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Prospering in the 90s
ABSTRACTS
by their managements to be classed as ventures and recorded in the PIMS database that way. The authors wished to test some of the "folklore" of venture management, particularly the dual idea that such ventures within large firms have greater resources to draw upon but are saddled with a bureaucracy that inhibits them. They found a way to measure whether a series of ventures did or did not have access to a set of helpful resources, whether they had a top-management reporting status (a measure of their resistance to bureaucracy), and then whether their projects ended up with higher quality products and lower cost products. This permitted them to correlate resources with outcome and bureaucracy with outcome. Their first hypothesis was that resource sharing would have a favorable effect on both product quality and production cost. That is, in a larger firm there are more marketing, manufacturing, technology, dollar, etc. resources available to help the venture. The authors pointed out that prior information had suggested that higher quality may be associated with higher costs, but in some cases it is actually associated with lower costs. So their second hypothesis was that, regardless of the size of the firm, if the venture had a high-level reporting relationship it would be better able to resist the encumbrances o f the corporate bureaucracy. The flip side of these hypotheses, of course, is that a venture that lacks resources it can tap and/or that has to struggle deep within a bureaucracy will not come up with high-quality, or low-cost, products. The PIMS database questionnaire offered information on whether the venture had used the resources of other departments, and which ones. From this the authors sorted each venture into two piles--high-sharing and low-sharing. The questionnaire also asked how many levels of management there were in the firm, and at what level the venture reported. If at one of the top two levels, it was scored as high-level reporting; if at the others it was low-level reporting. The firms in the PIMS database also reported on production cost, stated as a percentage of its three leading competitors' weighted average production cost. (No information was given on how each venturing firm was to know its competitors' production costs.) The product quality scoring was a complex index process, but essentially the
J PROD I N N O V M A N A G 1992 ;9:246-259
253
venture's output was scored as superior, equivalent or inferior to the products of its three leading competitors. The results were as follows. First, resource sharing does indeed raise the quality o f the product produced. However, second, it also raises the cost o f the product. Third, having a high-level reporting relationship has no main effect on either quality or cost. In firms where there is strong resource sharing, reporting to top management has the strange effect of reducing the cost of the new product but lowering its quality. In summary, the authors say " O u r data illustrate the two-edged character of resource sharings, and the highly situational costs and benefits of reporting to top management. It appears that there are few if any simple prescriptions for managers of ventures; they must learn to live on the horns of a dilemma."
Prospering in the 90s, Charles R. Taylor, Across the Board ( J a n u a r y - F e b r u a r y 1992), pp. 43-46 This brief article summarizes some of the key findings from a new Conference Board study entitled Global Presence and Competitiveness o f US Manufacturers (New York: The Conference Board, Report No. 977, 1992). The first part of the report studied the 1980s, as a contrast with the future. Statistics from the decade confirm that shifting a firm toward high technology was a wise strategy. Three technology-based industries (chemicals, electrical machinery and nonelectrical machinery) grew much faster than the rest of the fields in the database. Successful manufacturers also increased their overseas presence. They moved manufacturing abroad first, and followed that with direct investment to gain economies of scale, support R&D programs there and accommodate product diversity. In the end, multinational manufacturers were 50% more likely to survive the 1980s than were domestic corporations, and had a 9% return on assets compared with 7% for domestic firms. Joint venturing also was linked to above-average profitability, as was the licensing o f technology. Conducting R & D abroad was associated with both above-average profits and better growth. The author of this report predicts that these and other trends have produced more uncertainty
254
J PROD |NNOV MANAG 1992:9:246-259
than at any time since World War II. Particularly critical are technology advances, competition from abroad, increasing complexity of manufacturing and widespread cultural change and political disorder. This uncertainty mandates a global presence, to capitalize on the unexpected opportunities and hedge the unexpected crises. It also mandates commitment to technology, of all types and levels, and the d e v e l o p m e n t of high-quality management staffs. Foreigners will increasingly occupy management teams in the United States. The author also speculates that we will be operating in a new paradigm, consisting of two networks. One, an information network, will span the globe and will allow more knowledge workers to control and alter manufacturing processes. The other network, operating below the informational one, will be a production and distribution network of rapidly increasing efficiency, partly based on the available information in the higher network. Lastly, the author disdains Federal industrial policy (because we simply cannot predict which industries will be winners) but does argue that we need governmental c o m m i t m e n t to help us become more competitive in everything we d o - cheaper capital, more productive labor and reliable infrastructure.
The Management of Complexity, Peter Child, Raimund Diedrichs, Falk-Hayo Sanders and Stefan Wisniowski, The McKinsey Quarterly (1991), pp. 52-69 This article raises an issue that has been on a lower burner for many years. That is, how far can we go in adding products to meet the desires of customers before the complexity of those products raises the costs of operations beyond the value of the customer goodwill and sales volume? Given recent activities to speed up operations, raise product quality and lower product costs, these authors feel from their experience as consultants at McKinsey that we now know better ways of designing, manufacturing and distributing products, ways that now challenge past decisions on product-line proliferation. In fact, they feel most firms should review this issue, and as they do, there will be new pressures on product line extension strategies, and new
ABSTRACTS
product managers will be asked to challenge proposed additions more vigorously and develop the items with an eye to minimizing costs of operations. As the authors say, " O n the road to great service, high quality, and accurate information, you can find your organization performing too many tasks, producing an excessive number of items, keeping unnecessary stocks, and producing multiple flows of materials and information." Their solution involves three steps: creating transparency, optimizing market variety and minimizing business complexity. Creating transparency requires first the compilation of all costs of product variety, a compilation not made in the routine process of business. This set of costs includes materials, parts, features, packages, making design changes, filling out purchase orders, preparing production schedules, site m o v e m e n t of product in process, distribution expenses and inventory costs of all types. From this total is subtracted an estimate of the costs produced by the simplest combination of operations required for participation in the firm's core business. The difference is the cost increment due to variety. A key benefit of this cost compilation is learning what the real drivers of cost are, thus the education of people who are not directly responsible for these costs but whose decisions increase them. The second step is for the firm to optimize variety. This means "assessing the level of [minimum] variety at which consumers will still find its offering attractive and the level of complexity that will keep the firm's costs low." The complexity determination is important because there are ways whereby one can have line variety but still no costs of complexity. Using modularized product design is one way. In this minimizing effort, the firm is encouraged to inform customers of the values of reduced variety (e.g., price, quality, delivery time and flexibility). One steel firm, for example, had high costs (in spite of high market share) because they had let the line expand, so undertook to standardize it. Over 5 years they achieved the lower variety level they wanted, and without price reductions. Customers liked the consistent quality of units produced, on-time deliveries, lower set-up costs from standard units, etc.
by their managements to be classed as ventures and recorded in the PIMS database that way. The authors wished to test some of the "folklore" of venture management, particularly the dual idea that such ventures within large firms have greater resources to draw upon but are saddled with a bureaucracy that inhibits them. They found a way to measure whether a series of ventures did or did not have access to a set of helpful resources, whether they had a top-management reporting status (a measure of their resistance to bureaucracy), and then whether their projects ended up with higher quality products and lower cost products. This permitted them to correlate resources with outcome and bureaucracy with outcome. Their first hypothesis was that resource sharing would have a favorable effect on both product quality and production cost. That is, in a larger firm there are more marketing, manufacturing, technology, dollar, etc. resources available to help the venture. The authors pointed out that prior information had suggested that higher quality may be associated with higher costs, but in some cases it is actually associated with lower costs. So their second hypothesis was that, regardless of the size of the firm, if the venture had a high-level reporting relationship it would be better able to resist the encumbrances o f the corporate bureaucracy. The flip side of these hypotheses, of course, is that a venture that lacks resources it can tap and/or that has to struggle deep within a bureaucracy will not come up with high-quality, or low-cost, products. The PIMS database questionnaire offered information on whether the venture had used the resources of other departments, and which ones. From this the authors sorted each venture into two piles--high-sharing and low-sharing. The questionnaire also asked how many levels of management there were in the firm, and at what level the venture reported. If at one of the top two levels, it was scored as high-level reporting; if at the others it was low-level reporting. The firms in the PIMS database also reported on production cost, stated as a percentage of its three leading competitors' weighted average production cost. (No information was given on how each venturing firm was to know its competitors' production costs.) The product quality scoring was a complex index process, but essentially the
J PROD I N N O V M A N A G 1992 ;9:246-259
253
venture's output was scored as superior, equivalent or inferior to the products of its three leading competitors. The results were as follows. First, resource sharing does indeed raise the quality o f the product produced. However, second, it also raises the cost o f the product. Third, having a high-level reporting relationship has no main effect on either quality or cost. In firms where there is strong resource sharing, reporting to top management has the strange effect of reducing the cost of the new product but lowering its quality. In summary, the authors say " O u r data illustrate the two-edged character of resource sharings, and the highly situational costs and benefits of reporting to top management. It appears that there are few if any simple prescriptions for managers of ventures; they must learn to live on the horns of a dilemma."
Prospering in the 90s, Charles R. Taylor, Across the Board ( J a n u a r y - F e b r u a r y 1992), pp. 43-46 This brief article summarizes some of the key findings from a new Conference Board study entitled Global Presence and Competitiveness o f US Manufacturers (New York: The Conference Board, Report No. 977, 1992). The first part of the report studied the 1980s, as a contrast with the future. Statistics from the decade confirm that shifting a firm toward high technology was a wise strategy. Three technology-based industries (chemicals, electrical machinery and nonelectrical machinery) grew much faster than the rest of the fields in the database. Successful manufacturers also increased their overseas presence. They moved manufacturing abroad first, and followed that with direct investment to gain economies of scale, support R&D programs there and accommodate product diversity. In the end, multinational manufacturers were 50% more likely to survive the 1980s than were domestic corporations, and had a 9% return on assets compared with 7% for domestic firms. Joint venturing also was linked to above-average profitability, as was the licensing o f technology. Conducting R & D abroad was associated with both above-average profits and better growth. The author of this report predicts that these and other trends have produced more uncertainty
254
J PROD |NNOV MANAG 1992:9:246-259
than at any time since World War II. Particularly critical are technology advances, competition from abroad, increasing complexity of manufacturing and widespread cultural change and political disorder. This uncertainty mandates a global presence, to capitalize on the unexpected opportunities and hedge the unexpected crises. It also mandates commitment to technology, of all types and levels, and the d e v e l o p m e n t of high-quality management staffs. Foreigners will increasingly occupy management teams in the United States. The author also speculates that we will be operating in a new paradigm, consisting of two networks. One, an information network, will span the globe and will allow more knowledge workers to control and alter manufacturing processes. The other network, operating below the informational one, will be a production and distribution network of rapidly increasing efficiency, partly based on the available information in the higher network. Lastly, the author disdains Federal industrial policy (because we simply cannot predict which industries will be winners) but does argue that we need governmental c o m m i t m e n t to help us become more competitive in everything we d o - cheaper capital, more productive labor and reliable infrastructure.
The Management of Complexity, Peter Child, Raimund Diedrichs, Falk-Hayo Sanders and Stefan Wisniowski, The McKinsey Quarterly (1991), pp. 52-69 This article raises an issue that has been on a lower burner for many years. That is, how far can we go in adding products to meet the desires of customers before the complexity of those products raises the costs of operations beyond the value of the customer goodwill and sales volume? Given recent activities to speed up operations, raise product quality and lower product costs, these authors feel from their experience as consultants at McKinsey that we now know better ways of designing, manufacturing and distributing products, ways that now challenge past decisions on product-line proliferation. In fact, they feel most firms should review this issue, and as they do, there will be new pressures on product line extension strategies, and new
ABSTRACTS
product managers will be asked to challenge proposed additions more vigorously and develop the items with an eye to minimizing costs of operations. As the authors say, " O n the road to great service, high quality, and accurate information, you can find your organization performing too many tasks, producing an excessive number of items, keeping unnecessary stocks, and producing multiple flows of materials and information." Their solution involves three steps: creating transparency, optimizing market variety and minimizing business complexity. Creating transparency requires first the compilation of all costs of product variety, a compilation not made in the routine process of business. This set of costs includes materials, parts, features, packages, making design changes, filling out purchase orders, preparing production schedules, site m o v e m e n t of product in process, distribution expenses and inventory costs of all types. From this total is subtracted an estimate of the costs produced by the simplest combination of operations required for participation in the firm's core business. The difference is the cost increment due to variety. A key benefit of this cost compilation is learning what the real drivers of cost are, thus the education of people who are not directly responsible for these costs but whose decisions increase them. The second step is for the firm to optimize variety. This means "assessing the level of [minimum] variety at which consumers will still find its offering attractive and the level of complexity that will keep the firm's costs low." The complexity determination is important because there are ways whereby one can have line variety but still no costs of complexity. Using modularized product design is one way. In this minimizing effort, the firm is encouraged to inform customers of the values of reduced variety (e.g., price, quality, delivery time and flexibility). One steel firm, for example, had high costs (in spite of high market share) because they had let the line expand, so undertook to standardize it. Over 5 years they achieved the lower variety level they wanted, and without price reductions. Customers liked the consistent quality of units produced, on-time deliveries, lower set-up costs from standard units, etc.