Monday, May 9, 2011

The Modular Company

A friend was talking about the airline industry the other day - specifically that airlines have been focusing on their core competency - flying planes - while outsourcing other elements of the process to other companies. While you book a flight through a United-branded website, the reservation system is handled by a completely different company. An airline can outsource customer service, baggage handling, food prep etc. and focus on what they do best. The airline makes sure that everything works together seamlessly for the end-user.

The conversation made me think of something I read in The PayPal Wars - when PayPal wanted to allow users to interact with each other to solve problems with the PayPal service, they decided to create online message boards. This was in 2001 or so, and their best option for getting the boards up and running was to create them from scratch. Fast-forward a decade later and no web startup would think of building their own message boards. Your company can be modular - you have ZenDesk for customer support, Get Satisfaction for customer feedback, hosting and infrastructure management from AWS and company email, calendar, etc. from Google Apps, along with literally thousands of other functions that can be better fulfilled by other companies.

It really makes the idea of a one-person company more viable than ever. The person in the middle can focus on the core activity of the company while for the rest they select the right modules and manage the interactions between the various components - which is of course no small task.

It's also interesting to look at the cycles of centralization and de-centralization taking place in various companies and industries. For example, while the iPad has an Apple logo on the back, the screen is made by LG, the flash memory by Samsung and the camera, the audio controller and the battery by other different companies. Apple takes the various components, fits them in their design and makes the software pulling everything together. Another company physically assembles the devices.

With the introduction of the iPad, however, the processor was designed in-house by Apple. Prior to the introduction of the iPad, Apple acquired P.A. Semi, a chip design firm and created their own processors to use in the iPad, iPhone and iPod touch. Apple has also recently entered into partnerships with Toshiba on flash memory production. I suppose when your company relies on so much of one element from a third party (Apple is the single largest purchaser of flash memory in the world) or when you can't achieve competitive differentiation with a third-party "module" (most mobile processors come from a few companies) it makes sense to bring it in-house - whereas an airline's reservation system - while important - can rest on a good-enough solution. What are other reasons to outsource vs. in-house?

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