Overview
This paper sets out to unravel some indicators as to why the traditional established economies are in trouble, by providing a synopsis of the challenges and opportunities arising from the globalisation of supply and customer markets, and illustrate some proven approaches to resource and compete in these tough rapidly evolving business scenarios.
The challenges of globalisation
All advantage is temporary. The ultimate advantage is achieved by choosing high value competencies well and establishing how long to invest in them, and identifying commodity competencies to divest. The faster the product life cycle the shorter the advantage. In 1888 Kodak created the slogan “you press the button we do the rest” and from this a highly vertically integrated model was created maintaining an almost Neolithic control of the photographic market. This was achieved until digital technology arrived. It is essential that an organisation becomes flexible enough to jump when required.
There is no competence more critical to a business than the development of an end to end competency chain from the consumer to the raw material supply. There is no one make or buy strategy that will stand the test of time. It is by defining the long term distinctive specialisation of the organisation, and the organisations position in a network of complimentary specialist diversified suppliers that an organisation will achieve a competitive position. Diversified suppliers bring a wealth of experience from other customers; they provide an early warning platform and the ability to easily modify their existing loosely coupled customer business processes. Captive suppliers often have hard wired business processes making innovation more difficult. The speed of learning is then the key source of advantage, and the loose coupling provides the supplier the space to innovate to deliver clearly set performance targets. Further more; the scale enjoyed by many diversified suppliers enables them to provide attractive career paths to retain highly skilled employees. When looking at the business as a whole, the decision is how much of the past should be taken forwards and how much should be reviewed.
Many organisations consider offshoring partnership strategies cynically as other organisations can gain access to the same services. This is a very static view – it is the way and how fast that you innovate with these suppliers that develops their competence, and therefore your source of competitive advantage. Existing companies that cannot reduce their organisational or product costs by leveraging emerging capabilities will ultimately be searched out by competitors. Care should be made to harness distinctive capabilities offshore, treating these partnerships as access to emerging capabilities and markets rather than squandering the opportunity, by simply transplanting existing operating models offshore. Dependency for knowledge is very much more difficult to uproot than the dependency for capacity – so supplier relationships in these circumstances should be very much more open and transparent, with joint incentives. Boeing outsourced various parts of their manufacturing to Japanese companies that grew beyond the ability of Boeing to control them. IBM too made a crucial decision to outsource the micro processing needs to Intel and operating system to Microsoft. These suppliers went on to produce the lions share of profits, and customers became much more concerned with Windows or Intel inside than the IBM brand. Every project that is undertaken alters an organisations capability that becomes available for future projects. The key is to concentrate on elements of projects that maximise competitive advantage, and assemble the supply and competence chain accordingly. One way of viewing this is to focus on what matters most to the end customer and plan to outsource the rest, in close collaboration with suppliers that are capable of hitting the mark.
The emerging challenge for slow moving businesses is to look outside the business to review rapidly emerging business models. The best managers should look at the big picture which is rapidly becoming global in terms of suppliers and markets. Financial services in 2005 grew from 24% of the UK economy to 30% and manufacturing is 14% and still declining. As much of the UK financial services industry is located greater than 200m from customers this service too could be provided overseas.
Businesses firmly anchored in competitive emerging markets can successfully export their business models overseas for example ICICI an Indian Bank are signing up 1500 new Canadian accounts every week. There will always be room for specialists but will supply to the mass market ever return?
Increasing project complexity
Aircraft projects are notoriously complex; electronics modules have very short product life cycles, to be integrated with the much longer product life cycles of the airframe. These projects are approached by adopting a modular approach so that the designs can be integrated into the product, although designing the supply chain along side the product and processes is often overlooked. Modularity of design makes suppliers more interchangeable, and the company more autonomous. BMW conversely have chosen a highly integral approach, which created huge problems setting up sites in the US, where suppliers were used to a modular approach. Intel are expert at launching concurrent product and process launches with their vertically integrated suppliers to create modularity and dramatically reduce the risk and lead time of new product launches.
When Chrysler created modular product architectures to reduce their business overhead costs they created modular product architectures however through divestment of core skills, compromised the overall systems integration and quality consequently suffered. Toyota deploy a similar model, conversely they retain the deep integration skills and rarely outsource core technologies or fundamental knowledge.
Supply base trends
They key questions are; what are core internal capabilities should be developed and invested in, and what activity should be divested to a specialist? The emerging trend in the supply market is managing networks of specialist suppliers, with the value in the network coming from the primary orchestrators who define challenging performance targets, and support the supply base to remove barriers and provide the space to develop the detail the solution to leverage the value in the partnership. The start is to define and cascade the orchestrator’s business requirements, and review partners underlying capability vs. these based on evidence, their fit with the business and their willingness to co-operate. Make v/s buy methodology is often applied in a static environment and misses the point that you are planting a seed, and what you are really looking for in developing the relationship is an enduring and sustainable partnership. The new basis for trust in these relationships comes through clear aggressive targets and network collaboration to achieve a common set of objectives, whilst mutually developing partner’s capabilities. Pure cost based decisions without the review of core capabilities often produce acrimonious outcomes, increased overall costs, and divert the orchestrators’ core resource.
Disruptive business models
Nick Hayek created the Swatch watch, in 1985 when Swiss watch making was flooded with cheap imports and debt. He reduced the number of components from 90 to 50 and speeded up production and the Swatch was born. In the 1990s he went onto redefine the business process to make cars. He teamed up with Mercedes Benz to create the Smart car capable of being built 2 hours faster than others. The factory is based in Southern France, laid out in large cruciform that houses integral supplier’s facilities that directly feed the main assembly line. The systems partners were responsible for about 70% of the engineering development from the start. The IT was outsourced to Andersen Consulting. Orders are received from shopping malls for short delivery to maintain maximum flexibility. It is anticipated that the suppliers will recover their 1.8bn DM investment during the 1st 6 years.
Tata the Indian truck manufacturer, are working on a $2200 car, to be supplied in knock down kit form to be built and be serviced via the vast network of local Indian garages. This concept makes a car an affordable commodity and develops a win-win franchise opportunity for people regionally to create a local enterprise.
For hundreds of years up to the 1820s China like the US today controlled 30% of global GDP, and they were really the only economic superpower. From 1949-1976 during Mao’s government, China lost a generation of entrepreneurs. Deng changed this and this enterprise has once again been let loose by relinquishing central control and providing the infrastructure and investment to support start up and growth. From 1978 – 1991 the number of local enterprises increased from 1.5m – 19m, and China has a vibrant aggressive market where only the most rapidly evolving businesses survive.
Change management
Setting targets and measuring results
Correctly chosen market focussed performance targets can begin to drive the right behaviour and develop an agile outward looking culture. These metrics can help prevent backsliding into old habits, and create a virtuous circle of data gathering, analysing, and testing. In this way the team will develop their awareness of the opportunities and the imperative of doing things in a different way. Early wins excite and energise the team. Promote those that have the insight and drive to advance the bigger picture and lead the critical mass of people required to support the change. An awareness of what has worked well is important to create a link with the past and build on recent successes. Successful change managers are expert at changing threats into exciting development opportunities, whilst developing the organisation and skills to develop clear lines of accountability, and observing informal networks not shown on organisation charts. Benchmarking exposes established team members impartially to new ways of thinking, and bringing in support from the outside can a platform to promote creative thinking whilst developing the culture and direction of the business.
The aggressive performance targets that can come out of benchmarked capability reviews, force executives to rethink business models, and challenge the view of strategy being the focus on a desired steady state. The new imperative having made tough decisions is how fast these capabilities can be developed to stay ahead of the competition.
Decision making
Consensual decisions can squander innovation and drive a team mad if difficult decisions have to be made. If a decision requires energetic support a consult and decide approach works best until the team becomes more experienced. Actions coming out of a consult and decide approach provide the opportunity for learning, builds the change managers authority and the teams skills to facilitate the move to a more consensual approach. A successful team is one that has clear direction and creates its own momentum and evaluates ideas based on merit, rather than force of personality, expertise or authority. By changing behaviour in this way, so does attitude as people feel a fundamental need to preserve consistency of individual’s behaviour and beliefs.
Innovation
Many executives view uncertainty as a disruptive force. Innovation comes from individuals and corporations provide the environment to encourage or stifle innovators in large groups. Maverick’s fire imaginations however do not fit into typical hierarchies, and are often seen as threats to the established masters of politics. Large organisations tend to focus in protecting their assets not realising that these assets could be at threat from radical evolving business models capable of quickly destroying this value. Emerging markets create a steady stream of challenges and opportunities and their leaders base their plans on a hypothetical view of the future, gather facts, and create a high sense of urgency whilst balancing top down priority setting with local execution. These enterprises accept uncertainty as the norm and focus on strengthening their agility and resources in periods of stability, so that when an opportunity arises they can mobilise resources to create significant value in a short period of time. The key is updating the picture as it unfolds. Lenovo for example launched their 486 PC with a 30% price reduction, which was only possible through the culmination of actions taken over a decade. It is taking advantage of a cumulative series of actions that is hard to emulate, which creates the luxury to choose the timing of deployment when it hurts most, and at a time when competition will not be able to respond.
Cumulative operations improvements create the luxury of choice. Continual waves of innovation cannot be copied and create distinctive advantage, and being at the centre of the toughest markets helps mitigate the risks of predicting what the future will look like.
Resourcing the change
Change is certainly the imperative; yet many initiatives miss the big picture and meddle at the periphery, management teams are often too inward looking; miss the shifts in the supply and customer markets, and their executives often lack the breadth of skills or direction to create the team and business model to be fit for the future. For client management teams that recognise they need support it is difficult to know where to turn.
There are scars in almost every business from a consultancy engagement. Consultants should engage widely, communicate simply without jargon, develop bespoke client based methodology, develop rapport by bring pragmatism and a breadth of management skills, build momentum by delivering interim solutions day-day problems, and develop phased programs that actually recognise and meet the client team development requirements.
The emerging trend for resourcing change is interim management. Interim managers are seasoned top managers who partner a business at a senior level, brought in to resource a business requirement. They often bring the analytical capability of a consultant but also are given the authority to implement their proposals by working through and leading the client team. In this way skills should be retained and fitter management developed to meet the future business challenges.
Either way, success comes by relentlessly and pragmatically focussing on where the business is now and moving to where it should be by; developing bespoke multifaceted methodology to manage risks and make it happen, whilst in parallel; communicating without jargon, engaging and developing the client team. To deliver a successful change program, a breadth of management experience and presence is essential to develop rapport with stakeholders, develop skills and momentum by identifying and taking the opportunity to deliver tangible results whilst openly transferring knowledge by working along side client teams as the main program unfolds.
Developing management skills
Increasing shareholder value today presents resourcing challenges. In a recent survey 54% of UK PLCs suggested they don’t have sufficient talent at senior management level, and only 21% have talent development programs. This high risk gap is often filled by recruiting permanent staff from outside. The skills required to line manage a business and align a business are very different. Recruiting a change manager into a permanent role can be a mistake. Conversely a capable line manager can fail due to lack of skill or support when faced with new and immediate challenges.
There are 3 main assets in any business; business process, employee knowledge, and fixed assets. Anyone can buy fixed assets. As a start leverage employee skills – the key tool to realise this is to develop the business process and work x functionally to address complex challenges. In a business environment where product life cycles are becoming shorter, products become commoditised very quickly – it is the service associated with these products that often differentiates suppliers. The main causal driver for customer satisfaction is employee motivation. There are 3 primary elements of employee satisfaction; clear direction, working relationships, and employee development focussed at realising these objectives. Individuals in the customer front line that feel empowered, and are involved in the problem solving business process, when supported and developed can effect lasting change, and significantly contribute to increasing customer satisfaction. This strategy builds a hugely motivating environment to work in.
The outcome of many US acquisitions of UK manufacturing businesses has been to outsource entire manufacturing operations to low cost centres. The reality of deploying this strategy wholesale to serve the huge variety in EMEA regional and bespoke customer requirements is that the supply chain becomes too long, leading to higher service costs, unresponsiveness and diluted supporting skills. Being in the centre of the toughest market is certainly core to developing the most effective capabilities and business processes, however the local retention of core skills and the requirements of local customisation should also be considered. Toyota for example has long established a tradition of retaining core design capabilities in house.
They foresaw the increase in importance of vehicle electronics systems and developed a joint venture with Texas Instruments to build a semiconductor factory. As automotive manufacturing is unlikely to become as modular as the PC industry this may be the best course. The key is to identify which competencies will be of the greatest value to invest in and which to outsource to most competitively meet customer requirements.
The challenge is to develop more resources by looking outside the organisation and viewing global competencies as complimentary rather than competitive, and accepting that the organisation should play a key role in developing these competencies to meet customer specific requirements.
Specialisation is a trend that is unlikely to be reversed; it gives access to global economies of scale and the associated refined competence that can be influenced. In competitive markets with excess capacity a dynamic is created whereby business models and product architectures are being built from the bottom up. Further more as technology is becoming more modular, equipment manufacturers are becoming design manufacturers. In the case of mobile phones, established players such as Nokia with their very high relative wage levels make a significant target for these emerging design manufacturers who could cut them out of the value chain by supplying service providers direct.
Managing customer – supplier interfaces for low cost is important to reduce the cost of switching suppliers. These interfaces should provide the opportunity to share learning between partners, and simplify the review and daily communication process.
Summary
Traditional operational savings no longer suffice, there is now a gap waiting to be filled to create more value through innovation, and the toughest market is likely to drive the most economic value in the relationship. There are 2 key decisions to be made; what to offshore, and what to outsource. Offshoring is the movement of business activity to exploit differentiating skills or cost differentials, whereas outsourcing is shedding non core business activities.
There are threats in supplier networks that force executives to mitigate the risks; changes in fiscal policy, increasing wage levels, increases in material costs or the emergence of strong regional suppliers. The businesses that have outsourced too much or have moved the supply of poorly designed products overseas has led to issues realising target savings and a fundamental deterioration in customer service. Often by focussing key resources on value engineering to reduce labour costs, products can be produced more cost effectively locally to serve regional markets. Let’s not forget business processes and fundamental business practice in the West have been refined over decades and these can continue to be deployed as a significant source of advantage to leverage employees’ knowledge. In many emerging economies whilst labour costs may be lower, productivity is often lower too thereby marginalising the offshore partners benefit. Core business capabilities in the long term are likely to converge in the toughest markets, where there are the best incentives, educational systems and skill sets. Rising salaries are a natural consequence of increased expectations coming from employees working in these vibrant emerging economies, although in China there are still 800m people living in rural areas on wages as low as 45c/hr, which explains why China could have many more years of explosive growth fuelled by these low labour costs.
There is plenty of recent evidence that with the emergence of open markets and convergence of fiscal policies that the emerging currency is becoming the flow of labour to where the best paid work is. Many customer service roles are tradable, figuring that if a job can be done 200m from a customer it can be done anywhere in the world. High salaries make a large target and certain skilled employees are very vulnerable. The key is how we choose to; spend our time and leverage our employee’s knowledge to become more market orientated and sharpen the focus on customer service in the evolving global economy. The UK Government’s pre-occupation with the support of technology based enterprises is therefore a misnomer – it is by organising the supply chain competencies regardless of product or service type, earning the right to manufacture or deliver a service regionally, and focussing on supporting high value added service that profit will be sustainable and businesses will become an integral part of their customers businesses.
It is no wonder that the traditional economies are in trouble.
