John Hagel III and Marc Singer

Beneath the surface of most companies are three kinds of businesses—a customer relationship business, a product innovation business, and an infrastructure business. Although organizationally intertwined, these businesses differ a great deal. …These three businesses rarely map neatly to a corporation’s organizational structure. Rather, they correspond to what are popularly called “core processes”—the cross-functional work flows that stretch from suppliers to customers and, in combination, define a company’s identity.

Managers talk about their key activities as “processes” rather than as “businesses” because, with rare exceptions, they assume that the activities ought to coexist. Almost a century of economic theory underpins the conventional wisdom that the management of customers, innovation, and infrastructure must be combined within a single company. If those activities were dispersed to separate companies, the thinking goes, the interaction costs required to coordinate them would be too great.

Working from that assumption, large companies have in recent years spent a lot of energy and resources reengineering and redesigning their core processes. They have used the latest information technology to eliminate handoffs, cut waiting time, and reduce errors. For many companies, streamlining core processes has yielded impressive gains, saving money and time and giving customers more valuable products and services.

But managers have found that there are limits to such gains. Sooner or later, companies come up against a cold fact: the economics governing the three core processes conflict. Bundling them into a single corporation inevitably forces management to compromise the performance of each process in ways that no amount of reengineering can overcome.

…If scope drives customer relationship businesses and speed drives innovation businesses, scale is what drives infrastructure businesses.

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