Industry Practice – 'Value Stream' Exploitation – Identifying New Possibilities (Part 4)

Corporate Reconstruction -

It is inevitable that the road to the future, although as yet untravelled, for most people is governed by the patterns of the past.

Herein, automotive history provides basic case studies and so lessons over the last century or so. The innate complexity and impact of designing, manufacturing and selling vehicles means that a very broad spectrum of economic, social, commercial and industrial issues must be understood and expediently deployed to the advantage of the firm.

Depending upon time-frame, context and a company's competitive position, the individual and sometimes coalesced operational functions have demonstrated themselves as able to critically 'add-value' to the enterprise.

To demonstrate, investment-auto-motives expands the core graphic shown thus far, so as to illustrate how auto-producers in the distant and recent past have been both reactive and proactive to their surrounding conditions.

Given their early C20th impact inevitably the American Big Three led the way. Initially seeking production efficiencies on basic vehicles, such internal cost savings providing a reduction in ultimate retail price, so as to create an affordable supply-driven marketplace. Once established, able to exploit any robust national economic agenda provided by stable industrialisation, thereafter a mix of both product innovation and increased availability of consumer credit, together with substantial used car market, would created a virtuous circle throughout the economy across company, consumer, sector and government.

This same model, central to Capitalism, replayed around the globe as the 'American Model' took hold; with specific tailoring to the domestic and export needs of the newly developing country.

Thus to create a robust and thriving post-WW2 economy, from a near 'clean sheet' beginning, the Japanese recognised that the substantial 'value-added' needed to fully prosper would require a newly adopted ever-questioning 'improvement mentality'.

To achieve this Japan's leadership knew it must fully adopt and expand upon the American scientific approach to manufacturing, by plying that same attitude across complete internal systems. Though necessarily starting from the production function, each would be examined and re-examined so as to improve internal efficiencies; primarily across design, engineering, manufacturing, distribution.

Here it must be stated that whilst the 1930s 'Deming Approach' undoubtedly did much to assist Japan as part of its own post-WW2 “great leap”, fact is that previous trade relations with the USA in the 1880s for arms had originally illustrated the importance of production efficiency. And between the 1910s and 1940s its close trade links with Germany had engrained a mindset of Teutonic rationality into the Keiretsu when scaling their own industrialisation plans. Both these US and German influences meant that the post-war industrial reconstruction could be re-made along very efficient lines and operated with very advantageous commercial insights.

In the all too real terms of WW2, Japanese companies en mass, and critically their functional innards, had been wholly de-constructed and far more powerfully reconstructed.

Likewise, the acute advantages of this learning saw a very partial trickle-effect throughout parts of SE Asia as America's hard and soft circles of influence grew ever wider.

South Korean, Malaysia and 'Modern' India were able to quite literally enjoy the fruits of Japans achievements in quality improvement during the early phases of their own auto-industry development. This primarily done so through technology transfer agreements for either specific vehicle systems or more often complete ex-generation vehicles.

S.Korea's original Hyundai Pony originally used powertrain from Mitsubishi (also using components from Ford). Malaysia's original Proton Saga was effectively a badge-engineered Mitsuibishi Lancer/Colt, having been put through a 'tear-down' process for lower cost local manufacture as part of Malaysia's first 'National Car' ambition, creating many elements of the complete value-chain. Whilst India's Maruti 800, the first effort as mobilising some of the masses, was a localised Suzuki Fronte/Alto.

This early-phase ability to effectively sit upon the shoulders of the Japanese giant markedly increased local expectations regards the pace of potential change for their own new indigenous auto-sectors; at least for a time, before realising just how long such as catch-up, if at all possible, would take. Even Proton's deep pocket efforts of subsidising its ownership of Group Lotus for its engineering know-how has failed to maintain local and international product competitiveness, even if the vehicle's themselves could be said to be wholly Malaysian.

Importantly, though starting from scratch and understandably leveraging or purchasing external capabilities, these new auto-nations had not (thankfully) had to undertake the same innately long and painful re-learning process Japan had been forced to from the earliest years of the twentieth century. But it had been a mental and physical deconstruction and reconstruction process which ultimately re-honed and restrengthened the then innately solemn and very focused Japanese character, from Board Room to Apprentice.

Unlike Malaysia's nationalistic grand ambition in Proton, India and S.Korea have trodden more viable paths at different rates.

Having piggy-backed donor vehicles through its history, India well recognised that having previously served the likes of TATA, Hindustan, Mahindra and Premier very well over decades with 'surplus profits', ultimately the disadvantages of a protectionist umbrella would ensure national industrial decline. Eventually it opened its doors to allow industrial partners such as Suzuki far more freedoms, thereby able to create its 'Small Car Hub' for export growth and as importantly able to properly evaluate best-in-class engineering solutions via the 'tear-down' of the Toyotas, Hondas, Fords, Chevrolets, Renaults, FIATs etc it allows (in a still acutely managed manner) into the country through reduced tariffs and local assembly incentives. Thus Indian producers continue to learn by standing on the shoulders of others, with the hope of much increased reach to global markets.

Hyundai Motor of S.Korea recognised the immensity and indeed folly of trying to create a wholly indigenous 'auto-nation', at the cost of export potential, before India. However, it took a different route. Even though its chaebol stretches across an integrated vertical and diagonal value chain, to both keep apace of quickly changing best-practice technical developments of the Triad supplier-base, and to create the strength of a worldwide corporate foot-print, it was recognised that the Hyundai should not try to be omnipresent. Instead Hyundai Motor effected a strategy with good timing. S.Korea was for many years effectively a 'National Cars' state with Hyundai, Kia and Samsung brands protected from imports, but with the relative luxury of both quietly improving its mechanical quality by gaining engineering input from its slowly increased foreign footprint. So although still much criticised for its innately 'heavy' and diverse corporate structure and the firm grasp of family ownership, Hyundai Motor has succeeded on the global stage through both a slow and steady approach to quality improvement and equally critically the ability to exploit S.Korea's technical lead in micro-electronics during an era when the ability to cheaply integrate electronic content became vital to a burgeoning VM's business model.

Quite obviously, as the world's #4 auto-maker today in terms of scale, Hyundai's success, as with Toyota's previously, will now serve as the strategic template for those Chinese and Indian auto-makers that which to enter the global stage. And theoretically increasingly likely to do so in due course thanks to the speed of an IT assisted learning curve.

Presently the need for European, American and Japanese firms is to climb ever higher up the 'value-curve' by leading and so moulding consumer perceptions. Here the realm of already present screen-based 'augmented-reality' and that of dream-scape 'hyper-reality' are now apt to converge as 3D virtual reality etc becomes ever more ingrained into everyday alternative experiences, so promoting both desire for 'the real thing', and extended existence in these alternative realities (the realisation of 'Second Life).

With this in mind regards the influential trends of tomorrow, and question mark about a wide realm of potential outcomes, the following web-log instalment provides case-study examples whereby 'added-value' has been obtained to date in the conventional manner. Illustrations from the various individual functional departments which when combined form the building blocks of the archetype automotive company.

It is well understood that more academically minded theoreticians / observers wish to see a wholesale restructuring of the sector, so as to release internal value for investors. Whereby the low-value functions of auto-players are increasingly disposed of, with central specialisation in the high-value activities of customer services and life-cycle.

On paper and simplistically this makes complete sense for the investment community. It would require continued progression of historic precedence, thus arriving at an ever shortened “vertical model”, and new introduction of greatly increased "horizontal integration" amongst the supply base. Thereby seeing today's auto-players effectively become Auto-Brand companies who in turn brief, commission and buy-in their products from a set of 0.5 Tier Integrators who themselves purchase from various horizontally organised and consolidated systems suppliers.

However, such monumental change necessitates a willingness to forego control over critical critical 'core competences'.

This highly unlikely given the origins of auto-companies (in which all-round competence became key to success), the desire fore 'destinational control', and the still massive future potential for global mobility span and depth.

Hence investment-auto-motives call to “deconstruct to reconstruct” current internal mindsets and processes.

This journey starts at the notional “front end” of the process, initially relating to the marketplace and customer. Then passing through individual functions that sit 'behind the scenes'. Returning to the marketplace by way of the “back-end”. However, it should be noted that the beginning of the activity chain and end of the chain are closely linked, and set to be more so as firms increasingly engage in consumer orientated services.

The following provides a guide to the past and present, and the obvious ways in which 'added-value' was captured.

Auto companies themselves must now envisage just how today's increasingly connected, artificially intelligent and immersive IT could create next phase industrial transformations.

Industry Practice – 'Value Stream' Exploitation – Identifying New Possibilities (Part 3)

To do this requires anatomical deconstruction and efficacious analysis of the firm's underlying functional parts, operations, perspectives and vision.

Historical Thinking for Future Thought -

It is here that an analysis of past and present conglomerates - which often in their early days and under family control - endeavour to run as self-sustaining enterprises, would be useful.

Most notably the efforts of eastern conglomerates which were necessarily built and maintained upon slimmer financial resources: the Indian family firms from the late 19^th century onward, advances of Japanese Keiretsu over the 1960s/70s, and 1980s/1990s ambitions of S. Korean Chaebols.

[NB this not to be confused with the overly diversified structures and so little existent cross-synergies of 1960s American domestic conglomerates, which were effectively 'financially engineered' creations by Wall St of the time].

Whilst under western colonial or occupational influence, and so an aligned economic template, these conglomerates grew from primary industries onward, befitting export needs and providing foundations for national growth. Yet it was often the fact that “necessity was the mother of invention” and so resourcefulness which honed such adroit early era EM mentalities. With limited resources, it was a matter of starting at 'first principles' which build respective enterprises and latter empires.

It was said that Japan's astounding post WW2 re-emergence was very much assisted by “The 7 Whys?” Questioning “why” seven times led to an issue 'deconstructed' to its core essence. Such drilling-down into a topic would reveal a wealth of previously unappreciated new knowledge, providing improved insight.

First applied by Japan and India upon the textile loom technology imported from the UK and USA, what was initially a 'make do and mend' mentality to periodically fix imported looms and later improve self-made looms, in time became the quality obsessed inquisitiveness for which Toyota latterly became legendary, with the 'first principles' approach demonstrated by TATA Motors upon its revolutionary Nano model.

Interestingly and wholly ironic, this engineering-led philosophical approach - which itself came to influence the very pan-operational mentality of many firms under the quality banner (ISO 9000 etc) - appears to at last be making recent in-roads into the field of product design itself.

Ironic because the origins and edict of good design is purity / simplicity, this for the most part long since lost in the everyday given the economic desire for replaceable design-fashions

More recently global firms have perceived the aligned product needs of notionally globally converged consumer expectations and needs, from phones to cars - detailed in previous web-logs as driven by the “re-balancing” of AM decline and EM rise over the last two decades.

Whilst inevitably fashion plays a continued role in generating consumer demand, as part of this worldwide re-alignment there has been a trend toward 'first principles' design. De-cluttering superfluous product attributes to strip-out design and manufacturing costs, and critically the promotion of implicit or explicit product honesty. Although not as 'clean' as original Bauhaus Modernism, and undoubtedly influenced by Apple's 'pseudo-modernist' iPod and iPhone, such new efforts from mobile phones to kitchen appliances to even cars (such as Dacia) nonetheless convey a functionality trend which serves a broad demographic mix of global peoples. They range from the 'thrift shop' attitude of a disenfranchised western youth through to the worldwide consciousness of the older no-nonsense 'grey market'.

Just as real-world economic pressures for many in the Triad regions, and now in EM regions, have demanded a return to intelligent 'first principles' perspective – effectively deconstructing their own lives – so such an attitude should emerge within the corporate world toward better evaluating the inner workings – inputs and outputs - of the company's functional parts.

This was partly done after 2008 in the West and now being undertaken across the BRICs etc, but only so far as returning to expected 'business as usual'.

Now almost worldwide, beyond the US, we see a mix of quantitative easing, outright currency devaluation, lowering central bank base rates and negative overnight interbank rates; all of which serve to support world economic transitional shifts, from America's domestic 'higher-value' supply-push for re-industrialisation, to China's efforts to create far more compelling domestic demand-pull in consumerism and commercialism.

Whilst presently painful for many populations, with the renewed flow of credit into the demand function, there is little reason not to expect an eventual phased global rebound, starting (as thus far seen) in the USA...even though the time-frame is longer  than historically experienced on a country by country basis.

But this necessarily painful process only returns us to the conventional commercial mindset, offering 'surface-level value', itself to be experienced over the short and mid-term as 'new-value' (not 'added-value') is regained via the lowering commercial cost-bases (ie labour input, materials input, energy input etc).

Longer term economic strength depends upon an commercial and industrial inquisitiveness and so true 'added-value' across all sectors, something perhaps not really seen for over thirty years given the world's previous free-ride upon the (1994 to 2008) massive credit-expansion bubble.

Importantly, the mid to long term will require 'deep-level value' commercial thinking, which mimics the resourcefulness seen previously in the once lesser parts of the world. A deconstruction of the value-streams of today's internationally networked companies and sectors.

Such efforts to begin soon so as possible to map-out such a future.

Value Extraction: 'Hard' and 'Soft' Asset Re-Utilisation -

As recognised, these aforementioned conglomerates were created in the wake of direct western influence, yet so as to ensure both commercial expansion and the national interest, these groups - both sector divergent and industrially concentrated - were deliberately designed and constructed, under the auspices of influential families, to create co-dependent economic eco-systems.

The prime intention was to provide for a level of internal pricing flexibility throughout the value-chain: the ability to set and reset what latterly became known as 'transfer pricing'.

This meant that at the front of the chain the ability to pass-on the advantages of any reduced input cost (eg materials, energy) via parallel discounting to the processing division above, to inflate its profits if seeking required expansion. Or this discount could be continually passed-on up the ladder if deemed necessary to sell the completed product – then often into new export markets – with a pricing advantage.

Tightly controlled 'vertical integration' was seen as commensurate with the ambitions of any developing country seeking to both provide for a new home market and create its position within the broader worldwide commerce.

This is perhaps the simplest yet most obvious use of that value chain. Indeed, today's automotive corporate template – from Ford to GM to Toyota to Hyundai to TATA, today's derives from such necessary and highly effective origins.

However, as also seen, when investor value and extra-ordinary corporate income gains can be had via divestment of a “none-core” low-order division, to form an independent firm which itself is able integrate 'horizontally', investors and executives have been happy to agree. The notion being that the new enlarged company will achieve new scale efficiencies and so enable even greater discounting for its ex parent client.

[NB this the likely outcome within a tightly controlled, highly inter-relational B2B environment, yet open to doubt regards B2C retail environments (as the head of TalkTalk has rightly raised regards the recent BT-EE merger in the telecoms sector].

Some auto-industry observers view this divestment for re-investment themse as an ongoing evolutionary process, with eventually Tier 0.5 players (such as Magna International) moving from niche and mid volume build capacity toward full scale operations as a 'contract manufacture' on behalf of the well known auto-brands, as they themselves move up the added-value-curve.

If indeed so, this will be but the latest chapter of the “hard asset” 'deconstruction and reconstruction' process for the prime auto-players. But the corporate desire for manufacturing control means that although heralded over twenty years ago, along with similar separation of engineering staff (to the likes of MSX International) the trend thus far has not been as prolific as first expected.

With this in mind today as another deferred mid/long-term possibility, yet another interpretation and proposition of the internal corporation should be considered regards during this interim.

A New Inquisitive Era -

A new incarnation of philosophical deconstruction and reconstruction for the remaining “hard assets” within western firms and the increasing plethora of “soft assets” (spanning people to IPR) and the oft overlooked connection that exists between the two.

In effect a re-examination of the very construct of the operational elements of the organisation.

Reconsidered in the same wholly holistic manner seen in the past, when “not a stone was unturned” and “every drop of blood was extracted” from those stones. That 'needs must' ethos past saw little operational waste and maximisation of resources.

Within autos, worn-out plant and machinery would would enter the furnace, melted-down and recycled to feed what was a steel based empire. And most ironically is the fact that during this era whilst Marx et al opposed the de-humanising industrial doctrine of 'Fordism' – prior to unions' demands for efficiency robbing 'job descriptions' and 'work to rule' - the best suited staff would be re-deployed as freely as necessary.

This corporate attitude maximised efficiency, grew internal learning, provided individuals with greater value within the company, and critically nurtured new thinking.

It was this holistic flexibility and questioning for betterment which underpinned the very beginnings of the automotive industry, drove down cost, added quality and reduced time; later matured into Deming's, Kaizan and Sigma-Six quality principles.

The aim: to proliferate new thinking...to enable improved adaptation and innovation... and to lead to new solutions.

Yet as companies grew into large national entities and finally global corporations, the very structure of the organisation inevitably created organisational inflexibility, divisional and functional separation – and even under the cross-functional matrix structures generated home department loyalties – inter-divisional politics and the inevitable dreaded 'silo effect'.

Operational Deconstruction -

By the mid 1920s the modern corporate organogram had been set, originally derived from military precedence it was expanded with the arrival of: modern marketing, product research and management science. By the late 1940s the newer craft of operational systems analysis was deployed by Ford, using the ex-military knowledge of the 'Whizz Kid' senior managers; themselves adept in operational deconstruction during wartime.

[NB Since the advent of IT this has ballooned as a field, 'paperless solutions' ranging from truly insightful to bloated simplicity; to overcome human infallibility and assure consistency, yet simultaneously creating new administrative fiefdoms where process may topple common sense].

The stereotypical organogram obviously consists of a top-level executive function, which below sits the prime separate functional activities, and often invisibly below these the running of individual projects consisting of a multi-functional matrix framework. Those core operational departments and matrix teams enabled by the cross-interaction of administrative processes.

For sake of brevity and clarity the accompanying diagram highlights the central operational functions only (with its own sub-functions shown). These represent the effective 'value-chain' of value-enhancing operations, and though each is vitally important, the diagram seeks to posit each department in accordance with the typical mindset of the business-minded strategic investor.

From this perspective, beyond the prime importance of the Balance Sheet, Income Statement and Uses of Funds within Financial Accounting, the graphic posits as a start point for corporate deconstruction the lead role of the Marketing Dept (determining tomorrow's market potential), followed by clockwise depictions of: Design, Product Engineering, Manufacturing Engineering, Procurement, Distribution and Sales.

Functional Analysis -

It is of course the remit of the departmental head to asses the past practice, current capabilities and future potential of his/her function. The fortunes of the company and the perspectives of the board will dictate how the management accounts are apportioned, invariably imposing budgetary constraint upon the departmental manager. Typically that person will have typically risen through the ranks of his/her own discipline gaining staff and projects management experience over time, yet rarely appreciates the big picture concerning the firm at large and all the parallel departments.

Thus responsibility for apportioning the annual budget, and its reduction or enlargement throughout the year, lays with ideally a well rounded executive team; who individually can perceive the competitive position of the company relative to macro conditions and relative to micro level appreciation of with cross-functional experience and appreciation. Although that team will invariably consist of people who have a discipline bias given their background, each must be able to understand the strategic and operational importance, and prime issues within, of the separate parts that make up the whole. It is only in this manner that the board will gain consensus so as to effect necessary organisational change.

Beyond daily and weekly direct reporting to his/her executive regards everyday operations, the departmental head will also contribute towards the strategic development of the function. Yet here, whilst the all too obvious exists: e.g. alteration of operational focus, associated change of staff structure, request for improved IT systems and similar; it is rarely the case that a manager will be requested to provide a far wider perspective of re-consideration, essentially how that department could – in principle – be add new fundamental value.

Any result will be a mix of that manager's own professional knowledge (real vs theoretical) and ambition, his/her own perceptions of the company's true willingness to support the effort, and personal concern about high probability of mid-term failure reflecting badly upon personal performance.

Add to this a manager's typical prime concern for their personal circumstances (internal respect, pay level, years to retirement etc) and it is then easy to see why the catalyst of change rarely occurs amongst middle management, who themselves perhaps proportionately gain the most from business as usual.

Introduction of any new Chairman or CEO obviously leads to a strategic review of the firm, typically with contribution from those within, and depending upon the company's size and available cash, this limited or biased internal view counter-balanced by the use of external professionals for an independent perspective of how the firm should be re-shaped to suit prevailing challenges and opportunities.

Unfortunately, returned recommendations are respectively, overly short-sighted and restrictive from the internal feedback, and overly predictable, trend specific, idealised and impractical from the external feedback. The crucial element of fundamental yet achievable evolution of departments, so selectively and combined adding greater value to the firm, all too often appears wholly ethereal.

All this recognised as barriers to progress still does not alter the need for a firm to re-assess its internal competencies and inter-relationships, to create new value, thus the philosophical search for a practical pathway must be maintained.

That new added-value gained from

1. Specifically within the organisation, with new 'input' and 'output' propositions

2. Creating co-ventures with other internal departments

3. Creating joint ventures with external parties

4. Providing the basis for divestable 'Spin Offs'