Resource Allocation Processes Have to Change

The March edition of the Harvard Business Review had one of the best articles on strategy and restructuring (in response to the recent downturn) that I’ve read in a long time. In finding your strategy in the new landscape*1, the author notes that for much of the next decade, we can reasonably expect to see weak global growth, pressures from overcapacity, persistently high unemployment, volatility in the financial markets, costlier capital, a greatly expanded role for governments, a much larger burden of regulation and taxation for all, and maybe even increased protectionism. Essentially, a global marketplace that is pretty common when you consider not the last 5 years, but instead look back through the last 500 years (and the last 50-60 years in particular as there is lots of detailed economic data available post WWII).

Up until the invention of the standard shipping container in the 1950s, global trade, and global growth, was very slow. Up until the exuberance of the IT boom, and the virtual wealth it created, capacity was limited, as demand was, more or less, steady and predictable most of the time. Even in the developed world, unemployment has been traditionally much higher than it was between 1997 and 2000 and 2005 and 2009 for most of the last few centuries which saw a lot of poverty, war, and suppression of the rights of women (who were encouraged to stay home). There have been booms and busts in the markets for hundreds of years. After all, the IT bust wasn’t the first great bust — at the very least it was preceded by the crash in the Dutch Tulip Market in the late 1630’s where, at the peak of Tulip Mania in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman! Capital has traditionally been much costlier than it has been in recent years — as recently as 1981, the Bank of Canada interest rate exceeded 20% (and from 1976 to 1992, it averaged significantly more than 10%). Throughout most of history, it was the governments, and not the global corporations, that held most of the reigns, regulation was the reaction to every problem, and when cheap imports threatened an industry, tariffs were slapped down faster than a bell clapper in a goose’s ass*2.

The author, Pankaj Ghemawat, then goes on to state that managers cannot afford to ignore the risks of pursuing a global strategy in the uncertain years ahead and that they must change their strategic approach in several dimensions. In particular, companies whose strategies currently emphasize smoothing differences and achieving economies of scale across national boundaries may need to shift toward adapting to local conditions and their resource allocation processes will have to change, too. And the changes will have to take place on the sell side and the buy side. Not only will the one-product fits all strategy be unlikely to work, but so will the one location produces for all. When you consider steadily rising shipping costs, increasing labor costs in “low cost countries”, and the costs of a single factory having to regularly shut-down and retool a line for different products (or variants), outsourcing sometimes becomes more expensive than near-sourcing or even home-sourcing. That’s why a strategic shift will need to be made across the board.

Furthermore, in addition to rethinking the scope of off-shoring, companies also have to:

  • simplify supply chains,
  • import process innovations from emerging countries, and
  • move R&D to where the (best) researchers and market growth are.

Your supply chain is too complicated.

You have two many products that use too many different raw materials coming from too many suppliers and travelling down too many lanes in too many shipments because you’ve never optimized and consolidated your suppliers, SKUs, and lanes. While you need redundancy to avoid risk, there’s a difference between using 3 suppliers and using 13-30 suppliers, which is what the average company who hasn’t fully analyzed the category (and the end-to-end supply chain behind it) is doing. (And since less than 10% of the market is using SSDO regularly, opportunity abounds!)

When you have to do more with less, that’s when you innovate or die.

When you have no money, you tend to think different than when you have more than you can spend. This often leads to completely different kinds of innovation than what we produce in the western world. And that’s likely the kind of innovation you need to tap an emerging market where the middle class makes 1/10th to 1/8th of what the middle class makes in the USA.

The best researchers know the market.

If you’re trying to innovate a new product for a market, you need people who understand what the market will like. Those kind of people are native. Maybe they’re not your people, but maybe that’s a good thing. Not only will they innovate for their market, but they’ll bring you new ideas, and some of these ideas might improve your global operations.

In other words, the elastic that holds the global market together is trying to snap back, and you’re going to have to be agile and adapt if you’re going to hold on.

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*1 I was thrilled that, unlike just about every other publication out there, the author did not use the all-too-common, and all-too-stupid, “new normal” terminology which drives me nuts because anyone with half a brain that either (a) studied her history or (b) lived through it knows that it’s just the old normal coming back with a vengeance, and doing it on a global scale.

*2 Ask a Texan.