Academic journal article The McKinsey Quarterly

The Future of the Networked Company

Academic journal article The McKinsey Quarterly

The Future of the Networked Company

Article excerpt

Even during the present slowdown, networked companies are outperforming conventional ones. They are likely to go on doing so.

When Cisco Systems announced a $2.2 billion inventory write-down in the second quarter of 2001, skeptics immediately proclaimed the fall of the network business model that Cisco exemplifies. [1] Superior information technology and real-time management, the critics reminded their readers, were supposed to have enabled networked companies to avoid precisely such setbacks.

Cisco's vaunted supply chain systems were indeed meant to provide greater notice of impending demand slowdowns than they did in this case. But reports of the demise of the network model-in which companies go far beyond outsourcing and actually collaborate in the delivery of products and services to customers-are much exaggerated. "Network orchestrators" like Cisco might be experiencing their first real taste of adversity, but the network strategies they deploy look stronger than ever.

Indeed, Cisco outperformed its peers not only during the boom years of 1995 to 2000 but also during the first-quarter-2001 downturn (Exhibit 1). By most measures, its fellow network orchestrators--such as Charles Schwab, CNET Networks, eBay, E*Trade, Palm, and Qualcomm--did so as well. Our analysis shows that network orchestrators have reached their market milestones more quickly and earned greater value per employee than have their peers (see sidebar, "Still looking good?" on the next spread), and it suggests that they will continue to outperform other top companies inside and outside their industries. Because they own fewer assets and leverage the resources of partner companies, network orchestrators require less capital and return higher revenue per employee than do conventionally run companies, and they are better able to weather the damage usually inflicted by market volatility.

Where did they come from?

During the past decade, big corporations learned to dismantle, or "unbundle," themselves into their component parts, some of which they deemed to lie at the core of their business, while they sold off others. [2] In so doing, however, they encountered a discomfiting question: if they were not exiting the business but would continue to deliver a complete product or service to customers, what would be their relationship with their former subsidiary or its marketplace counterparts?

As Cisco morphed into a virtual corporation during the 1990s, it answered that question by creating a "gated network" of contract manufacturers and suppliers connected to one another and to itself by a powerful set of network applications running on its proprietary extranet. Cisco itself was disintegrating--that is, withdrawing from those parts of the industry value chain where it lacked preeminent advantage--but that didn't mean it was disengaging from the manufacturers, subcontractors, resource planners, and other companies on which the seamless delivery of its products to customers depended.

In fact, its network comprised a tightly disciplined group of businesses resembling a Japanese keiretsu--a bloc of interdependent companies operating within a given industry. Unlike keiretsu, however, a network's sinews are not cross-holdings of debt and equity but rather an information standard, which functions as a lingua franca, enabling network participants to exchange information about customers, products, schedules, inventories, costs, and almost any other data needed to serve those customers and create competitive advantage. (Networks differ from keiretsu in another respect as well: the customers themselves, being the generators of market information to which the businesses count on having instantaneous and broad access, are integral members of the network.) Whatever the information standard chosen, it facilitates interaction by specifying the ways in which information exchanged among the partners' respective systems must be formatted. …

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