Small World Effects, Keystone Strategies and Cooperation.

By Brian Ohanlon, published at 10 May 2007 - 8:12pm, last updated 10 years 27 weeks ago.

Some good points made by David Ramos here: But I disagree with this:

"Apple was, and still is, a hardware company."

I think, that Apple still manages to remain a vertical company. It is neither exclusively software or hardware. Intel even has beefed up its software end of things in recent years. On the other hand, Microsoft has managed to explore the hardware with its sealed box products for gaming. But from what I read in Thomas Friedman's book, The World is Flat, is that Apple remains vertical but does make heavy use of those horizontal global supply chains, as Nick points out in the original post.

Apple's engineers apparently do work in very tight, feedback loops with the Asian component suppliers. In effect, Apple's engineers manage to achieve an iterative design process, by use of tele-conferencing and such across the global, to other highly skilled and innovative components suppliers in Asia. So, Apple is leveraging it's own high end innovation capabilities. But it is also leveraging the capabilities of sophisticated component designers on the other side of the globe.

Clay Christensen deals with this in his book. Clay describes basically, the Keystone Strategy, which is based on the Small World Effects theory. Something that Wal Mart, Adobe Acrobat and Microsoft have used to good effect. That you give a little back into the ecosystem, you operate within. By extracting all the value of a network, you gradually deplete your ecosystem - not what you want to do. You want the ecosystem healthy, you want good players around you, who are on your side. Microsoft has been very good at doing this. People are happy living inside the Microsoft ecosystem, otherwise they would have left it ages ago.

Clayton describes it slightly differently though. He talks about the fueling the supply chain. Like the way that Kmart used electric appliances from Sony, for a while, to excel upwards into a more lucrative tier of supply chain status. Sony on the other, gained the use of an excellent supply channel for its disruptive products. In the end though, Kmart had to move onto clothes, as a means to sustain its own growth. At the moment, Apple is feeding its channels in Asian. Allowing them, to move up into innovation. Dell provided the channels in Asia, with a way to grow for the last ten or twenty years. But there is competition in the supply channels now, everyone is trying to emulate the Dell effect. Which means that supplying the components will become less profitable from here on in.

Component suppliers in Asia, therefore have to look around for ways to move up in their sophistication. They are searcing around for products that will do that. The PC parts for Dell, was doing that for over a decade, but not anymore. So Asian partners are very eager, to excel in the higher end design jobs, like those they do with Apple on the iPod. This is a region Dell should be exploring. Employing more creative engineers in the States, to work in concert with more innovative designers on the supply side of the channel in Asia. Because this Asia-Apple relationship, this new kind of value network is only growing stronger. And from what I can see, the Asian are sick of just supplying Michael with battery components for less and less margin.

Indeed, Thomas Friedman in his book describes each of the products in his Dell notebook. Where it came from, how it got to the Dell manufacturing plant, who were the backups, if that channel failed, etc, etc. What Friedman really didn't cover, was how unhappy the suppliers might be feeling these days, just supplying the parts. Those guys over in the Eastern manufacturing base, are hungry to move up nowadays. China is very ambitious. The partnership with Dell may not look as sexy as it once did. Friedman's Dell theory of conflict resolution, may have difficulties already. You can see the beginning of the conflict, in how much Asia want to work now in concert with Western engineers. Not just shovelling them the parts.

Dell should definitely approach this as an opportunity, rather than a threat to its business model. But doing that will be hard, it will require a separate team within Dell, who are not indoctrinated with the Dell's ethos. I would volunteer gladly for that position. In todays world, I assure anyone, that working in cooperation, you have to study your networking effects, your small world effects, supply chain cooperation and keystone strategies. Without this background research, you are going to find it difficult to do innovation productively, regardless of how much individual talent you have. That is my firm resolution, and why I greatly oppose any mandate, from any web site, including this one - which tries to trumpet how wonderful cooperation is, without stressing the basic need for study of networking itself, and its behaviour at a very fundamental level.

"The hardware is actually made up of standardized modular components, and it's assembled in some dirt-cheap Asian factory and shipped in dirt-cheap containerships."

So when Nick Carr actually says that, I don't think he has really studied the case well enough. China isn't interested in becoming the cheap, standard, component provider anymore. That is the mistake with the Dell strategy. And if you looked more closely at it, you will find, the iPod kind of product, is giving the Chinesse companies the opportunity they crave to move upward on the innovation ladder. Everyone has been too quick to characterise, the Chinesse in the iPod equation, as the dirt-cheap part. When in fact, this is just a legacy in our perception of the days when Dell ruled the world, and dirt-cheap might have been a step up for China.