The Dangers of Deconstruction

Article excerpt

Farming out non-core needs can produce hollow results for a company.

The unseemly squabble over the future ownership of Amstrad marks the end of Britain's last white hope in the PC brand wars. But the collapse of Alan Sugar's creation as a serious contender also raises doubts over 'hollow' corporations -- which which make little or nothing of what they sell.

Sir Clive Sinclair, who was hailed for his pioneer hollowing, started with calculators; the business eventually failed in what developed into a Sinclair tradition. Now, piquantly enough, the last relics of the Sinclair computer are in the urn with Amstrad's hopes. But if Amstrad's decline is a portent, that is bad news for bigger and better computer firms: for hollowing-out is in.

Sun Microsystems, the workstations champ, no longer runs its own distribution, makes its own chips, services its own machines, or manufacturers its own components. It designs chips, software and workstations, which others make and Sun markets. Sun is not alone. Unisys and ICL are other companies that have retreated massively from manufacturing to concentrate on services and marketing. Both Apple and Compaq's notebook hits depend on Japanese suppliers. Even IBM, which once neither bought from outside makers nor sold to them, now has products bearing nothing of its own save the label. This is part and parcel of a general trend that Business Week calls 'deconstruction': the corporation 'downsizes', cutting employment and activities, as it concentrates on 'core competencies' -- farming out all non-core needs.

Sounds great, in theory: does it work, in practice? Just downsizing doesn't; the statistics show that companies which shrink most are outperformed handsomely by those which expand -- a glimpse of the obvious as ever was. If a business is growing organically, raising sales and profits, employment will also rise. If it is cutting employment, capabilities are usually being reduced in reaction to ebbing finances and markets.

This can be a deeply depressing exercise in chasing your own tail: depressing not only in terms of workforce morale, but financially. Look at the travails at Philips for a sad saga of European tail-chasing. Among Americans, Eastman Kodak has cut 12,000 jobs: its return on equity (ROE) has collapsed by two-thirds. American Express has seen its ROE halve. Managements have laid off workers instead of tackling the true causes -- and created new problems. Zenith Electronics has so savaged its numbers that it cannot meet demand for new flat computer screens. Once it led in quality TVs, an industry which largely abandoned manufacture in face of Japanese competition, and thus committed suicide. …

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