ASUSTeK started out making the simple circuit boards within a Dell computer. Then ASUSTeK came to Dell with an interesting value proposition: ‘We’ve been doing a good job making these little boards. Why don’t you let us make the motherboard for you? Circuit manufacturing isn’t your core competence anyway and we could do it for 20% less.’
Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. On successive occasions, ASUSTeK came back and took over the motherboard, the assembly of the computer, the management of the supply chain and the design of the computer. In each case Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. However the next time, ASUSTeK came back, it wasn’t to talk to Dell. It was to talk to Best Buy and other retailers to tell them that they could offer them their own brand or any brand PC for 20% lower cost.
Grossly simplifying, some products are Bill of Materials (BOM) products and some are Designed products. BOM products come to market via a process of generating a parts list and then integrating. In place of designers, BOM products have buyers and integrators. In place of innovation, BOM products have standards. The standards are preferably “industry standards” produced by consortia of companies that manufacture or distribute the product. Vendors compete on price and “alliance” to be allowed to sell parts to the integrators. Buyers work in a bureaucratic system in which specialists oversee acquisition of parts and the product as a whole is viewed primarily in terms of the sum of parts costs. Usually there are a small number of large integrators who act as the gateway to the market.
All the recent progress in cell phone handsets has come from companies that defied the BOM process. Instead of trying to sell items into the “stack”, RIM and Apple both have been able to imagine the handset as a complete product and innovate. Google is also changing the game by bearing down on what services can be delivered over a mobile device. These companies are in the business of creating products for end users and not in the business of selling parts to buyers of components. If you create products, BOM issues don’t go away, but they do not dominate.
The BOM process can dominate even in what appear to be more open markets. In a previous note, I discussed Dell’s efforts to sell against Apple to the people and businesses found at SXSW. Even though, as Jay Pinkert points out, Dell has improved design for cases, it labors under a disadvantage against Apple, because Apple can do end-to-end product design and Dell is forced to live at least in part in the BOM process world. Apple is not only designing the case, they control the operating system, the windowing environment, the middleware, and they can strongly influence and package application software. So Apple can look at what a conference organizer or musician wants or maybe what they will want once someone shows it to them, and try to design a product that will be compelling in totality. A company like Dell is constrained to delivering what is ultimately just a vehicle for vanilla Windows (or Linux) – a component of a stack. While the packaging can be improved, they cannot reach the customer in the same way that Apple can. Musicians and conference organizers and marketing agents want to have an aesthetically pleasing communications/graphics design machine or email/composing system or presentation device or some combination of these. None of them demand Vista or OS/10 or an intel processor or any of the technical parts. Of course, the traditional downfall of companies like Apple is that they grow an internal BOM process that transforms their own engineering staff into integrators and parts vendors.