Articles

For companies considering offshoring, there are dangers in taking too narrow a geographical view, say the authors. Every country presents a different mix of strengths and weaknesses. One country may, for instance, have very low labor costs but a high degree of political instability and a small domestic market. Another might offer a wealth of engineering talent but quickly rising labor rates. A third may have robust local markets but intrusive regulatory regimes and a weak transport infrastructure. Currency fluctuations may unexpectedly swell the costs of sourcing from one country, for instance, or a natural disaster may wreak havoc on a critical source of supplies. The authors suggest that offshoring is no different from any investment program that involves choices with widely divergent cost and benefit characteristics in that it makes sense to create a portfolio that balances risk and reward over both the short and long terms. Their research, canvassing 138 manufacturing executives in sectors ranging from automotive to consumer products to technology, confirms the wisdom of a portfolio approach. It reveals that while many companies confine their offshoring efforts to China and India, 96% of cost leaders are active in countries beyond those two, and nearly half of the leaders have offshore activities in three or more additional countries. The authors illustrate their argument with a description of the global outsourcing portfolio strategy of U.S.-based conglomerate Emerson Electric. They conclude with a brief discussion of a number of practical steps executives can take to ensure that their portfolios are constructed successfully.

INTELLIGENCE: RESEARCH BRIEF: Vigilance is the key to avoiding potential organizational nightmares.

How a textile manufacturer balances cost cutting with mass customization in its domestic facility.

Utopian visions of frictionless, knowledge-sharing, global supply chains are somewhat overstated.

In an attempt to increase both efficiency and service quality, more and more companies are outsourcing to third-party suppliers some key business processes, such as human resources, information technology and procurement. The universe of potential suppliers is diverse and growing, made up of locally based specialists, offshore providers with comparatively low labor costs, and global suppliers who are able to apply sophisticated management techniques and technology. The challenge for clients is to understand their own requirements and to identify providers whose capabilities and objectives are best aligned with their particular needs. Drawing on extensive research, the authors identify three potentially critical areas of supplier competency: delivery competency, transformation competency and relationship competency. Within that context, they discuss 12 capabilities through examples drawn from the outsourcing experiences of firms such as BAE Systems, Lloyd's of London, Deutsche Bank and Bank of America. By benchmarking supplier capabilities against its strategic and operational intent, a company can work to establish relationships that support its business objectives.

People categorize themselves on the basis of demographics, social roles and shared consumption patterns, and these various identities are both numerous and fluid, changing over an individual's lifetime and across situations. That fact is not fully recognized by traditional demographic and psychographic techniques, and the labels that consumers use to define who they are do not necessarily correspond to the variables that marketers typically rely on. A new approach -- identity marketing -- better captures the complex process of how people's sense of who they are influences their purchase decisions. To be sure, the complexity of identity-based judgments presents both opportunities and obstacles for marketers, but companies often fail to appreciate this. In fact, many marketing blunders can be traced back to a fundamental misunderstanding of customer identity. Common mistakes include the following: (1) selling new products solely on their features, (2) failing to solidify first-mover advantage, (3) fighting the competition head-on, (4) sticking with what's worked before, (5) underestimating low-involvement products, and (6) attacking negative word-of-mouth. Identity marketing helps companies avoid such mistakes by providing a deeper understanding of how customers become strongly attracted to the brands and products that are linked to their multiple -- and sometimes seemingly contradictory -- identities.

Forming close relationships with suppliers or customers is a popular business strategy, but such partnerships can develop problems. The authors observe that many close business relationships -- whether joint ventures or loose alliances -- fail. They describe a phenomenon they call the "dark side" of close relationships and maintain that close relationships that seem quite stable can, in fact, be vulnerable to decline and destruction. The authors draw both on their own surveys of business relationships and on other examples. The authors point out that the same factors that strengthen a partnership can also open the door to relationship problems. For example, when an automaker and a supplier built up personal relationships between employees at the two firms to facilitate their alliance and just-in-time manufacturing process, the trust and personal relationships also enabled the supplier more easily to cut corners in the production process. While observing that business relationships with problems can linger on for a surprisingly long time, the authors recommend strategies to prevent the "dark side" from taking over a business relationship. One such strategy is to ensure that both parties in the relationship make investments in it, in effect swapping "mutual hostages." If, however, damage to the relationship has already occurred, possible strategies include turning the crisis into an opportunity to improve the partnership, rotating in new personnel, reconfiguring the relationship or terminating it.

Information technology is undergoing an inexorable shift from being an asset that companies own -- in the form of computers, software and myriad related components -- to being a service that they purchase from utility providers. Three technological advances are enabling this change: virtualization, grid computing and Web services. Virtualization erases the differences between proprietary computing platforms, enabling applications designed to run on one operating system to be deployed elsewhere. Grid computing allows large numbers of hardware components, such as servers or disk drives, to effectively act as a single device, pooling their capacity and allocating it automatically to different jobs. Web services standardize the interfaces between applications, turning them into modules that can be assembled and disassembled easily. The resulting industry will likely have three major components. At the center will be the IT utilities themselves -- big companies that will maintain core computing resources in central plants and distribute them to end users. Serving the utilities will be a diverse array of component suppliers -- the makers of computers, storage units, networking gear, operating and utility software, and applications. And finally, large network operators will maintain the ultrahigh-capacity data communication lines needed for the system to work. IT's shift from an in-house capital asset to a centralized utility service will overturn strategic and operating assumptions, alter industrial economics, upset markets and pose daunting challenges to every user and vendor. The history of the commercial application of IT has been characterized by astounding leaps, but nothing that has come before -- not even the introduction of the personal computer or the opening of the Internet -- will match the upheaval that lies just over the horizon.

All executives have two basic drives: to add value to products or services, and to deploy resources with a certain amount of efficiency. The first drive can be inferred by a business's gross margin and the second by its relative indirect expenses. Together, the two numbers constitute an executive's "financial signature." There are four extreme categories of signatures: (1) gross margin and expenses are both high, (2) high gross margin and low expenses, (3) low gross margin and high expenses, and (4) gross margin and expenses are both low. The categories are labeled "venture capitalist," "buccaneer," "mercantilist" and "discounter," respectively, and each has a characteristic set of financial behaviors. Certain financial signatures are best suited for particular industries. Mercantilists, for example, are ideal for commodity markets with high fixed costs. Moreover, companies might need executives with different financial signatures at various stages in their life cycle. A startup, for instance, might be better off with a venture capitalist at the helm. Later, that same firm might need to fill its executive suites with discounters. No matter how capable the leader, a mismatch between an organization's requirements and the actual financial signature of its CEO can lead to management problems, possibly even to company failure.

Corporate social responsibility has become a vital part of the business conversation. The issue for most companies is no longer whether to engage in socially responsible activities but how to achieve the maximum benefit from the resources available for social projects while still increasing shareholder value. In this article, the authors draw on years of quantitative and case-based studies of major corporations to conclude that CSR activities work best for society and the corporate participants when they are managed strategically and in collaboration with an array of commercial and noncommercial partners. The authors cite exemplars such as Avon Products, whose name is synonymous with responses to women's healthcare issues, and The Home Depot, whose foundation involves suppliers and government agencies in large-scale efforts to combat housing problems in the United States. The authors point to five core principles behind effective CSR strategies, from the need to contribute "what we do" to the importance of accommodating government's regulatory and taxation influences.