For those involved in out-sourcing or off-shoring, Andy Rappaport discusses why outsourcing works for the IT industry but fails in the automobile industry. He writes that “the U.S. IT industry has been able to innovate over the past 20 years even while ceding leadership of component technologies and basic processes.”

For example:

1. Apple enjoys an unfettered supply of leading edge technology because its software, design, marketing, and retail prowess give it ultimate control over customer spending.

2. Amazon, Google, Hewlett-Packard, IBM, AT&T, and Qualcomm have used their investments in software, services, infrastructure, and intellectual property to do the same.

3. All use their market power to force upstream vendors to invest for them to make the inputs to downstream innovations and transformations cheaper and more plentiful.

4. As long as they innovate sufficiently to follow the flow of market value downstream, all are able to limit the eventual return and market power accruing to these upstream innovations.

However, he warns that this model breaks down “where U.S. companies and innovators do not naturally control downstream demand. Take batteries for electric vehicles. The U.S. has ceded both innovation in the critical building block (the battery) as well as leadership in the integration of these blocks into downstream value (competitive automobiles).”

Full article here: http://blogs.harvardbusiness.com

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