Sunday, April 10, 2011

Forego Know-How, Forego Competitive Advantage

Nearly three years ago I blogged on Boeing’s strategic mistake of outsourcing the design and build of the 787. I wrote: “While Boeing still retains vast amounts of intellectual capital through its central role in the 787 developments, it is foregoing a tremendous amount of intellectual property in the form of know-how.”

Know-how is about experience. It is something that blueprints and instructions cannot impart. In the case of aircraft manufacturing is the the know-how of engineers and the technicians who put the pieces together. But know-how plays the same important role in any industry.

In his book The Wealth and Poverty of Nations, David S. Landes tells of the French needing an additional supply of their 75-mm field guns during WWI. They ask for US help and sent the blueprints over to the US. However, even though they followed the blueprints precisely the US team could not build satisfactory canons. It wasn't until a team of French workmen came over and showed the Americans how to make and assemble the pieces, that the American could build guns of comparable power and stability. - Know-how!

The 787 uses new materials and new designs. But these raise problems that were not anticipated by the engineers. Discovering how to solve those problems and how to get around these many little obstacles is what makes up know-how. Since it is 3rd parties who are doing this work, Boeing isn't even aware of most of these problems and solutions. Boeing has given away that know-how. And, more importantly, the know-how is now available to any competitor who wants to contract with the 3rd party.

Actually Boeing should have known this. Before all this outsourcing began John Hart-Smith, a senior technical fellow at Boeing gave a talk internally in which he pointed out the pitfalls of the outsourcing strategy

"Subcontracting of higher-level design work means partners may end up with the specialized knowledge they need to supersede the prime manufacturer. One must be able to contribute in some way to products one sells to avoid becoming merely a retailer of other people's products."

His main recommendation was:

"Retain sufficient in-house production manufacturing that it is possible for future engineers to acquire the skills needed to develop new products, without which all businesses will fail."

Of course, as an engineer he was thinking engineering, but the problem is more widespread. It is also the knowledge of the technicians in airframe, avionics, flight control, and powerplant who figure out ways to put things together that miss out on know-how.

Outsourcing is something that must be thought through thoroughly. When you outsource a portion of what creates your competitive advantage, then you risk losing control of the valuable intellectual property known as “know-how.”

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