Let’s say an orchestrator makes a strategic shift to develop deeper in-house bench expertise on up-stream value chain capabilities. Over time, this leads to an increased span of control in upstream value-chain coordination and management to reduce external dependencies.
In an effort to cut cost in the 1990’s, automotive OEMs over-indexed on outsourcing key component prototyping and manufacturing to Tier One suppliers in a turnkey model, leading to loss of development control and increasing costs. In recent years, many OEMs have invested in the in-house expertise required to regain control of upstream component of outsourcing management and coordination activities.
Other orchestrators, like Redbox, delegate increasing scope of activities to external partners as market place alternatives offer better efficiencies, scale and flexibility compared to internal capabilities. The DVD kiosk innovator designed and prototyped its first generation platform in-house but quickly realized that it could accelerate redesign lead time and production ramp-up efficiencies by leveraging the know-how and scale of Get-A-Movie, their design partner and contract OEM Flextronics.
Similar to evolving its span of upstream value chain control, orchestrators can also change the degree of partnership competition by moving from a single turnkey partner to multiple partners, especially as integration activities and underlying technologies become more commoditized across the development lifecycle. Several years ago, a leading consumer healthcare company moved to a dual-contract design and manufacturing model for its innovative diabetes-monitoring platform once it had erected strong patent protection and realized that several underlying proprietary technologies are becoming commoditized, allowing them to increase supplier competition and flexibility at minimal IP risk.
Figure 5 summarizes the various market and structural factors triggering a need for evolving partnership structure across key outsourced activities.
It is also important to ensure incentives and contract structures align as partnership structures evolve. Defining a fixed fee contract structure with product design firms during the prototyping stage is sub-optimal since it encourages the design firm and its upstream suppliers to cut cost and protect margins, rather than encouraging the desired behavior of rapid design and innovative experimentation. Similarly, employing a cost-plus contract with key manufacturing partners during the platform production ramp-up stage leads to excessive cost inefficiencies as contract manufacturers are incentivized to over-index on quality and speed over balancing with long-term production costs and efficiencies.
Success Driver 3: Managing Value Chain Entropy
Distributed product development environments can be entropic as well as complicated. And unmanaged entropy can create untold issues.
When Sony orchestrated the design and development of its Blu-Ray DVD-enabled PlayStation 3 console, it underestimated the complexity of the increasing pile-on of Blu-Ray design partners, component manufacturers and software integrators involved in rolling out a standardized specification enabling seamless production integration and ramp-up. The resulting systemic entropy delayed the global launch by over a year, giving the competing Microsoft Xbox a unique opening to steal market share.
Checking value-chain entropy requires unique skill sets and aggressive, hands-on management or the resulting process can destroy a product and, over time, the innovation ecosystem. Unchecked value chain entropy leads to an accumulation of extraneous assets and unnecessary capital demands. It increases the likelihood of assigning assets to wrong roles, sub-optimal system performance and slows down and/or impedes decision making as overly complex networks prevent external signals from accurately reaching the orchestrator. Increasing entropy overwhelms commercial ecosystems leading to complete platform failures. The bottom line: entropy creates more points of unpredictable disruption and failure.
The orchestrated retail/CPG space