The question still remains, why does Tolaram [makers of Indomie in Nigeria] need to invest in electricity, water, education, logistics, and so on, in order to deliver a pack of noodles to the average Nigerian? Surely, it wouldn’t need to do this if it were operating in, say, the United States. The answer to that question—on when and whether a company should internalize and integrate certain costs even though they don’t seem core to the company’s business—can be explained by one of the management theories I teach my students.
The decision on whether a company should integrate certain aspects of its business model (bring them in-house and do it by themselves) or whether it should outsource them depends on a theory we call interdependence and modularity. A company should develop an interdependent (integrated) business model when it cannot depend on suppliers for specifiable, verifiable, and predictable inputs. In some cases, this can be access to constant electricity, quality raw materials, or even well-educated employees. Inputs cover anything an organization needs to ensure it properly accomplishes the Job to Be Done for which customers “hire” its product.
In other words, if the company cannot reliably depend on a particular input from a supplier to accomplish the customer’s Job to Be Done, then the company must integrate its operations—create and manage all those “inputs” itself. For example, when Tolaram began operating in Nigeria, it had partnerships with several other companies for its packaging and logistics needs. Tolaram also depended on suppliers for wheat, flour, and oil. But because supplies from these companies weren’t reliable, Tolaram had to integrate these components into its business model. It had to do these activities itself. If other companies were able to provide these supplies reliably, Tolaram would have been able to more easily outsource these activities to these companies.
In this case, Tolaram would not have had to integrate as many aspects of its business model and would have developed something more modular.
The company would have partnered with reliable suppliers in the same way many companies in the United States partner with UPS or FedEx for their logistics and shipping needs, or with other suppliers of things like electricity, water, raw materials, and so on. It was precisely because Tolaram could not find reliable companies that it decided to integrate many aspects of its business model.
An interesting thing happened after Tolaram successfully integrated these other aspects of its business model, including logistics, packaging, electricity, and others. When other companies, many of which also needed these things, saw that Tolaram could reliably provide them, they began asking if Tolaram could sell those services to them. And just like that, a cost center was transformed into a profit center for Tolaram. That is the power of pull.The Prosperity Paradox
Which inputs that your organisation needs – people, material inputs, logistics or processes – can you obtain reliably from outside?
Where might you benefit from bringing the inputs into your organisation?
Which of your processes and inputs – training, logistics, materials – could you turn from a “cost centre” into a “profit centre” if you supplied it to others?