MANUFACTURING FLEXIBILITY AS A STRATEGY

FOR COMPETITIVE ADVANTAGE IN A GLOBAL

ECONOMY

Abstract
This paper adopts a multidisciplinary perspective to analyze current changes in firm’s organizational
strategies and assess their implications from the perspective of industrial organization and employment.
The analysis first draws on recent developments in the strategic management literature that conceptualize
the firm as knowledge-based or competence-based. This approach is built upon to develop a competence-
based organizational model integrating both firms’ internal management practices and external linkages
into a unified analytical framework, and showing how firms respond to new competitive pressures by
managing competencies on an intra-firm and inter firm basis. Part two considers how such model can
contribute to explain the emergence of global production networks, which are analyzed by focusing on the
key dimensions of power, activity and geography, along the lines of the global commodity chain
framework. The employment outcomes of competence-based organizational strategies and network forms
of organization are then discussed from the perspective of labour market segmentation theory, with
emphasis on the emergence of new forms of employment segmentation within and between firms. This
paper adopts a multidisciplinary perspective to examine these new strategies as well as their implications
in terms of industrial organization and employment. By doing so, it aims to highlight major changes in
power relations both between firms, through the new dynamics of competition, and within firms, through
new forms of employment relations. Firms' organizational strategies are a key driver of changes in these
two areas, and as such they constitute the entry point of our analysis. The first section builds on recent
developments in the strategic management literature that conceptualize the firm as knowledge-based or
competence-based, to propose an original model for analyzing firms' organizational strategies. This model
integrates both firms’ internal management practices and external linkages into a unified analytical
framework, showing how firms can successfully respond to new competitive pressures by managing
competencies on an intra-firm and inter firm basis. Competence-based organizational strategies are
increasingly blurring inter firm boundaries, leading to the emergence of complex production networks
where activities are coordinated through a mix of co-operation and market links. The second section
combines a strategic management and a global commodity chain perspective to analyze the structure and
dynamics of these networks, focusing on the key dimensions of power, activity and geography. Drawing
on well-known case studies of production networks in the Third Italy, the United States, Japan, and East
Asia, it identifies dominant forms of network organizational the global level, beyond the specificities of the
various industrial communities within which such networks are embedded at the local level. These global
networks can be considered to constitute a new form of industrial organization, which is deeply
transforming the way value is created and distributed within global industries. The third section turns to the
employment outcome of competence-based organizational strategies and network forms of organization.
By combining two levels of analysis, the firm and the network, it highlights the emergence of new forms
of employment segmentation within and between firms, as well as within and between locations, and
discusses how these differ from traditional patterns of labour market segmentation. It concludes by pointing
to the need for innovative policies aimed at stabilizing competitive pressures within and between firms, and
to the challenges and difficulties involved in achieving such goal.

Introduction
 Manufacturers around the globe are undergoing a profound transformation. External market shifts and
technological changes are reshaping the competitive landscape for manufacturing firms, ushering in a new
era of growth, change, and economic opportunity. We surveyed over 300 global executives to analyze the
ramifications of these changes for manufacturers. The survey and a series of related interviews with market
leaders show that competitiveness hinges on transformation to respond to market shifts and technology
trends. The goal is not only to “make better things”—creating products and services that meet customer
needs and are truly innovative and distinct—but also to “make things better,” facilitating the engineering,
service planning and execution, management and production processes through which innovation can
evolve from conception to retirement, and creating a closed feedback loop to ensure continual improvement
and alignment across the business. This dual emphasis on making better things while making things better
is driven by several broad market shifts. According to the survey, the top trends that are jolting business as
usual in the global manufacturing industry include:

■ Economic realignment due to recessionary forces in the developed world, and the rise of fast-growth
emerging economies.

■ Technology change driven by Big Data, the Internet of Things, mobile and social computing, and the
cloud.

■ Talent challenges as the developed world sees a skills gap and the emerging world lacks sufficient
management depth.

■ Supplier and partner complexity caused by distributed sourcing, engineering, and production, as
companies must manage more partners across more dimensions of quality, compliance, and risk.

■ Greater global competition as firms must defend their domestic markets from new overseas rivals while
simultaneously tapping new markets for long-term growth.

■ Increased regulation arising from environmental concerns and standards-based factors like ISO
compliance that apply across an increasingly interconnected world.

■ Changing customer behavior, including fragmenting customer demand.

45% 46% Increased 60% Talent

60% Supplier and
fragmenting 59% Global competition shortages/
regulations partner complexity
customer labour costs
demand
61% Technology 66% Economic realignment

Fig. 1: External market shifts are remaking the landscape for manufacturers.

The effects of these shifts vary in intensity according to company size, industry, and region, and are viewed
differently across executive functions. For example, economic realignment is a greater concern for
companies in the industrial equipment sector (74% of respondents) than other firms. Technology change
ranks highest in faster-growth markets in Asia (75%), where firms are less invested in legacy systems and
so can move quickly to adopt the latest equipment. At the same time, 69% of manufacturing C-level
executives views talent shortages and labor costs as a critical worry. All of these changes are happening
against the backdrop of increasing regulatory constraints, which C-level executives cite as another
important area of focus (52%).

Given the forces at work, manufacturing firms are taking a variety of approaches to transform their
businesses and find new ways to differentiate themselves. One important strategy involves interweaving
new services with product offerings to provide additional value—not only at the time of sale, but throughout
the product’s useful life. Other strategies focus on globalized product development and tying planning and
engineering functions much closer together in order to offer virtually any number of options to products
built around the same core platforms. This report analyzes how manufacturers are transforming their
businesses to succeed in the new global landscape. The report found that successful transformation
initiatives were grounded by three broad themes:

■ Rethinking strategy and planning to eclipse pure operational excellence as the source of competitive
differentiation;

■ The service imperative that extends beyond repair and maintenance to become a key differentiator and
profit driver in its own right; and

■ Innovation everywhere, expanding beyond traditional product R&D to encompass all parts of the
enterprise ecosystem.

These three approaches provide a scaffold for evolving transformation into tangible business results.
Manufacturers that place a higher priority on these elements can realize significant revenue growth and cost
reduction.

Definitions used in the study:

Strategy and planning refers to decisions regarding how a company engineers, sources, manufactures,
and services its products, and coordinates these processes.

Service refers to how a company plans to service its products, delivers its services, and coordinates these
processes.

Manufacturing operations refers to the execution of manufacturing processes, including purchasing,

logistics, production, scheduling, and control.

WAVES OF CHANGE
As market and technological forces upend many time-honored assumptions about manufacturing, strategic
transformation has become a necessity. Over two-thirds (68%) of manufacturing firms are expected to
undergo a significant business process transformation over the next three years. Geographically, more firms
in Europe (74%) are expected to overhaul their basic operating models than those in North America (64%)
and Asia (67%). Given the shifting landscape, fresh thinking is needed to effect transformative change. Key
areas of manufacturing transformation include rethinking strategy and planning, the service imperative, and
innovation everywhere. How manufacturers prioritize these themes can have a substantial effect on revenue
and costs.

Rethinking strategy and planning Strategy and planning for products (43% of respondents), service (37%),
and manufacturing (31%) rate as top factors driving business success, according to our survey. Strategy and
planning eclipse operational execution as a competitive driver for all industry sectors.

One reason for increased emphasis on strategy and planning is that traditional means of improving bottom-
line performance are running out of steam. Over half (52%) of survey respondents report that they have
wrung out almost all savings in their manufacturing operations. While this figure indicates there is still
work to be done, 65% of surveyed executives believe that optimizing operations has become the industry’s
price of entry rather than a source of long-term differentiation. That number rises to 71% in three years.

Today 3 years

Optimization of
manufacturing
operations has become
the price of entry

Most of the cost savings

have been achieved from
optimizing supply chain
and manufacturing
operations

0 10 20 30 40 50 60 70 80

% of respondents

Fig. 2: Optimization of manufacturing operations becomes routine

Another reason for heightened attention to strategy and planning is customer fragmentation, a major
concern for manufacturers. The customer fragmentation trend is most pronounced in Asia (57%), where
customer needs and budgets are widely divergent, and is top-of-mind for C-level executives (57%).
Responding to greater fragmentation, more than two-thirds of survey respondents will apply Voice of the
Customer initiatives, led by aerospace (72%), high tech (75%), and very large firms (79%), to better
understand their customers. Over half of surveyed executives plan to develop networked or “smart”
products to create a feedback loop that incorporates customer data, with high tech (71%) and very large
firms (60%) leading the way. Some 43% of manufacturers plan to relocate more production to be near
customers, particularly the medical devices (54%) and automotive (50%) areas. But manufacturers aren’t
just playing defense in response to the relative decline of operations as a differentiator and greater
customer fragmentation. Among the proactive steps being taken is heightened coordination of strategy
and planning between engineering and service functions, which will rise from 54% today to 73% in three
years according to the survey. Better coordination between engineering and service divisions dovetails
with greater intent by executives to use feedback from service execution (52% today) to drive decisions
and enable improvements to product development and quality (65% in three years).

POLICY CHANLENGE
Effectively addressing today’s social and environmental challenges depends on the world’s communities,
nations and regions creating economic wealth in ways that are consistent with the tenets of sustainable
development. This depends in turn on their ability to build development strategies based on appropriate
forms of economic competitive advantage in globalizing markets marked by ever-increasing competitive
pressures. This challenge is illustrated by the strategic goal adopted at the Lisbon Summit in March 2000
for the European Community to become by 2010, “the most competitive knowledge-based economy in the
world, capable of sustainable economic growth with more and better jobs and greater social cohesion”. The
European Commission’s recent communication concerning ‘corporate social responsibility’ (CSR) seeks
to establish how CSR can con- tribute to this strategic goal. The Commission rightly frames CSR in the
broader context of globalization and the emerging debate about the role of business in society. The
Commission’s communication largely focuses on how best to encourage voluntary business activities and
associated outcomes within an institutional framework of stakeholder dialogue. It therefore highlights the
need to develop micro-level management skills, tools and standards.

The potential of a significant macro-level shift in the role of business in society remains to be adequately
explored, as do its policy implications. In particular, there has been practically no consideration to date of
whether CSR could shift the basis of a nation’s economic competitive advantage. 2CSR practitioners and
analysts have been largely unconnected from, and uninformed about, the functioning of the broader
competitive environment. The ‘business case’ for CSR has remained a fundamentally micro-affair.
Similarly, mainstream analysts and architects of the foundations for international competition have in the
main ignored the possibility of a nation’s economic competitive advantage being grounded in the social and
environmental performance characteristics of the business community itself for accountability and The
Copenhagen Centre have moved to close this gap by initiating an exploration of how shifts in the role of
business in society might underpin new forms of international, economic competitive advantage. The
intention at this stage has been to stimulate much- needed debate by setting out some of the issues,
challenges and dilemmas for policy-makers from public bodies, business and civil society institutions. The
initial work suggests that:

•Societal benefits from changes in the role of business in society will remain limited unless such changes
support local, national and regional economic competitiveness strategies and outcomes.
• Such strategies and outcomes can and should be developed, and can be most effective if rooted in
partnerships between business and civil society and public sector organizations.

•Public policy could productively strengthen the links between such partnerships and the competitive
advantage of nations.

COMPETITIVE PARADOXES
The impact of globalization on social and environmental outcomes is a topic that solicits varied and
conflicting views. Just as many point to seeming gains from international investment and trade, so do others
highlight the apparent downsides. The relationship between economic growth and social and environmental
outcomes has, similarly, long been hotly contested. Clearly the starkest issues concern the fate of over one
billion people, mostly living in economically-poorer nations, who live on less than a US$1 per day. 6Yet
the paradoxes of economic growth are equally, if not more apparent in so-called developed countries.
Economies tradition- ally thought of as ‘Anglo-Saxon’, for example, are not only those that rate amongst
the most competitive, but also lead the developed world in levels of economic inequity between their
citizens. 8 In Europe as a whole, the significant economic growth of the last decades has been accompanied
by growing inequalities rooted in an unequal access to work. 9 Indeed, the meaning of access to work is
itself transforming, as teleworking, part-time and casual work portfolios become the norm. By the mid-
nineties, for example, 25% of all UK jobs were part-time.10

There are growing calls on national, regional and international public institutions to reinvent public policy
to provide the checks and balances required to guide how economic processes create social and
environmental outcomes. The Lisbon declaration is a clear example where the European Community has
acknowledged its responsibilities, and affirmed its commitment, to becoming the most competitive
knowledge economy in the world whilst securing and nurturing social cohesion. The Government of South
Africa has, in different words but a similar vein, clearly established policies and practices that are intended
simultaneously to make the economy ‘fit’ for international com- petition, whilst driving through an explicit
programme of black economic empowerment across the nation’s labour and financial markets. These
national and regional policies are as much reflections of deeply- rooted tensions as they are manifestations
of coherent strategies. Every aspect of publicly-funded, social welfare expenditure across Europe is
challenged by the seeming imperative of creating lean economies. This, despite the fact that a knowledge-
based economy can certainly breed inequality in a world where at least 15% of adults have only elementary
literacy skills in 14 out of 20 OECD countries,11 or in the UK where it is estimated that 25% of the
population are unable to read or understand basic government documents.12 Black empowerment initiatives
by the Government of South Africa are criticized by some, accused of under- mining the country’s
economic competitiveness and so, ultimately, the very basis on which black economic empowerment might
be achieved. These criticisms are made despite the broad acceptance that social unrest arising from unequal
development is a strong disincentive to potential inward investment. These policy tensions are reminiscent
of the debate in the 1990s over the extent to which developing countries needed to ‘catch up’ with developed
countries before addressing growing environmental problems. Those opposed to direct intervention to raise
environmental standards based their arguments on the so-called Environmental Kuznets Curve. This
inverted U-shaped curve suggested that pollution levels will only fall after a sufficient level of economic
wealth had been created to enable countries to spend money on environmental protection (see Figure 1).
The economist Francis Cairn cross, for example, argued that, ‘as poor countries grow richer and trade is a
powerful source of wealth – their environmental standards will rise.

CONVENTIONAL WISDOM ON ECONOMIC COMPETITIVENESS

The economic competitiveness of nations is traditionally judged using a variety of indicators of productive
factors that demonstrate market flexibility, technological and organizational dynamism and innovation, and
social and political stability. There are many indexes of competitiveness. Each has a different emphasis,
but all in the main cover the same territory. The IMD, a leading European business school, for example,
uses 314 criteria in creating its economic competitiveness ranking covering 49 countries. These criteria are
grouped into four broad areas: economic performance, government and business efficiency, and
infrastructure. Corporate responsibility is not part of the IMD’s analysis. However, many of the precepts of
corporate responsibility are embodied in the IMD’s handling of so-called ‘soft’ issues, such as ‘values-in-
society’, and attitudes towards gender and other aspects of discrimination. Notable is that most of these
issues are located within the IMD’s fourth category, ‘infrastructure’, a simple indication that the IMD does
not consider these to offer any direct contribution to business productivity. Indeed, they are, in the main,
not even seen as providing any indirect contribution to business and overall productivity in that these criteria
are framed largely in the negative, i.e. scoring positively towards economic competitiveness if they do not
constrain market flexibility or productivity. In some instances this borders on tautology. The criteria
‘environ- mental laws’, for example, is understood to mean “Environmental laws and compliance do not
hinder the competitiveness of businesses”. There is, in short, little indication in the IMD approach of the
view that responsible behavior might contribute towards competitive advantage, for example through its
positive impact on workforce motivation, innovation or brand recognition. The World Economic Forum
(WEF) has also contributed its thinking to the analysis of economic competitiveness. The WEF’s
competitiveness index is calculated using five categories of criteria and associated data: the country’s level
of GDP per capita in 1992; the Economic Creativity Index; the Finance Index; the International Index; and
the Economic Crises Index. Although framed differently, the majority of the underlying criteria used in
these five categories are broadly similar to those used by IMD. Not surprisingly, therefore, its Global
Competitiveness Report provides a country competitiveness ranking strikingly similar to that of the

The conventional wisdom about economic competitiveness, in short, treats societal issues in one or more
of the following ways:

• Inputs to business (often externally developed and delivered), rather than a part of business strategy and
outcomes;

• Enabling economic competitiveness where they build human capital or other inputs at minimal cost;

• Neutral (at best) where they do not undermine market flexibility and the overall dynamics of the social
economy.

COROPRATE RESPONSIBILITY
The role of business in society is a hot topic amongst public policy makers, NGOs, trade unions and the
business community itself. Increasing numbers of corporations are expressing the aspiration of addressing
the ‘triple bottom line’ in their policies, strategies and practices. This growing business group has mainly
been led by global corporations with retail premium brands. More recently, this group has been joined by
increasing numbers of hitherto less visible corporations that have been directly or indirectly impacted, often
negatively, by rising public concern and anger. The changing role of business in society has come to mean
many things. Corporate sustainability, corporate social responsibility, and corporate citizenship are but a
few of the new terms that have emerged to describe this period and process of challenge and change. There
is, however, an emerging consensus that the scope of the challenge is not confined to philanthropic
activities, and moreover extends beyond the more obvious legal responsibilities to include for example
labour standards in supplier factories, the accessibility by poor people to life-saving drugs, and the basis by
which and transparency of how management decisions are made”. This are the dimension of corporate
responsibility; • Human rights •Working conditions • Equality and diversity • Consumer protection
•Environment and health impacts • Economic development • Ethical business practices •Lobbying and
political influence • Businesses’ role in conflict zones.

How Does Corporate Responsibility Relate To Market Flexibility?

Free market proponents have long argued that the best way to overcome poverty is to liberalize markets,
thus unleashing the dynamism of capital effectively applied by profit-seeking business entrepreneurs. From
this camp has emerged a potentially significant critique of corporate responsibility, best represented by the
work of the ex-OECD Chief Economist, David Henderson.31 Henderson argues that societal ills are best
addressed through liberal markets in which the remit of business is to make profit and where the role of
government is the redistribution of wealth through the collection of taxes and provision of public services.
He argues that in voluntarily accepting responsibility for broader social and environmental outcomes,
business incurs significant costs, which in turn hampers the effectiveness of markets, reducing the potential
for wealth creation that could otherwise alleviate poverty and social inequality. Demonstrating the many
business cases for corporate responsibility goes some way to undermining this argument. However, most
business cases are still rooted in first generation, short-term reputational and financial benefits. It remains
plausible that a company could find it profitable in the short-run to embrace aspects of corporate
responsibility practices, whilst still suffering as a result from reduced competitive- ness in the longer-term.
Some would argue, for example, that the demise of Ben & Jerry’s and the poor financial performance of
The Body Shop were intimately related to their ‘misguided’ focus on aspects of corporate responsibility
that over time eroded their competitive thrust. There is little doubt that the efforts of companies such as
Nike to improve labour standards in global supply chains cost real money that is not directly recovered
through increased sales and profits. Addressing labour standards thoroughly does not automatically bring
its ‘just rewards! Reduced reputational risk, although real, does little to level the cost-based playing field
with what John Elkington calls the ‘stealth companies’ organizations that remain under the radar of public
scrutiny whilst investing little or nothing in progressive change.

The very notion of market flexibility has become so ideologically charged that some advocates of
progressive corporate behavior reject it outright as a worthy challenge. This is a mistake, and potentially a
lethal one. Economic competitiveness certainly needs a dynamic and enterprising business community.
This is nurtured and enabled in large part by markets that encourage and reward innovation, minimize
unnecessary costs, and allow business to focus on the challenges of securing viability and success. The
desire for corporate responsibility must go hand in hand with the need for appropriate flexible markets.
There is therefore clearly a challenge in ensuring that corporate responsibility practices do not damage the
dynamism of the broader economy by becoming, for example, overly bureaucratic.

Corporate Responsibility Clusters as Drivers of Competitive Advantage?

The initial research by Accountability and The Copenhagen Centre suggests that the dynamic, relational
aspects of corporate responsibility practices may well provide the key to understanding its links to a nation’s
economic competitive advantage, and so its ability to provide significant support in addressing public policy
goals. This resonates with the idea of ‘clustering’ as a basis for analyzing economic processes that has
gained considerable credence amongst economists and business leaders alike since it was first put forward
by Michael Porter of Harvard University.32The term cluster refers to collectives of organizations that are
not only linked through buyer-seller relationships, but through a broader set of interactions. These
connections allow for a collective, but self- organizing development process across the business
community.

In terms of corporate responsibility, common issues such as labour integration, social investment strategies,
lifelong learning for the work- force, gender and ethnic minority representation and participation in
decision-making face all industries and sectors in varying degrees. They are likely to have the same
stakeholder groups in common and by working with them in collaboration, groups of businesses can
significantly and collectively address issues that are of pressing importance to local and regional
communities and the wider array of societal interest groups. Similarly, in terms of environmental
stewardship, clusters of businesses are likely to be drawing upon the same pool of finite resources and be
subject to the same pressures to demonstrate responsibility, be affected by the same regulation, be levied
by the same taxes and be subject to the same public policy environment. The idea of ‘corporate
responsibility clustering’ takes the model of synergies between competing companies to an altogether
different level, and into largely unexplored territory. It may be, for example, that companies based in
countries with unusually intensive NGO climates, such as the UK, become more knowledgeable about civil
society, more able to handle NGOs around the world, more effective in managing reputation, and even more
dynamic in identifying new product and process opportunities associated with social and environmental
dimensions of performance. It is very likely that companies that have invested in partnerships with NGOs,
trade unions and public bodies in addressing anything from ‘conflict diamonds’ to bribery to labour
standards will be more competent in identifying and building profitable business partnerships. Service
providers from auditors to PR advisors will build specialized skills and networks in the field of corporate
responsibility, which can be a source of international business opportunities in the future. Public bodies that
learn to thrive in environments where corporate responsibility practices are more visible and debated are
perhaps more likely to develop productive relationships with the business community. Such governments
that are also active on the international stage, moreover, will tend to pro- mote corporate responsibility in
international markets, thus providing an additional foundation for such practices to underpin their own
business community’s competitive advantage.

‘Corporate responsibility clustering’ is a multi-faceted affair. It extends beyond the business community,
and can include relationships as diverse as partnerships and law-breaking confrontations. The over-arching
competitive advantage that such clustering might deliver is rooted in many possible learning mechanisms
and processes, ranging from viral forms (e.g. NGO campaigns spreading across sectors) through to
antibiotic variants (e.g. companies investing in learning and change to prevent potential problems in the
future). From this perspective, NGOs can and do provide an extraordinarily cost-effective consultancy
service to business, accelerating their learning, sensitizing them to new issues, and creating more
responsive, agile organizational cultures. Corporate responsibility will support social inclusion at national
and regional levels if we can move it beyond ad-hoc initiatives and stand-alone business cases. The
dimensions described above provide food for thought, and some signposts to guide much-needed
exploration of the facts of the matter.

The role of trust and shared values

Trust and shared values appear as central mechanisms for work co-ordination and control in the flexible
enterprise. From the perspective of organizational theory, when work is complex and constantly changing,
"direct control" based on supervision becomes too expensive, and "bureaucratic control" based on work
standardization cannot be used. Organizations have to rely on "unobtrusive control", or “the control of the
cognitive premises underlying action” (Perrow, 1986, p. 129). This form of internalized control is
conducive to trust by one's peers and management, allowing for co-operation to develop within the
organization. Firms can either select individuals with appropriate norms and/or develop them in new
recruits through the processes of interaction taking place within the firm. Within contract theory, trust is
regarded as an alternative mechanism to the market and the bureaucracy for coordinating transactions.
Under conditions of strong uncertainty and complexity, the firm cannot control transactions through market
prices or bureaucratic rules, and relies on socialization as the principal mechanism of mediation or control
(Ouchi, 1980). Macneil (1980) further elaborates on the distinction between market-based and trust based
transactions, making an important contribution through his typology of “discrete” versus “relational”
contracts. Discrete contracts are strictly defined in their duration and content. They are limited to the
exchange of goods, with a well-specified distribution of costs, benefits and responsibilities between the
parties.

By contrast, relational contracts primarily involve persons rather than goods, so that they tend to be unique
and non-transferable. The value, content and duration of exchange are loosely specified and the transaction
proceeds in an adaptive manner, on the basis of shared norms and values among individuals. Thus, trust
has a well-established function as co-ordination and control mechanism both in organization and contract
theories. While more subtle and difficult to implement than other mechanisms, control based on shared
norms and values appears as the most effective choice when activities, or transactions, are of a complex
and changing nature.

The strategic role of human resource management

The role of human resource management (HRM) in supporting firms’ competitive advantage has received
growing attention over the last decade, leading to the emergence of different streams of literature. The
strategic human resource management (SHRM) perspective sees HRM as contingent on firms’
environment, competitive strategy and organizational structure (see Lawler, 1995, for review). When
competitive strategies are targeted toward innovation and adaptability in a complex and changing
environment, the relevant modes of HRM present similarities with those identified in the Japanese
model(Aoki, 1990, 1994; Cole, 1994; Koike, 1994) as well as the U.S. participative management model
(Beer et al., 1990; Kochan and Osterman, 1994; Pfeffer, 1994). In these various approaches, the central
goals of HRM are to promote employee commitment to the work of the organization, to foster employee
initiative and creativity, and to provide the firm with an adequate pool of individual competencies.
Achieving these goals requires a consistent set of HRM practices including the selection, development,
appraisal and motivation of the workforcee. First, researchers emphasize the greater selectivity of firms
engaged in competencies development strategies. Selection criteria can be of an objective nature when
applied to technical skills, but tend to be rather general and subjective for evaluating work attitudes and
values, or the ability of individuals to successfully operate within the organization. Second, human resource
development can be defined as “a series of experiences that stretch individuals to learn new knowledge,
attitudes, and behavior” (Beer et al., 1990). It relies mainly on job and task experience, i.e., on-the-job
training, which is most conducive to the development of experiential knowledge. Third, the appraisal of
individual performance relies on a combination of objective and subjective criteria. The former can be used
for evaluating results, while the latter apply to the assessment of work attitudes and behaviors, the best
reflect the potential contribution of individuals to the organization. Techniques to motivate the workforce
present greater variations depending on the country considered. In the Japanese model, employees are
motivated to engage in continuous learning and problem-solving because these activities are taken into
account in performance appraisal, which in turn affects promotion opportunities.

Changing forms of industrial organization: the rise of global production networks

As previously mentioned, competence-based organizational strategies involve to redefine both firms'
activities and their relations to other firms performing complementary activities. Through externalization
and quasi-internalization, enterprises are developing complex webs of inter firm linkages, thus transforming
the organization of production within their industry through the emergence of network forms of
organization. These networks have studied from a variety of theoretical perspectives, among which the
"strategic network” and "global commodity chain" approaches can be usefully combined for the purpose of
our analysis. On the one hand, both are concerned with the organization of complementary activities within
the value chain, and with changing firms' power positions within their industries. On the other hand, each
emphasizes distinct and complementary aspects of production dynamics. The strategic perspective on inter
firm networks is primarily concerned with firms ‘competitiveness. It defines a strategic network as a “long-
term, purposeful arrangement among distinct but related for-profit organizations that allows those firms in
them to gain or sustain a competitive advantage vis-à-vis their competitors outside the network” (Jarillo,
1988, p. 32). Drawing on management theory, the strategic perspective highlights the need for command
and co-ordination within inter firm networks, if these are to provide a superior source of competitive
advantage. Accordingly, a strategic network is led by a focal organization that co-ordinates relations among
firms specialized at various stages of the value chain (Jarillo, 1988; Sydow, 1992; Miles and Snow, 1994).
Such perspective allows to link firms' organizational strategies to the dynamics of inter firm relations, by
shifting the focus of analysis from the firm to the network, while retaining a consistent view of
competitiveness and its organizational requirements. However, the strategic network approach says little
on the broader social, institutional, geographical conditions of firms' operations, as these tend to be
consistently overlooked in management and strategy research.
The Competitive Environment

Whilst it is essential for all managers to have some insight into how their organization is affected by the
environment, it is also desirable for them to consider how some of the environmental forces might be
influenced and managed to gain benefits for the organization. This is less possible generally in the case of
small businesses as they are relatively less powerful. However, small companies should examine their
environment for opportunities and threats in order to establish where they can gain competitive advantage
and where their resources might most usefully be concentrated.

Thinking strategically requires an awareness of alternative strategic purposes and objectives and the ability
to recognize critically different environments. In addition it requires the ability to diagnose an organization
in terms of various critical characteristics and to be able to shape those characteristics so that the
organization is best fitted to its environment in order to achieve its strategic purposes and objectives.

A complex and dynamic modern environment is inevitably difficult to forecast, the inherent uncertainties
can make it highly unpredictable and potentially chaotic. Individual managers would develop their
environmental and strategic awareness through experience and perception, and by thinking about their
observations and experiences. It is particularly important to assess the significance of what happens and
what can be observed to be happening. However, in considering future strategic changes there will be an
additional need to supplies, customers, competitors, demand, technology, government legislation and so
on. Managers who are encouraged to think about future changes, to ask questions and to query assumptions
will increase their insight and awareness and this should help decision making.

Effective strategic management involves more than just a few easy steps. It requires managers to thing
strategically, to develop the ability to see things in motion, and to make sense out of a cloudy and uncertain
future by seeing the interdependency of key factors. This ability requires more than a passing awareness of
significant social, political, legal, economic and technological trends.

Managers who think strategically are able to envision their organizations in the context of world trends and
events and to spot important interdependencies. They focus on how their organization should act and react
to emerging opportunities and barriers.

For any organization certain environmental influences will constitute powerful forces which affect decision
making significantly. For some manufacturing and service businesses the most powerful force will be
customers; for others it may be competition.

According to Ansoff, the extent to which the environment is changeable or turbulent depends on six factors:
changeability of the market environment, speed of change, intensity of competition, fertility of technology,
discrimination by customers, and pressures from governments and influence groups. He suggests that the
more turbulent the environment is, the more aggressive the firm must be in terms of competitive strategies
and entrepreneurialism or change orientation if it is to succeed.

The competitive environment is affected by market structure and profitability; the intensity of competitive
rivalry and the degree of differentiation; market growth; the stage in the life of the products or services in
question and the frequency of new product launches; capital intensity; and economies of scale. It is
important for managers to appreciate where the greatest opportunities and threats lie at any time and focus
attention on those areas which are currently affecting the organization and which require strategic attention.

Strategic Approach

Strategy is not about planning, but about thinking and doing. It is not a technique, but a way of managing
the business according to a strategic understanding and perspective

Strategic management is concerned with understanding, choosing and implementing the strategy that an
organization follows. Managers should be aware of the issues which must be addressed if changes in
strategy are to be formulated and implemented effectively. In addition, they should be aware of the
managerial and behavioral processes which take place within organizations in order that they can
understand how changes actually come about. Strategic management is the ongoing process of
ensuring a competitively superior fit between the organization and its ever-changing environment. Strategic
management is the process that defines the organization’s mission, scans the environment to ascertain
opportunities, and then merges this assessment with an evaluation of the organization’s strengths and
weaknesses to identify an exploitable niche in which the organization will have a competitive advantage.
This process also includes implementation. The best strategy can go away if management fails to translate
that strategy into operational plans, structural designs, systems of motivation and communication, control
systems, and other necessary means of implementation.

Strategic management involves awareness of how successful and strong the organization and its
strategies are, how the effectiveness of these strategies might be improved, and of how circumstances are
changing. The important issues are:

• the ability of the organization to add value in meaningful ways, which

• exploit organizational resources to achieve synergy and at the same time

• satisfy the needs of the organization’s major stakeholders, particularly customers and owners.

The selection of new strategy must take account of these criteria.

The studies of small manufacturing firms competing in a wide variety of industries suggest that obtaining
information on several aspects of specific environmental sectors (for example, customers, competitors,
suppliers) facilitates alignment between some competitive strategies and environments (that is, industry life
cycle stages) whereas the frequency of scanning has no effect on such alignments.[2]

Environmental scanning is generally viewed as a prerequisite for formulating effective strategies.

Moreover, effective scanning of the environment is seen as necessary to the successful alignment of
competitive strategies with environmental requirements and the achievement of outstanding performance.

Environmental scanning is viewed as the important step in the process linking strategy. Scanning the task
and general environment allows a firm to learn about opportunities that it may be positioned to take
advantage of and conditions or events that threaten its performance or survival, thus enabling the firm to
formulate a competitive strategy congruent with critical environmental conditions.
Organizations must be able to understand the complexity and trends of the changing environment. Some of
the changes will be the result of external forces. Others will be the outcomes of actions taken by
organization itself. From this learning, organizations must be able to manage change successfully, changing
technologies, processes and architecture to maintain a successful match with the environment. In turn this
should create positive and beneficial competitive outcomes.

Therefore strategic management in small organizations should involve the following:

• a clear awareness of environmental forces and the ways in which they are changing

• an appreciation of potential and future threats and opportunities

• decisions on appropriate products and services for clearly defined markets

• the effective management of resources to develop and produce these products for the market –
achieving the right quality for the right price at the right time.

Strategic management is effective when resources match stakeholder needs and expectations and change
to maintain a fit in a turbulent environment. The external environment consists of suppliers, distributors,
customers and customers as well as bankers and owners. If organizations want to be successful and in many
cases, profitable, they have to meet the needs and expectations of their stakeholders. Their relative demands
determine what it is that a business must do well.

Therefore, if organizations are to satisfy their stakeholders, especially their customers, whilst outperforming
their rivals, their competitive offering should comprise:

• the ability to meet the recognized key success factors for the relevant industry or market

• distinctive competencies and capabilities which yield some form of competitive advantage, and

• the ability and willingness to deploy these competencies and capabilities to satisfy the special
requirements of individual customers, for which a premium price can often be charged.

Strategic success requires a clear understanding of the needs of the market, and the satisfaction of targeted
customers more effectively and more profitably than by competitors.

Competitive advantage

Real competitive advantage implies companies are able to satisfy customer needs more effectively than
their competitors. It is achieved if and when real value is added for customers.

A business must add value if it is to be successful. The important elements in adding value are:

• understanding and being close to customers, in particular understanding their perception of value

• a commitment to quality
 • a high level of all-round service

• speedy reaction to competitive opportunities and threats

Small organizations which understand their customers can create competitive advantage and so benefit from
higher prices and loyalty of customers. Higher capacity utilization can then help to reduce costs.

While it is important to use all resources efficiently and properly; it is also critical to ensure that the potential
value of the outputs is maximized by ensuring they fully meet the needs of the customers for whom they
are intended. An organization achieves this when it sees its customers´ objectives as its own objectives and
enables its customers to easily add more value or, in the case of final consumers, feel they are gaining true
value for money.

Business strategy in an Organization

Business strategy is all about competitive advantage. In general, strategy is to do with long term
prosperity. It is concerned with long term asset growth, not short term profit. Thus businesses need strategy
in order to ensure that resources are allocated in the most effective way. This is particularly important when
it comes to major resource allocation decisions.

The purpose of strategy is therefore not best conceived in terms of its impact on “the bottom line”. Instead
it can be identified in more operational terms as setting the direction of a business and achieving a
concentration and consistency of effort. In this way inconsistent flitting from short term opportunity to short
term opportunity is avoided and business expertise and leadership can be built up. Finally, the purpose of
strategy must also be to ensure an awareness of when change is necessary and thus the ability to be flexible.

Business strategy is concerned with how to make an individual business survive and grow and be
profitable in the long term.

The main considerations are as follows:

• the creation of customers

• the identification of appropriate market niches where no competition exists

• the identification of customer needs and how best they can be satisfied

• the application of technology and its future development or substitution

• the understanding of competitors and how direct competition may be avoided

• the motivation of people to put their efforts and enthusiasm behind the strategic aims of the
business.
 According to Henry Mintzberg, business strategy could follow one of three modes: planning,
entrepreneurial, and adaptive. He argues that the right choice depends on contingency variables such as the
size and age of the organization and the power of key decision makers.

The planning mode is a strategy approach that includes a clear statement of objectives, a systematic
analysis of the organization and the environment, and a plan of action to reach those objectives. Managers
should follow the planning mode when the organization is mature and well established, resources are
adequate to engage in opportunity analysis, senior management is in agreement as to the organization’s
objectives, and environmental uncertainty is at a low level. Different conditions may favor one of the other
modes.

The adaptive mode is a strategy approach characterized by both the organization’s objectives and the
means to achieve these are continually adjusted. The organization moves ahead timidly in a series of small
disjointed steps. The adaptive mode of strategy making will be most effective when environmental
uncertainty is at a very high level, thus focusing management’s attention on the short term, and when
internal power struggles make it impossible for senior management to agree on where the organization
should be going.

The entrepreneurial mode presents a strategy approach in which, a strong leader, usually the organization’s
founder, draws on personal judgment and experience to form an intuitive image of the organization’s
direction. This strategy is characterized by bold decision making in which periods of pause are followed by
periods of sprinting. The entrepreneurial mode is more likely to be effective when the organization is young
and small, when a single, powerful leader has an intimate knowledge of the business, or when crises occur.

Small businesses produce relatively few products or services. Their resources and capabilities are limited.
Their strategic options are comparatively simple and narrowly focused. These conditions do not require the
sophistication inherent in the planning mode. Strategic planning practices in small firms have been found
to be unstructured, irregular, and incomprehensive. They are best described as informal; they are almost
never written down and are rarely communicated beyond the chief executive’s closest associates. Moreover,
the strategic focus in small businesses takes on a more limited time horizon than in large organizations,
usually covering periods of two years or less. Based on Mintzberg´s analysis, we might expect the strategic
planning process in small business firms to resemble the entrepreneurial mode more than the planning
mode. This is what surveys indicate.

Entrepreneurship and Strategic Management

There are numerous examples of entrepreneurs, who, by reason of considerable success early on, thought
they could rely on their intuition only, and failed. In other words, good ideas and visions are necessary but
not sufficient; they must be complemented by rational analysis. Strategic management provides for a
method, and an attitude to filter the visions of entrepreneurs through rational analysis and decision-making.

The main objective of strategic management is, therefore, to guide the flow of ideas and visions, and convert
them into business decisions.
The Strategic Entrepreneurship Concept of Strategic Management in Small and Midsized
Organizations

The concept of strategic management in small organization should be the strategic entrepreneurship
concept. This concept incorporates both the intuitive-creative and the rational elements. The strategic
process is kicked off by the entrepreneur in the firm, presenting his view on how the organization should
develop and what quantitative targets he has in mind. This leads to a vision statement which outlines how
the company should develop and which targets should be met in time. The vision statement is the
expression, in business terms, of the entrepreneur’s intuitive views. Following this, a rational process starts
with the well-known internal and external analyses, because business decisions require and internal as well
as an external situations, as well as the vision of the entrepreneur. In this way the internal and the external
analyses provide the criteria by which the final decision can be chosen from a range of options and
implemented including controlling. The process of finding options for the issues is, once more, intuitive.
Selection is a rational process, using criteria derived from the vision statement, especially its quantitative
targets. The option which best satisfies the criteria will be selected as the decision concerning the issue.
This is the way in which entrepreneurs make their major decisions.

Strategic approach and Small and Midsized Firms

Small business managers´ experiences with strategic approach and strategic management point to the
need for possible modifications in this process.

First, the process need not be as detailed or lengthy as practiced by large organizations. It could involve
simply responding to the questions:

• Where are we?

• Where do we want to go?

• Can we get there?

• How can we get there?

• What decisions must be made to get there? How do we monitor performance?

Second, because of an organization’s small size, most if not all key employees can make inputs into the
process. This allows the company to use important expertise and contribute to the development of employee
commitment and communication. In essence, it becomes a valuable learning experience for all involved.

Finally, top management, or the top manager must be willing to give strategic management a chance. The
manager must recognize that his or her company has become a growing enterprise. There is a need for
taking the planning out of the mind of a single person and spreading the responsibility around. The benefit
of this is that the process of transforming a company into a formal organization is enhanced.

Strategic approach in small firms offers some unique advantages and disadvantages.
On the positive side, an organization’s small size may not present the complexity and detail faced by
strategic planners in larger firms. In fact, the small business may be considered simply a strategic business
unit. Other advantages include limited products, services, and markets served, the relatively small resource
base, and a limited number of options.

On the disadvantage side, some equally significant issues exist. First and foremost, the executive team is
usually small, sometimes only one person. This executive, or entrepreneur, may have always operated the
firm from his or her own instincts and sees little use in formalized procedure. Second, information and data
to prepare an external and internal analysis may be limited, if they exist. Third, key employees usually have
gained their skills through experience rather than with the use of systematic procedures, and resistance to
change may develop. Other problems may include the constraint of limited resources and the issue of
company ownership.

Planning for Competitive Advantage

If the organization gains an advantage, the business will survive. If that advantage is significant, the
organization will thrive. According to M. Porter, companies can choose between three general strategy
types to build competitive advantage: a differentiation strategy, a low-cost strategy, and a third approach,
frequently used by entrepreneurs, is focus, or a niche strategy.

A firm that uses a differentiation strategy competes on the basis of its ability to do things differently than
its major competitors do. A firm that uses a low-cost strategy builds competitive advantage by producing
goods or services at the lowest possible cost. And if entrepreneurs persist in their ability to keep costs lower
than others, their organizations thrive. In contrast to the cost leadership and differentiation strategies, which
are based on the creation of competitive advantage over an entire market segment, Porter´s focus, or a niche
strategy recommends focus on market niches – on specific target groups, particular portion of the product
spectrum or a narrower geographical market. Competitors using niche strategies are specialists. They serve
a narrow market segment that can be local or national. Niche strategists build special skills that are uniquely
matched to a specific market; they are rewarded with high profit margins. Effective entrepreneurs are aware
that establishing and maintaining a competitive advantage is a great challenge. Without careful attention,
competitive advantage can be easily lost.

The Competitive Specialization

Though an understanding of the business mission is the key to survival, it is not in itself sufficient for
high performance. That is achieved by exploiting the competitive specialization. There are three ways in
which the competitive specialization can be exploited.

Firstly, it can be strengthened or intensified so that it is more readily perceived by customers or so that
customers accord it a higher value and are therefore prepared to pay a higher premium. Thus, for example,
a specialization related to product quality could be intensified by increasing the quality of the product
further and/or promoting the quality of the product more effectively. The result will be to increase the actual
and perceived level of quality and reduce the price sensitivity of the product.
Secondly, the specialization can be broadened so that it satisfies the needs of more customers. The most
obvious way that this can be done is by geographic broadening, but any product which is focused on an
arrow segment of the market can potentially have its focus broadened to appeal to other segments.

Finally, the specialization can be prolonged, so that it survives through developing technology and changing
consumer tastes.

Intensifying the specialization must only be done with care and on the basis of hard information about
customer perceptions. Broadening the specialization also has its dangers. Widening that focus to encompass
more market segments risks losing its perceived value to the existing customers. Similarly with prolonging
the life of a specialization, some specializations are related to single products, or to single clearly defined
markets, which have finite lifetimes.

Conclusion
A new manufacturing mindset
A confluence of external market pressures, new technologies, and new competition compels manufacturers
to transform their business processes. The report reveals that effective, lasting transformation requires a re-
think of strategy and planning, an intense focus on creating service-based value, and an embrace of
technology-driven innovation above and beyond traditional.

Given that, how should manufacturers shape their transformation priorities going
forward?
Map market trends
The research suggests that manufacturers must start by grasping the market trends expected to have the
greatest impact over the next three years and then map those findings to how they currently align strategy
and planning. Global economic headwinds over the past decade combined with new technology rank as the
top two factors (cited by 66% and 61% of respondents, respectively) that have created a systemic rather
than cyclical change in manufacturing competition.

Questions to consider:

■ Do we have a clear idea which market trends are likely to have the greatest impact on our firm over the
next three years?

■ Do we have an economic model that quantifies how our transformation initiatives and priorities impact
our revenue and costs?

Assess coordination of strategy and planning activities

A second step is for manufacturers to analyze how they coordinate strategy and planning activities across
their organizations. Executives must ask themselves and their teams how their strategy and planning process
aligns engineering, service and supply chain/manufacturing functions. Among the likely methods to drive
tighter coordination over the next three years are global product quality (60%), global service (57%), and
global product compliance (55%) efforts. Each endeavor also depends on a closed loop among functions
inside the organization and between the manufacturer and its partner ecosystem.

Questions to consider:

■ Do we know how well strategy and planning is coordinated within and across our business functions
(e.g., engineering, supply chain) to respond proactively to market trends?

■ Do we have in place robust methods for coordinating strategy and planning throughout the organization
and partner ecosystem (e.g., global product quality, global product compliance, global product
development)?

Measure progress toward a service-centric business model

Service cannot be viewed simply as a way to enhance the value of present products, but as a distinct value
proposition and revenue generator in itself. To start, manufacturers must take feedback from service
execution to drive decisions and enable improvements across service planning as well as product
development and quality. Within three years, 77% of surveyed executives intend to harness service
execution feedback to improve their service value propositions, while over half (52%) plan to use the same
data to improve product development and quality; 56% plan to establish service as a profit center.

Questions to consider:
■ Do we have an effective HR strategy for recruiting, training, and retaining the talent needed for ongoing
service transformation?

■ Are we maximizing our use of remote diagnostics, and other forms of direct feedback to improve the
customer experience with our products and services?

Understand sources of innovation

Manufacturers must approach innovation as an enterprise-wide effort. Leading manufacturers are sourcing
innovative solutions from emerging markets and bringing them to developed ones (50% of surveyed
manufacturers within three years). Alongside geographic sources for new innovation, firms are expanding
the use of smart products (over half of total respondents, 60% of very large firms, and over 70% of high
tech firms within three years) to give them greater insight into customer needs and preferences.

Questions to consider:

■ Do our innovation efforts extend beyond traditional R&D to encompass all parts of the enterprise
ecosystem?

■ Do we embrace a design, build, and service anywhere philosophy, and how do we compare to competitor
capabilities and customer expectations?

Thus, there will be no shortage of work for manufacturers that keep up with the speed at which market
trends evolve and stand ready with a relevant value proposition. Indeed, those who choose the right
priorities now are most likely to be the ones that thrive during this important period of industry
transformation

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