Why has the year been so difficult for many suppliers? First, prices for many key commodities — for example, oil, steel, energy, and plastics — have risen dramatically. Second, many companies are still following strategies they pursued in the 1990s. In the automotive industry, suppliers continue to focus on winning as much business as they can, whatever the cost; then they figure out the details of profitability later. Today, however, it makes more sense for most suppliers to reject business where they can’t make a profit. Third, the supplier base is going global. This was once a business that had a few global suppliers; now, Toyota, DaimlerChrysler, BMW, and others are asking their suppliers to make that transition. The result is increasing competition as these suppliers also bid for business across manufacturers. Finally, the traditional adversarial approach to sourcing, common in much of the industry, has proved damaging both to suppliers and to the manufacturers that contract with them. That approach is so culturally ingrained that it is hard to dislodge; but those who move beyond it, as Toyota and Honda have done, will be positioned to thrive even against upstart car manufacturers from India and China.
We see similar supply chain pressures in other industries, as they adjust to shortages of raw materials and change long-established practices. In the oil and gas industry, for example, suppliers are coming to realize that the tactics of the past, developed during a time when oil was relatively cheap and services relatively plentiful, no longer work for them. They are moving away from spot bidding and seeking long-term contracts. As these practices continue, the balance of power in many business relationships will be changed, giving suppliers more of an edge — at least for those that survive.
3. Consumer packaged goods: reorganizing for growth. During the last 20 years, many manufacturers have struggled to grow their businesses in the sophisticated consumer markets of North America and Europe. They’ve based their strategies on cutting costs and growing through acquisitions, and they’ve found “organic” growth, based on increasing demand for their products and brands, harder and harder to achieve.
Now the game is changing. Partly because of the growth of emerging markets in countries such as China, India, and Brazil, and partly because the mix of products is becoming more complex and sophisticated, some of the most successful companies have started to seek a new approach to growth. They face a difficult challenge: finding the right balance between large and profitable global brands on one hand, and, on the other, locally customized and tailored products. The most successful companies are reorganizing themselves accordingly, adopting more complex organizational structures that can make more sophisticated products and brands. Consumers will see this play out in the form of products that vary more from one region to the next, for example, or change more rapidly on the shelves. Corporate employees and managers will find themselves balancing two or three bosses at once, embracing ambiguity, and having their incentives more closely linked to organizational profitability and performance, with better flow of information and more emphasis on letting people throughout the enterprise make broader-based decisions.
Our own research on the “DNA” of effective organizations suggests that, although the difference is invisible to many, it will be very real to people who work in those companies — particularly the winners. Not every consumer products company will figure out how to become an effective global, execution-driven enterprise — but those that can’t make the switch will probably not survive.
4. Credit cards: challenged by their own success. As financial historians have noted, the availability of short-term, relatively easy, unsecured credit has been one of the major factors in transforming the purchasing power of the consumer class. Credit card issuers, for their part, have been one of the most consistently innovative branches of the financial-services industry. But now their own success threatens their profitability.