Rapid Response Capabilityin Value Chain Design

MIT/ GM

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About the Research• General Motors Powertrain

– 20 engine sub systems– 20 transmission subsystems

1. Customer Importance – Customer preference assessment project

2. Technology Clockspeed3. Architectural Relationship

4. Supply Base Capability5. Competitive Position

Interviewed dozens of engineers in engg., mfg., procurement, financial analysis, benchmarking etc

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Chest X-Ray

Organizations today must quickly and continually assess which parts of their value chain are vulnerable, which parts are defensible, which alliances make strategic sense, and which threats are deadly.

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Key QuestionsWhere is value being created, and which activities are not adding to

overall enterprise value?

• Sourcing: What areas of the business should remain in-house versus being outsourced?

• Investments: Where should investments be made, and how should they be leveraged?

• Alliances: How can the value chain be organized to optimize existing and emerging alliances.

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Integral

Modular

NoneFewMany

AdvtgeParityDisadv

FastMedSlo

HiMedLo

Strategic Value Assessment

CUSTOMERIMPORTANCE

TECHNOLOGYCLOCKSPEED

COMPETITIVEPOSITION

CAPABLESUPPLIERS

ARCHITECTURE

POSSIBLE DECISIONS• Insource• Invest• Partial outsource• Partner/ acquire• Partial insource• Spin off• Develop suppliers• Outsource

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Synthesizing Strategic & Economic Elements

INSOURCELEVERAGE

OUTSOURCE HARVEST

Low(-ve)

High(+ve)

ECONOMIC VALUE ADDED

High

Medium

Low

STR

ATE

GIC

VA

LUE

AD

DED

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The objective is to define a target value-chain configuration on the basis of both strategic and economic analyses.

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The Value-Chain StrategicDecision-Making Framework

RECOMMENDATIONS• Sourcing

• Investment• Architecture

• Alliance InsightsSYNTHESIS

STRATEGICVALUEADDED

ECONOMICVALUEADDED

QUALITATIVEMODEL

QUANTITATIVEMODEL

• Cust. Imp.• Tech Clocksp.• Comp. Pos.• Cap. Supplr.• Architecture

• Cost• Assets• Revenues• Comp. Cost Structure

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Assets

Knowledge Assets Design & engg of

products, processes &

services

Supply Assets manufacturing

& deliverycapabilities

At a strategic level, every sourcing decision throughoutthe value chain, is a choice between dependence and independence for supply & knowledge.

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Hi customer importance+

Fast Clockspeed

HighStrategic

Value

InsourcingStrong competitiveposition

Supply-basecapability

Hi modularity inarchitecture

Outsourcing

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Customer ImportanceENGINES & TRANSMISSIONS

Pick-up Truck• superior acceleration• smoothness of engine

Minivan owners

• interiors

• reliable engine

Research unearths what product characteristics the customerwill trade-off or pay for.

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Technology Clockspeed

FRUITFLIES(Fast Product Life Cycle Changes)

MAMMALS(Medium PLC)

REPTILES( Slow PLC)

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Technology Clockspeed

CYLINDER BLOCK• slow change• outsourcing easier MICROCHIP CONTROLLER

• rapid change in technology• risky to outsource

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Competitive Position

Same component, same customer importance, same technology clockspeed, but different sourcing decisionsBased on competitive position.

Cost = industry avg.Outsource- cheaper

Cost = lowest in industryMfg. in house

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Capable Suppliers

InternationalAffiliates

CREATE INTERNAL MARKET PLACE

IndependentVendors

OR

EXAMPLE

ENGINE BLOCK at GM

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ArchitectureKarl Ulrich

STEREO SYSTEM - MODULAR

AUTO ENGINE - INTEGRATED

The best course of action is to retain independence forknowledge in the engineering & manufacturing domains,but allow significant dependence for supply in manufacturing capacity.

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For an organization whose annual investments in products,processes, capacity and technology are typically measuredin billions of dollars, the value-chain model provides a new

way too help direct these investments and related sourcing decisions.

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Applying the Framework:GM Powertrain’s

Exhaust System Engineering

EXHAUST SYSTEM- GM

• High customer value• Rapid Technology

clockspeed• Strong competitive

advantage• Weak supply base• Modular Architecture

CATALYTIC CONVERTER

What’s the sourcing decision?

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Applying the Framework:IBM’s Fateful Outsourcing Decision

• Customers don’t care if IBM made processor

• Fast clockspeed• Small supply base –Intel &

AMD• Modular architecture• Independent Wintel supply

base• Low entry barriers: Compaq,

Dell• Processor modular but integral

to Operating System

Where did IBM go wrong?

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Applying the Framework:Outsourcing Consumer Product Manufacturing

Think P&G or Unilever:• Brand image• Mixing & bottling mature

processes• Technology clockspeed –

slow• Many suppliers• Production of shampoo

modular

Should P&G outsource? Why?

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Applying the Framework:Napster’s Unrecognized Supply Chain Value

• Napster’s identity for sharing- important to customers

• Clockspeed – fast• Competitive position –

strong---------------------------------• Napster’s demise led to

multiple web sites devoted to sharing

• RIAA has made value chain difficult to control

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Building SWAT Capability in a Fast Clockspeed World.

• SWAT = Special Weapons & Tactics• Be prepared for rapid value-chain

transformations.• SWAT teams must rapidly assess which

parts of the chain are vulnerable, which parts are defensible, which alliances are palatable, and which threats are deadly.

• The value chain framework can help organizations build this critical capability.