Connecting With The Future

Over the next two decades the structures of manufacturing companies will be transformed, and relationships with customers will undergo dramatic change.

The spectacle of executives at General Motors Corp. periodically browbeating suppliers to get greater value is about to become business history. GM, Ford Motor Co., and DaimlerChrysler AG, far earlier than anyone expected, are creating a jointly owned, Internet-based trading exchange that will be open to all car makers and their suppliers. "This is going to change everything," predicts Michael Fradette, the Boston-based global director of manufacturing management consulting at Deloitte Consulting. Fierce competition on the exchange will drive down the prices of components. The car companies won't have to. The motor-vehicle industry isn't the only segment of manufacturing that promises to be transformed -- or significantly redesigned -- during the first quarter of the 21st century. Propelled in part by the Internet, extranets, and growing experience with e-business, major change is gaining momentum in businesses as varied as semiconductors, food processing, pharmaceuticals, metals, chemicals, aerospace, and automobiles. One measure of that change is the speed with which new terms are sweeping into the business lexicon. Dot.coms, B2B, value chain, human capital, e-business, cybersecurity, data mining, and microsites are just a few of the terms that successful executives now must carry in their working vocabulary. But a more telling signal of significant change is the approaching revolution in the structure of companies. An impressive 78% of CFOs expect their firms will not exist in their current forms in the year 2025, reveals a recent survey of 277 companies by the Financial Executives Institute, Morristown, N.J., and Duke University's Fuqua School of Business, Durham, N.C. Twenty-five percent of the executives think it's "unlikely" their companies will remain unchanged, while another 53% consider it "highly unlikely." Among high-tech firms, small companies (annual revenues below $100 million), and financial firms, executive expectations for dramatic change run at 80% or higher. Executives in manufacturing need a better understanding of the impact of transformational issues such as structure, customer relationships, and size. IW will focus on these incipient issues in a series of articles during the next several months. Structure: 'very different' Mackey McDonald, chairman and CEO of VF Corp., is positioning the $5.5 billion, Greensboro, N.C.-based firm to be on the cutting edge of a dramatically different apparel industry. By the year 2020 -- and in sharp contrast to apparel's traditional structure of centrally directed production and linear processes -- McDonald foresees customers, retailers, and factories around the world exchanging information and taking collaborative action. "Our role changes from just making stuff to managing the supply chain," he emphasizes. His forecast may well become the reality in the trade-protected U.S. textile and apparel industry, whose companies until recently have not welcomed or capitalized on the rising tide of change. But for much of the rest of global manufacturing, McDonald's expectations understate the scope of what's coming. The manufacturer of the next quarter century "will look very different from what we have traditionally thought of as a manufacturer," stresses Deloitte Consulting's Fradette. As companies recognize that their brands are more powerful than their existing capabilities, they "are going to be ripping apart every aspect of their total value proposition," he states. Flexibility will become the distinguishing characteristic as more manufacturers look like "a dynamically configured holding company," Fradette anticipates. "Pretty much, anything goes. There are no rules," he stresses. "What it means is that no one configuration -- no matter how radical -- is going to sustain you. You have to be able to [reconfigure to seize market opportunities] over and over again." And it means being able to operate all over the globe -- particularly in Asia. By the year 2025, he says, companies will have an even greater need to be in such places as China, which by then will have emerged as the No. 1 economy in the world. In aerospace, the only way companies will be able to make their next-generation products "is really by creating an extended digital enterprise [and] collaborating seamlessly around the world with all their systems and business processes," stresses Pat Toole Jr., IBM Corp.'s Charlotte-based general manager for engineering solutions. Meanwhile, in aerospace and other industries, the introduction of super-sophisticated design-simulation computer programs will make even some of the "gee-whiz" design software of the past decade seem as primitive as the Wright brothers' first aircraft. Likely to be reduced to a mere manufacturing footnote, for example, is the paperless, "all-on-the computer" approach that Boeing Co., Seattle, is using to design its entry in the current Joint Strike Fighter military-jet competition -- and used successfully to design the 777 commercial jet in the mid-1990s. "More powerful optimization technology -- being able to study designs and synthesize the most suitable design for a set of constraints and boundary conditions -- is clearly where things have to go," asserts Jim Scapa, president and CEO of Altair Engineering Inc., a Troy, Mich.-based developer of product-engineering software. Peering into manufacturing's future, Iain Somerville, a Los Angeles-based partner in Andersen Consulting, foresees sophisticated information technology linking business units into highly competitive value networks that he dubs "arrays." Like the very large array of movable radio telescopes spread across the New Mexico desert, the manufacturing array's prowess will come in major part from the existence of multiple perspectives. "The basic concept is to have entrepreneurial units -- little businesses -- creating as much value as they can by doing something distinctively well in the world and then sharing through a network with others to create a preeminent value network," explains Somerville. Absolutely convinced that such a collection of production, R&D, logistics, marketing, and management elements will create greater value than a traditional, vertically integrated company, Somerville contends, "You had better get an array before an array gets you. If you're a large player, you had better disaggregate what you do into its pieces and make sure each part of your array is the best in the world. And if you're a small player, you want to get into an array or you're going to get locked out." In the auto industry, GM Chairman and CEO John F. Smith Jr. expects the auto giant, once the classic bureaucratic corporation, to be increasingly defined by its alliances, its so-called third-party capabilities. "General Motors could be a brand -- with something completely different under the hood," suggests Deloitte's Fradette. He reasons that customers will care a lot less about which suppliers produce the parts than that the "GM" car they buy delivers value and that it satisfies their expectations of function, quality, and reliability. In the near future, between 2006 and 2010, believes Garel Rhys, professor of motor industry economics at the University of Wales' Cardiff Business School, many companies in the auto, chemical, electronics, and aerospace industries will be morphing from multinational corporations into what he calls global "molecular structures." Essentially, they'll become "robust" matrix organizations with strong bonds existing between individual business operations. And each of the business elements, wherever in the world it is, will be "as important as everything else," says Rhys. For example, he suggests imagining yourself in a car company that wants to design a new engine. Rather than making the project the province of one development group in one country, "all the talents you have around your world network" can be deployed as a team. "You bring in the strengths [from] everywhere. You get best practices immediately," he contends. Ask other experts to name a readily identifiable structural model for manufacturing's future and many of them cite highly successful Dell Computer Corp. "Dell didn't necessarily make a better PC or do a tremendously different job on customer service," observes Scott Millwood, vice president of corporate e-commerce sales at Datastream Systems Inc., a Greenville, S.C.-based asset-management software producer. "But what they did is use technology to make their supply chain so darned efficient that it seamlessly melded with their in-house information systems. And they got to a point where they could do one-on-one marketing and one-on-one buildouts," he states. "It certainly has beat the pants off some of the other PC makers who haven't caught onto that model yet." Customers: pulling, not being pushed A quarter century from now, says Deloitte Consulting's Fradette, manufacturers won't so much be pushing products on consumers as customers will be pulling products onto the market. "In the year 2025, the world will be dominated by customer-centric notions," he says. Consumer buying power and the "pure raw horsepower" of the 'Net and other communication technologies will have made "the individual [consumer] absolutely dominant." For example, in the year 2025, "every automobile manufacturer will build to order," with just three days' elapsed time from order to delivery, two days less than the five-day production goal that Toyota Motor Corp. is targeting. Significantly, Armand V. Feigenbaum, president and CEO of General Systems Co. Inc., Pittsfield, Mass., believes it won't take 25 years -- or even five years -- for this customer-centric scenario to emerge. The Internet has already "changed this game very, very dramatically," he states. For example, Feigenbaum recalls that only a few years ago surveys showed that a customer who liked a particular auto or home appliance would tell six other people -- and a customer who didn't like a product told 22 others. In the Internet era, he figures, "you put three zeroes after those numbers." Both the upside payoff and the downside risk of how customers regard certain manufacturers have increased by a factor of a thousand. Dearborn, Mich.-based Ford seems to be recognizing such telling metrics. It's linking with Yahoo! Inc., Santa Clara, Calif., to develop personalized services -- including service reminders, recall notices, and credit account data -- for consumers. "The world is moving online, and we want to ensure that we meet consumers there, meeting their needs in the virtual world as well as the physical world," says Jacques A. Nasser, Ford president and CEO. "We are connecting with consumers through multiple touch points on their turf, at their time, and on their terms." The world's automakers also will be increasingly connecting to customers in the physical world through their finance, service, and aftermarket offerings, indicates Cardiff Business School's Rhys. "Certainly Ford Motor Co. seems to be leading that particular trend in Europe. [It bought] Kwik-Fit, [service outlets that] will replace your tires [and] exhaust systems," he notes. As Nasser's and Rhys' comments reflect, dramatic changes in the ways companies meet, greet, and deal with customers won't be limited to the U.S. The business transformations now under way in North America and, to a lesser extent, in Europe will spread to most of the rest of the world -- including the emerging industrial economies of Asia, Latin America, and Africa. A U.S.-based firm "can no longer [afford to] be an insular company in North America," contends Raj Aggarwal, a professor of finance at John Carroll University in Cleveland. "U.S. companies' ability to make money will depend more and more on non-North American locations -- whether it be Latin America, Asia, or Europe." Indeed, a customer shouldn't have to care where products are coming from, stresses Maryanne Steidinger, former vice president of marketing at Camstar Systems Inc., a Campbell, Calif.-based manufacturing-execution software producer. All the customer cares about, she says, is that a product is being made to specifications, that the right numbers are produced, that the products are delivered when promised, and that the colors are as ordered. If Bill Sheeran, director of the Center for Integrated Manufacturing Studies at Rochester Institute of Technology, is correct, many of those products will be "green." As public and business sensitivity to the impact of industry on the environment increases, products are going to be designed and manufactured for recovery and reuse, he believes. In fact, that's already happening in Europe, specifically in Germany, where automakers are required to take cars back at the end of their useful lives. "I don't know how far that type of movement would spread into the United States, but you will see it out there on the horizon in some form," confidently predicts the former United Technologies Corp. and General Electric Co. executive. Will big be better? If the U.S. Federal Trade Commission and the European Union's antitrust officials approve the pending merger of London-based Glaxo Wellcome PLC and SmithKline Beecham PLC, the product will be a drug company with US$189 billion in market capitalization, roughly equivalent to the size of Hong Kong's economy. Pharmaceutical firms are not the only companies combining for the future. In 1999, reports Thomson Financial Securities Data, Newark, N.J., a record $3.4 trillion in mergers and acquisitions were announced. Among manufacturing's marquee deals completed in 1999 were the Daimler-Benz AG/Chrysler Corp. merger, Ford's $6.45 billion acquisition of Volvo AB's car operations, the merger of Honeywell Inc. and AlliedSignal Inc., and the melding of Germany's Hoechst AG and France's Rhne-Poulenc SA to create Aventis SA. Such mergers and acquisitions typically produce substantial cost savings and extend corporate global reach. But the current craving to combine is raising questions about the long-term value of such megadeals as Daimler/Chrysler and Ford/Volvo. "We've now seen companies get to be bigger than they need to be . . . because of the sort of empire-building instinct of a lot of executives," asserts Gabor Garai, managing partner at the Boston office of law firm Epstein Becker & Green. Garai puts together midmarket mergers and acquisitions (up to $500 million) for manufacturing, technology, and professional-services firms. Specifically, he wonders whether consolidated market power will dramatically limit customer choices and restrict -- if not eliminate -- new entrants in a number of industries. Those two outcomes, however, are less than inevitable. First, Garai himself figures that by 2005 -- only five years from now -- 25% or more of today's highly publicized big-ticket mergers could well be "unmerged." A basic reason: "Large and slower-to-respond" companies will fail miserably at integrating the entrepreneurial management that originally attracted them to the companies they've acquired, he says. Second, new market entrants are likely to provide a check on potentially stifling industry consolidation. "I see the kind of entrepreneurship that has emerged in high technology in Silicon Valley appearing in different kinds of ways -- using network technologies [and] global capabilities -- across other manufacturing industries," says Andersen's Somerville. And in the automotive industry, probably after 2015, "you will get standalone Indian companies, Chinese companies, Russian companies," stresses Cardiff Business School's Rhys. "The availability of choice to the consumer will not diminish." No guarantees There are no guarantees -- virtual or otherwise -- that within the next two decades manufacturers will be leaner, more agile, more responsive to customers, more productive, more profitable, and more humane than companies are today. This despite outsourcing more activities to generate greater value. Or moving away from production altogether to focus on marketing and distribution. Or strengthening supply and value chains with real-time knowledge sharing. For example, even with thousands of megabytes available, today's most advanced computers don't have the computing power to run the super-sophisticated product simulations envisioned by Altair Engineering's Jim Scapa. As Altair learned following the introduction of its OptiStruct topology optimization software in 1994, companies can be surprisingly slow to adopt and adapt. "While we see the slope of adopting this technology really starting to move up rapidly now, it's been a much slower process for us, because companies don't know quite where this fits in their design process," Scapa concedes. An outside observer would have expected Boeing to have designed a commercial aircraft completely on computers "years and years" before it actually happened, claims Datastream Systems' Millwood. "That's a great example of how long it really does take for the real world of manufacturing to catch up and utilize some of the technologies that are available." One possible explanation for such inertia is the dated organizational structures that so many companies cling to like a security blanket. Even with executives such as General Electric Co.'s CEO John F. Welch Jr. clearly demonstrating the positive bottom-line impact of "boundaryless" behavior, literally thousands of manufacturers around the world continue to isolate their employees in functional silos labeled R&D, production, purchasing, distribution, marketing, finance, and engineering. These vertical structures -- and the attitudes they foster and the cultures they create -- constitute the greatest area of resistance to change as manufacturing changes, says Edward W. Davis, a professor at the University of Virginia's Darden School of Business Administration, Charlottesville. Management's unwillingness to recognize the need for change and its lack of will to change are why the e-business operations of some traditional brick-and-mortar companies are being established at separate sites from existing businesses, says Ron Norelli, founder and CEO of Norelli & Co., Charlotte, a management consulting firm. What's more, business academicians have yet to develop models by which to manage the (virtual) factory of the future, adds George Vairaktarakis, assistant professor of operations management at Case Western Reserve University's Weatherhead School of Management in Cleveland. "Quality," for example, "is not going to go away. But the question in the future will be how manufacturers will control quality when it doesn't own the factories where products are made."

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