INTERNATIONAL BUSINESS OPERATIONS Lecture note- Strategic Flexibility for Competitive Advantage in Global Business

In bullet points:a) b) c) d) e) f) g) h) i) The fire in Philips factory Esquels strategic dilemma VWs loss of market share in China The concept of Strategic Flexibility Foresight versus Insight Elements of Strategic Flexibility Strategic Sensitivity Unity of purpose Resource Fluidity

The Fire in Philips factory On March 17th, 2000 a lightning struck the semi-conductor factory in Albuquerque, New Mexico. Almost all the stock in the factory was destroyed. Philips informed the two affected customers: - Nokia and Ericsson. Nokia acted swiftly by dispatching a team of engineers to assess the damage and there was no response from Ericsson. When it was finally clear that, months worth supply will be disrupted, Nokia immediately changed its product design and sourced an alternate supplier. It took Ericsson on the other hand five weeks to realize the severity of the situation, this resulted in a $ 400 million loss in sales and ultimately resulted in $ 1.68 billion loss. Esquels Strategic dilemma In 2000, Esquel, a leading Hong Kong based producer of cotton shirts faced a query from its retail customers: Nike and M&S on its environmental practices and the demand was to consume less water and use less pesticides and fertilizers. Esquels cotton supply came from Xinjiang province of Northern China that depends mainly on underground sources of water. The traditional method of irrigation there was to periodically flood fields, an inefficient approach that created a perfect breeding ground for insects and diseases. Heavy pesticide use was a necessity. Productivity was an issue. A switch to organic cotton could cause crop yields to drop by as much as 50%. Even though the climbing demand for organic cotton was likely to boost prices.

Complicating matters even more, organic cotton fiber is weaker than that of conventional cotton and has different physical characteristics. It would need extra processing, leave a greater percentage of scrap during fabric manufacturing, and require chemicals and dyes more environmentally harmful and more expensive than those used on conventional cotton. Esquel switched to sustainable farming techniques, by using disease resistant and genetically engineered seeds, which require less fertilizer and used drip irrigation technique to save water. In addition Esquel invested a lot of managerial time in building supplier-customer relationships with farmers, by giving them MF loans and redesigned its supply chain, as per new crop growing practices.

VW in China In 2003, VWs market share in China was 30%, sold seven hundred thousand cars and China contributed to around 14% of total global sales. The Chinese car market in early 2000s was growing @ 49% per annum since 2002. The total earnings in 2003 were 561 million Euros. In 2004, the earnings fell to 222 million Euros and market share dropped to 25%. In 2007, the companys China business failed to break even, it held just 17% of Chinas market, while sales of GM, Toyota and Honda surged. Between 2003 and 7, car makers doubled their production capacities, along with entry of local rivals such as Cherry and Great Wall and Chinese consumers were showing more interest in newer models of rival and local producers. GM secured components at a cheaper price from South Korea and launched a range of cheaper models to wean away Chinese consumers, while VW stuck to a few existing models at higher prices. Despite declining sales volumes, VW announced 5.3 billion Euro investments to increase capacity in 2006 and regain a 30% share; by 2007 VW was stuck with huge unsold inventories. The Concept of Strategic Flexibility What the above three examples show? The commitment to ones strategic vision is important. However, the situation can change dramatically, by the time one arrives in market. The time gap between launching a product in domestic market and international market is considerable, as a firm has to set up its distribution channels, finalize its entry plans, and enters into agreements with local partners. By which time the market situation can change or can start changing. The subtle shifts may not be visible initially. Being strategic evokes peering into the future and making long term commitments. In contrast, being agile evokes staying nimble, open to sudden changes and always be ready to reassess past choices. On one hand a strong strategic commitment can lead to inertia and being a prisoner of past success, on the other hand being flexible can prevent firms from building the kind of core competencies and a unique value proposition essential for building a hard to imitate competitive advantage.

Strategic flexibility is then is one of the toughest organizational traits to develop and sustain, which is a perfect trade-off between being completely rigid and completely flexible, theoretically sounding elegant, very hard to attain in real world of business. Foresight versus Insight In English detective literature, Sherlock Homes perhaps remains one of the most famous characters, whose methods are often applied by real life detectives as well. Whats little known is that, Sherlock had an elder brother Mycroft Homes, who was an armchair analyst and was said to possess a superior analytical brain than his more illustrious younger brother. Often Sherlock consulted Mycroft for his analyses. Mycroft analyzed logically, sitting on the chair, Sherlock was always at the scene of crime, collecting evidence, looking for clues that a criminal leaves. Sherlock can be said to possess insight, whereas Mycroft had the foresight. Foresight comes from logical and structured thinking, whereas insight comes from intense first hand interactions on the field with customers, dealers, suppliers and so on. In early 1990s, Nokias top management had a great insight into the future mobile market: - Nokia visualized the mobile as an instrument of communication, to be used by the masses at affordable rates, backed by independent cellular service operators like Airtel or Vodafone etc. Nokias two chief competitors: - Ericsson and Motorola were locked with their past legacies. Motorola saw the mobile as a specialized communication instrument for the military and scientific explorations or to be owned only by the CEOs and the top brass or senior Government officials and ministers, this stemmed from Motorola being associated with the US Army since WW II;; . Ericsson only saw the mobile as an extension of its fixed landline network. Both the firms failed to see the future evolving. Foresight then is the left brained logical and analytical thinking, structured and systematic. Whereas insight is the intuitive right brained thinking, erratic and highly creative. In todays fast changing business environment, foresight needs to be complimented with insight, in order to succeed and survive. Combining foresight with insight is THE ESSENCE OF STRATEGIC FLEXIBILITY. Elements of strategic flexibility Strategic flexibility results from three kinds of Meta capabilities (meta capabilities are at organizational level, that arises out of collective behavior of employees and from a well-defined code of conduct and knowledge processing mechanisms). They are:a) Strategic sensitivity (also known as peripheral vision in strategy literature) b) Unity of purpose c) Resource fluidity

Strategic Sensitivity and Unity of Purpose Nokias leadership displayed a unity of purpose, during the Philips fire crisis and was quick to take a critical decision to change the course of current strategy, whereas Ericssons leadership due to lack of unity in decision making was slow to react and lost the game. Nokia also displayed a keen strategic sense, when it visualized a mass market for mobile phones and the unity of purpose in its leadership enabled Nokia to take a clear lead in the mass mobile telephony (its indeed ironic to see the same company known for smart and agile thinking lose its way today and surrender the leadership to Samsung, Nokia posted a loss of $ 1.72 billion as per B/week dated July 19th, Nokias global market share has declined from 40% in 2008 to 29% by 2011, Nokia failed to sense the shift towards smartphones, thus becoming a prisoner of its own success!). VW in China failed to sense the shift towards cheaper and newer models, offered by rivals and lost the game, on the other hand Esquels leadership had a great unity of purpose to take a major decision to reconfigure the supply chain completely. Resource Fluidity To speak about strategic flexibility becomes meaningless, without resource fluidity. Resource fluidity doesnt entail moving around a huge machine from one place to another! Resource fluidity implies that an organization is able to reconfigure its resource deployment and allocation policies quickly to take advantage of a changing situation. This in large and complex organizations often becomes a herculean task; resource fluidity also implies that strategy is freed from the organization structure to the extent possible. Once a firm commitment towards a strategy is made, the strategy is translated into budgets and standards and gets crystallized in a BSC framework; this also results in changes in organizational structure, which gets ossified over a period of time. The allocation of budgets as per divisions, which are treated as profit centers locks up resources in terms of capital, people and knowledge within a division, as the divisional chief is made responsible for its performance. Thus once resources gets locked up as on the product/country/division lines, in a large MNC with a matrix structure, it becomes a herculean task to move these resources for a specific purpose fast enough. To provide easy access to resources, many organizations today attempt to free the structure from strategy. This is done by: -

a) Develop a cross functional and collaborative board or council. This ensures that the key resource allocation decisions are not taken by a few top managers or staff members, who know nothing about new business development. CISCO follows the practice of developing a council, which at any point of time comprises 9 to 10 VPs of engineering and product divisions. This council debates on resource allocation and issues on strategy. The cross functional council provides a multi-point access to resources, instead of a single point access in hierarchical organizations b) A centralized MIS across the company across the world. ABB uses its own customized MIS called ABACUS. c) Delink results from ownership of resources. HP has 5 supply chain models and 3 go -tomarket models, owned by a central hub, which owns the critical resources in terms of people and capital. Any business division may approach the HP global hub to uses one of these models and get access to resources accordingly. The hub coordinates across the plants. d) Establish a clear set of governance mechanisms for collaboration and reward systems. e) Adapting to a continuous review, once in 3 months. f) Restricting over investment in the core business or the existing cash cow g) Foster people mobility by adapting a jobs-can-find-you approach. This ensures that a division or country head cant lock up key personnel and CISCO has a 10% rotation rule. h) Set clear and measurable reward systems, facilitating job rotation i) Move teams, just not individuals