- Email: [email protected]
A framework for constructing Euro-networks
Eunqwn Managment Journal Vol. 11, No. 1, pp. 55-61, Printed in Great Britain.
02632373193 $6.00 + 0.00. 0 1993 Pergamon Press Ltd.
1993.
A Frameworkfor Constructing Euro-networks SANDRA VANDERMERWE, Professor of International International, Lausanne, Switzerland
Firms operating transnationally in Europe must restructure to become Euro-organizations if they are to succeed in the future. Using the old, national model to capture consumers is a competitive disadvantage nowadays. Sandra Vandermerwe offers a framework for this Euro-structuring to take place. The base line is understanding future Euro-customers. Euroconsumer clusters are emerging and need to be identified; there are major shifts occurring in industrial purchasing criteria; suppliers and customers are entering new relationships; Europewide decentralized networks are the new corporate structure; and firms will locate according to where each element of the system belongs best. Managers must strive for an integrated pan-European network of operations if they are to succeed in the new unified Europe. From computer companies to auditing firms, chemical manufacturers to retail distributors, the question is the same: what will future Euro-organizations look like? How will they be structured, and why? As of yet there are no neat solutions or formulae which answer these questions. The purpose of this article is to offer a conceptual framework which managers may find useful in meeting their challenge. What we do know is that domestic setups are redundant. Why? On the business-to-business front, customers want pan-European goods with consistent service from country-to-country. Thanks to Euro-wide mass media, end users see TV and print commercials for consumer products and services and expect to find them where they live and work. In any event, firms operating transnationally in Europe find that domestic structures are costly, leading to duplications in manufacturing, marketing, logistics, purchasing, and human resources - duplications which they can ill afford in today’s climate. Euro-structuring
is however easier said than done. For
Marketing and Services, IMD
the transformations strike at the very heart of traditional country management autonomy, recarving territories, redistributing customers and responsibilities, and redefining performance criteria and reward systems. It also calls for more than the physical structural changes. Managers will have to make a mental leap away from the model which sought to maximize the results of each country’s business operation, to one which realizes the potential of the system as a whole.
Beginning With The Customer Euro-structures begin with one fundamental principle: decisions about organizing start with a profound understanding of customers: who they are, where they are located and how they can best be served. With the advent of the new Single Market and the political, social and technological changes being witnessed in Europe, some old questions about customers require new answers. Who are the future Euro-customers, both industrial and consumer? What drives their purchasing decisions? Where are they geographically clustered? How can we reconfigurate the new market into some meaningful format? And, finally, how do we create organizations that get to these customers in a cost effective manner and evoke the desired response from them? To make matters still more complex, this issue, though European, in reality requires that decisions be made in a global context. European plans and objectives must clearly be harmonized to fit the wider global arena. For even if a firm intends to confine its operations to Europe, the chances are that both its competitors and its customers will be taking a broader perspective. In the Europe of yesteryear, traditional geo-political and cultural barriers separated markets and dictated the construction and architecture of corporations. We believed, and probably rightly so, that customers differed radically from boundary to boundary, region to region, area to area, location to location. In those days, manufacturing techniques could not offer the flexible alternatives they can today, information technology did not exist to
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
55
A FRAMEWORK FOR CONSTRUCTING EURO-NETWORKS
eliminate the constraints of time, space and distance. Organizations were designed around fine and specific differences in the tastes, preferences and buying criteria of national customers whom they faithfully served in their own geographic area. In any event, at that time, technical obstacles prevented goods and services made in one country from competing in another without costly modification.
national’ and ‘European’ customers, who identify with pan-European brands and universal concepts, are willing to use information technology and, through the data at their disposal, are able to make better choices about what to buy and from whom. They also want price parities, greater variety and better, more consistent service. This ‘melting pot’ effect is of course in line with global trends elsewhere in the industrialized world,
These barriers and the assumptions underlying them are gradually falling away. The new European market (to say nothing of the addition of the former Eastern Europe) is destined to be one of the most lucrative in the industrialized world. The present EC alone is thirty per cent bigger than the US and almost three times the size of Japan, and Europe has become a target for American, Japanese and European multinationals (and others) that want to muscle in and gain the economies of scale and strategic presence that will improve their international competitive position.
The real issue, though, is to what extent the new single market will be ‘one’ market, or if differences among national consumers will persist? Will consumers’ needs have enough in common to enable firms to take advantage of scale economies? Will there be sufficient similarity so that firms can adapt products and services, as well as offer customized regional and local variations, in the same way that firms such as Benetton, to name one, have done for years, treating Europe as one market? Can firms creatively find a way to avoid duplication of energy, time and resources by centralizing some activities while at the same time providing the input and services needed locally to retain their customer base?
The firms that thrive will first have to wrestle with some complex issues such as: . . . .
which new Euro-markets to serve (as opposed to countries); where to set up operations (regionally and locally); how to organize and coordinate activities (between the countries involved); how to reorientate their people and incentives (for a pan-European result).
The Emergence Clusters
of Euro-consumer
Managers need a new picture of the European market before they can decide what new Euro-markets to serve. The convergences taking place among businesses - for instance, between manufacturers and distributors, manufacturers and suppliers, and firms both in services and goods and their customers - is actually changing the very nature of the traditional marketplace. Business customers are forming several collaborative alliances (including buying) which, by stretching across traditional national and competitive borders, have altered the economic balance of power. Firms are also centralizing their buying activities. Whereas purchases were previously done locally, now more and more firms source from one strategic centre for the whole of Europe, if not the world. Information technology has made it easier for both firms and individuals to do this cross border buying. Remote technological infrastructures enable interface between firms and their users without face-to-face contact. And a generally heightened awareness through information has given customers more choice and clout. Formerly fragmented and confined, end-user national consumer market segments are thus converging to become a new vibrant pan-European geographic and economic market power. Increasingly, they are ‘Inter56
As regulatory barriers crumble and demarcation lines disappear, consumers, suppliers, competitors, and the goods and services they produce, will be contained in a very different geographic and economic space. Managers must replace their old view of this marketplace with something fresh and new. Only by searching for a new conceptual framework can they begin to figure out how the new Euro-market will configurate. Instead of either one, single homogeneous market or a collection of small specialized markets, the most likely model for the future mass Europe is a market system consisting of regional Euro-clusters with customers geographically close but not necessarily living in the same country. They will have the same or similar economic demographic and/or lifestyle characteristics, which cut across cultural and national boundaries, and they will display similar needs and purchasing behaviour. Differences among customers will exist but will not be nationally determined. In fact, consumers in a cluster will be closer to each other in their purchasing tastes and behaviour than to consumers with the same national origin. The market, including the end users, as well as the manufacturers, intermediate firms and retailers that serve them, will thus change from a culturally complex set of national units to a new, equally complex market system based on similarities rather than differences consisting of: .
Groups of regional mass clusters (large and mediumsized groups made up of consumers with ‘common’ needs). When aggregated, these groups make up the mass Euro-market in a given product or service category. This will be a huge growth market in industries where country differences have historically been high.
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
A FRAMEWORK FOR CONSTRUCTING EURO-NETWORKS
.
.
Groups of regional niche clusters (large and mediumsized groups, probably the biggest market, made up of consumers with similar but somewhat differentiated needs). When aggregated, these groups make up the regional Euro-markets in a given product or service category. Local and specialized clusters (small-sized groups with highly specialized needs). Offerings cater to locality, lifestyle, and industry differences or specialized applications. The conservative localized end of this market will largely fade away over time.
Opportunities will thus exist for firms to target the lucrative Euro-customer clusters, consisting of aggregated groups of these markets, if they change their orientation and abandon their country for country focus. (See Exhibit 1.) The larger and medium-sized companies and alliances will aim at the larger and medium-sized mass (‘common’ needs) or niche (similar differentiated needs) clusters. The medium and smaller companies, as well as the self-employed innovative firms, will thus be able to service these firms or capture the smaller local or highly specialized markets, offering particular expertise, and products in small volumes.
Shifts in Criteria
Industrial
Purchasing
In addition to the reconfiguration of markets in general, there are some major shifts in industrial purchasing criteria which will influence the way in which corporations restructure. Some of the more important ones are cited below. (See Table 1.)
Table 1
Shifts in Industrial Buying Criteria
National Model
Pan-Europe Model
On-time
Speed Time to market
Responsiveness
Flexibility Any choice, any place, any time
Price Competitive (Domestic)
Low Delivered Pan-European
Product Specification
Total System Effectiveness Goods + Services
Professional Relationship
Partnership Strategic Relationships
Sales
Cost
Speed - Time Required to Reach the Market With customers increasingly pushing for speed, firms must organize and locate manufacturing and logistic operations close enough so that goods and support services reach their customers in the minimum response time. They also need locations with effective transportation and communication facilities and infrastructures.
Flexibility -
Any Time
Any Choice, Any Place,
In addition to wanting responsive suppliers, today’s customers demand more and more flexibility and need to be able to react instantly to changes in the market. They want maximum choice and variety with ever shorter lead times, increasingly ordering from, and for, anywhere in Europe. ‘On time’ is no longer enough. Buying goods and services ‘anytime’ is now as important. This requires innovative management information and delivery systems.
Old Target Focus
New Target Focus
Country
1
Country 2 Country 3 Country 4 Country 5
(
Euro-Cluster A Euro-Cluster B
!. u Euro-Cluster C Exhibit 1
Old and New Target Market Focus
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
57
A FRAMEWORK FOR CONSTRUCTING EURO-NETWORKS
Low Delivered Cost -
Pan-European
Being price competitive in a domestic sphere was always important and easy to predict. Today, the emphasis has shifted. Customers are buying in larger groups and quantities from single points; therefore, they expect better and equalized prices throughout Europe. In addition, delivered costs Europe-wide have become the issue, which makes the cost of getting it there quickly as important as the cost of the product itself.
Tofal System Effectiveness of Goods and Services
Combination
In the past, product specifications and costs largely dominated purchasing decisions. Decisions on location tended to be based on where the desired quality of labour material and infrastructure could be found at an acceptable cost. Today, however, customers want sophisticated combinations of goods and services. Application value and, therefore, local presence and accessibility to know-how and other services are now of highest importance.
Partnership-
Strategic Relationships
With customers demanding systems and application value rather than goods or services that simply conform to specifications, there is a shift in the role and relationship between suppliers and customers. Professional sales is becoming a relationship management function. Firms are making account management a focal point of strategies and thus structures. They find that customers ‘want to see one face’, and account managers are taking on this coordination role at a much more strategic level. Interdisciplinary teams of sales, technical service, design and development engineers are an important part of this new thrust.
Building Euro-Organizations Ever sensitive to national differences and management sensibilities, most European firms were (and many still are) modelled on a ‘federation’ of national companies or subsidiaries, operationally autonomous, run by a country head. Decisions were often based on what was good for individual countries rather than for Europe as a whole, which meant that facilities and resources were often wasted. Minimum emphasis was given to Europewide strategy, thinking or competitiveness. Coordination was the sole responsibility of the head office with its own, inevitably national bias. In the light of the changes and what is at stake, managers need to reconstruct their organizations. Given the expected market reconfigurations and industry concentrations, structure and location can no longer simply be tied to specific countries. Although each Eurocompany will ultimately find its own arrangement, the object is to shift the locus of value creation from individual countries to a Europe-wide decentralized network which is interconnected and interdependent, serving a Euro-wide market. Some activities will be 58
rationalized, others expanded. Some will be close to served markets, others not. All must be integrated on a local, regional and pan-European basis. Managers must be ultra-sensitive to costs but, at the same time, prepared to use innovative delivery systems, information networks and advanced manufacturing techniques to give the market what it wants - speed, flexibility, choice and a dedicated local presence to ensure responsiveness and ongoing relationships. Thus, for many, the challenge is how to build an organization which is both cost effective and relationship based, which produces mass modular products and services, yet can also deliver customized, localized outputs when and where relevant. What are the main elements of such a system? (See Exhibits 2 and 3.) By no means intended to be complete, the exhibits provide a starting point for thinking about how new Euro-wide organizational architecture may look if built around a hypothetical Euro-market. In the first map (Exhibit 2), the old format is shown, i.e. most of the elements, with the exception of Headquarters Manufacturing and Logistics, R&D, Sales and Services, appear in each served country. In the second map (Exhibit 3), the picture changes to a Euro-network with elements situated at different geo-levels, pan-European, regional and local. (A global level should be added but this would complicate the diagram.)
Criteria for Decisions on Location In the Euro-organizations of the future, location will be an important decision. However, the issue of location is not where firms should locate their organizations, but rather where each element of the system should go. There are some interesting trends beginning to emerge which should be considered: While most decisions will be fixed site locations, information technology will make mobile activities ever more feasible. Factories, decentralized workshop units, and service points will literally be moved to where and when the demand, needs or conditions prevail, and also goods will increasingly be made, assembled or customized en route. Remote location services will become more popular with advances in telecommunications, as will remote processing of ‘back office’ activities, with the advent of new global express parcel delivery. Formulae no longer involve either centralization or decentralization, but creative combinations of both, with coordination and integration the key to success. Integration must take place on a geographic as well as a functional basis. Structures will be increasingly flexible. For example, ‘Strategic Centres’ or ‘Support Centres’ known by many names such as ‘Centres of Excellence’, ‘Service Support Centres’, etc., will consist of individuals and units working from some central point on a Euro-wide basis, but available
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
A FRAMEWORK FOR CONSTRUCTING EURO-NETWORKS
Code:
0
Hypothetical national markets
6%
Headquarters
X
Manufacturing and Logistics
__
-r-J
R&D Sales n /
I
Exhibit 2
Services
Formal Old Euro-Organizations
-
Everything Everywhere
Code:
0
Hypothetical Euro-Customer
Cluster
6bHeadquarters q
Strategic & Support Groups
.
A/C Management
l
Exhibit 3
.
Format New Euro-Organizations -
whenever and wherever management and customers need them in a kind of ‘floating matrix’. Increasingly, advanced information networks make it feasible to access know-how and other
Sales
One Integrated System
l
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
services from individuals or groups ‘on-line’ OI both a Euro- and global basis. With time-based competition so critical and costl more critical, firms are likely to do much more sub 59
A FRAMEWORK FOR CONSTRUCTING EURO-NETWORKS
.
.
Major objectives for each element of the system must be set by individual firms according to their own products/markets circumstances. Then major selection criteria can be set. A general summary of the main criteria for location decisions for each of the elements is presented below. (See Table 2.) . .
R&D - where technical and living conditions prevail and where R&D talent exists; Manufacturing and Logistics - in areas where the infrastructure and utilities, quality and cost of materials, labour and transportation are in line with the objectives of the company, mobile decentralized units where and when practical; Account Management - centres (if not the offices and factories) where customers are making buying and other strategic decisions; Sales - local presence where buyers are located; Services - for instance Consulting and Know-how, Technical Maintenance and Support - locally where the market or key customers are situated.
contracting and outsourcing - thus the managers need to build a Euro-structure with these potential partners in mind. Environmentalism will result in moves to optimize product life and create self maintenance products, influencing the nature and location of service units. With new demographic trends, especially the dramatic decreases in young labour and new work values, where personnel want to live will become an increasingly relevant issue in network location decisions.
Headquarters - wherever a top management panEuro team can be best located; Strategic Groups and Support Cenfres - in fixed locations or mobile when and where prevailing conditions demand, in locations with good technical and information infrastructures, ease of communication and coordination with whole system and with a pool of management;
Table 2
Euro-Organizations: Location Levels
Major Objectives
Headquarters
Pan-Europe
. Pan-European . Integration
Pan-Europe Regional
The implications of a new unified European market are not all obvious. There will be social, political, and economic adjustments that will only be fully understood in time. What we do know is that firms both inside and outside Europe are making plans to seize new opportunities from what is one of the largest, most stable and wealthiest markets in the world. Those who persist in using the old, national model to capture these consumers will be at a disadvantage.
Some Major Criteria for Location Decisions
Key Elements System
Strategic Groups Support Centres
The Challenge Ahead for Managers
Main Criteria Selection
Top Team
whole system
. Accessibility, responsiveness . Coordiation with system
l
l
l l l
R&D
Pan-Europe
. Technological, technical excellence . Coordination, A/C mgt, sales support
Manufacturing and Logistics
Regional Local
l l l
. Maximize speed, flexibility, quality . Minimize cost . Coordination R&D, A/C mgt, sales support
l
l l l
Account Management
Pan-Europe Regional
. Ongoing customer involvement . Coordination whole system
Sales
Regional Local
. Maximize
relationships key local buyers . Coordination A/C mgt support
Services and Maintenance
Regional Local
. . . .
60
Service local served markets Maximize responsiveness, speed Coordination with support centre Coordination A/C mgt, sales
l
Locus accessibility management Euro-teams Infrastructure for coordination, integration, commuting Technical, information infrastructure Ease communication, commuting Availability management excellence Availability personnel Living conditions Technical, educational
infrastructure
Quality infrastructure, transportation, utilities Distance market Quality labour, materials, resources costs Locus key customers strategic decision making buying markets
and
l
Locations served key local buyers
and
l
Location SeNed markets, key customers and end users
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
A FRAMEWORK
Organizational and locational changes must be made according to the new picture of this market. Along with these changes, challenges. For example:
there will be other major
How to assess the profitability of customers on a pan-European rather than product or country basis. How to coordinate the information and people networks that provide the capacity to act and interact on a global, European, regional and local basis. How to overcome the inevitable resistance and fears, and convince management to be prepared to change and take the necessary risks. How to redefine the future role of the country manager, given the new regional emphasis. How to create a Euro-wide ‘Profit and Loss’ Account (P&L) responsibility, while matching it to incentive and motivation schemes. How to capitalize on existing skills and know-how while building a truly European board and management team. How to integrate the rest of Europe and Eastern Europe in this organization scheme.
FOR CONSTRUCTING
EURO-NETWORKS
Vandermerwe, Sandra, From Fragmentation to Integration: A Conceptual Pan-European Marketing Formula, European Management Journal, Vol. 7, No. 3, (1989), pp. 267-272. Vandermerwe, Sandra, Strategies for a Pan-European Market, Long Range Planning, Vol. 22, No. 3, (1989), pp. 45-53.
Note This paper is based on a presentation to the European League for Economic Cooperation (ELEC) Symposium on ‘Social Europe’, Utrecht, Holland, and is included in their proceedings.
Some American, Japanese and European companies have approached Europe as a whole for some time. Now, others have also begun, but most have a long way to go. It is important that firms (and governments) work at a reasonably uniform pace to build the infrastructures and organizations that will make a new and unified Europe work, both for customers and the corporations which serve them. They can only do this if they maximize their operations as a whole in one integrated pan-European network.
Bibliography Vandermerwe, Sandra, and L’Huillier, Marc-Andre, EuroConsumers in 1992, Business Horizons, Vol. 32, No. 1, (Jan-Feb. 1989), pp. 34-40.
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
SANDRA VANDERMERWE IMD International, P. 0. Box 915, CH-2001, Lausanne, Switzerland At present Dr Vandermenoe is Professor of international Marketing and Services at the international lnstitute for Management Development (IMD), Lausanne, Switzerland. Her special field of interest is marketled transformations. She initiated and directs 1MD’s Managing Services - a multifunctional two week programme. Recently her book ‘From Tin Soldiers To Russian Dolls - Creating Added Value Through Services ‘, dealing with the role of services in corporate strategic development, was published by Butterworth-Heinemann, in 1993. Prof. Vandermenoe is well known for her challenging views in the field of pan-Europeanization, changes in customer values and market-led strategies. She teaches and consults widely and writes for several journals worldwide. She is an Associate Editor for the European Management Journal. An lrish citizen, she lives with her husband Andre and two children Eamma and Meg in Morges, Switzerland.
61
02632373193 $6.00 + 0.00. 0 1993 Pergamon Press Ltd.
1993.
A Frameworkfor Constructing Euro-networks SANDRA VANDERMERWE, Professor of International International, Lausanne, Switzerland
Firms operating transnationally in Europe must restructure to become Euro-organizations if they are to succeed in the future. Using the old, national model to capture consumers is a competitive disadvantage nowadays. Sandra Vandermerwe offers a framework for this Euro-structuring to take place. The base line is understanding future Euro-customers. Euroconsumer clusters are emerging and need to be identified; there are major shifts occurring in industrial purchasing criteria; suppliers and customers are entering new relationships; Europewide decentralized networks are the new corporate structure; and firms will locate according to where each element of the system belongs best. Managers must strive for an integrated pan-European network of operations if they are to succeed in the new unified Europe. From computer companies to auditing firms, chemical manufacturers to retail distributors, the question is the same: what will future Euro-organizations look like? How will they be structured, and why? As of yet there are no neat solutions or formulae which answer these questions. The purpose of this article is to offer a conceptual framework which managers may find useful in meeting their challenge. What we do know is that domestic setups are redundant. Why? On the business-to-business front, customers want pan-European goods with consistent service from country-to-country. Thanks to Euro-wide mass media, end users see TV and print commercials for consumer products and services and expect to find them where they live and work. In any event, firms operating transnationally in Europe find that domestic structures are costly, leading to duplications in manufacturing, marketing, logistics, purchasing, and human resources - duplications which they can ill afford in today’s climate. Euro-structuring
is however easier said than done. For
Marketing and Services, IMD
the transformations strike at the very heart of traditional country management autonomy, recarving territories, redistributing customers and responsibilities, and redefining performance criteria and reward systems. It also calls for more than the physical structural changes. Managers will have to make a mental leap away from the model which sought to maximize the results of each country’s business operation, to one which realizes the potential of the system as a whole.
Beginning With The Customer Euro-structures begin with one fundamental principle: decisions about organizing start with a profound understanding of customers: who they are, where they are located and how they can best be served. With the advent of the new Single Market and the political, social and technological changes being witnessed in Europe, some old questions about customers require new answers. Who are the future Euro-customers, both industrial and consumer? What drives their purchasing decisions? Where are they geographically clustered? How can we reconfigurate the new market into some meaningful format? And, finally, how do we create organizations that get to these customers in a cost effective manner and evoke the desired response from them? To make matters still more complex, this issue, though European, in reality requires that decisions be made in a global context. European plans and objectives must clearly be harmonized to fit the wider global arena. For even if a firm intends to confine its operations to Europe, the chances are that both its competitors and its customers will be taking a broader perspective. In the Europe of yesteryear, traditional geo-political and cultural barriers separated markets and dictated the construction and architecture of corporations. We believed, and probably rightly so, that customers differed radically from boundary to boundary, region to region, area to area, location to location. In those days, manufacturing techniques could not offer the flexible alternatives they can today, information technology did not exist to
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
55
A FRAMEWORK FOR CONSTRUCTING EURO-NETWORKS
eliminate the constraints of time, space and distance. Organizations were designed around fine and specific differences in the tastes, preferences and buying criteria of national customers whom they faithfully served in their own geographic area. In any event, at that time, technical obstacles prevented goods and services made in one country from competing in another without costly modification.
national’ and ‘European’ customers, who identify with pan-European brands and universal concepts, are willing to use information technology and, through the data at their disposal, are able to make better choices about what to buy and from whom. They also want price parities, greater variety and better, more consistent service. This ‘melting pot’ effect is of course in line with global trends elsewhere in the industrialized world,
These barriers and the assumptions underlying them are gradually falling away. The new European market (to say nothing of the addition of the former Eastern Europe) is destined to be one of the most lucrative in the industrialized world. The present EC alone is thirty per cent bigger than the US and almost three times the size of Japan, and Europe has become a target for American, Japanese and European multinationals (and others) that want to muscle in and gain the economies of scale and strategic presence that will improve their international competitive position.
The real issue, though, is to what extent the new single market will be ‘one’ market, or if differences among national consumers will persist? Will consumers’ needs have enough in common to enable firms to take advantage of scale economies? Will there be sufficient similarity so that firms can adapt products and services, as well as offer customized regional and local variations, in the same way that firms such as Benetton, to name one, have done for years, treating Europe as one market? Can firms creatively find a way to avoid duplication of energy, time and resources by centralizing some activities while at the same time providing the input and services needed locally to retain their customer base?
The firms that thrive will first have to wrestle with some complex issues such as: . . . .
which new Euro-markets to serve (as opposed to countries); where to set up operations (regionally and locally); how to organize and coordinate activities (between the countries involved); how to reorientate their people and incentives (for a pan-European result).
The Emergence Clusters
of Euro-consumer
Managers need a new picture of the European market before they can decide what new Euro-markets to serve. The convergences taking place among businesses - for instance, between manufacturers and distributors, manufacturers and suppliers, and firms both in services and goods and their customers - is actually changing the very nature of the traditional marketplace. Business customers are forming several collaborative alliances (including buying) which, by stretching across traditional national and competitive borders, have altered the economic balance of power. Firms are also centralizing their buying activities. Whereas purchases were previously done locally, now more and more firms source from one strategic centre for the whole of Europe, if not the world. Information technology has made it easier for both firms and individuals to do this cross border buying. Remote technological infrastructures enable interface between firms and their users without face-to-face contact. And a generally heightened awareness through information has given customers more choice and clout. Formerly fragmented and confined, end-user national consumer market segments are thus converging to become a new vibrant pan-European geographic and economic market power. Increasingly, they are ‘Inter56
As regulatory barriers crumble and demarcation lines disappear, consumers, suppliers, competitors, and the goods and services they produce, will be contained in a very different geographic and economic space. Managers must replace their old view of this marketplace with something fresh and new. Only by searching for a new conceptual framework can they begin to figure out how the new Euro-market will configurate. Instead of either one, single homogeneous market or a collection of small specialized markets, the most likely model for the future mass Europe is a market system consisting of regional Euro-clusters with customers geographically close but not necessarily living in the same country. They will have the same or similar economic demographic and/or lifestyle characteristics, which cut across cultural and national boundaries, and they will display similar needs and purchasing behaviour. Differences among customers will exist but will not be nationally determined. In fact, consumers in a cluster will be closer to each other in their purchasing tastes and behaviour than to consumers with the same national origin. The market, including the end users, as well as the manufacturers, intermediate firms and retailers that serve them, will thus change from a culturally complex set of national units to a new, equally complex market system based on similarities rather than differences consisting of: .
Groups of regional mass clusters (large and mediumsized groups made up of consumers with ‘common’ needs). When aggregated, these groups make up the mass Euro-market in a given product or service category. This will be a huge growth market in industries where country differences have historically been high.
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
A FRAMEWORK FOR CONSTRUCTING EURO-NETWORKS
.
.
Groups of regional niche clusters (large and mediumsized groups, probably the biggest market, made up of consumers with similar but somewhat differentiated needs). When aggregated, these groups make up the regional Euro-markets in a given product or service category. Local and specialized clusters (small-sized groups with highly specialized needs). Offerings cater to locality, lifestyle, and industry differences or specialized applications. The conservative localized end of this market will largely fade away over time.
Opportunities will thus exist for firms to target the lucrative Euro-customer clusters, consisting of aggregated groups of these markets, if they change their orientation and abandon their country for country focus. (See Exhibit 1.) The larger and medium-sized companies and alliances will aim at the larger and medium-sized mass (‘common’ needs) or niche (similar differentiated needs) clusters. The medium and smaller companies, as well as the self-employed innovative firms, will thus be able to service these firms or capture the smaller local or highly specialized markets, offering particular expertise, and products in small volumes.
Shifts in Criteria
Industrial
Purchasing
In addition to the reconfiguration of markets in general, there are some major shifts in industrial purchasing criteria which will influence the way in which corporations restructure. Some of the more important ones are cited below. (See Table 1.)
Table 1
Shifts in Industrial Buying Criteria
National Model
Pan-Europe Model
On-time
Speed Time to market
Responsiveness
Flexibility Any choice, any place, any time
Price Competitive (Domestic)
Low Delivered Pan-European
Product Specification
Total System Effectiveness Goods + Services
Professional Relationship
Partnership Strategic Relationships
Sales
Cost
Speed - Time Required to Reach the Market With customers increasingly pushing for speed, firms must organize and locate manufacturing and logistic operations close enough so that goods and support services reach their customers in the minimum response time. They also need locations with effective transportation and communication facilities and infrastructures.
Flexibility -
Any Time
Any Choice, Any Place,
In addition to wanting responsive suppliers, today’s customers demand more and more flexibility and need to be able to react instantly to changes in the market. They want maximum choice and variety with ever shorter lead times, increasingly ordering from, and for, anywhere in Europe. ‘On time’ is no longer enough. Buying goods and services ‘anytime’ is now as important. This requires innovative management information and delivery systems.
Old Target Focus
New Target Focus
Country
1
Country 2 Country 3 Country 4 Country 5
(
Euro-Cluster A Euro-Cluster B
!. u Euro-Cluster C Exhibit 1
Old and New Target Market Focus
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
57
A FRAMEWORK FOR CONSTRUCTING EURO-NETWORKS
Low Delivered Cost -
Pan-European
Being price competitive in a domestic sphere was always important and easy to predict. Today, the emphasis has shifted. Customers are buying in larger groups and quantities from single points; therefore, they expect better and equalized prices throughout Europe. In addition, delivered costs Europe-wide have become the issue, which makes the cost of getting it there quickly as important as the cost of the product itself.
Tofal System Effectiveness of Goods and Services
Combination
In the past, product specifications and costs largely dominated purchasing decisions. Decisions on location tended to be based on where the desired quality of labour material and infrastructure could be found at an acceptable cost. Today, however, customers want sophisticated combinations of goods and services. Application value and, therefore, local presence and accessibility to know-how and other services are now of highest importance.
Partnership-
Strategic Relationships
With customers demanding systems and application value rather than goods or services that simply conform to specifications, there is a shift in the role and relationship between suppliers and customers. Professional sales is becoming a relationship management function. Firms are making account management a focal point of strategies and thus structures. They find that customers ‘want to see one face’, and account managers are taking on this coordination role at a much more strategic level. Interdisciplinary teams of sales, technical service, design and development engineers are an important part of this new thrust.
Building Euro-Organizations Ever sensitive to national differences and management sensibilities, most European firms were (and many still are) modelled on a ‘federation’ of national companies or subsidiaries, operationally autonomous, run by a country head. Decisions were often based on what was good for individual countries rather than for Europe as a whole, which meant that facilities and resources were often wasted. Minimum emphasis was given to Europewide strategy, thinking or competitiveness. Coordination was the sole responsibility of the head office with its own, inevitably national bias. In the light of the changes and what is at stake, managers need to reconstruct their organizations. Given the expected market reconfigurations and industry concentrations, structure and location can no longer simply be tied to specific countries. Although each Eurocompany will ultimately find its own arrangement, the object is to shift the locus of value creation from individual countries to a Europe-wide decentralized network which is interconnected and interdependent, serving a Euro-wide market. Some activities will be 58
rationalized, others expanded. Some will be close to served markets, others not. All must be integrated on a local, regional and pan-European basis. Managers must be ultra-sensitive to costs but, at the same time, prepared to use innovative delivery systems, information networks and advanced manufacturing techniques to give the market what it wants - speed, flexibility, choice and a dedicated local presence to ensure responsiveness and ongoing relationships. Thus, for many, the challenge is how to build an organization which is both cost effective and relationship based, which produces mass modular products and services, yet can also deliver customized, localized outputs when and where relevant. What are the main elements of such a system? (See Exhibits 2 and 3.) By no means intended to be complete, the exhibits provide a starting point for thinking about how new Euro-wide organizational architecture may look if built around a hypothetical Euro-market. In the first map (Exhibit 2), the old format is shown, i.e. most of the elements, with the exception of Headquarters Manufacturing and Logistics, R&D, Sales and Services, appear in each served country. In the second map (Exhibit 3), the picture changes to a Euro-network with elements situated at different geo-levels, pan-European, regional and local. (A global level should be added but this would complicate the diagram.)
Criteria for Decisions on Location In the Euro-organizations of the future, location will be an important decision. However, the issue of location is not where firms should locate their organizations, but rather where each element of the system should go. There are some interesting trends beginning to emerge which should be considered: While most decisions will be fixed site locations, information technology will make mobile activities ever more feasible. Factories, decentralized workshop units, and service points will literally be moved to where and when the demand, needs or conditions prevail, and also goods will increasingly be made, assembled or customized en route. Remote location services will become more popular with advances in telecommunications, as will remote processing of ‘back office’ activities, with the advent of new global express parcel delivery. Formulae no longer involve either centralization or decentralization, but creative combinations of both, with coordination and integration the key to success. Integration must take place on a geographic as well as a functional basis. Structures will be increasingly flexible. For example, ‘Strategic Centres’ or ‘Support Centres’ known by many names such as ‘Centres of Excellence’, ‘Service Support Centres’, etc., will consist of individuals and units working from some central point on a Euro-wide basis, but available
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
A FRAMEWORK FOR CONSTRUCTING EURO-NETWORKS
Code:
0
Hypothetical national markets
6%
Headquarters
X
Manufacturing and Logistics
__
-r-J
R&D Sales n /
I
Exhibit 2
Services
Formal Old Euro-Organizations
-
Everything Everywhere
Code:
0
Hypothetical Euro-Customer
Cluster
6bHeadquarters q
Strategic & Support Groups
.
A/C Management
l
Exhibit 3
.
Format New Euro-Organizations -
whenever and wherever management and customers need them in a kind of ‘floating matrix’. Increasingly, advanced information networks make it feasible to access know-how and other
Sales
One Integrated System
l
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
services from individuals or groups ‘on-line’ OI both a Euro- and global basis. With time-based competition so critical and costl more critical, firms are likely to do much more sub 59
A FRAMEWORK FOR CONSTRUCTING EURO-NETWORKS
.
.
Major objectives for each element of the system must be set by individual firms according to their own products/markets circumstances. Then major selection criteria can be set. A general summary of the main criteria for location decisions for each of the elements is presented below. (See Table 2.) . .
R&D - where technical and living conditions prevail and where R&D talent exists; Manufacturing and Logistics - in areas where the infrastructure and utilities, quality and cost of materials, labour and transportation are in line with the objectives of the company, mobile decentralized units where and when practical; Account Management - centres (if not the offices and factories) where customers are making buying and other strategic decisions; Sales - local presence where buyers are located; Services - for instance Consulting and Know-how, Technical Maintenance and Support - locally where the market or key customers are situated.
contracting and outsourcing - thus the managers need to build a Euro-structure with these potential partners in mind. Environmentalism will result in moves to optimize product life and create self maintenance products, influencing the nature and location of service units. With new demographic trends, especially the dramatic decreases in young labour and new work values, where personnel want to live will become an increasingly relevant issue in network location decisions.
Headquarters - wherever a top management panEuro team can be best located; Strategic Groups and Support Cenfres - in fixed locations or mobile when and where prevailing conditions demand, in locations with good technical and information infrastructures, ease of communication and coordination with whole system and with a pool of management;
Table 2
Euro-Organizations: Location Levels
Major Objectives
Headquarters
Pan-Europe
. Pan-European . Integration
Pan-Europe Regional
The implications of a new unified European market are not all obvious. There will be social, political, and economic adjustments that will only be fully understood in time. What we do know is that firms both inside and outside Europe are making plans to seize new opportunities from what is one of the largest, most stable and wealthiest markets in the world. Those who persist in using the old, national model to capture these consumers will be at a disadvantage.
Some Major Criteria for Location Decisions
Key Elements System
Strategic Groups Support Centres
The Challenge Ahead for Managers
Main Criteria Selection
Top Team
whole system
. Accessibility, responsiveness . Coordiation with system
l
l
l l l
R&D
Pan-Europe
. Technological, technical excellence . Coordination, A/C mgt, sales support
Manufacturing and Logistics
Regional Local
l l l
. Maximize speed, flexibility, quality . Minimize cost . Coordination R&D, A/C mgt, sales support
l
l l l
Account Management
Pan-Europe Regional
. Ongoing customer involvement . Coordination whole system
Sales
Regional Local
. Maximize
relationships key local buyers . Coordination A/C mgt support
Services and Maintenance
Regional Local
. . . .
60
Service local served markets Maximize responsiveness, speed Coordination with support centre Coordination A/C mgt, sales
l
Locus accessibility management Euro-teams Infrastructure for coordination, integration, commuting Technical, information infrastructure Ease communication, commuting Availability management excellence Availability personnel Living conditions Technical, educational
infrastructure
Quality infrastructure, transportation, utilities Distance market Quality labour, materials, resources costs Locus key customers strategic decision making buying markets
and
l
Locations served key local buyers
and
l
Location SeNed markets, key customers and end users
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
A FRAMEWORK
Organizational and locational changes must be made according to the new picture of this market. Along with these changes, challenges. For example:
there will be other major
How to assess the profitability of customers on a pan-European rather than product or country basis. How to coordinate the information and people networks that provide the capacity to act and interact on a global, European, regional and local basis. How to overcome the inevitable resistance and fears, and convince management to be prepared to change and take the necessary risks. How to redefine the future role of the country manager, given the new regional emphasis. How to create a Euro-wide ‘Profit and Loss’ Account (P&L) responsibility, while matching it to incentive and motivation schemes. How to capitalize on existing skills and know-how while building a truly European board and management team. How to integrate the rest of Europe and Eastern Europe in this organization scheme.
FOR CONSTRUCTING
EURO-NETWORKS
Vandermerwe, Sandra, From Fragmentation to Integration: A Conceptual Pan-European Marketing Formula, European Management Journal, Vol. 7, No. 3, (1989), pp. 267-272. Vandermerwe, Sandra, Strategies for a Pan-European Market, Long Range Planning, Vol. 22, No. 3, (1989), pp. 45-53.
Note This paper is based on a presentation to the European League for Economic Cooperation (ELEC) Symposium on ‘Social Europe’, Utrecht, Holland, and is included in their proceedings.
Some American, Japanese and European companies have approached Europe as a whole for some time. Now, others have also begun, but most have a long way to go. It is important that firms (and governments) work at a reasonably uniform pace to build the infrastructures and organizations that will make a new and unified Europe work, both for customers and the corporations which serve them. They can only do this if they maximize their operations as a whole in one integrated pan-European network.
Bibliography Vandermerwe, Sandra, and L’Huillier, Marc-Andre, EuroConsumers in 1992, Business Horizons, Vol. 32, No. 1, (Jan-Feb. 1989), pp. 34-40.
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 1 March 1993
SANDRA VANDERMERWE IMD International, P. 0. Box 915, CH-2001, Lausanne, Switzerland At present Dr Vandermenoe is Professor of international Marketing and Services at the international lnstitute for Management Development (IMD), Lausanne, Switzerland. Her special field of interest is marketled transformations. She initiated and directs 1MD’s Managing Services - a multifunctional two week programme. Recently her book ‘From Tin Soldiers To Russian Dolls - Creating Added Value Through Services ‘, dealing with the role of services in corporate strategic development, was published by Butterworth-Heinemann, in 1993. Prof. Vandermenoe is well known for her challenging views in the field of pan-Europeanization, changes in customer values and market-led strategies. She teaches and consults widely and writes for several journals worldwide. She is an Associate Editor for the European Management Journal. An lrish citizen, she lives with her husband Andre and two children Eamma and Meg in Morges, Switzerland.
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