Tuesday, 22 April 2008

Industry Structure - 'Old' vs 'New' Templates – Power begat Profit / Profit begat Power

The ‘shape & mass’ of a company is usually developed over years if not decades, theoretically honed to a specific structure that underpins the basic tenants of commerce – profit and power.
Of course changing economic contexts demand that its basic shape be malleable enough to shrink and expand as required, through either organic growth/contraction or ‘bolt-ons’ and ‘spin-offs’ to keep the company healthy and value creating.

Those 2 prescient elements of profit & power don’t change, but macro and micro level influences like globalisation, business process re-engineering, a broadening knowledge-based labour market and of course information technology has evolved operational trends and management science to alter the traditional relationship between profit and power, and critically the definition of the latter.

Commercial theory posits that Power can be defined in many ways, but the most elemental is control across the full-span of value chain, from beginning to end. Historically, this is how the great industrialists from Rockefeller to Ford built their empires, and it’s the very model that BRIC’s oligarchs and executives favour today. As part of their conglomerate’s growth, they have had to grow vertically and horizontally, indeed there could be said to be a ‘snowball effect’ of a growing business which naturally creates it.

However, the emergence of a diverse service economy, enhanced by the advent of globalisation, enabled the individual firm to reach-out across an ever more varied business landscape (made-up of ever more dedicated, area specific, enterprises and services). As the business world fragmented and globalisation grew the vast array of options, we could say that a first stage enabled the west to access low-cost, low-value Asian manufacturing and ‘brain-ware’. We are know witnessing the second stage of the process as Asian firms, having grown on the back of low cost products and services, now seek to access to ‘step-change’, world-class technologies and know-how - ideally via M&A, not JVs, as exemplified by TATA and Jaguar-Land Rover. This then demonstrates the modern interpretation of the conventional ‘Power’ through a massive tangable asset base, business (and possibly market) integration providing ‘Profit’.

There has also emerged a its polar opposite of this paradigm, the newer re-interpretation being that (calculated) Profit itself provides the leverage for Power. A power based not upon complete value-chain ownership, but the ability to orchestrate those others whom own different sections of the required network to create, from a blank page, a value-adding product or service. At its essence it reflects the ideology of ‘knowledge broking’ and depends greatly upon a massive network of business connections, commercial acumen and credibility.

Of course this is what the very well connected world of pro-active investment banking has been doing for over 150 years utilising the best minds to create industrial business models and of the development of new financial instruments and fiscal engineering.

But as the west becomes an increasingly post industrial economy and relies upon the new (non-tangible) cerebral asset base of a knowledge economy so industrial activity itself has evolved to the ability to harness intelligence and create value. This, from a historical process perspective, done backwards to conventional business practice - from inside an 'in-situ' plant-tied firm. Essentially a de-constructive and re-constructve approach of many other's assets and abilities.

The 1990s evangelism of Business Process Re-engineering (created by MIT’s Hammer & E&Y’s Davenport and quickly adopted across industry) called into question every activity within the generic firm’s internal value-chain, and prompted the elimination or cost-down of non and low value-adding processes. That in turn led to massive cross-sector re-organisations, especially of Fortune 500 and FSTE 100 companies, which with the help of large management consulting firms established additional, new IT and Admin-based facets to the previously aged and very industrial Support Services sector.

We could say that, that was the start of the devolution process and pretty soon the questioning regards “what is our core business and related activities” dug into link after link of that value-chain. The divestment of ‘non-core operations’ (open to definition and so the spark behind many a middle-management inter-departmental feud) allowed a firm to more intently ‘focus’, and so, increasingly the weak links of the chain, often based on a “complexity equals cost” argument, were removed. This was the basis for the likes of Delphi’s, Visteon’s, Magna’s etc emergence as massive Tier 1 players, able to more efficiently assembly sub-assemblies, which latterly became whole vehicle modules, that take complexity, time and cost out of a VM’s own production lines.

Take this to its natural conclusion, and we have the slow erosion of a VM’s traditional activities, preferring to actively outsource full production and act as Brand-Enterprises. Of course this has already happened with the production of niche vehicles such as GM’s VX220, low volume models such as Porsche’s Boxster and lower-volume local-production variants such as BMW’s X3, Jeep Cherokee and Chrysler Voyager and Mercedes 4WD vehicles. As a result we’ve seen the slow development of Tier 0.5 producers such as Magna Steyr. As the western auto-industry contracts due to economic and cyclical pressures, this trend to ‘farm-out’ production will continue, and the recent major shape-shifting of Detroit’s Big 3’s plants, [and in turn Delphi & Visteon plants] whether individually closed or contractually left open to spin-off, demonstrates that this decade’s ongoing re-structuring campaign is a modern watershed in the old fashioned ‘Power equals Profit’ formula.

As western procurement and manufacturing diminishes the bottom line so that formula has been questioned and re-orientated to ‘Profit equals Power’. Compelling, highly confidential, and increasingly stake-holder shared, business cases for vehicle projects or even whole divisions are the basis for multi-party shared risk-reward agreements. And as the whole playing field of vehicle design and marketing methods changes under the edict of global warming and the CO2 challenge, to include different powertrain types and new value-based (not price based) retailing methods emerge, so the once relatively simple procedure of developing a new vehicle (ie single model, heavy ‘carry-over’ replacement) becomes a far more complex exercise, requiring very different organisational thinking and abilities.

The ever deepening application of BPR has questioned what makes the foundation of tomorrow's new world auto-company? It has become more nebulous, more intelligence-orientated, more time-cost specific, and ultimately 'simply' ties financing to market opportunity using entrepreneurial skill and other parties' capabilities and assets.

From that basis the advanced thinking in the West seeks-out the ‘Profit begats Power’ idiom in the Brand-Enterprise ideal, whilst the East evolves the more conventional ‘Power begats Profit’ philosophy. But of course, although these 2 commercial / corporate belief systems cognitively appear worlds apart, they are could within 10 years be practical twins.

Coca Cola set-out the brand-centric, (bottling plan) asset divested, business model but who in automotive terms has that equivelency in sector power. We naturally look to Detroit with its history and slimmed but still massive asset-base and its Wall Street ties, but do GM, Ford or Chrysler have that Coca-Cola equivalency? Perhaps the recently globalised Chevrolet might?Toyota definitely does, but given general ongoing Japanese business conservatism, and Toyota's well-defined culture and core-competancies would it even wish to try?

The 'Profit to Power' formulae is in there, but it neccessitates a great deal of further examination by pro-active investors, financiers and auto-industry captains.