Resiliency: The Necessity
Looking beyond technical and technological advancement, this Article deals with crucial element of economic inclusion without which the business case can never be complete. Aligning economic parameters with business main stream to work out for improved performance is a necessity. The technology is useful only if it is utilized to meet the purpose.
This article is suitable for Business Leaders, CXOs, ROI Concerns, Policy & Decision Makers and all futuristic Leaders.
Business Leaders worldwide expect their organization to capture competitive advantage…. Globalization & Digitization has pushed the organization in a direction that represents new normal of uncertainty… Survival or growth of enterprise depends on capacity to generate wealth across value chain.
Sustainability is rapidly becoming a strategic priority for businesses. The evidence that sustainability is becoming a core consideration for successful businesses around the world grows stronger with ever changing macroeconomic developments. Business environment is becoming more complex and fast moving than ever. Successful beacons are taking necessary corrective action to align with changing world.
In VUCA World, given rise in intense competition, business is at war today. Conventional way of doing business need to be reworked from 21st Century Business perspective.
This article examines the drivers and implications of ever changing macroeconomic changes and defines framework of evolution for industrial architecture.
The Revolution
For 20 years or more we have recognized, the way we do business has serious impacts on the world around us. Now it is increasingly clear that the state of the world around us affects the way we do business. The organizations need to understand the forces that drive their market and impact their profitability & the sustainability in the medium to long term. Knowing what those effects will be and how business can manage them successfully means developing a sophisticated understanding of these factors and how they work. The challenges thrown up by unwanted changes were set against a competitive landscape that had also rapidly and radically reshaping us. us Competition has been coming from new and previously unseen sources. To survive businesses saw alignment across the supply chain, adopting flexible supply chain that became extremely essential. This has seriously impacted the value chain that has been ignored across industries to deeply and adversely impact economies and economic entities across nations.
Let us examine where we went wrong!
Chinese Factor
The economic wisdom is rooted in a profound understanding of the relationships that exist between different orders of law that operate within an economic community. It is above the man-made laws and regulations that societies develop themselves; there are laws of nature that operate by virtue of the individual and social nature of human beings and human societies. It can be seen, in the same way that an artisan needs to take into account those laws of nature that operate to limit his artefacts, it is necessary for Organisations & Governments to take certain ‘natural laws’ into account when devising particular socio/economic arrangements.
Wisdom lies in going by the rules of the world and various laws of economics. Trying to rule the world with our own rules will have devastating effect as has been the case with Chinese Economy. Corona Virus may be the excuse to initiate action by global majors against China, it is the outburst of retribution what China have been doing for the decades.
China has taken undue advantage of Globalisation and WTA. Both the global policies were designed to bring adherence & cohesive measures within developed and developing countries for inclusive growth. But Chinese action to derive benefit for being superpower has resulted into rise in income inequality, protectionism, creating differences between countries, disturbing global peace etc. Most of countries have started reemploying duties to safeguard their industries and the national income challenging globalisation.
However, for the lust of power Chinese move were against well established laws of economics that has to reciprocate some day. Effort to re-write laws by Xi Jinping has gone against him and the country. Through this article effort has been made to expose those wrongs for better awareness by respective countries and economic entities and take precautionary measures in designing their cost structure based on economic principles for sustenance and inclusive growth.
Dream of Superpower
Prior to the initiation of economic reforms and trade liberalization nearly 40 years ago, China maintained policies that kept the economy very poor, stagnant, centrally controlled, vastly inefficient, and relatively isolated from the global economy. Since opening up to foreign trade and investment and implementing free-market reforms in 1979, China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.” Such growth has enabled China, on average, to double its GDP every eight years and helped raise an estimated 800 million people out of poverty.
China became the world’s largest economy (on a purchasing power parity basis), manufacturer, merchandise trader, and holder of foreign exchange reserves. This in turn has made China a major commercial partner of the United States. China is the largest U.S. merchandise trading partner, biggest source of imports, and third-largest U.S. export market. China is also the largest foreign holder of U.S. Treasury securities, which help fund the federal debt and keep U.S. interest rates low.
The Chinese government had made innovation a top priority in its economic planning through a number of high-profile initiatives, such as “Made in China 2025,” a plan announced in 2015 to upgrade and modernize China’s manufacturing in 10 key sectors through extensive government assistance in order to make China a major global player in these sectors. However, such measures have increasingly raised concerns that China intends to use industrial policies to decrease the country’s reliance on foreign technology (including by locking out foreign firms in China) and eventually dominate global markets.
China’s growing global economic influence and the economic and trade policies it maintains have significant implications for the United States and hence are of major interest to Congress. While China is a large and growing market for U.S. firms, its incomplete transition to a free-market economy has resulted in economic policies deemed harmful to U.S. economic interests, such as industrial policies and theft of U.S. intellectual property.
Increasing its capacity at reduced cost, China not only disturbed US Economy but also all of global economies. Many industries across globe were closed.
Where China faulted? : A good learning
The fault line lies in its economic policies and greed for being superpower. The last ten years of stimulus and deleveraging is a story of “eight-plus-two.” Eight years of government stimulus after the global financial crisis, followed by a couple years of conscious deleveraging and credit reduction. China’s debt-to-GDP ratio soared from 120 percent in 2007 to 253 percent in Q2 2018 (higher than the ratios in Germany and the United States).
Fast industrialization process and output maximization has increased domestic competition that compelled industries to reduce its price while compromising quality. In order to prevail upon international market and maintain its competitiveness, China had been manipulating its economy devaluing its own currency. This process has lead to lower industry realization and increased borrowing leading to corporate debt of $13 trillion+ as of date.
On the other hand in order to ensure competitiveness, salaries across china have been kept low that resulted in lower purchasing power of domestic consumers despite having huge population and domestic market.
Instead of optimizing its cost based on global demand, it went on increasing its capacity and overall supplies that put heavy pressure on its own cost beside disturbing global economic entities. Unable to bear the cost pressure, Chinese producers have no other way but to compromise with quality that severely impacted its own image and good will while producers of other countries had to perish.
Manipulating its currency to facilitate lower price has further caused huge damage to its own economy and at the cost of global supply lines.
It is therefore its poor economic wisdom & policies that have put entire global economy at stake.
It is now amply clear, to do business reading of economic parameters and the governing factors is a must. Looking beyond superficial values is extremely essential for sustainability.
Global Impact
Cheap products and cheap exports have caused exponential damage to global economy. China dreamt of creating whole world as its trading partner. Many entities across globe have failed to compete with the Chinese price and had to close down their units. This has angered the whole world, particularly US that lead to US-China trade war joined by many countries off late. The mistakes committed by China are irreparable.
China has basically tried to create trading partners across the globe. Cheap supplies have uprooted many industries across globe. The prices of various products on offer were beyond its logical costs. Raw material prices being the same across world, subject to logistics cost, it is a matter of great concern how it could supply at such a lower cost? The matter should have been considered by global & industry experts to raise the alarm bell and refuse. But that has not been done that encouraged China to harm all of us at the global platform.
China has disturbed global economy. It has taken undue advantage of Globalization and WTA framework that has resulted into protectionism measures, income inequality and political indifference between nations. It has caused huge unemployment to rise across globe. But all these have come with rider to China itself. China has committed too many mistakes in the process that will have devastating impact over its own economy. Global economies may recover from the impact in the long term but it will be extremely difficult for China to recover. Given global trust and faith it has lost is difficult to win over again.
Where Global entities faulted? A Lesson
Capgemini in its survey report during 2018 has said — More than 70% of global organizations have shifted their focus from Customer Analytics to Operational Analytics.
Curious and Serious players have shown their interest to achieve Operational Efficiency only post Pandemic seeking complete tools & techniques to ensure high productivity of all the resources and reduce their production cost.
Assigned to analyse several organizational economic performance and suggest means of improvement through fundamentals and tools of Economic Engineering & Econometrics has shown some shocking results. Though achieved higher sales, organisational performance, productivity and profitability has shown declining trend through years. Their cost of production has been shockingly high that allowed China to occupy business space.
Let us review the performance to explore why global organizations were not cost-efficient & competitive-
Declining Organizational Total Factor Productivity
Despite increase in sales to indicate growth, microanalysis of economic factors has shown all the economic parameters are independent to each other with no control whatsoever. Economic factors are not aligned to business need despite organizations have required highly paid skills. Organizations have been incurring very high cost of production based on economic parameters within their control with no justifications. Business Leaders have always shown their satisfaction with the sales result and considered it as their achievement and growth. Subject to demand-supply gap, some organizations I know have sold their finished products fetching premium of over 185%. While the rest thought of the routine ball game and ignored. But the reality was far from different. The inside story, that has never been considered, has caused much damage under changed scenario.
Multi-Factor Productivity
Business parameters are never the same due to fast changing macroeconomics. Every day operation brings new challenges that are difficult to be handled. Decision makers are bound by their limitations and short of business sense-making. In total divestment of fundamentals, inter-alia, business analytics through objectivity, organizations tried to save huge re-skilling and up-skilling cost, they incurred high production cost. Little did they know in saving few hundred thousands they have incurred millions of losses. This has lead to reduced Human Intellectual Index and declined organizational marginal GDP over the period of time detrimental to organizational interest.
In following objective principles of management through hierarchy of commandments, such an act has proved detrimental to their own interest and organizational growth paving ways to others with business space.
Organizations are incurring high operational cost and losing heavily each day, to the extent of around 20–30% of their daily investment, which they can save through operational analytics. Those learnt have started reaping benefit.
Observations
Manufacturing is not just about assembly of parts or preparing input basket for value added product/s. It is governed by host of economic factors that need to be considered- measured & controlled for being cost-efficient & competitive.
There exist extra ordinary connections between the economy and investment results. Business Leaders who ignore the economy set themselves to fail. Decision makers who understand the economic stress point fair the best.
Ever changing macroeconomic factors governs our input prices and organizational sales and is beyond our control. Whereas microeconomic factors are within our control that requires neutralization of ever changing macroeconomic implications at micro level of operation, but is often neglected or ignored. Profit is incidental to operation. Operation is governed by operational efficiency that is grossly overlooked.
Global entities have their focus confined to growth scaling sales revenue. They feel satisfied with the result out of explicit costs that never considers variation in economic factors, or, implicit costs.
General notion of growth scaling sales revenue has not improved bottom-line. Due to declining economic performance, economic entities have never been cost efficient & competitive. Modern theories of firm strategy integrating various analytics has yielded little to no result. Even copying Lean Philosophy from Toyota Production System, that has been framed based on business dynamics of Japan has also failed to improve bottom line and make them competitive.
They can improve their organizational performance and organizational productivity through series of simple analysis, inter-alia, microanalysis to find which factor is responsible for poor performance and depleting profit.
With no consideration for economic principles and importance of competitive advantage through innovation, they followed management principles of objectivity. Little did they know, management is a tool to manage what exists or seen. But economic factors responsible for diseconomies are hard to see but are grossly ignored. Sales revenue is inversely proportionate to organizational productivity & profit as per theory of Law of Diminishing Margin Being an economic entity this is an important element and fundamental to business that finds no place in the organization. Organizations have to help themselves improving return to scale.
Disruption and growing business complexity is the biggest organizational dilemma. Growth is directly proportionate to shrinking leadership ability.
Huge gap is also observed in Business Plan where demand factor has not been considered to work out on price and cost.
Total cost is subject to change through each batch of production. Our entire effort goes down the drain due to diseconomies and misaligned factors.
Example-
1) Qualities of no two supplies from same source can ever be the same even if supplied within specified range. This causes variation in output that has never been considered in the books.
2) Increase in profitability has never been to the extent of increase in sales, even though each unit produced carries equal amount of profit.
3) Whole effort to save huge cost, clocks-off, leaving Business Leaders wonder where all the money gone!
But organizations prefer to work based on standard costs in VUCA World where costs changes every moment.
Organizations have to Reimagine, Reinvigorate & Restart ensuring sustainability goal.
Road Ahead
Business is no more limited to conventional norms of selective improvement. A transformation is not a series of incremental changes, it is a fundamental reboot. It has to represent a fundamental and risk laden reboot of a company with a goal of achieving dramatic improvement in performance and altering its future trajectory.
Leadership is not by position or chair we occupy. Traditional business practices of 19th & 20th Century has been replaced by 21st Century Business perspective. Leadership & performance parameters have seen a complete shift. For resiliency, sustainability and growth, we need to have capabilities confirming to-
· Curiosity
· Business Insights & Analytical role
· Strong Determination to succeed
· Deep Engagement
Industries have to work on future of production system and rework on new analytical roles across functions keeping in view fundamentals & tools & techniques of Economic Engineering and Econometrics, a combination of Business Economics, Operational Research and Industrial Engineering. 0 Looking beyond “Managing Performance, organisations have now to “Enable Performance” in this uncertain world.
There are BIG Names in Consultancy world who in the name of Operational and Business Improvement charge huge amount, to the extent of several millions for a standard report suggesting manpower reduction with no consideration to economic cycle — Increase in unemployment will reduce demand of Industrial products adversely impacting the business. Besides this, reduction in manpower has its adverse consequences over other costs.
Organizations have to rework on their business model exponential to the requirement of 21st Century trajectory and VUCA world for being cost-efficient & competitive through innovations and critical thinking according to the economic & technological need of Industry 4.0.
Building performance pillar is central to success under new normal of Industry 4.0 for perfect utilisation of the tools of AI and the technology. The purpose of Industry 4.0 is more about Business Analysis, Business Intelligence and Decision Intelligence than technological advancement.
“Mere adopting tools of AI will not yield desired results unless supported by robust performance pillar to analyse economic parameters that keeps on changing on regular basis.” — PwC.
World Economic Forum has recently said- ““The World will always need human brilliance, human ingenuity and human skill. Machines will supply us with insights & perspective we need to reach to solutions, but, machines won’t supply judgment or the ingenuity. People will”.
Maintaining Law of Equilibrium and cost optimization process can only take your organization to whole new level of sustainable paradigm.
Mckinsey has done the survey across globe to find out how organizations are implementing Industry 4.0.
Enno de Boer, Partner and Global Head of Manufacturing at McKinsey & Company as reported by World Economic Forum says : “These pioneers have created factories that have 20 to 50% higher performance and create a competitive edge. They have agile teams with domain, analytics, IoT and software development expertise that are rapidly innovating on the shop floor. They have deployed a common data/IoT platform and have up to 15 use cases in action. They are thinking scale, acting agile and resetting the benchmark.”
Focussing on shop floor through operational efficiency will generate sustainable revenue & profit to ensure growth.
The behaviour of each resource in use has to be monitored, controlled & determined for optimum allocation and utilization using simple mathematical and analytical tools of Economic Engineering and Econometrics across value chain, a subset of microeconomic & fundamental of operation.
It’s encouraging to see lot of organizations are now showing interest. This is healthy sign to counter malefic moves like China to retain business and economic space. Being self-dependant is fundamental to stable economy.
I am surprised with the growing awareness of Industries across the globe who wants to be competitive and achieve sustainability. They keep on coming to me in big numbers with a request to analyze their economic performance and suggest improvement. Pandemic has not been a deterrent to them. They want to learn through distance-either through telephonic discussion or over skype and else. Chinese episode combined with Pandemic has taught us big lesson.
Actions against China have created huge business space for domestic industries to rise again. Let this opportunity not be lost for being cost-efficient and competitive. Organisations should now learn to be self-dependant and future proof themselves with technology and performance pillar based on fundamentals of business.
About the Author:
Manoj Trivedi is a Founder Director and Business Mentor of iGlobal Research and Analytics based out at India. He writes & mentors manufacturing industries based on his four decade ot rich expertise and leadership across diverse industries. His articles finds a place in several Chambers of Commerce, Institutes including University of Sheffield, UK, Texas Ventures, USA etc. Donned several hats, his exemplary work and expertise has been retained by Consortium appointed by Govt of UK & European Union to develop industries across ASEAN and African countries, Several Chambers of Commerce, Industry Associations across India and Ministry of MSME,Govt of India. Being Second-To-None, he is passionate helping industries grow through performance pillar of Industry 4.0 looking beyond technological advancement. He guides implementing tools of AI in-house saving 90% of projected cost. Through performance pillar he enables saving 20–30% of operational costs on recurring basis y-o-y. He can be reached at corporateiglobalresearch@gmail.com, or, through WhatsApp at (91) 9433013863.