Theories about management style and corporate structure are as prone to faddishness as music or fashion, and the fad that has ensnared the business world for several decades is the notion that companies should do nothing that’s not directly related to their core business product or service.
And maybe not even that.
Like a lot of fads — hey, even disco probably had a moment or two of rationality — this one was grounded in some defensible notions. Running a vertically integrated company and everything needed to support it requires time, attention and capital, all scarce resources. If someone has more expertise and efficiency at doing some of those jobs, let them.
That way of thinking was a reaction to the days when companies not only made a product but sometimes all the components that went into it — and even mined, shipped and refined the raw materials. Dropping the do-it-all-yourself approach did have its benefits; companies became more focused on the business they were supposed to be in, and thousands of subcontractors, suppliers, vendors, service providers and consultancies sprang up to take on the jettisoned workload.
But much like a pendulum given too violent a shove, what resulted was an overreaction. Companies didn’t just pare away the nonessential stuff; they began hacking away at pieces integral to their operations and prospects. Core functions such as product design and production were treated with the same regard as landscape maintenance.
Bad things happened. Businesses got cut from the information loops of product development and customer feedback. They lost control of production and service delivery, leading to headaches when problems cropped up (and when don’t they?).
Declaring the fad of the stripped-down company over is a risky proposition, but there are definite signs that the philosophy is getting a rethink.
Most prominent of those signs was Boeing’s declaration earlier this year that “where we need to, we will build selective vertical capability.” The 777X composite wing facility at Everett is a prime example of performing in house a chunk of work that might have been contracted out.
Another transportation-equipment assembler, the truck builder Paccar, now produces its own engines at a plant in Mississippi. Recently, it introduced its own branded line of truck axles, and even more recently its own automatic transmission (although that’s still made by an outside party).
Food processor Darigold also announced it’s taking over distribution of its products to stores. The sale of the company that had been doing this job provided the opportunity to bring that operation in house.
Perhaps the company most energetic in the do-it-yourself movement has been Amazon. (Really, we tried to go at least one month without a mention of you-know-who; these days that’s a near impossibility, whatever the subject). There’s no need for Amazon to build and operate its own warehouses, its own logistics network, even its own online operations. There’s no shortage of companies happy to take Amazon’s money to do those things.
But Amazon sees value in controlling and running certain aspects of its businesses. That’s also the official reasoning behind Darigold’s move (which is no small investment: 100 tractors, 180 trailers and about 200 employees). “We are making this investment to upgrade our local delivery capabilities and maintain control throughout the value chain,” the dairy cooperative says. “Doing so makes us better equipped to more quickly provide farm-to-market delivery.” Boeing, meanwhile, wants the threat of keeping work in house as a negotiating weapon on supplier prices.
Most companies won’t return to the days when they controlled every phase, from mineral to consumer. But it turns out that there’s more to running a business than coming up with the idea and then letting someone else handle the details as to how it’s designed, made and sold.
Bill Virgin is the founder and owner of Northwest Newsletter Group, which publishes Washington Manufacturing Alert and Pacific Northwest Rail News. Reach him at email@example.com.