Let me tell you a story. A story of a company called Hornby. If you’re British, you’ll know them. You might even be feeling slightly nostalgic merely thinking about them. Hornby makes little model trains, and has been doing so for a very, very long time.
Ten years ago the company was nearly bankrupt. In an attempt to save costs they decided to outsource production to China. However, much to their surprise, they discovered the Chinese not only produced much cheaper, they also delivered superb quality. Therefore, middle managers could not resist spending all the money that they were saving through the outsourcing on adding additional quality in their product designs and, most of all, a lot of extra detail: a working light on every table in the restaurant carriage, windscreen wipers on the locomotive, a bit of dirt (painted) on the bottom of the carriages, etc. Their products became perfect scale models.
Then, as much to their surprise as to their joy, they noticed sales increasing substantially. When it persisted, they started talking to their vendors to figure out what on earth was happening?! They discovered that it was no longer fathers buying model trains for their children, but buying them for themselves (and in the process spending quite a bit more money on themselves than on their children…). Inadvertently Hornby had moved out of the toy market into the hobby market, producing for collectors rather than children.
Not long thereafter, Hornby was outperforming the FTSE dramatically, seeing its share price rise from 35 to 250 in just a few years.
But what can we learn from a story like Hornby’s? Isn’t their smart change in strategy simply due to sheer, unintended luck!? Well, partly, but that’s perhaps the first lesson. I find that many successful companies with great innovative strategies (e.g. Southwest Airlines, Zara, CNN) experienced some significant element of serendipity at their inception. But we (and often they) post-rationalise things as if it was all planned as such from the get-go.
But why? There is no shame in getting lucky. A great manager (such as Hornby’s Frank Martin) does not necessarily come up with the strategy, but is superb at recognising the opportunity when it comes knocking on the company’s door, while subsequently carefully adding all the other necessary strategic elements (marketing, investor relations, distribution, etc.) to take advantage of the opportunity. Just recognise the importance of luck – rather than deny it – and make sure you gratefully take advantage of it.
It is true that the argument used against outsourcing to a so-called low-cost country (such as China) is often ‘they won’t deliver the right quality’. I am glad to hear that doesn’t always have to be the case. Can you point me to other insights about outsourcing?
To be honoust, I don’t know much about outsourcing… as it is not something I specialise in. However, my colleague next door here at the London Business School, Professor Puranam, does. One of his articles which I like, and which speaks to your question, is this one: https://sloanreview.mit.edu/wsj/insight/global/2007/06/15/