Apple’s Car and What It Means for Manufacturing

Apple Car is about to enter the auto market, and it’s all over the news. I mentioned this earlier about what it means for decoupling and so on, but I’m going to take it further because I received many questions about this. I’m going to talk about what is core to your business. In any business you’re in, there are certain things that you’ve decided are the core part of your business, and you can never remove control of that from your business and hand it to someone else. For a long time, strategy has taught you that you cannot outsource what is core because if you do, that means that anyone else can do it, and if anyone else can do it, then how do you have a point of differentiation here?

Let me ask you this question. For two similar companies offering the same service in the same sector, do they have the same core assets and capabilities? Is it possible that two direct competitors in the same sector, serving the same customers, can have two distinct and different core capabilities and assets? The answer is yes. Your point of differentiation doesn’t lie with the assets you have; it’s the way you use those assets, the way you pull them together and integrate them to do something different from what your competitors are doing. When Apple rumors started coming out, there was an overriding theme of people saying that manufacturing is dead, and this is the nail in the coffin for manufacturing in high service-based economies like the United States. According to these people, we should drift away from manufacturing and not consider bringing it back to the United States. Of course, Tesla did not get that memo on their way to being an $800-billion market cap. company where manufacturing is tightly integrated into their core.

The point is this: manufacturing is not dead. If you’ve built a core capability around profitable manufacturing, you will be profitable as a manufacturer. You need to understand what business you’re in, where you want to play and how you’re going to manufacture. How does manufacturing help you increase the net margin on your product? If the ability to manufacture in-house is not important to increasing the value of whatever you’re offering, then yes, get rid of manufacturing. But that actually comes back to an even deeper insight, which is: what is the risk you want to bear? Manufacturing is not just about whether it’s core or non-core. It’s a risk. What risks do you want to keep on your balance sheet? And what risks do you want to move—in other words, outsource—off your balance sheet?

When we talk about assets being core and critical, we must also remember there is a risk attached to each asset, each capability, each critical function. You can create a spreadsheet ranking all of your core attributes, core capabilities, all of your critical capabilities, and then you can attach a risk score to it, which the market does anyway. This then begs the question: if all of your assets and capabilities can be expressed as a risk, which risks do you want on your balance sheet, and which risks do you not want on your balance sheet?

For SCR-Advanced members, we’re going to make a future update showing you how we analyze a disease that’s affecting the workforce for a company that is a risk now on their balance sheet. Unless they manage that disease, it will affect the way the equity markets respond to them. The question becomes: Can they take that risk off their balance sheet—legally, ethically and adhering to GAAP standards? Or if they can’t take the risk off their balance sheet, how do they manage the risk so they’re not punished in the equity markets?

This is a way of thinking about strategy that could set you apart. You have to think about the risks you are taking as you keep things on your balance sheets and as you move things off your balance sheet. Every strategy has a risk. Every capability has a risk. Every core asset introduces a risk. You have to catalog it, score it and decide if you want to keep this risk on your balance sheet. If you are not equipped, if you are not the best company to manage it, you need to move it off.

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #15.