No Survival without Operating Efficiency

There is no way a business can survive without internal operating efficiency. For example, the sweet spot of most of the consumer electronics goods prices is about $300. This sweet spot price point has stayed at $300 level for almost two decades. The sweet spot for X'mas gifts in the consumer electronics segment in the US is in the range of $100 - $200.

Whether it is iPod, iPhone, PlayStation or a regular Denon receiver, it is hard to achieve a sufficiently large market without hitting this price point. Therefore, you have to cut down the cost of inputs to a point where you can hit this sweet spot without making a loss. If you can't, then you have to accept a loss on the main unit and attempt to make that up when you sell complimentary products. Sony and several electronic gaming system manufacturers have adopted this strategy for the initial roll-out of their PlayStation units. The search of lower costs and operating efficiency in the area of software development and manufacturing very quickly extends the supply chain to India and China. Several software development firms in India and assembling firms in China, for example, Foxconn Technology, have the sole strategy of maintaining high efficiency of labor and doing everything to lower the cost of labor in assembling of products.

While there is some differentiation based on the reliability of supplies and quality of output among the firms in India and China, their raison detre for being part of, for instance, iPhone supply chain is that they can provide labor-intensive software and assembly services at a lower cost than anyone else. The current state of competition among the software development firms in India and manufacturing/assembly firms in China is mostly cost-driven that relies heavily on tiny profit margins, lower cost of labor, economies of scale and internal operating efficiencies. Is this situation going to be permanent? I doubt. Competitive position based on operating efficiencies is not sustainable in the long run.

There are several other examples of firms that are heavily dependent on internal operating efficiencies to meet a low price threshold and achieve competitive advantage. Is this competitive advantage based solely on internal efficiencies sustainable in the long run? I agree that while the sustainability of competitive strengths based solely on internal efficiencies is highly doubtful, it is a necessary condition for staying in this market.

Does outsourcing really mean achievement of operating efficiencies? This is another question. You can certainly outsource your internal inefficiencies and achieve a lower cost. However, this hasn't worked very often.

For a successful business operational efficiency is necessary but not sufficient. Here is another thought on operational efficiency and strategy: http://techenbiz.blogspot.com/2010/06/efficiency-is-not-business-strategy.html.