Strategy

Many Western managers were introduced to lean production in 1990, with publication of The Machine That Changed the World, based on a five-year study of Toyota by MIT's International Motor Vehicle Program. Since then, thousands of managers have been drawn to the principles of lean management as a way to achieve faster cycle times, reduced defect rates and sharp gains in on-time deliveries. Lean management permits a marked reduction in inventory levels required across the supply chain. These changes should result in better financial performance, especially because companies achieve simultaneous declines in manufacturing and service costs. But, as the authors point out, the transition takes time, and it is full of obstacles. One of the biggest and most predictable hurdles is the crisis in confidence that occurs when management isn't able to improve financial performance quickly enough. Lean transformations generally have short-term adverse impacts on the company's bottom line (that is, things get worse before better). Management needs to anticipate these challenges and explain them clearly. To help managers overcome the financial hurdles on the path to lean, the authors offer new tools for anticipating the deterioration in financial performance that invariably occurs as a mass producer goes lean and for understanding the real performance improvements that take place during this period. Their approach, which they call "value-stream accounting," helps managers plan for the short-term financial impact, monitor progress, understand the operational improvements and develop strategies to maximize the longer-term benefit. Traditional accounting systems are not designed to show the causes of adverse impacts or reveal the future benefits that will accrue from improved operational processes. Managers need to understand that the "bad" news isn't really bad -- it's part of the necessary process of establishing a stronger, more productive organization. The authors' approach replaces the traditional cost-accounting system with a transparent accounting system that tracks the company's value streams, which incorporate all of the value-adding and non-value-adding activities required to bring a product or service from start to finish.

In recent years, researchers and consultants have advanced a number of customer metrics to explain the connections between customer behavior and growth. But these efforts have generated more smoke than heat. Despite claims to the contrary, the authors argue that the most popular metrics have shown only modest correlations to growth. None of them have shown themselves to be universally effective across all competitive environments. Early customer metrics tried to explain why people buy. To many companies, it came down to marketing. Yet, as the authors explain, the issues that affect customer loyalty are complex and go beyond standard marketing. This gave rise to a new category of metrics aimed at understanding the customer experience. Although managers have learned a lot about the components of service quality (including reliability, responsiveness and empathy), the approach doesn't point managers to specific actions they can take. Beginning in the 1990s, many managers began paying closer attention to customer retention -- in particular, understanding what makes for dissatisfaction and satisfaction. But as the authors note, the linkages among satisfaction, customer behavior and positive financial outcomes have been modest. Today's most popular metric, the Net Promoter Score, focuses on how customer word of mouth -- both negative and positive -- can advance growth. Developed by Bain & Company Inc. consultant Fred Reichheld, it claims the ability to predict future growth from customer replies to one question: "How likely is it that you would recommend this company to a friend or colleague?" The authors found that the linkage between the Net Promoter Score and subsequent customer behavior was modest at best; models based on multiple variables consistently outperformed models based on Net Performer. The authors are skeptical that there can be a single metric that reduces complex, multifaceted constructs to one or two dimensions; if there is, they write, "there's a good chance it will ignore one or more important aspects of the equation."

In global supply chains, managers have consistently struggled with sharing valuable knowledge with buyers and suppliers across borders. Increasingly, talk of the "dark side" of collaborative relationships has left managers wondering who benefits most from knowledge-sharing activities: their companies or their partners. In order to find the answers to these questions, the authors conducted an in-depth study of more than 100 cross-national supply chain partnerships in the industrial chemicals, consumer durables, industrial packaging, toy and apparel industries in multiple locations in 19 countries. Knowledge sharing encompasses the sharing of information, but it doesn't stop there. Much of the information that companies share -- data on inventory levels, sales, production schedules and prices -- is easy to codify and transmit. But other types of knowledge are more difficult to codify: know-how, managerial and communication skills, and organizational memory. Intercompany knowledge sharing is a joint activity between supply-chain partners; the parties share knowledge and then jointly interpret and integrate it into a relationship-domain-specific memory that influences relationship-specific behavior. The authors found three types of knowledge sharing within the supply chain, each offering distinct benefits to buyers and suppliers: information sharing, joint sense making and knowledge integration. They also found that no matter how "diverse" the home cultures of the buyer and supplier companies, these differences had no impact on the propensity to share knowledge. Drawing on examples from the auto (Toyota), aerospace (Boeing, Lockheed Martin and United Technologies) and toy industries, they examine how different types of knowledge sharing can benefit buyers or sellers individually, but more importantly, how it can enhance the performance of the partnership as a whole. They conclude that, while suppliers generally benefit more from knowledge-sharing activities, both buyers and suppliers profit; understanding the benefits of absolute versus relative gains is critical when building world-class global supply chains. Sharing knowledge effectively means understanding that a disparity in benefits is part of what it takes to build partnerships that last.

Asia, Latin America and Eastern Europe are delivering strong revenue and profit growth.

Strategy is a mechanism through which a company makes sense of the world around it. It is a collection of ideas about how the company intends to win, the source code upon which everything else depends. Because strategy can only capture a company's best thinking at a given point in time, the author argues that strategy, much like a software program, needs to be updated and refined as people gain new experience and knowledge. With traditional approaches to strategy development, the author argues, planning is optimized for the original targets; it is difficult to change directions once implementation is under way. Adaptive processes, by contrast, help companies create and adapt strategy quickly and iteratively, so that people can effectively triage issues and allocate resources in changing environments; they are optimized to identify the best ideas and to ensure that individuals throughout the organization have access to the latest version so that everyday actions can be aligned with the most important strategic insights. Since people throughout the organization play roles in the company's strategic success, strategy development needs to tap into ideas from everywhere. This requires opening up the process to people throughout the organization, permitting extensive face-to-face collaboration, and arranging for individuals other than senior executives to facilitate important strategic discussions. Drawing extensive comparisons with software development and using examples from companies including Metrowerks and Shamrock Foods Co., the author focuses on three major themes: having an iterative, or "spiral," approach versus a linear approach; organizing the strategy-making process around people rather than processes; and the recognition that in strategy there is no such thing as a "silver bullet." Most managers operate in settings that are too dynamic and complex for simple success recipes. Instead of seeking long-term sustainable advantage, good managers need to create sustaining advantages on an ongoing basis.

The dangers associated with China’s ascendance are exaggerated.

Competing in China is the only option for multinationals that want to build or preserve their global position.

Does vertical integration make sense, particularly when an industry is moving offshore to regions of cheaper labor?

International arrangements require more formal mechanisms.