Why sourcing is getting more exciting by the day

One of the effects of the recent economic meltdown is American and Western European consumers looking for cheaper products. Many are shaken and struggle to pay off existing loans, let alone feel comfortable to engage new ones. At the same time are billions of consumers in Asia, South America and in a lesser extent Africa, entering the middle class. But a middle class which can only afford cheap products. Companies react to these developments by producing cheaper products and services, like the one Lac (2,000 dollar) car from Tata.

In the Harvard Business Review article ‘Innovation’s Holy Grail’, C.K. Prahalad and R.A. Mashelkar argue that this change in demand requires companies to think differently about innovation. Where traditional innovation is built on the assumption of abundance in capital, knowledge and other resources, will future innovation be driven by the need to build more products with fewer resources. According to the authors, companies should focus on ‘affordability and sustainability, not premium pricing and abundance’. The subsequent global search for lower cost, affordable talent pools will lead to even more dispersed value chains, requiring sophisticated IT solutions to manage the accompanying complexity.

Other business models are based on free, as free is better than cheap. This business model is based on providing free services to most consumers in combination with adjacent revenue sources that cover the cost. The concept of free services was made popular by author and Wired editor Chris Anderson in his book Free: The Future of a Radical Price . In reality is the product or service is indeed free for most consumers, with advertisers or ‘premium users’ generating the necessary revenue. Will this the future? Not very likely as the available revenue pool generated by advertisement or user-upgrades is limited. Even Facebook with 500 million users still requires cash donations from its owners.

While being price conscious are consumers at the same time looking for products which reflect their desire for individualism. Companies like Netflix and Amazon.com have already mastered the skill of selling a large number of unique items in relatively small quantities, while still making a profit. Chris Anderson described this concept in this book The Long Tail: Why the Future of Business Is Selling Less of More and this retail concept is gaining in popularity with the consumers’ desire to reflect their personality in the products and services they buy. The ‘Long Tail’ in the book title refers to the statistical property that a larger share of consumers rests within the tail of a probability distribution than observed under a 'normal' or Gaussian distribution. More simply stated, consumers used to be happy with a black Ford, but not anymore. They expect all available colors of the rainbow, paying only a minimum premium for that added value. This requires companies to combine two, on first sight conflicting, requirements in their production process: efficiency and differentiation.

Offering a wide variety of customizations without adversely impacting cost is a skill which Western European car manufacturers learned to master. There the customization process starts with feeding information left behind by visitors of their websites regarding preferred models, colors and options into the production process. A production process which is based on the capability of putting a wide variety of modules together as a jigsaw puzzle. The flexibility these modules bring into in the design process and supply chain is the cornerstone of the car industries’ ability to combine product flexibility and efficiency. It drives the adding and removing of functionalities, integration with suppliers, and allocation of R&D efforts among all companies involved.

To execute innovation for low cost and ‘lean customization’ more successful than next doors competitor, one shared ingredient is necessary: information dominance. Where achieving air dominance is crucial to decide a military conflict in your favor, will gaining information dominance be central in doing business in the years to come. It can be simple like soccer team AC Milan using a mathematical model to predict the chance players will get struck by an injury. Google uses self-learning algorithms to improve search results and present advertisements while the success of retailers Wal-Mart and Ahold is derived from knowing more of consumers and suppliers than their competitors.

These organization have been able to get a grip on the massive data amounts and can predict to a high degree what an individual customer will buy next. Smart technology alone is however not enough as all relevant information was available on the terrorist who boarded the flight between Amsterdam and Detroit in December 2009. In this case the human factor prevented the proper conclusion to be draw. In that sense is terrorist hunting like doing business, IT can do a lot, but the chain is as strong as the weakest chain.

What else on tomorrows agenda? Expect more patent lawsuits related to business models. Companies increasingly approach new business process outsourcing models or methods as intellectual property and try to protect it with a patent. With several e-commerce related patents being awarded, is it also for IT important to be vigilant when the business requests mimicking somebody else’s e-business concept. Patenting a new business concepts is however at the same time also a mechanism for startup companies to defend themselves against the might of established companies.

Established companies which have capital to spend, but lack the flexibility, creativity and drive of small companies. Many large corporations have insulated themselves over time from their customers, with the financial services industry as an obvious recent example. Transforming large corporations into more nimble organizations is therefore one of the main challenges for tomorrows executive. Corporations are increasingly being challenged by SME’s which rely heavily utilizing the latest technological advances to provide higher quality products and services at lower cost levels.

Which service providers are ready to support corporations dealing with these challenges? Challenges which are re-shaping the market place and accompanying make-or-buy decisions.