Managing A World Class Business
November 1 1987 by Gary E. Liebl
Few realize that learning how to succeed with a global strategy is not an economic miracle confined to Japan. It is a far broader movement. A number of additional countries are suddenly emerging into the global economic arena, challenging the U.S. for world dominance, and creating a climate of uneasiness.
As a result, seeing industrial leadership emerge beyond our own shores has provided many forward-thinking American companies with just the incentive needed to reexamine their business philosophies, strategies and operating conditions. A few CEOs have acknowledged this new business climate, taken the risks inherent in making changes and are emerging as serious global contenders.
To maintain a strong competitive position, every American company can and must face the same change: Accommodations must be made, bold steps must be taken and controversy has to be endured in order to succeed over the long haul in a new global economy.
For example, many believe that the computer industry recession of 1985 and 1986 was merely cyclical, and that we will soon enjoy the same environment that preceded it. I disagree. It is my opinion that we are in a new ball game.
Let’s consider the statistics. After several decades of 20 to 25 percent annual growth, the U.S. computer industry growth slipped to about five percent in 1985. That figure edged up only slightly during 1986, to about nine percent. As a result, the computer industry has gone through incredible trauma over the last three years. Visible signs of this have been lower earnings, red ink, massive layoffs, significant top management restructuring, and numerous filings of Chapter 11.
The computer industry was totally unaware that this change in market conditions would occur. Many analysts explained the conditions with such cliches as “cyclical trends,” “short-term aberrations,” “explainable short-term phenomena,” and, perhaps the best of all, a “slump.” After three years, most people would agree that terms such as cyclical, short-term, and aberration, have far outlived their credibility. Going back to the ball game analogy, any player who has been in a slump for three years running would have been taken out of the lineup long before this.
This high-tech industry is undergoing fundamental changes. To survive in today’s climate, business must realize that conditions are now radically different from what they had been and will never return to their earlier status. Managers must learn to deal with the dynamics of how the industry is working now in order to survive into the 1990s. The computer industry, is making a transition from adolescence to young adulthood. That is always challenging and traumatic.
Companies that respond appropriately will survive. Companies assuming they must simply devise a series of innovative techniques to ride out a short-term cyclical phase, or to put new notches in an ever-tightening corporate belt, will not achieve success. They will eventually strangle themselves and die. Many already have. In the highly competitive computer industry, there are only winners and losers. It is impossible to struggle along for very long in a dangerous no-man’s-land. The winners will be those who have responded to fundamental changes in the marketplace and industry, and who have initiated corresponding changes in the way their businesses operate.
CHECKLIST FOR SUCCESS
There are five key areas that can represent a virtual checklist for success in the new computer industry arena. They are the concept of the global marketplace, the issue of quality, low-cost manufacturing, financial strategy, and finally, strategic management.
Whether American business likes it or not, there is only one market today and that market is global. In the last two decades, the influences of technology, transportation and communications have created one global economy. Unfortunately, there are far too many American businesses, in fact, the majority, that are being dragged kicking and screaming into the reality of this global market. Instead of dealing with the issue in a carefully planned strategic way, they are simply reacting and responding. Because their responses are knee-jerk reactions, many companies are not reacting in a way that is productive or meaningful.
For decades, America enjoyed a position of worldwide prominence and has been a net exporter. As a result, most American businesses have not accurately understood the implications of true participation in world markets, but rather, have simply become “exporters.” U.S. companies have found it so easy to ship and sell product abroad that they have actually come to believe, in many cases, that they are international. With so much prior demand for American technology and the relative ease of exporting, many business executives have misled themselves and remain naive about the realities of worldwide economic participation.
Today we are no longer a net exporter and are being challenged by technology from abroad. Moreover, many of our international competitors are tougher, more aggressive and understand far better the criteria needed for success as multinational participants. Furthermore, they recognize that we really are in one global economy. They have had to in order to survive.
What does it take to participate effectively in the global market? It means, in many cases, developing a full legal and physical presence in major worldwide markets and not just utilizing arm’s length distributors. It means establishing subsidiaries, opening sales offices, creating relationships with local suppliers, and becoming a true corporate citizen in the major countries in which one expects to do business. It means, among other things, participating in international markets on their terms, not ours.
The second key criterion for success in this era is having an obsession with quality. This is a tough one. What company does not recognize the distinct advantage held by Far East manufacturers in consumer electronics, automobiles, and other industries because of their excellent quality? What company has not plastered its walls with slogans and bombarded its management with new objectives aimed at higher quality? Unfortunately, most of these efforts are very superficial.
Far East manufacturers have conditioned our marketplace and environment to expect quality far higher than prior standards. When was the last time your television broke down? How often do you repair your Japanese-made car? Today the customers of the computer industry demand quality at the 98 or 99 percent acceptance level. For the most part, U.S. industry has a long way to go to meet these objectives. Unfortunately, competitors from the Far East are already there! Will we neutralize that advantage with superficial slogans? Absolutely not!
Regardless of the size of the company, it must be willing to invest substantial dollars in specific, carefully planned quality programs that address the fundamentals of how products are designed and how manufacturing processes are implemented. World-class companies today recognize the importance of critical programs that focus on statistical process control, quality/ productivity improvement, product life cycle management, failure mode analysis, and environmental stress-screening. What is unique about most of these programs is that they are not confined to the production people in the manufacturing plants. Most of them involve executive management and its teammates, whether they are in manufacturing, engineering, marketing and sales, service, finance, or human resources. Many companies might ask whether they can afford to spend the money to drive quality to 99 percent. I would ask whether they can afford not to.
Who can measure the competitive advantage this affords against companies whose poor quality drives up the level of rejects and maintenance costs for the customer base? A focus on quality neutralizes the most significant, so-called “unfair advantage” or basis for differentiation which the Far East suppliers possess. The market has set new quality standards. Are we really prepared to respond?
The third criteria for success in this era is the necessity to be a low-cost manufacturer. This represents the other side of the quality coin. In fact, the two must work together. It is impossible to become the lowest-cost supplier without achieving the highest levels of quality. If a company analyzes its operations carefully, it will find that many of its costs are directly related to quality issues. Investments in inspection, scrap, rework, redesign, etc., all represent the so-called cost of quality.
Along with quality, business must totally rethink its manufacturing processes and methodologies by adding more sophisticated planning, new and creative plant layouts and education.
High-quality/low-cost manufacturing is even more important for those products being driven toward the commodity end of the scale. If products are manufactured and sold in volume, it becomes tougher to assure their value and to package premium products for market consumption. As the pressure drives a product toward the commodity end of the scale, it becomes necessary to make strategic tradeoffs.
In many cases, this means becoming a global manufacturer as well as a global supplier. It means going offshore for some percentage of the volume production, to places like South Korea, Singapore, Malaysia, Taiwan and Thailand. This does not mean the hiring of another U.S. company outside the U.S. for manufacturing. It means opening a facility and hiring the people of the country in which the company is manufacturing.
What can result? Labor costs can be as low as 15 percent of equivalent U.S. costs. Material can range from 60 to 75 percent of U.S. costs. There will be an opportunity for participation in a unique infrastructure which will allow spontaneous and almost immediate J.I.T. methodologies. The bottom line? Costs will be driven down dramatically and gross margins will rise rapidly.
Although many consider a decision to manufacture overseas to be unpatriotic and irresponsible, I disagree. The decision is strategic and will help assure the longterm success and dominance of a company. No matter how efficient U.S. competitors become, some will never be able to reach the labor and material efficiencies achieved in the Far East nor can they get the incredible benefit from the industry infrastructure that exists in that region. Companies that recognize this change and act on it will have a remarkable cost advantage, allowing them to compete more aggressively on price, to benefit in terms of profitability, and to dramatically improve their quality.
Are the answers protectionism and trade barriers? Absolutely not. For as long as many of us can remember, we enjoyed the advantage of being an exporting nation. As a result, international competitors had to become more skilled in marketing, distribution and manufacturing to neutralize our advantage. They now deserve the competitive advantages that once belonged to the U.S. While I am not sanctioning dumping, or other unfair trade practices, I do defend the right of international competitors to win business if they are better at marketing and are lower-cost higher quality producers. The response is to do what they are doing, but do it even better. Today, there are many American companies proving it can be done. They are competing in global markets on the markets’ terms and winning business by being the best. Can any competitor in the computer industry strive for anything less?
The fourth key criterion for success in competing in a global market is financial strategy. The statement sounds trite. Who does not have a financial strategy? Every company strives for 25 percent annual growth. Isn’t that a financial strategy? Absolutely not. Historically, the executives of both this youthful computer industry and the investment community have been preoccupied with growth. Somehow, in the back of everyone’s mind, the assumption was made that profitability would eventually come if there was enough growth. In the extreme example, many companies were funded five years ago with millions of dollars of initial seed investments that showed no profitability for the first five years. As an industry transitions from adolescence to young adulthood, it faces a responsibility to have in-depth and comprehensive financial strategies that set targets, not only for growth per-year and after-tax profitability, but also must focus on return on assets and return on capital.
The growth-strategy parameters under which growth will be stimulated must be carefully defined. Perhaps, in the computer industry, 25 percent growth per year that carries a 25 percent return on assets is better than 40 percent growth with a five percent return. At the other end of the spectrum, is a five percent after-tax profit bad if the return on investment is high?
Executives must reorient their management teams. They must become more sophisticated financial managers and depart from the traditional growth-at-any-cost philosophy, and move toward a contemporary approach responding to the needs and expectations of the real bosses-the shareholders.
Implicit in this philosophy is an understanding of total cost. Is a 20 percent gross margin bad and 40 percent good? No. They are both good if the operating expenses are in line with the particular margin level and if the return on capital meets the proper benchmarks. Finally, business decisions should be aligned with financial strategies. Does the opportunity to cut margins and sell a high-quantity order to a key account add to or detract from the value of resources? Historically, the process has involved taking basic measures that are a response primarily to a desire to add to volume. Each investment must be scrutinized in a comprehensive and responsible fashion. This means reorientation and re-education of middle-and upper-management teams. A world-class company in the future will not only grow at a considerable rate, but will add value to its asset base at every step.
The fifth and final criterion is strategic management. It is trite to suggest that executives must orient themselves to strategic planning. Unfortunately, most executives go up to the proverbial 40,000-foot level once a year, take a good look around, develop a great plan, bind it up in a beautiful folder, present it to the board, gain overwhelming approval, and then place it on the shelf. One year later, they dust it off, take a look, and realize that they have made very little progress toward their new strategic vision. The methodologies and management styles used in the past must now be challenged and overhauled. This change can best be accomplished, not through strategic planning, but rather, through strategic management.
There ‘is a fundamental difference between the two. There is a particular challenge in making the transition from strategic imperatives to an operating scenario with established, agreed-upon priorities. Developing a good plan is tough; implementing it is 10 times tougher. Annual operating plans must become true subsets of the strategic perspective that drives the company to become a global, world-class supplier.
The CEO’s primary and exclusive preoccupation can no longer be just operating the business. The CEO must learn to effectively delegate a large portion of the running of the business to the management team and must devote a percentage of time, on a regular basis, to strategic management. Altering a CEO’s perception of this strategizing role is a complex, highly personal and often frustrating undertaking. It is a real challenge to back away and look at the business with objectivity, but it must be done. If the CEO does not personally assume the role of driving the process, it simply will not come to pass and the company will become vulnerable as our rapidly changing environment renders the current approach outmoded, outdated and ineffective.
Frequent off-site meetings between the CEO and his management team are key to improving strategic management. Each year, two of those meetings can be devoted to updating the five-year, long-term strategic vision and plan.
This process should examine user trends and needs, new technologies, competition and economic considerations. The team must develop and reaffirm its mission and define the strategic imperatives necessary to reach those long-term goals. There is no greater responsibility for executive management than to address the challenges of redesigning the business to accommodate these new strategic imperatives.
This is not esoteric long-term planning. It means rolling up one’s shirt sleeves and wrestling, not with the what, but rather, the how, of implementation. For this reason, no executive manager can afford to be any less than a 50 percent strategic and a 50 percent tactical manager. Delegate the day-to-day firefighting as much as possible to the next levels of management, and let the vice presidents wrestle with transitioning companies into finely tuned, highly competitive contemporary aggressors.
To compete in a global economy means I we must acknowledge world markets and play by the global economy’s rules. As worldwide competitors, we can be just as effective as any company with its corporate I origins in South Korea, Japan or Taiwan. We must do what they do. We must do it even better. The payback is certain: a world-class company which achieves market dominance and achieves it very profitably.
Gary E. Liebl is president and chief executive of Cipher Data Products, Inc., a San Diego-based company that designs, manufactures, and sells a broad line of removable data storage hardware and subsystems. He was formerly group operating officer for the Information System Group of McDonnell Douglas, and CEO of Microdata Corporation.