Flexibility within and among locations can help companies respond to changing conditions

Manufacturers of all types seek the same Holy Grail: the strategy that delivers products at the lowest possible total landed cost. In search of that goal, over the past few years companies all over the world have relocated facilities, outsourced production to low-cost countries, invested in automation, consolidated plants, or fundamentally redefined relationships with suppliers.

Establishing the cheapest manufacturing footprint becomes infinitely more elusive when basic assumptions change fast and furiously, as they have in the past year. Redesigning the footprint can be the biggest and most important transformation a manufacturer can undertake. Yet too many managers choose the footprint by using only a single set of future cost and demand assumptions. Any manufacturing footprint exposes companies to risks, such as changes in local and global demand, currency exchange rates, labor and transportation costs, or even trade regulation. A wrong bet can transform what should be a competitive advantage into a mess of underutilized or high-cost assets.

The missing ingredient in many manufacturing-strategy decisions is a careful consideration of the value of flexibility. Companies that build it into their manufacturing presence can respond more nimbly to changing conditions and outperform competitors with less flexible footprints. To capture this value and gain the best position for responding to future economic changes, all companies should integrate flexibility into their manufacturing-footprint or sourcing decisions.
(From McKinsey Quarterly)

New Financial Power Brokers

Let me share the abstract from a recent article published in Mckinsey Quarterly. Last year’s events have altered the fortunes of the four large groups of investors—oil exporters, Asian sovereign investors, hedge funds, and private-equity firms—described as “the new power brokers” in a 2007 report from the McKinsey Global Institute. That MGI study analyzed their rapid rise in wealth and clout at a time of soaring crude prices, expanding trade, and cheap credit. Although the boom years ended in late 2008 as the financial crisis escalated and the global economy slumped, new MGI research shows that the power brokers fared relatively well. But their future paths have diverged: petrodollar and Asian sovereign investors are more influential than ever, while the rapid growth of hedge funds and private-equity firms has halted abruptly.

What’s the difference between the chicken and the egg?

What’s the difference between the chicken and the egg? The chicken is a lot more work to eat — feathers and such — but offers a lot more opportunity for a good meal.

Which came first? It really doesn’t matter, although first-mover advantage is a great thing to have. But, how much risk the chicken faced crossing the road is a pretty big deal, and stops many from choosing the chicken. So, whether you pick the chicken or the egg, you face some pretty tough decisions.

This is a simplistic way to think about opportunities and rewards, market choices and risk. However, meeting change head-on, making tough choices and assuming risk seems to be the only constant among today’s most successful businesses.

Risk aversion is part of human nature. There is comfort in knowing your surroundings, knowing what is safe, and knowing what works and what doesn’t. Unfortunately, businesses today trying to play by yesterday’s rules are in a difficult position.

All is not lost — many companies have developed ways to cope with today’s environment, and the most successful have figured out their identity is tied to serving their customers.

Shifting to a focus on what customers want instead of on what a company is comfortable making is a good first step toward adapting to today’s marketplace. Second, fostering an accountable entrepreneurial environment seems to be a must. Third, investing in the pursuit of markets, wherever they are, is a strategy full of uncertainty, but often presents the opportunities with the highest rewards. And, finally, marketing, marketing, marketing — it builds brands, protects all the effort that has gone before and leads to new opportunities.

Agreements are dictated more by politics than by economics

Something is usually better than nothing. Shorn of all of the economic jargon and legal niceties, that is the logic behind the booming business in bilateral trade deals that is sweeping Asia. As the Doha round of world trade talks languishes, Asia’s trading nations say that they cannot afford to sit on their hands and wait for Doha to revive. Better, they argue, to loosen up trade with simpler deals between a couple of countries or, if you are truly ambitious, a handful.

Some regional trade deals in the right circumstances have indeed added to economic well-being. But the sorts of deals that are now being signed in Asia, just when multilateral trade desperately needs supporting, are likely to do less for their countries’ economies than for the egos of the politicians who sponsor them. Taken as a trend, they amount to a dangerous erosion of the system of multilateral trade on which global prosperity depends.

Japan’s luxury shoppers move on

Japan’s luxury market is worth as much as $20 billion—second only to the United States. Yet Japanese consumers’ seemingly insatiable appetite for luxury goods has declined, with the current economic crisis not only reducing discretionary spending but accelerating fundamental shifts in their attitudes and behavior. While these changes are likely not temporary, the market will remain very large and attractive. If luxury players want to succeed in such an environment, they must adjust their strategies.

Cannibalisation

If a firm introduces a new product or service into a market where there is little scope for further growth, that product or service will either eat into the share of the market’s existing products, or swiftly disappear from sight. If some of the existing products are manufactured by the firm that is introducing the new product, the newcomers will cannibalise the old ones; that is, they will eat into the market share of their own kind. For example, it has been estimated that two-thirds of the sales of Gillette’s Sensor razor came from consumers who would otherwise have been customers for the company’s other razors. Each new blade is cut-throat competition for its predecessors.

There are sound reasons for firms to do such a seemingly stupid thing. In the first place, they may need to keep ahead of the competition. In the chocolate-bar market in Britain, for instance, the decline in Kit Kat’s share was arrested by the launch of a new, more chunky bar, which undoubtedly cannibalised the market for the original. Its appeal was to all those people who buy chocolate bars, which includes those who bought the old Kit Kat.

Firms may also choose to cannibalise their own products by producing marginally improved products. The idea is to persuade existing customers to purchase an upgraded version. This is common in the PC market, for example, where Intel’s newest, most powerful processor cannibalises the last generation of Intel processors, but in the interests of arresting decline in the total market.

Economists sometimes distinguish between planned and unplanned cannibalisation. Planned cannibalisation is an anticipated loss in sales of an existing product as a result of the introduction of a new product in the same line. In the unplanned version, the loss of sales is unexpected.

China and its Trade Surplus

A rebalanced global economy requires America to consume less and save more. That means the world’s three big surplus economies—China, Germany and Japan—will have to save less and spend more. None is under more scrutiny than China, whose vast current-account surplus has been fingered by some as the ultimate cause of the financial crisis. The case against China is exaggerated but a surplus of more than $400 billion in 2008, or 10% of GDP, was clearly too big. Can China right its trade imbalances, and if so, how will it achieve rapid growth in future?

The good news is that the surplus is already shrinking. The strong rebound in China’s economy in the second quarter—pushing GDP 7.9% higher than a year ago—came entirely from domestic demand. This sucked in more imports, while exports continued to slump. Another way to look at the huge swing in China’s trade is that net exports (exports minus imports) contributed 2.6 percentage points of the country’s GDP growth in 2007, but shaved almost three points off its growth in the first half of this year.
(From Economist)