Friedman's The World Is Flat, How Companies Cope, Lesson #5:

In a flat world, the best companies stay healthy by getting regular chest X-rays and then selling the results to their clients.

Chest X-rays are good but only look at one part of the body. Really, Friedman means to say complete medicals but that metaphor is not as vivid. Whatever the comparsion, the best companies understand their inputs, processes, and outputs. They get this understanding by having very smart people -- internal and external consultants -- review the company on an ongoing basis. Their task is to identify operations that are essential to the growth of the company and separate them from those that can be outsourced to free up cash for reinvestment.

Friedman argues that an average healthy company is doing well if 25% of its activities are core competencies. Think about it for a moment. In a healthy company, 75% of operations can be improved or outsourced. Doing so would improve the company's health. Imagine what unhealthy companies might achieve.

Once a company has identified an inefficiency and improved it, it can then sell that capability to customers.

The example Friedman uses is HPs contract to implement and manage the core banking system of the Bank of India in Mumbai. 750 branches were included in the deal. Why did HP win this contract? Through a process of self-diagnosis, it had reduced eighty-seven different supply chains down to five across 178 different countries. Get this number right: Five supply chains managing $50 Billion in revenue. No wonder the Bank of India thought it could benefit from HP's core competency.

Many people see these gains in efficiency coming on the backs of lost jobs. In fact, what happens is that good companies use the free cash to grow their operational competencies. (...read more...)