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Wednesday, January 12, 2005

Value chain disaggregation & how to join it, if you can't fight it!

Disaggregration of the value chain is inevitable given the lowered costs of transaction facilitated by the Internet. Most of the things firms do inhouse today will be outsourced either to a different geographic location or to a different firm.
How do established companies in areas other than( & including) strat consulting counter this? Hmmmmm. Let's see. Voila!!!!. Companies should also disaggregate their internal value chains using the internet(or is it intranet?) I was thinking about the feasibility of this idea in my 10 ft x 8 ft room.
What is the main problem in achieving the most profitable cost structure wrt of a firm's(let's say XYZ) purchasing deptt?Think for a minute before you scroll down.
Well, as you might have guessed,it's competition. XYZ's pd isn't inefficient/ineffective by itself but is so in relation to others. In a perfect world you should have been able to fire your entire pd & get a brand new pd the nest day. Unfortunately, life doesn't work like that. Your pd might rightly complain that other deptts didn't furnish it with the right information in time & that's why it made the faulty decisions? It might also claim that it doesn't get any leeway in recruiting staff for it's deptt. Incompetent staff is thrust on pd by the HQ. What a mess!!! What to do?? One firm tried to disintermediate it's own firm by actively encouraging poaching among it's own divisions & giving employees a lot of freedom. That firm was(?is) Enron. Ouch. Obviously there are risks are at either end of the pole. Free market competition is the most efficient of them all causing a firm into extinction if it fails continuosly. Although, difficult to implement in a closed firm setting, some parts of free markets theory can be applied.
Here are my suggestions:-
1)A set of progressive benchmarks should be set after research on best practices at other firms & the compensation structure tied to it.
2)Depending upon the criticality of the pd in the overall setup it should be allowed recruiting autonomy subject to some central norms.
3)The compensation structure of the pd & all other deptts should also be tied to the overall business performance such that inter-deptt costs can also be lowered.
4)All said & done a certain amount of inefficiency has to tolerated since a internal deptt's employees jobs just aren't on the line unlike external firms whose survival depends on their competitiveness.


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