What’s your employer’s core business? The answer probably isn’t as clear as it once was, especially as IT helps companies plow into new markets and redraws the line between what’s done in-house and what’s ceded to third parties.
Does UPS deliver packages, or is it a full-service logistics and supply chain management company? Does Amazon.com sell books, music, electronics, and other consumer goods, or is it better positioned as an IT infrastructure provider? Does General Motors make cars and trucks, or is much of its future also in satellite-delivered navigation, safety, and security services? Is Cisco a network systems manufacturer when it doesn’t actually manufacture anything itself?
Buffeted by global competition and evolving customer expectations, nearly three-quarters of companies will have to fundamentally alter their core businesses over the next decade in order to survive, posits Bain & Co. partner Chris Zook, author of the book Unstoppable (Harvard Business School Press, 2007). Between 1994 and 2005, Zook’s research finds, more than one in three Fortune 500 companies “completely transformed their core business, some even reinventing themselves completely,” and the pace of business change continues to accelerate.
In their book New Age Of Innovation (McGraw-Hill, 2008), University of Michigan management experts C.K. Prahalad and M.S. Krishnan insist that the biggest winners in 21st century business will be those that assemble a global ecosystem of partners, emphasizing flexible access to materials, products, talents, and expertise, not ownership. The old GM owned or directly controlled most factors of production, including rubber plantations for its tires in the early days. The modern GM still needs to produce autos (and do a better job at that), but it’s no longer practical or efficient for the company to own every parts supplier, and it must also build stronger relationships with customers through OnStar and other offerings—move from a transactional relationship, to use the New Age of Innovation parlance, to a technology-based service orientation.
Satyam, the $2.6 billion India-based outsourcing and service provider, sees a $10 trillion potential market in “virtually deliverable” business services: taking over or managing customers’ HR, financial, procurement, legal, engineering, manufacturing, design, R&D, and other operations, many of them still considered absolutely “core” to companies. Rivals IBM, Accenture, ADP, Tata, Wipro, Cognizant, and many others also are on this hunt. Wipro, for instance, generates $1 billion a year providing R&D services for other companies.
Of course, companies can also stretch their cores too far. Several major financial services companies, for instance, have “insourced” IT and other operations they had come to view as nonstrategic. One of Enron’s failings, besides employing a bunch of con men, was its lack of a business center: As it moved beyond oil and natural gas distribution, positioning itself as a trusted middleman for electronic trading of everything from metals and paper to telecom bandwidth, Enron entered markets in which it had zero expertise, and it eschewed owning or directly controlling much of anything. In contrast, Wal-Mart still keeps its retail competencies very close to the vest, down to application development.
No question, though, that IT and globalization stand to shift the core of almost every business. My InformationWeek colleague Bob Evans has summed up this challenge for IT professionals in three forward-looking questions: “In 12 months, what business will your customers want you to be in? In 24 months, what business will your customers demand you be in? And is your company nimble and agile enough to move at a pace that will let you change to meet the evolving requirements of those customers?”
We’ll be talking a lot more about this subject at the InformationWeek 500 Conference: Tomorrow’s CIO. Check out the conference agenda at informationweek .com/500/08/agenda.htm.