PIVOTAL EVENTS OR TRENDS LEADING TO EACH SCENARIO
What pivotal events or trends should manufacturers watch for as signs that the world is heading toward one or another of the four quadrants? As shown in figure 7, the trends to watch for as indications that the business environment is heading towards each of the four scenarios are presented.
Overall, as discussed above, while the possibility of a business environment described by the unconnected scenarios of either Trench Warfare or Microbreweries in 2008 is not ruled out, the connected worlds of Keiretsu and Silicon Valley are highly favored. Taken together, the figures demonstrate a clear directional trend toward increased connectivity as well as increased dispersion, led by the high tech industry. (See figure 8.)
CONNECTING TO THE BOTTOM LINE
What are the bottom-line implications of these findings and how will they translate to increased shareholder value? Looking at the key corporate performance indicators for the manufacturing firm in 2008 by industry, there was variation by industry.
In the automotive industry, the best indicators of future profitability are expected to be net margins and earnings growth, followed by return on investment. These indicators should be taken together to ensure that growth represents a positive balance of revenues against costs to enhance shareholder value. Specifically, while revenue-generating opportunities exist in the automotive industry, particularly in emerging markets, recent shortfalls in demand coupled with overcapacity have made cost-cutting strategies key. Overall, the choice of top performance indicators here reflects the severe pressures in the industry to reduce costs.
While lean manufacturing has squeezed nearly as much as possible of the excess out of manufacturing processes, which account for about 22 percent of a car's cost, integration of suppliers in manufacturing operations and in new product development was identified as a top strategy in the increasingly connected economy over the next 10 years. This indicates an anticipated increase in outsourcing as a cost-cutting measure. Related to this, manufacturers have been working tightly with their first-tier suppliers to further reduce procurement costs, which account for about 48 percent of a car's cost. Another area where costs can be reduced is in distribution and final sales, which account for about 30 percent of a car's cost. Investments in marketing and in technologies that allow for real-time customization, as evidenced by the rise of Internet-based electronic commerce together, are other top strategies advocated.
As in the automotive industry, the aerospace industry's most important measures of corporate performance are also expected to be net margins, earnings growth, return on investment, market share, and, finally, sales growth. Here, again, the pressure to raise revenues relative to costs is particularly important due, in this case, to variable demand and the steep cost of investing in new capacity. Capturing revenue-generating opportunities, which may be temporary, requires infrastructural investments to meet demand, which tend to be quite costly. The key strategies for addressing such tradeoffs are, as in automotive, outsourcing and increased integration of suppliers in manufacturing operations and new product development, both of which can spread risk while allowing for more flexible responsiveness to demand.
In high tech, the most important performance indicator by 2008 will be, regardless of scenario, sales growth, which ranked relatively low for the more mature automotive and aerospace industries. The importance of sales growth in high tech probably reflects the pursuit of lock-in strategies. Such strategies are designed to tie the customer to a given company, and are associated with the increasing returns such lock-in makes possible. Return on investment and market share followed as critical performance indicators, further indicating trends towards the kind of lock-in or increasing returns strategies that Bill Gates has taught us all so well. The best strategies for achieving this are new product development and real-time customization. Related to these issues, competing with product life cycles will be another key challenge in high tech—anyone who has held a
palm pilot can see how quickly the industry can change and where the future of computing is likely to be.
Finally, in the process industry, the more important performance indicators, regardless of scenario, are return on investment, followed by net margins, market share, and earnings growth. Given the quite large economies of scale in this industry, together with the growing competitive pressures arising from deregulation in the U.S., the strategies advocated here encourage, on the cost side, investment in processes to reduce coordination costs and, on the revenue side, setting up subsidiaries to achieve a global presence.
In conclusion, the information revolution will usher in a new era for the manufacturing firm. In the industrial age, Adam Smith cited owned assets as the key source of shareholder value for firms because they optimized productivity, innovative capability, and competitive advantage. This still holds today, yet more and more production and innovation now occurs beyond the traditional factory walls. Managing such nonowned yet critical connected assets will be a growing source of shareholder value in the information age. Businesses will have to manage portfolios of connections, leveraging the capabilities of their suppliers, employees, and partners, while working with customers toward real-time customization.
Overall, regardless of either industry or scenario, the ability to manage such connected assets will be the most critical capability for the manufacturing firm in 2008. Only by managing its connected assets will the manufacturing firm from now to 2008 secure its connection as well to the bottom line.
For balance of this article, click on the below link:
Lean Manufacturing Articles and click on Series 12