Missing Links? To keep things running smoothly, you just have to mind your own business, right? Wrong. If millennium madness has taught you anything, it should be this: Your business is only as strong as your weakest link.

In the early 1990s, one of Chrysler's hottest products wasthe Jeep Grand Cherokee. The procurement and supply departmentdecided to determine how reliable its suppliers were and beganmapping out all the sources for the Jeep's engine. One of itscomponents was a roller-lifter valve made by Eaton Corp.

But the raw metal castings for this piece came from a small shopnear the Eaton factory. The castings company, in turn, got theunique clay it used in its foundry from another supplier. WhenChrysler visited that source, it discovered the company had beenlosing money on its clay and its owner had decided--without tellinganyone else--to change his business. Imagine the reaction of theChrysler executives when he informed them that he was planning toprocess the clay into kitty litter instead! If Chrysler hadn'tbeen keeping tabs on its suppliers, it could have lost a lot oftime and money trying to replace its clay supplier.

The supply chain, with all its implications, is the subject ofClockspeed: Winning Industry Control in the Age of TemporaryAdvantage (Perseus Books) by Charles H. Fine, who notes thatany weak link in a company's economic chain--up to ultimatesuppliers and down to final consumers--could endanger its health,as it did Chrysler's.

Fine also argues that there's no such thing as permanentdominance of one company in an industry because there arepredictable cycles of change in customer-supplier relationships.Starting with intense competition in a new industry, some companiesbecome stronger because they have proprietary solutions or powerover scarce resources, or because they bundle something valuablewith less important offerings to gain control. Eventually, a fewmajor players emerge and are served by everyone else.

But that honeymoon rarely lasts long. Typically, says Fine,industry leaders become bureaucratic and arrogant and don't seethe new wave of competition coming. Schwinn, the bicycle leaderfrom the 1890s to the 1970s, dismissed the mountain bike trend--atrend that helped drive the company into bankruptcy. IBM gave awaythe future of PCs when it picked Microsoft and Intel assuppliers--now everyone is more concerned with the "IntelInside" label than the computer itself.

"Nature abhors a monopoly," Fine observes, adding thatby studying past cycles, you can predict where your industry isheaded and foresee emerging opportunities that could eventually putyou in the driver's seat.

Fine, a professor of management at the Massachusetts Instituteof Technology's Sloan School of Management in Cambridge,Massachusetts, also consults for some of the world's largestcorporations, including General Motors, Intel and Nortel Networks.The case studies in Clockspeed come primarily from those andother industry giants, but Fine believes the lessons learned by thebig guys are also crucial for small companies as they claw theirway to the top.

If you're serious about these issues, you have to readFine's book--several times--because it delves deep into thejungle of corporate intellectualism, the stuff of giants that wecan only touch on here. More important, these issues can't betreated as just another interesting management theory. IfFine's right, your survival depends on paying attention to thedynamics of the supply chain and implementing changes in the wayyou do business.

Scott S. Smith:You believe entrepreneurs need tochange the way they deal with their suppliers. Why is that?

Charles H. Fine: Often they just deal directly with thefirst tier [of suppliers], and not in the way they need to. Mostfamiliar is the organizational chain: which companies are supplyingwhat products and services. When you map this out in asophisticated way, you'll realize who is making lots of moneyat the points of scarcity. You also begin to see what theinterrelationships are.

Then you need to do a technology chain, so you can see who isdependent on which critical technologies. You don't need toknow everything about a company whose technology plays a small rolein the chain--you just need to be aware of the role it plays.

Finally, you need to draw a capabilities tree, showing who isproviding which capabilities. For example, your company might bedependent on FedEx for shipping or on a certain accountingsoftware. Those controlling important information have more powerin the chain. Your company has to decide what its core capabilitiesare and what it's better off outsourcing to someone else in thechain.

Smith:Give us a real-life example of how this processhappens.

Fine: The Japanese company Shimano controlled more than90 percent of the component business for derailleur-equipped bikes,building market share by integrating traditionally modular partsand bundling unrelated products. In 1988, [a company called] SRAMdeveloped Grip Shift, a mechanism allowing cyclists to shift gearsby rotating a dial on their handle bars rather than pushing twolevers up or down, as they had to do with Shimano's system,which has 100 pieces. Grip Shift only has 20 pieces, and just twoof them move, so [the mechanism] doesn't wear out as easily andit weighs less. SRAM persuaded one "insignificant"company [to incorporate the Grip Shift in its bikes]. It was slowto be accepted, but by 1995, Grip Shift had gained 60 percent ofthe shifter market.

Smith:How can a company put the information itgathers about the supply chain to use in the way it producesgoods?

Fine: Traditionally, the product development departmentcomes up with great ideas without much regard to how they are to besourced. For instance, Intel's engineers once designed a[complicated] chip package, and it turned out there wasn'tenough machine-tool capacity in the entire world to manufacture thepackages.

You need to think about the three dimensions of what is calledconcurrent engineering: People involved in product development needto work hand-in-hand with those responsible for procurement and forthe manufacturing process, or you can run into trouble. Besides,when you have employees from different departments talk to eachother, you can get unexpected positive outcomes from their variedperspectives.

The main point is, you don't want to make yourselfvulnerable to suppliers. As much as 80 percent of a product'slife-cycle cost is determined by decisions made early in the designprocess.

Smith:When a business works with outside companies,are there tricks to making the process run more smoothly?

Fine: You want what we call proximity. One [kind ofproximity] is geographic--you're in the same physicalarea--which is why Silicon Valley works so well. Or you might lookfor cultural proximity--similarities in the ways things are done,the same language, and so on. You might set up electronicproximity--lots of e-mail, faxing and videoconferencing. This[proximity] will improve the process.

Smith:What are some methods of product-costing andaccounting that small companies might not know about?

Fine: Most would know about traditional overheadaccounting, where you lump together all your costs as overhead andsmear them across all your products. A better method is theactivity-based method, which lines up costs with specificactivities so that if you decide to outsource all your software,you can take into account the costs of your people working withoutsiders to make sure their modules fit with your hardware. Makesure you aren't spending extra money trying to make differentsystems work together.

There's also bottleneck costing, which looks at where yourproduction process is being held up and costing you because ofdelays. It might be that the software and hardware developmentdepartments are efficient, but testing is overloaded, so you'drealize you have to add capacity there.

Smith:Where would you place your bets on futureopportunities for small companies?

Fine: Powerful computers and the Internet could stimulateentry into movie production and distribution. Entrepreneurs arelikely to make driving to the video store obsolete.

Retailing is going to change dramatically because of theInternet. I'm not even sure Wal-Mart will survive as it is.Most Internet start-ups and dot-coms will fail, but collectivelythey will change the way we live.

Telecommunications in its broadest sense is very excitingbecause everyone wants to be more wired, more in touch, andthey'll pay for it. And biotech has enormous potential becausethe major pharmaceutical corporations have [compartmentalized] sothat there are a lot of little openings, lots of outsourcing.

Finally, I see the automobile becoming our information center.The executive who has to drive to meetings should be able toprocess material by plugging in his laptop. A mother should be ableto keep track of her kids while she's shopping. The car willbecome the central nervous center for all the information in ourlives.

Scott S. Smith writes about business issues for a variety ofpublications, including Investor's Business Daily.

Scott S. Smith writes abouth business issues for a variety ofpublications, including Investor's Business Daily