"Heave ho the anchor, set the main sail, and man your battle stations," you can almost hear CEOs cry as they strike out in their corporate ships in search of the treasures of worldwide markets. Once able to keep shareholders at bay with large chunks of domestic market share, today's captains of industry now ride the world's high seas in search of global gold. But slow growth, economic instability and deflation, and a whole new set of competitors can slow the progress of even the sleekest crafts. How should CEOs configure their ships, which course should they steer, and what supplies should be on board to last the journey to these faraway shores and win the battles that inevitably will be fought there? These and other questions were posed by IndustryWeek to CEOs and other corporate officers in large manufacturing companies worldwide as part of the 1999 IndustryWeek senior-executive survey. Sponsored by Thomas Group Inc., a global management-consulting firm headquartered in Dallas, the survey reveals the actions needed not just to survive, but to flourish in this tough and unforgiving global economy. In addition to compiling the actions and initiatives companies have adopted, IW's survey reveals the practices found most effective to increase margins and competitive advantage in world markets. This report of survey results leads off a special section written specifically for IW's CEO and senior-management readers. IW celebrates its CEO of the Decade and CEO of the Year. Then two articles cover the personal role of the CEO in increasing his or her company's global competitiveness and what worries CEOs the most.
By far the key structural change made by companies to become more globally competitive -- and the one also rated as most powerful -- was to focus on core businesses, a strategy adopted and rated effective/very effective by 90% of respondents to
's survey. Structural changes adopted by roughly seven in 10 companies included flattening the organization by removing layers of management, merging with other companies to form new structures, decentralizing business units, and creating global business units. These changes were rated effective/very effective by some two-thirds of respondents who have adopted them to improve global competitiveness. Now the world's third largest chemical manufacturer and operating in 168 countries, Dow Chemical Co., Midland, Mich., provides a prototypical example of a company built to win worldwide. Even prior to its August $11.6 billion acquisition of Union Carbide, the company had added $10 billion in complementary acquisitions and invested $5 billion in capacity additions to core assets. Meanwhile, Dow has divested more than $10 billion in nonstrategic businesses during the last six years. In 1996 the company transitioned from a geographic, matrix organization to a structure of global business processes and 15 global business units, each with global profit/loss (P/L) accountability. In reengineering for global processes, the company deployed a global IT infrastructure for the required real-time delivery of information, cut $5 billion in costs (over five years), and flattened the organization from 10 to 12 layers down to four to six from the CEO to the most junior employee. As a result of these initiatives, "Dow is now making two to three times the earnings it used to make at an equivalent position in the global chemical market cycle, and we are earning the cost of capital at the trough of the cycle, something we have never done before," says CEO William S. Stavropoulos. Of course, there are many ways to set up a structure armed for global competition. Herman Miller Inc., the $1.8 bil-lion office-furniture manufacturer in Zeeland, Mich., restructured its international operations under one executive at headquarters who reports to the CEO. After the change, Herman Miller returned to sustained profitability in one year following five years of losses, says David L. Nelson, chairman of the board. At Ford Motor Co., President and CEO Jacques A. Nasser is creating a kind of hybrid organization, balancing global integration and regional influence. Although functions such as purchasing, engineering, and manufacturing still have global scope, branding and marketing will be powered locally in the new setup. Opening trade and shifting to the euro should have a positive impact on the structure and global competitiveness of European companies in general, because they are now able to concentrate on the most strategic locations in which to operate. "The impact of the euro will be positive, because it will force European companies to streamline, to consolidate activities, because they don't need facilities in every European country," says Stephane Garelli, professor of world competitiveness at the International Institute for Management Development (IMD), Lausanne, Switzerland.
Asked which corporate strategies were effective in increasing their company's global competitiveness, 90% of respondents mentioned driving P/L responsibility deeper into the organization; reducing operating expenses; more strategic alliances with customers, suppliers, and even competitors; and reducing operating expenses. These were rated as effective/very effective strategies by about three-quarters of those citing the practices. Focusing R&D expenditures on shorter-term specific business opportunities was also mentioned by almost eight in 10 executives and was rated as effective/very effective by more than half of those. Implemented by some 70% of companies -- but rated effective/very effective by only about one-third of those -- were increased use of outsourcing and contract employees as a route to global competitiveness. Shifting to shorter-term R&D paid handsome dividends for floor-covering manufacturer DLW AG in Bietgheim-Bissingen, Germany, which earns more than 50% of its revenues outside its home country. Within three years the company reconfigured 60% of its sales to new products, which normally had accounted for 25% to 30% of sales. In the process, the company gained one full market-share point in a fragmented global market where no company has more than 10%, says Bernd Pelz, chairman of the board. "And we went from [reporting losses] to an EBIT [earnings before interest and taxes] of 5% of turnover, which is increasing." Shifting to shorter-term R&D, however, can be at the expense of more basic research, a disturbing trend for the long-term competitiveness of these companies and industry overall. Lucent Technologies Inc., the communications-equipment giant in Murray Hill, N.J., is actually increasing its R&D expenditures for more basic research. Its $3.7-billion-plus R&D budget represents 12% of sales, up from 8% to 9% before spinning away from AT&T in 1996, with nearly 10% of that devoted to basic research. Likewise, Dow Chemical has shifted money with an eye to the discovery of game-changing technologies rather than incremental product-development improvements. "We found that although we had great technology, we were not translating that technology into value creation in the marketplace," says Stavropoulos. "We found we were spending too much money on small incremental projects and not enough on some fundamental breakthroughs." As
's survey points out, alliances loom large in the fortunes of most major companies because no single manufacturer can expect to have all the competencies necessary to compete worldwide. Partnerships also can create the relationships upon which new business is based. "Increasingly, the key to success in our kind of business is being invited in by a potential customer to be part of a multifunctional product-development team," says Stephen R. Hardis, CEO of Eaton Corp., the $6.6 billion Cleveland-based manufacturer of engineered products. "If you wait until the product has been designed and bid, you are dead. We must truly understand our customer's requirements and position ourselves so that he sees us as the source of his future."
Surprisingly, many companies engaged in competition in the global arena have not adopted world-class value-chain strategies, according to our survey. For instance, only about five to six in 10 companies:
- Are managing manufacturing capabilities on a global basis;
- Have adopted Six Sigma processes;
- Have standardized manufacturing processes worldwide;
- Have shifted manufacturing to regions of lower-cost labor.
Of the companies adopting world-class value-chain strategies, those rated most effective in making their companies more globally competitive include:
- Collaborative planning with customers /suppliers, especially effective in aerospace and high-tech companies;
- Maintaining leaner inventories;
- Managing manufacturing capacity on a global basis, especially effective in the automotive value chain, though adopted by only about half of the companies responding overall.
While eight in 10 companies are adopting limited or sole sourcing arrangements with suppliers, less than half of those found it to be an effective/very effective strategy to increase global competitiveness. Use of electronic commerce had a similar respondent profile.
's survey reveals that CEOs and senior executives use a variety of metrics to measure the performance of their companies in the global economy. About one in five respondents picked profit margin as the single most important measure, followed closely by earnings per share, economic value added (EVA), return on capital, and return on equity, in that order. Share price was a distant last among eight measures suggested. Significantly, more so than in any other industry value chain, executives in aerospace felt market share was an excellent yardstick of company performance, second only to profit margin. Among executives contacted in phone follow-ups, the resounding up-and-coming metric mentioned was EVA, with adopting companies building strategy and incentive compensation around the concept. EVA is a methodology for translating share price and dividends into all the aspects of business that can be managed to drive those two factors, including such things as return on gross investment, free cash flow generated, and ability to change margins over time. "We have been largely dissatisfied with the other attempts we have made to have some kind of an indicator that would be universally understood and universally appropriate for getting our businesses to measure how much value they really were creating," says Stephen Huggins, vice president of strategic resources and information technology as well as chief knowledge officer at B.F. Goodrich Co., the $4 billion aerospace, materials, and engineered-products manufacturer located in Charlotte, N.C. "In 1998 we became convinced that EVA was the best way to get in touch with all the possible levers one could throw within a company to generate long-term shareholder value." In the past, European companies typically equated performance with market share, especially in their local market, which was protected. As markets opened and competition increased, there was a move to profit margin as a performance metric. "Today European companies are moving toward EVA, due to the pressure of the stock market," says IMD's Garelli. "DaimlerChrysler, British Telecom, British Airways, Rhone-Poulenc, L.M. Ericsson, and Nokia have all adopted EVA, as well as most of the American companies operating in Europe." "Since EVA goes up as assets held go down, we have seen a policy where a lot of enterprises in Europe are disposing of assets at all costs, transferring them to distributors, partners, suppliers," continues Garelli. These assets might still be managed by the disposing companies, but "owning assets is not very popular these days. You rent or lease, and that applies to physical assets as well as human assets."
's executive survey tends to corroborate this view. When queried about value-chain strategies, European executives were much more keen on use of contract manufacturing as a strategy to increase global competitiveness than were their U.S. counterparts and found outsourcing logistics three times more effective than did U.S. executives.
New-product development will be an effective/very effective growth driver for almost nine in 10 of the companies surveyed. Mentioned as effective /very effective by about two-thirds of executives are expanding international sales, new applications of existing products, mergers/acquisitions, and market growth. Less than half of the companies surveyed see e-commerce as an effective/very effective driver of new growth in the global economy, although two-thirds acknowledged that the contribution of e-commerce to revenues will increase in the near future. E-commerce's contribution to new sales was forecast to increase from 4% to 13% during the next three years. While new products were the overwhelming choice for propelling companies to future success, the word "product" itself has taken on a new meaning. Companies successful in the global market strive to provide total solutions, including downstream services and product groups serving related needs or sold through the same channel of distribution. In mature markets or those with limited ability to raise prices, peripheral services not only serve as another profit-making opportunity, but also can provide the essential differentiation vendors need to be successful. "Building on their core competencies, firms have moved beyond the factory gate to tap into valuable economic activity that occurs throughout the product life cycle, from financing and maintenance to supplying consumables," says Rick Wise, vice president, Mercer Management Consulting, Boston. "Downstream markets tend to have higher margins and require fewer assets than product manufacturing and are often countercyclical." At Rockwell International Corp., a $7 billion electronics and communications manufacturer in Costa Mesa, Calif., CEO Don Davis has challenged his management to take a more expansive view of each business. "In the past people have defined our businesses more narrowly than they have to," he says. "For instance, there is a great opportunity for us in both of our big businesses [control automation and aviation electronics] for a lot of professional services that have nothing to do with selling a product." The company has had success offering start-up services for new installation of its control products, as well as services to integrate controls to a company's information infrastructure. In its aviation market, the company made an acquisition bid for a company that trades in used equipment. Many other companies are expanding their horizons to embrace more services. Both Caterpillar Inc. and Xerox Corp. have added diagnostics to their products, with Internet links back to service centers. Electronics giant Nokia Corp. looks beyond simply supplying cellular phones to helping carriers plan and manage networks and meet zoning requirements for construction of new transmission towers. General Electric Co. currently derives about 30% of revenues from services. Japanese manufacturers also must take a "softer" line in thinking about products to be successful in global markets, says Masao Nakamura, professor of commerce and business administration at the University of British Columbia, Vancouver. "Japanese manufacturing industries still rely heavily on hardware products, of which they are superb producers, when in the economies of Europe and the U.S. more value-added is found in software and other nonhardware components. Unfortunately, most Japanese manufacturers are still struggling in this era of a paradigm shift." Sony Corp. and Fujitsu Ltd. are among the Japanese companies that are successfully shifting their business paradigm. Sony has developed a new chip and software in its PlayStation entertainment technology, which has myriad other potential applications in computing. Fujitsu, the $44 billion computer integration-services behemoth, gets 39% of its revenues from software and services and now wants to become a strong player in Internet commerce and services.
Obstacles To Growth
Interestingly, more than 80% of respondents said that knowledge management -- acquiring and spreading information and best practices across the enterprise -- was the biggest internal obstacle to their company's growth in the global marketplace. Other significant internal challenges to growth, mentioned by about 70% of the executives, included:
- Deploying more efficient IT systems.
- Aligning compensation incentives and company objectives.
- Breaking down organizational barriers.
Achieving cultural diversity in the workforce, a theme commonly echoed as a driver for a successful global company, was not considered a major challenge, and was mentioned by only about 20% of respondents as an internal barrier to growth. Knowledge-management initiatives address one of the biggest opportunities available to all companies: getting more out of what they already have. To facilitate knowledge transfer within companies and ultimately along the value chain, companies are installing a host of IT applications to capture and share information and knowledge. Internally many companies are also establishing a chief knowledge officer (CKO) to spearhead their efforts. "Creating the position of CKO . . . starts to build both a culture and the systems that allow us to identify where our special knowledge and expertise is and to easily connect and communicate it throughout the organization, " says B.F. Goodrich's Huggins. "We are failing to get the value out of our businesses if we don't spend attention and resources on getting the knowledge and best practices around the company." Managing human resources is considered the biggest internal challenge to growth at Toyota Motor Corp., Tokyo. "The key to surviving in this age of global competition is to see how well we can apply the power of the individual to our organization as we acquire and nurture talent," says Takashi Kamio, managing director. "In other words, this is human-respect-based business management. Human-resource development, with an eye toward the ability to change and solve problems that may not have clear solutions, is one of the most pressing issues of our business operations." Compensation practices are another major internal issue for all companies. For those operating globally, they must be aligned with
business objectives, sometimes to the detriment of local P/L statements. "You'd like to think people always think corporately, but the reality is they don't," says Herman Miller's Nelson. "By having more centralized control over things, we were able to be attentive to [worldwide] customers and make decisions that weren't immediately favorable to a particular location, but really favored a partnership relationship with the global customer." The stock-laden incentive-compensation packages offered executives in the U.S. have a lot to do with the competitive nature of these companies. European and Japanese packages are far less weighted to equity opportunities, says Eaton's Hardis. Employment practices of the past, including entitlement raises, guaranteed promotions, and fulfillment of executive posts from within, are not the fabric of aggressive U.S. companies competing globally. Today executives have to earn it. "Because these executive positions have become higher-risk jobs, we are offering substantial financial opportunities in the form of incentives that are equity-based," says Hardis. "U.S. companies have become far more aggressive and proactive with these executive incentive packages compared with companies in Europe and Japan, which seem to have trouble dealing decisively with what it takes to be competitive in worldwide markets. People criticize some of the high payouts to CEOs and senior management, but it has given this economy incredible energy." Compared with challenges to growth within their own walls, respondents seemed far less intimidated by external factors. Seven in 10 executives cited limited opportunity to raise prices as their greatest external obstacle, by far the most significant barrier mentioned. About half cited a low-growth marketplace and instability of foreign economies as stumbling blocks to growth. Dealing with nontraditional competitors, high cost of capital, environmental regulations, and unfair trade practices were mentioned by about one-third of respondents.