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Google & Motorola: Verticalisation or outsourcing?

Issue Date - 15/09/2011
By announcing the acquisition of Motorola for a whopping $12.5 billion Google appears to be trying to take a leaf out of Apple’s book by becoming more vertically integrated. But, unlike Apple, it lacks any background or experience in manufacturing and has not been able to build up the capabilities. Thus, the question remains: Will it succeed? michael j. mol, faculty of strategic management, warwick business school

We all know these are turbulent times, but they are also very confusing times. As I am writing this, Google has just announced it is getting into the business of producing cell phones (in Europe: mobile) through its proposed takeover of Motorola Mobility for $12.5 billion. Google previously did not want to be seen anywhere near manufactured goods. Western stock markets have long placed a premium on firms which increased their focus, but in India Tata and others have been pretty successful on the back of the conglomerate model. Google is apparently trying to follow in the footsteps of Apple, now just about the world’s most valuable firm, but HP wants to get out of its hardware business altogether. And in the oil industry, which has always been highly vertically integrated, it is now becoming fashionable to split off exploration businesses. It makes one wonder whether any of these strategies are worth following. So verticalisation or outsourcing: What is your best strategy?

My own research into outsourcing, and that of other colleagues around the globe, suggests several answers to this question that your firm should be aware of when taking decisions about what activities to integrate and what activities to outsource. First, what is a successful outsourcing strategy is highly dependent on the context in which you operate. In India and other emerging markets it makes sense to integrate some activities which would be outsourced because successful outsourcing requires a strongly developed supply market. Where that market is still emerging, outsourcing simply may not be an option.

Second, there can be major changes in technology that facilitate outsourcing. Just witness how improved communication technology, along with increased training levels in countries like India, has produced the business process outsourcing revolution of recent years. When such changes occur and turn products and processes into commodities, it makes sense to outsource more. And over the years outsourcing levels have increased as a consequence. But many firms suffer from what my colleague Masaaki Kotabe and I have framed ‘outsourcing inertia’. Outsourcing inertia occurs when firms do not adjust their outsourcing levels quickly enough when there are significant changes in technologies and other changes in their environment. Examples of outsourcing inertia are plentiful, just think about the decades of struggle the “Detroit Big Three” have gone through.

Our research shows that most managers adapt their outsourcing strategies only when there is some trigger present. This trigger can come from outsiders, like shareholders or consultants, or when managers obtain new knowledge through networking events. It can also come from positive examples. Sometimes the trigger comes from top management, which decides that large-scale outsourcing is the way forward. And there are some cases where individual managers go out and make the case for outsourcing, often going against the grain of the wider organisation. But on the whole, most changes in outsourcing strategy come about through some form of outside information or pressure and not because managers are consciously analysing in detail whether outsourcing is the appropriate strategy. In other words, there is a lot of ‘following the herd’ going on when it comes to outsourcing.

In the case of Apple, however, the opposite seems to be happening. Apple is finding ways to add its own flavour to a host of technologies through its vertical integration strategy and is using this to produce the differentiated products that we all love. One of its advantages is in its shorter lead-times, which are enabled by not having to talk to all sorts of suppliers before getting things done. Another advantage is its ability to design products containing its own components, a classical vertical integration strategy. This helps Apple turn received wisdom on its head. Google now appears to be trying to take a leaf out of Apple’s book by becoming more vertically integrated. Will it succeed?

This is a difficult call. But several arguments weigh against Google’s decision. First, Google is effectively following the herd (Apple) here. Playing a game of catch-up is always difficult, and particularly so when the firm you are trying to catch up with is as successful as Apple. Second, it is not clear Google can be a successful manufacturer of mobile devices. Unlike Apple, it lacks any background or experience in the production of goods and thus has not been able to build up the capabilities needed to be successful in that game. Firms, which outsource, need to have sufficient capabilities to monitor and manage their suppliers effectively. But firms, which vertically integrate activities, need a strong ability to undertake the activities on top of this. If they do not have this, they might be better off outsourcing the activities. Third, one way or the other, by becoming a hardware producer Google will start to compete with the other users of its Android mobile operating system, such as Samsung and HTC. It is difficult to see how that can make everybody happy at the same time, particularly if growth rates in the smartphone segment start to decrease, as they inevitably will, and Android manufacturers start to compete harder.

Finally, it is not clear whether there will be any consumer response to Google’s new strategy. Are consumers happy to buy a mobile device from a firm which already holds much of their data? With pockets as deep as Google’s you can probably afford a gamble financially, and the Motorola takeover will also give Google an interesting addition to its patent portfolio, but there is a downside to this particular deal that Google will hope does not materialise. If it does, outsourcing might have been better than vertical integration after all.

Anirudh Raheja           

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