The combined forces of globalization and enhancements in information technologies have long since changed the competitive landscape in many industries. To compete and prosper, companies in such industries must respond to the demands of customers who are highly price-sensitive. The result is a relentless drive for efficiency — and for lower costs.
In response, companies have embraced specialization and outsourced non-core activities. The heart of the decision to outsource economic tasks rather than perform them in-house frequently comes down to cost. This is true whether you are producing mobile phones or underwriting mortgages. The quest for efficiency thus leads, over time, to complex supply chains in which participants are increasingly disassociated from the final customer transaction.
Such efficiency can benefit consumers but also has a dark side. Complex supply chains with many agents are more prone to problems, and on occasion, to spectacular collapse. Examples from the last few years include the subprime mortgage crisis; the failure of the Peanut Corporation of America; the 2007 pet food scandal; lead paint on children’s toys in 2007; melamine-laced Chinese milk products; contaminants in the drug Heparin; and dioxin-contaminated Irish pork. The consequences can be dramatic. Peanut Corporation of America, a peanut-processing company based in Lynchburg, Virginia, whose sales were estimated at $25 million, triggered a $1 billion recall as its contaminated product found its way into some 2,000 products. The toy company Mattel Inc., based in El Segundo, California, suffered substantial damage to its reputation in 2007 when a supplier to a supplier to a supplier to a supplier of Mattel chose to use lead-based ingredients that were outside Mattel’s specifications.
Together, these crises and recalls should concern executives across a wide variety of industries. Although these problems appear to be very different and were certainly shaped by their unique circumstances, we propose that a primary cause was essentially the same: the failure of the market mechanism to root out opportunism within the different levels of the market or supply system. Such opportunism can take the form of insufficient care given to ensuring safety or quality standards — or even, in some cases, to criminal misconduct.
Our research is part of a series of interdisciplinary studies aimed at understanding why business systems fail and what leaders can learn from such failures.