing number of industries are poised to extend modularity from theproduction process to the design stage.A Solution to Growing ComplexityThe popular and business presses have made much of the awesome power of computer technology.Storage capacities and processing speeds have skyrocketed while costs have remained the same orhave fallen. These improvements have depended on enormous growth in the complexity of theproduct. The modern computer is a bewildering array of elements working in concert, evolving rapidlyin precise and elaborate ways.Modularity has enabled companies to handle this increasingly complex technology. By breaking up a 3...product into subsystems, or modules, designers, producers, and users have gained enormousflexibility. Different companies can take responsibility for separate modules and be confident that areliable product will arise from their collective efforts.The first modular computer, the System/360, which IBM announced in 1964, effectively illustrates thisapproach. The designs of previous models from IBM and other mainframe manufacturers were unique;each had its own operating system, processor, peripherals, and application software. Every time amanufacturer introduced a new computer system to take advantage of improved technology, it had todevelop software and components specifically for that system while continuing to maintain those for theprevious systems. When end users switched to new machines, they had to rewrite all their existingprograms, and they ran the risk of losing critical data if software conversions were botched. As aresult, many customers were reluctant to lease or purchase new equipment.The developers of the System/360 attacked that problem head-on. They conceived of a family ofcomputers that would include machines of different sizes suitable for different applications, all of whichwould use the same instruction set and could share peripherals. To achieve this compatibility, theyapplied the principle of modularity in design: that is, the System/360's designers divided the designsof the processors and peripherals into visible and hidden information. IBM set up a CentralProcessor Control Office, which established and enforced the visible overall design rules thatdetermined how the different modules of the machine would work together. The dozens of designteams scattered around the world had to adhere absolutely to these rules. But each team 4...had full control over the hidden elements of design in its module—those elements that had no effect onother modules. (See ''A Guide to Modularity" at the end of this article.)When IBM employed this approach and also made the new systems compatible with existing software(by adding "emulator" modules), the result was a huge commercial and financial success for thecompany and its customers. Many of IBM's mainframe rivals were forced to abandon the market orseek niches focused on customers with highly specialized needs. But modularity also underminedIBM's dominance in the long run, as new companies produced their own so-called plug-compatiblemodules—printers, terminals, memory, software, and eventually even the central processing unitsthemselves—that were compatible with, and could plug right into, the IBM machines. By followingIBM's design rules but specializing in a particular area, an upstart company could often produce amodule that was better than the ones IBM was making internally. Ultimately, the dynamic, innovativeindustry that has grown up around these modules developed entirely new kinds of computer systemsthat have taken away most of the mainframe's market share.The fact that different companies (and different units of IBM) were working independently on modulesenormously boosted the rate of innovation. By concentrating on a single module, each unit or companycould push deeper into its workings. Having many companies focus on the design of a given modulefostered numerous, parallel experiments. The module designers were free to try out a wide range ofapproaches as long as they obeyed the design rules ensuring that the modules would fit together. Foran industry like computers, in which technological 5...uncertainty is high and the best way to proceed is often unknown, the more experiments and the moreflexibility each designer has to develop and test the experimental modules, the faster the industry is ableto arrive at improved versions.This freedom to experiment with product design is what distinguishes modular suppliers from ordinarysubcontractors. For example, a team of disk drive designers has to obey the overall requirements of apersonal computer, such as data transmission protocols, specifications for the size and shape ofhardware, and standards for interfaces, to be sure that the module will function within the system as awhole. But otherwise, team members can design the disk drive in the way they think works best. Thedecisions they make need not be communicated to designers of other modules or even to the system'sarchitects, the creators of the visible design rules. Rival disk-drive designers, by the same token, canexperiment with completely different engineering approaches for their versions of the module as long asthey, too, obey the visible design rules. 1Modularity Outside the Computer IndustryAs a principle of production, modularity has a long history. Manufacturers have been using it for acentury or more because it has always been easier to make complicated products by dividing themanufacturing process into modules or cells. Carmakers, for example, routinely manufacture thecomponents of an automobile at different sites and then bring them together for final assembly. Theycan do so because they have precisely and completely specified the design of each part. In thiscontext, the engineering design of a part (its dimensions and tol- 6[...]... global competitioncompanies focus on their core activities and outsource the rest their success increasingly depends on their ability to control what happens in the value chain outside In , their own boundaries the 1980sthe focus was on supplier partnerships to improve cost and quality 's , the , flexibility , and speed In today faster-paced markets focus has shifted to innovation , Hong Kong largest... teaching at the Harvard Business Schoolhis younger brother , and , William , the early 1970s was a newly minted Harvard. B.A The two young men were called home from the United States by M their father to breathe new life into the company , In this Since thenthe brothers have led Li & Fung through a series of transformations interview with , Victor Fung describes how Li & Fung has made the transition from... and the Circle K convenience-store chain in Hong Kong chairman of Asia the Hong Kong Trade Development Council and of Prudential 30 How do you define the difference between what Li & Fung does today—supply chain management—and the trading business founded by your grandfather in 1906? When my grandfather started the company in Canton, 90 years ago during the Ching dynasty, his "value added" was that... all three elements of the visible information tog ether and call them all simply "the architecture," "the interfaces," or "the standards." The hidden desig n parameters (also called ) are hidden information decisions that do not affect the desig n beyond the local module Hidden elements can be chosen late and chang ed often and do not have to be communicated to anyone beyond the module desig n team... chief executive, Donna Dubinsky, decided to shift course If they couldn't g et partners to develop the new concept, they would handle it themselves—at least the visible parts, which included the device's interface protocols and its operating system Palm would have to become an architect, taking control of both the visible information and the hidden information in the handwriting recog nition module But... immediately saw the threat posed by the Sun-AT&T alliance, and they forced AT&T to back away from Sun The workstation market remained wide open, and when Sun stumbled in 15 bringing out a new generation of workstations, rivals gained ground with their own offerings The race was on and it continues Needed: Knowledgeable Leaders Because modularity boosts the rate of innovation, it shrinks the time business. .. production program?" Starting with their designers' sketches, we research the market to find the right type of yarn and dye swatches to match the colors We take product concepts and realize them in prototypes Buyers can then look at the samples and say, "No, I don't really like that, I like this Can you do more of this?" We then create an entire program for the season, specifying the product mix and the. .. software became the key hidden module around which a consortium of companies formed to produce the complete product Sales of the first g eneration of products from both the consortium and its rivals, however, were poor, and Palm's partners had little interest in pursuing the next g eneration Convinced that capitalizing on Palm's ability to connect the device directly to a PC would unlock the potential... greater control over the visible information in its own system Sun hoped to use equity financing from AT&T, which controlled UNIX, to gain a favored role in designing future versions of the operating system If Sun could control the evolution of UNIX, it could bring the next generation of workstations to market faster than its rivals could But the minicomputer makers, which licensed UNIX for their existing... coordinate the efforts of the teams while still freeing them to innovate effectively In addition to focusing on technolog y, the company has survived in the intensely competitive disk-drive industry by paying close attention to the companies that assemble personal computers Quantum has become the preferred supplier for many of the assemblers because its careful attention to developments in the visible . 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