This article deals with fundamental of business for having competitive advantage in VUCA World enabling growth with an aim to inspire organizations with sense of purpose.
We are not living in monopolistic era. The world has moved from “Closed Economy” to “Open Economy” with Oligopoly. All of the countries and Economic Entities are bound by World Trade Agreement and its rules for no or lower customer tariffs and trade barriers. There are many producers for same products. Customers have a choice to buy value and lower price. Customers are no more reliable to plan our sales, production and gains. There are threats from new and unforeseen forces.
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.
Simultaneously, 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.
Digital world has brought the world much closer. Recognizing potential customers and reaching out to them has become much easier. The whole world can now be captured within the mobile or desktop screen.
Every producer is both buyer & customer. It is therefore very much pertinent to think and introspect-“Why any customers will buy your product?” As a customer we all think “What value I will get out of this product?”. “What Competitive Advantage the product has to offer?” Value is therefore intrinsic to all commercial dealings.
There is a threat from Start-Ups who come with innovative product with lot of features and value. You are fortunate that more than 90% die their unnatural death mainly because of “No Business Sense Making”. Majority of them have technical expertise but has no or less business acumen.
It is the sheer momentum that helps us to sustain in this Uncertain & Volatile world.
The threat from China & Chinese products has been enormous. Entire product we use in our daily life from “Bed to Bed” is Made in China. Aggressive Chinese policies have deeply impacted our businesses. Cheap products have caused exponential damage to global economy. China has created manufacturing hub with “Vision & Mission 2025” and made 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. Cheap supplies have uprooted many industries across globe. The prices of various products on offer were beyond its logical costs. But we have not been able to determine its cost element to sell at such low price. Being governed by Laws of Economics, China has grievously faulted. For the sake of brevity I do not want to reiterate here again. This has already been discussed and analyzed in my previous post “Beating China with Industry 4.0”. The purpose of this section is to remind readers of Chinese fault line such that it may be avoided ant repetition.
China has already 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 will be difficult to win over again.
Now that Global policies are directed against China, there is much of business space created both in domestic as well as international market.
The Pandemic Shock
I am often told we cannot think of anything else. We need to come out of Pandemic shock as quickly as possible. Given the rate of climate change and fast emerging global macroeconomic changes, this may be the beginning of new course. True, current pandemic has created crises of health and financial markets that are disrupting the lives of almost everyone on our planet including businesses. People the world over are getting sick and dying, global economies are facing a recession, and the financial futures of many people are at risk.Organizations have to prepare themselves with in-built Economic Stabilizer.
Before I dive deep into it, I must say any Growth is possible only through crisis. While everyone is struggling and thinking the same way, it’s only those with deep business sense making can leverage the opportunity to occupy the business space created by Pandemic and Chinese episode. Unless you take action now, you will remain a Struggler.
While we all have liquidity crisis that is going to continue for more time, we will to continue lose money every day through operational losses with whatever quantity we produce. Can you afford this at this juncture? The amount of loss that we are incurring everyday in our business is detailed below. Utilising our resources judiciously and at optimal level is the need of the hour and shall continue in future too for having competitive advantage.
The need of the hour is being self-dependant as is being facilitated by Government of India. Without the crucial element of inclusion & inclusive growth, your business case will be weaker by the day to question your sustainability.
Removing our fault line
As manufacturer, doing business with competitive advantage through judicious and optimum use of resources is your case. You need to ask yourself what qualitative advantage your product has. Customers are willing to pay more prices for a product that has more value. The trend has already set in. Mere selling standard product and depending on it will not serve your business purpose. Value is recognized by cost it incurs. Efficiency can be enabled through high productivity of all the resources for high value at low cost. Cheaper product is not sufficient any more. Strategic marketing and value based sales can work wonder to create a Brand with high value.
However, as a business leader, it’s your case to find: “Is your Organization Cost-efficient & Value effective?” Adding value across operational segment is also the requirement of IFRS Accounting.
Dozens of Serious & Curious organizations sought to know from me their organizational economic performance fault line along with suggestion to improve upon even during this Pandemic period. This made me to believe – Pandemic is no deterrent to serious people and organizations.
The findings and outcome has been astonishing..
Looking at growing sales y-o-y, all these organizations, prima-facie, as thought to have been doing great and very good when evaluated of their economic performance, they are found to heading south and losing steam of their core economic strength. Here is the finding. These findings, as case study, are not central to any specific organization but found to be rampant across organizations, small or big.
Declining Organizational Total Factor Productivity is seen across organizations
Despite an increase in sales to consider growth that made organizations happy to celebrate, microanalysis of economic factors has shown all the economic parameters are independent of each other with no control whatsoever. Economic factors are not aligned to business need despite having highly qualified and highly paid skills.
Organizations have been incurring very high costs across operation and incurring huge operational loss estimated at Rs 2.7 Millions Per Annum Per 10 Millions of Turnover despite the fact that microeconomic parameters are within their control. 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 found fetched premium while the rest find it difficult to realize their cost.
This establishes the fact that Profit is not only incidental to operation but is also a fortuitous gain.
Multi-factor Productivity shows no control over Economic Factors
Business parameters can never be the same due to ever-changing macroeconomics. Every day, operation brings new challenges with deep impact over the costs that was found to be difficult to resolve..
Each factor has been found to be independent of each other signifying no alignment to business needs.
Decision-makers have been found to be bound by their limitations and short of business sense-making. In total divestment of fundamentals, inter-alia, business analytics through objectivity, organizations have taken no steps to move through “Knowledge Economy” to “Wisdom Economy” for rational decision and to develop an understanding of the relationships that exist between different orders of law that operate within an economic community.
No effort is taken to create organizational wealth
Despite huge operational loss of Rs 2.7 Millions Per Annum Per 10 Millions of Turnover being incurred on recurring basis, organizations chose to ignore creating organizational wealth to save huge cost and achieve sustainability goal. They considered Learning Cost of few thousands and millions as wasteful expenditure. Whatever spent in Learning & Development has either not been implemented at work, or, was a mere formality to satisfy the board engaging cheap soft skill trainers in the name of savings & cost reduction.
Provided further, HR function have found to be with no capability to assess competency gap and/or any idea of the organizational requirement that best suits the requirement of the day. Under Industry 4.0, HR function has a bigger role to play rolling out HR 4.0 initiative but are short of required competency.
This has lead to deterioration in Human Intellectual Index and declined organizational marginal GDP over the period of time which has proved detrimental to organizational interest.
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.
Capgemini in its survey report during 2018 has said- “More than 75% of Global Organizations have shifted their focus from Customer Analytics to Operational Analytics. But this has not brought any improvement in the economic performance to organizations.
Conventional notion of growing scaling sales revenue continues unabated to handover our business space to China. The very fundamental of business is being ignored despite big organizations have costly & highly qualified talents & skills.
Driven by limited business sense and lack of economic wisdom, such practice of analyzing business was thought to be wasteful and the services of such skills were determined while opening the economy in 1991 and do away with Dept as a whole under the pressure of competition from MNCs, continue unabated.
Let it be made clear here– 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.
Efficiency lies in scaling through complexities. The reason why industries underperform is the inability of Business Leaders and CEOs to execute tasks against issues arising today in a way that prepares the organization for the future.
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 on real-time basis, but is often neglected or ignored.
Efficiency of Productivity Analysis, or, Economic Engineering lies in availability of data from various sources as facilitated by Industry 4.0 environment.
Seeing the sales grow Business Leaders feel immensely satisfied with the result out of explicit costs that never considers variation in economic factors, or, implicit costs. 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.
Inaccurate Business Plan, with no consideration of demand based Price & Cost, is also found not to stem out from lack of forecasting techniques but from mistaken fundamental and unfounded assumptions.
They have to 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.
Total cost is subject to change through each batch of production. Our entire effort goes down the drain due to diseconomies and misaligned factors.
But organizations prefer to work based on standard costs in VUCA World where costs changes every moment.
- Qualities of no two supplies from same source can ever be the same even if supplied within the specified range. This causes variation in output that has never been considered in the books.
- Increase in profitability has never been to the extent of increase in sales, even though each unit produced carries equal amount of profit.
- Whole effort to save huge cost, clocks-off, leaving Business Leaders wonder where all the money gone!
- Real cause of variation in material yield, besides quality, never explored.
- Inaccurate Business Plan does not stem out of defective forecasting techniques, but, from mistaken fundamentals and unfounded assumptions.
- Standard costs are used for variable costs that is ever changing.
Organizations have to Reimagine, Reinvigorate & Restart ensuring sustainability goal.
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-
- Business Insights & Analytical role
- Strong Determination to succeed
- Deep Engagement
Any change has to come from the top to percolate down the hierarchy. Industries have to work on their global competitiveness model creating new analytical roles across functions through fundamentals & tools & techniques of Economic Engineering and Econometrics, a combination of Business Economics, Operational Research and Industrial Engineering. Looking beyond “Managing Performance”, organizations have now to “Enable Performance” in this uncertain world.
Creating tools of performance evaluation using simple maths and statistics, inter-alia, Econometrics for Business Intelligence will help Decision Makers predetermine costs for better control of all the resources and economic factors through optimum allocation and utilization.
The purpose of Industry 4.0 is more about Business Analysis, Business Intelligence and Decision Intelligence than technological advancement. Developing capabilities across organization, functions and hierarchy is the first step towards new normal of Industry 4.0.
Building such capability, industries can adopt Industry 4.0 in-house to save huge cost of implementation, to the extent of 90% of estimated cost of Rs 10 Crore for a mid size organization. Developing performance pillar, any organization can save about 20-30% of operational cost annually on a recurring basis. Please read my article Industry 4.0 & Fundamentals of Manufacturing Ecosystem.
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.
Such a move with rational thinking will help organizations from any effort to dislodge.
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.
A word of Caution
Artificial Intelligence is Positive but has been made apocalyptic by Tech & IT organisations to prove complete distortion. AI is the simulation of human intelligence in machines that are programmed to think like humans and mimic their actions ideally to create more space within the resources for more output & improved productivity.
It is no way a One-Size-Fit-All product or approach, but has been made a standard product by Tech, IT companies
The reason why ERP, that cost organizations to the extent of around Rs 100 Millions, has either failed with only 25% capacity utilisation or has remain back-end office tool as a mere data centre is the best example that is set to be replicated again thankfully due to Tech & IT Companies and lack of awareness within CXOs.
PwC has rightly observed in its recent survey report- “More than 90% of CXOs have no idea about requirement of Industry 4.0 and risks involved”. Tech companies are taking advantage of it to charge heavily for incomplete delivery.
To adopt this, requires complete process knowledge across all domain to customize based on product, process and business dynamics. And that is the reason why the concept of Data Scientists is shrinking through passing days.
To make it a success and fulfil the purpose, Business Leaders & CXOs must have the complete knowledge of the requirement and capability to utilise. Organizations have to create their own “Modelling Scientists” & “Decision Scientists.”
Many Tech & IT companies do contact me but fail to impress upon. It is the cognitive ability of the organizations that can make them success.
When what’s next is uncertain, futurists think in the short-term and the long-term simultaneously finding their purpose.
Trust you are now ready to capture sufficient competitive advantage to impress your customer, why should they buy from you!!
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 find a place in several Chambers of Commerce, Institutes including University of Sheffield, UK, KLM Technology Gruop, Greater Houston 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 [email protected], or, through WhatsApp at (91) 9433013863.
Also read my earlier articles