80:20 principle of engineering, Why Apple’s products are ‘Designed in California’ but ‘Assembled in China’

When I was around 16 I read Software Engineering by Roger Pressman and over the years have mentored as many people I have worked or interacted with on how this was truly a path-breaking work.

Software Engineering: A Practitioner’s Approach

However what was among the core that stood in my mind all along was the cycle of engineering and what it really meant, Analysis, Design, Development/Coding/Production, Testing & Integration, Installation and Maintenance. Why was this so important.  Because if you do one understands;

1. What people to hire for what part of the value chain?
2. Where the real value capture is?
3. What business models are a real competitive advantage?
4. What are the investment opportunities across the cycle?
5. How to design, engineer and manage a product?
6. How to optimize a system, process or is culture where the real ROI is?
7. How to invest or divest?
8. Leadership or Management?

Why Apple’s products are ‘Designed in California’ but ‘Assembled in China’

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I put some simple infographic together so as to explain some basics.

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But looking at the midstream opportunities, outsourcing reduces up to 50% of production to the maintenance phase, creating additional margins generally by a simple thumb rule of 50% reduction, that can be either lower price to consumer or generate a greater Gross Margin.  This is a great case in point in China’s manufacturing and India’s software services industry growth over the last two and a half decades. It’s like most IP developed in Israel or Ireland, finds US and European Markets and then manufactures in China, supports in India or Asia and then compete on the business models in a market, a la downstream.

Why US Companies Are Drooling Over Israel’s Amazing Startup Scene

Israel’s High-Tech Pipeline to the U.S. – ‘Innovation going on in Israel is critical to the future of the technology business,’ Bill Gates said in 2006.

This is really interesting to look Upstream, Midstream or Downstream of any business and see why and what it takes to really understand the value of fundamentals.  Look at Profit Pools of the PC and the US Auto industry.

Screen Shot 2013-09-13 at 9.59.17 AM          Screen Shot 2013-09-13 at 9.59.11 AM

Where would you put your capital? Why are there so many companies being acquired or going out of business.  Why is BlackBerry not competitive anymore?

Look at the U.S. coffee profit pool shifted dramatically from 1995 to 2005 breakthrough imperative (pg 106).
The Breakthrough Imperative: How the Best Managers Get Outstanding Results

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You look close and understand what Howard Shultz is doing at Starbucks and whether it’s going to work or not and where the real IRR and NPV will be.

Starbucks CEO Howard Schultz: ‘Profitability Is A Shallow Goal’
The Huffington Post 

“Profitability is a shallow goal if it doesn’t have a real purpose and the purpose has to be share the profits with others,” he said. “We are equally proud of what we are doing in the community, what we are doing with our people and how the company has built itself around a purpose that is not just about making money. ”

A brilliantly co-aouthored article that I read last evening, “Special Forces” Innovation: How DARPA Attacks Problems, by Regina E. Dugan and Kaigham J. Gabriel, http://hbr.org/2013/10/special-forces-innovation-how-darpa-attacks-problems/ar/1

This another example of the principle of engineering, profit pools business models and creating a competitive advantage, till the pool shifts. That is when the disruption takes place.

How Can We Beat Our Most Powerful Competitors? Chapter 2, The Innovators Solution

Click to access TheInnovatorsSolutionChpt2.pdf

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That is also why GE makes most of it GMROI downstream from it’s upstream IP and why it’s future is linked to what it calls the Industrial Internet.
Introducing the Industrial Internet

GE moves into ‘Industrial Internet’ service with Amazon

Testimony of Cyber Espionage and the Theft of U.S. Intellectual Property and Technology to The Committee on Energy and Commerce of The U.S. House of Representatives, July 9, 2013 is a good read.


So it’s worth reading or re-reading some chapters of Roger Pressman and Why Apple’s products are ‘Designed in California’ but ‘Assembled in China’! Perhaps you will see the logic in Starbucks Ethiopian Coffee and why it makes great model to franchise.

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