Inspired by a thought-provoking LinkedIn post by Ed Morrison, the father of Strategic Doing, we delve into the crucial topic of the industrial commons and its decay. In an increasingly globalized economy, the allure of outsourcing manufacturing and supply chain activities to lower-cost regions has become a common practice among major corporations. However, this seemingly beneficial strategy harbors a hidden danger—the decay of the industrial commons. As companies like Dell have demonstrated, outsourcing can lead to the erosion of domestic skills, innovation capabilities, and economic stability.
This transfer of knowledge and capabilities to external suppliers not only weakens the original industry but can also create formidable competitors. To safeguard a nation’s industrial base and ensure long-term national prosperity, corporations must adopt a holistic strategy that strengthens domestic manufacturing, fosters innovation, and diversifies supply chains. This post delves into the consequences of the decay of the industrial commons and outlines actionable measures to prevent it, ensuring a resilient and thriving industrial ecosystem.
Case Study: The Greek Tragedy of Dell-Asus
The case of Dell and ASUSTeK (later known as ASUS) vividly illustrates the decay of the industrial commons. In the early 2000s, Dell, a leading computer manufacturer, decided to outsource the production of its motherboards to ASUSTeK. ASUSTeK offered to assemble the motherboards at a lower cost and eventually proposed making the entire PC for Dell. The cost savings were significant, and Dell, like many companies focused on efficiency and cost-cutting, agreed.
As ASUSTeK deepened its involvement in Dell’s production process, it gained invaluable insights into Dell’s operations, design philosophy, and competitive strategies. This knowledge transfer included the technical aspects of manufacturing and business practices, quality control, and supply chain management. Equipped with this knowledge and experience, ASUSTeK rebranded itself as ASUS and began producing and marketing its own computers, laptops, and other electronics. What started as a supplier relationship had evolved into direct competition. ASUS leveraged the skills and capabilities it had developed through its partnership with Dell to establish itself as a formidable player in the global market.
For Dell, the outsourcing decision led to a series of unintended consequences. By outsourcing critical components of its supply chain, Dell lost control over the manufacturing process, which affected its ability to innovate and respond swiftly to market changes. The domestic workforce lost opportunities to develop and refine manufacturing skills, leading to a decline in industrial expertise within the company. The shift of manufacturing jobs overseas contributed to job losses and economic challenges in regions that had previously supported Dell’s manufacturing operations. Additionally, Dell became vulnerable to supply chain disruptions and geopolitical risks associated with reliance on foreign suppliers.
The Dell-ASUSTeK case underscores the importance of maintaining a robust industrial commons. It highlights the risks of outsourcing critical manufacturing functions and the long-term strategic disadvantages that can arise. Companies must carefully weigh the immediate cost savings of outsourcing against the potential loss of innovation, skills, and control. The story of Dell and ASUSTeK serves as a cautionary tale about the perils of outsourcing and the decay of the industrial commons. It emphasizes the need for a balanced approach that protects domestic capabilities while leveraging global opportunities. Investing in local manufacturing, fostering innovation, and developing strategic policies can prevent the erosion of our industrial base and ensure sustainable economic growth.
Honoring Clayton Christensen
This analysis would be incomplete without acknowledging the profound contributions of Clayton Christensen. His detailed exploration of the Dell-ASUSTeK case in his book How Will You Measure Your Life? (2012) provided invaluable insights into the broader implications of outsourcing and the decay of industrial commons. Christensen’s work has illuminated many facets of business strategy and innovation, helping countless companies navigate the complexities of global competition. His legacy continues to inspire and guide strategic thinking in the business world.
From Case Study to Analysis
The example of Dell and ASUSTeK (later ASUS) vividly illustrates the phenomenon where outsourcing led to the transfer of knowledge and capabilities, ultimately creating a competitor and weakening the original company’s competitive edge. Let’s further analyse this phenomenon.
Analysis of the Decay of the Industrial Commons
- Loss of Capabilities:
- Skills and Expertise: When manufacturing is outsourced, domestic workers lose the opportunity to develop and maintain high-level skills.
- Innovation: Proximity to manufacturing often spurs innovation. Outsourcing can lead to a decline in R&D and innovation capabilities within the original country.
- Economic Impacts:
- Job Losses: Outsourcing can lead to significant job losses in the manufacturing sector, affecting the broader economy.
- Economic Dependency: The original country may become economically dependent on the outsourcing destination, losing control over critical supply chains.
- Strategic Vulnerability:
- Supply Chain Risks: Over-reliance on foreign suppliers can create vulnerabilities in the supply chain, particularly in times of geopolitical tension or global crises.
- Competitor Creation: As seen with Asistech, outsourced suppliers can become direct competitors after gaining the necessary knowledge and capabilities.
Preventive Measures
- Strengthening Domestic Manufacturing:
- Investment in Technology and Innovation: Encouraging investment in new technologies and innovative manufacturing processes can help maintain a competitive edge.
- Public-Private Partnerships: Collaborations between government, academia, and industry can foster a robust industrial base.
- Education and Training:
- Skill Development Programs: Investing in education and vocational training to ensure a highly skilled workforce.
- Continuous Learning: Promoting lifelong learning and continuous skill development to keep pace with technological advancements.
- Strategic Policies:
- Incentives for Local Manufacturing: Providing tax breaks, grants, or subsidies for companies that maintain or bring back manufacturing operations domestically.
- Regulatory Measures: Implementing regulations that protect critical industries and prevent excessive outsourcing.
- Supply Chain Diversification:
- Multiple Suppliers: Developing a diversified supply chain with multiple suppliers from different regions to reduce dependency on any single source.
- Onshoring and Nearshoring: Encouraging onshoring (bringing production back home) or nearshoring (moving production to nearby countries) to mitigate risks.
- Collaboration and Networking:
- Industry Clusters: Promoting the development of industrial clusters where companies, suppliers, and research institutions collaborate and share knowledge.
- Knowledge Sharing: Encouraging open innovation and collaboration among companies to maintain a competitive industrial commons.
Conclusion: Building Impact-First, Future-Fit Organizations
Given our focus on building impact-first, future-fit organizations, this article highlights the importance of weighing strategic decisions with a long-term perspective. Outsourcing can be financially attractive in the short run but economically disastrous in the long haul. Organizations must prioritize strategies that ensure long-term viability, foster innovation, and maintain robust industrial capabilities to achieve sustainable success. By doing so, we can build resilient organizations that thrive today and are prepared for tomorrow’s challenges.
