My mom has a new passion: knitting. And that means my kids get unique, gorgeous hand-made knitted sweaters that we will cherish for years. While watching her entangled in yarns, needles and loops, I started pondering: why is knitting a rare sight today?
The answer is simple -- its costly. Today's woman do not have the time to indulge in such laborious activity. And, there are alternatives: she can simply walk into a store and buy a decent machine-made sweater at a very reasonable price. Also, she does not need to spend a month to get a new sweater; she may not have the time or patience to do so. Even if she had, she may not want to do it -- knitting is laborious and repetitive and will detract her from doing other things that she wants to do. Finally, knitting requires skill and not everyone can acquire it.
Organizations behave no different -- if a task at hand is costly to do in-house, they choose a partner to do it. For example, Apple chooses to buy chips from its suppliers instead of investing in R&D and production plants. The reasons are similar to knitting -- if Apple started focusing on electronic chips R&D, the company might be distracted from its core business.
For a minute, lets assume the company will not be distracted. Are there any other reason to go outside the company boundaries? Definitely. A chip maker can produce million of chips for multiple consumer product companies and leverage economies of scale to be cheaper than the individual companies. Also, chip maker is the expert -- it possesses the skill to do it right.
Then why do some companies bring activities in-house? Continuing on Apple's example, the company designs its products hardware, software and even owns the retail stores. Now it has been rumored to invest or buy a chip company. This is a classic example of what's called vertical integration -- Apple owns most of the value chain. Why? Perhaps for competitive advantage and need for tighter control.
If a company builds products in a secretive fashion, like Apple, it might make sense to do as much in-house work as possible. If it is dependent on a supplier for a critical component, the company may not be first to market or keep a secret on the new product launches. However, it will be costly to do so.
Not every company is or can be Apple; majority of the companies sales numbers are a fraction of Apple's cash reserve: $137B. Most companies will do fine by picking and choosing between in-house and partner activities. There in lies the secret sauce -- choosing the right combination that supports the overall strategy and vision of the company.
Bottom line: do not choose to knit your own sweater, unless it is important to you, you have the time and you are passionate about it. My mom fits all the criteria : it is important to her (the sweater is for her grand kids), she has the time, and she is passionate about it.
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Copyright (2013) Ashish Arora. All rights reserved.This post is my personal opinion. It is not intended to reflect my employer's or any of its affiliates' opinion. Of course, this post is not meant to be a legal advice.
The answer is simple -- its costly. Today's woman do not have the time to indulge in such laborious activity. And, there are alternatives: she can simply walk into a store and buy a decent machine-made sweater at a very reasonable price. Also, she does not need to spend a month to get a new sweater; she may not have the time or patience to do so. Even if she had, she may not want to do it -- knitting is laborious and repetitive and will detract her from doing other things that she wants to do. Finally, knitting requires skill and not everyone can acquire it.
Organizations behave no different -- if a task at hand is costly to do in-house, they choose a partner to do it. For example, Apple chooses to buy chips from its suppliers instead of investing in R&D and production plants. The reasons are similar to knitting -- if Apple started focusing on electronic chips R&D, the company might be distracted from its core business.
For a minute, lets assume the company will not be distracted. Are there any other reason to go outside the company boundaries? Definitely. A chip maker can produce million of chips for multiple consumer product companies and leverage economies of scale to be cheaper than the individual companies. Also, chip maker is the expert -- it possesses the skill to do it right.
Then why do some companies bring activities in-house? Continuing on Apple's example, the company designs its products hardware, software and even owns the retail stores. Now it has been rumored to invest or buy a chip company. This is a classic example of what's called vertical integration -- Apple owns most of the value chain. Why? Perhaps for competitive advantage and need for tighter control.
If a company builds products in a secretive fashion, like Apple, it might make sense to do as much in-house work as possible. If it is dependent on a supplier for a critical component, the company may not be first to market or keep a secret on the new product launches. However, it will be costly to do so.
Not every company is or can be Apple; majority of the companies sales numbers are a fraction of Apple's cash reserve: $137B. Most companies will do fine by picking and choosing between in-house and partner activities. There in lies the secret sauce -- choosing the right combination that supports the overall strategy and vision of the company.
Bottom line: do not choose to knit your own sweater, unless it is important to you, you have the time and you are passionate about it. My mom fits all the criteria : it is important to her (the sweater is for her grand kids), she has the time, and she is passionate about it.
-----------------
Copyright (2013) Ashish Arora. All rights reserved.This post is my personal opinion. It is not intended to reflect my employer's or any of its affiliates' opinion. Of course, this post is not meant to be a legal advice.
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