Monday, February 13, 2012

What Business Are You In?

Virgil Carter

Non-profit organizations and for-profit corporations share at least one trait:  they are often one company, but three businesses!  Beneath the surface of many companies are three kinds of businesses:  1) a customer relationship business; 2) a product innovation business; and 3) an infrastructure business.  Every non-profit organization CEO understands these three kinds of businesses and the challenges they pose.  “Although organizationally intertwined, these businesses differ a great deal”, writes authors John Hagel III and Marc Singer in a recent McKinsey Quarterly article.

“These three businesses rarely map neatly to a corporation’s organizational structure.  Rather they correspond to what are popularly called “core processes”—the cross functional work flows that stretch from suppliers to customers and, in combination, define a company’s identity”, the authors note.  Almost a century of economic theory underpins the conventional wisdom that the management of customers, innovation and infrastructure must be combined within a single company.  “If those activities were dispersed to separate companies, the thinking goes, the interaction costs required to coordinate them would be too great”.

“Sooner or later, companies come up against a cold fact:  the economics governing the three core processes conflict!”  The authors write that, “Bundling them into a single corporation inevitably forces management to compromise the performance of each process in ways that no amount of reengineering can overcome.”

To see into the future of business organizations, “you only need to look at how Internet companies are organizing today”, the authors say.  “Portal companies such as Yahoo! Increasingly focus on managing customer relationships, relying on other companies to provide innovative products and services based on the World Wide Web, on the one hand, and infrastructure management, on the other.”  Many people will think of Yahoo! as a search engine, but in fact its searching product is provided by another company!  And Yahoo! has created business relations with large Internet access providers to manage a large portion of the Internet’s infrastructure.  The result is that Yahoo! can thus concentrate on a single core activity—attracting customers, gathering data on them and connecting them with both advertisers and merchants.

“The secret of success…is not just to unbundle but unbundle and then rebundle, creating a new organization with the capabilities and size needed to win”, say the authors.  What business is your organization in?

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