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(originally published by Booz & Company)


Seven Counterintuitive Trends

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.

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  1. Olaf Acker, Niklas Dieterich, and Christopher Schmitz, “Dueling Technologies at the Point of Sale,” s+b, Spring 2006: Mobile payments could transform the purchasing experience, but these systems have so far failed to spark much interest in the United States and Europe. The reasons reveal a great deal about the prospects for innovative financial services, and about the underlying nature of infrastructure change. Click here.
  2. Nikhil Bahadur, Edward Landry, and Steven Treppo, “How to Slim Down a Brand Portfolio,” s+b, Autumn 2006: Consumer packaged-goods companies have awakened to the risks of an overextended brand portfolio and begun to cut the fat with a vengeance. Click here.
  3. Doug Bartholomew, “A House Divided: Manufacturing in Crisis,” IndustryWeek, November 1, 2005: Overview of the “civil war” between large and small manufacturers as they battle in a landscape marked by expensive raw materials and competition from low-cost countries. Click here.
  4. Stewart Brand, “City Planet,” s+b, Spring 2006: Get ready for cosmopolitan slums with thriving markets, aging residents, and the most creative economies in history. Click here.
  5. Vinay Couto and Ashok Divakaran, “How to Be an Outsourcing Virtuoso,” s+b, Autumn 2006: As the turbulent global services industry matures, a highly skilled cadre of master providers and customers is emerging. Click here.
  6. Kevin Dehoff and Vikas Sehgal, “Innovators without Borders,” s+b, Autumn 2006: For companies that want to build a global growth engine, offshoring innovation is both a challenge and a necessity. Click here.
  7. Frank Galioto, Jason Kerins, Steffen Lauster, and Deanna Mitchell, “The Matrix Reloaded: The Multi-Axis Organization as Key to Competitive Advantage,” Booz Allen Hamilton white paper, January 2007: Consumer packaged-goods companies that master the matrix organization enjoy a competitive advantage that is powerful, sustainable, and highly adaptable as market and company priorities change over time. PDF download.
  8. Thomas Goldbrunner, Yves Doz, Keeley Wilson, and Steven Veldhoen, “The Well-Designed Global R&D Network,” s+b Resilience Report, May 15, 2006: A new study by Booz Allen Hamilton and INSEAD finds that organizations benefit when they configure their innovation networks for cost and manage them for value. Click here.
  9. Ronald Haddock, Christian Koehler, and Edward Tse, “A New Era for Chinese Vehicle Manufacturers: Opportunities and Challenges for Chinese Automakers as They Expand Overseas,” Booz Allen Hamilton white paper, January 2007: Strategies for Chinese automakers to grow in their home market and expand globally. PDF download.
  10. Steve Hedlund and Tom Pernsteiner, “Why Systems Haven’t Been the Solution for Suppliers,” Booz Allen Hamilton white paper, March 2001: Why automotive systems suppliers have been unable to generate adequate returns on their investments. PDF download.
  11. Barry Jaruzelski, Michael Busch, and Jay Kumar, “The Stealth Software Challenge,” s+b Leading Idea, December 12, 2006: Just about every product on the market, from planes to toasters to Legos, relies on microprocessors to work, but manufacturers usually treat software development for their products as an afterthought. Therein lies the problem. Click here.
  12. Edward Landry, Andrew Tipping, and Jay Kumar, “Growth Champions,” s+b, Summer 2006: How marketers can drive the only metric that matters. Click here.
  13. Matthew G. McKenna, Herve Wilczynski, and David VanderSchee, “Capital Project Execution in the Oil and Gas Industry: Increased Challenges, Increased Opportunities,” Booz Allen Hamilton white paper, March 2006: A Booz Allen survey of oil majors and suppliers revealed the pain points in supplier relationships. PDF download.
  14. Peter Parry, Varya Davidson, and Andrew Clark, “Crisis in the Oil and Gas Industry,” s+b Leading Idea, November 21, 2006: A skilled labor shortage threatens to stall the boom in investment and exploration. Click here.
  15. Jeremy W. Peters, “Auto Supplier Dana Files for Bankruptcy Protection,” New York Times, March 3, 2006: Overview of supplier bankruptcies in the automotive industry, including Delphi, Dana, Collins & Aikman, and Tower Automotive. Click here.
  16. C.K. Prahalad, “The Innovation Sandbox,” s+b, Autumn 2006: To create an impossibly low-cost, high-quality new business model, start by cultivating constraints. Click here.
  17. John W. Schoen, “Auto Industry Rocked by Delphi Bankruptcy,”, October 10, 2005: An analysis of how Delphi reached this point, and the bankruptcy’s effect on the automotive industry. Click here.
  18. Lord Andrew Turnbull, “Toward a Flexible Energy Future,” s+b, Winter 2006: When the price of fuel reflects all the costs, government and industry will know where to invest. Click here. 
  19. Herve Wilczynski, Matthew McKenna, and David VanderSchee, “Unprecedented and Unseen: The Next Great Energy Challenge,” s+b Leading Idea, November 9, 2006: As the oil and gas industries ramp up “megaprojects” to meet demand, few companies really know how to manage them effectively. Click here.
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