Integration and operational velocity of financial markets
Financial markets have been e-based for a long time and they operate 24 hours a day with a speed that is several times higher than a generation ago. Organisations, irrespective of size, can now cost-effectively manage banking relationships outside the home base. It is no longer an operational necessity for a UK-based company to bank in the UK, other than to have the means of meeting the day-to-day requirements of the business, such as paying suppliers and transacting payroll – though even these activities are getting increasingly decoupled from any country base. I know of several UK companies – some not very large – whose banking is done far from the UK.
Globalisation has affected the financial services sector to a greater extent and more quickly than other sectors. Since the “transfer� of money is very rarely a physical transfer and lends itself to computer-based operations, it is perhaps not surprising that this sector was the first to experience the effects of globalisation. Mergers and acquisitions in the banking sector have been both a driver of globalisation and a response to its anticipated potential.
Capital is a commodity and is tradeable on an arbitrage basis. The problem with this is that, given the much-increased circulation velocity of capital, markets adjust and attempt to clear much more quickly than in the past. This gives rise to a potentially higher level of foreign exchange risk ion the search for optimal foreign exchange cost. This gives us a very significant aspect of globalisation. If a firm can operate a global financing policy, the process of hedging minimises the effects of currency movements. If this is allied to a global sourcing policy, there is a closer balance between costs and revenues and a more even cash flow. Thus, purchasing gradually becomes more strategically significant.
This argument extends to ownership. Though a firm may be incorporated in one country, many are listed on several stock markets. Ownership of capital is thus a discriminator. Whilst it remains hard to find a firm whose stock is majority-owned outside its country of incorporation, the trend is clear. Therefore, even with minimal foreign trade, a company could be regarded as global via its ownership structure.
Diffusion of computer-based technologies and information systems
The advent of affordable computing power, previously available only to organisations with lots of money and strong cash flow, has helped to level the playing field. The concept of a “leadingâ€? company is changing. Large conglomerates are no longer automatically admired for their scale – indeed many are shunned by the increasingly well-informed investment houses. Many of the major breakthroughs are made by small, entrepreneurial companies based in mutually supportive clusters and supply webs.
The basic business question is how to satisfy the demand of customers who have a (now increasing) range of choice. Classically we used to see this as a choice between innovation/differentiation and operational efficiency/cost leadership. Nowadays there is usually no choice: both are necessary. The dimensions of quality and price are no longer a trade-off.
Information has become the “body tissue� of the modern corporation. Whereas previously trade arrangements were concluded substantially on the basis of asymmetrical information, the greater transparency in information has lead, simultaneously with the opening of markets under GATT and WTO, to a situation in which optimisation is easier and it takes no account of geographical boundaries. Though we are still faced with the principles of choice, complexity and incomplete information, the greater diffusion of I.T. has made the downside of this basic aspect of business a lot easier to deal with. Quite simply it makes it easier for companies to see where true value is added. It is my belief that we are seeing the end of the trade-based chain, in which a middleman imports, holds stock and then sells at a mark-up into a computer-based chain in which there are no middlemen but jointly-managed inventory based on integrated and interactive supply-demand systems between prime supplier and final customer. Superimpose this on a production function that operates across national boundaries and the result is much better resource utilisation. This leads us naturally to the concept of the “agile corporation�.
The “agile� corporation
As a direct result of the development of affordable computing capacity, a whole new range of organisational forms has become available. From the fixed, asset-based form we are observing more activity completed on the basis of “web� or “network� organisations. These have been termed “virtual� or “extended� companies: the more significant form is the “agile corporation�.
In most manufacturing sectors of the world’s developed economies there is one issue above all others that concentrates the mind of management; the erosion of unit prices and the decline in control of manufacturers over pricing. Each year manufacturers of many industrial products are facing the need to reduce product prices, or offer more features for the same price. Producer prices are, quite simply, eroding throughout the developed world and most notably in economies that have been noted for their manufacturing leadership in the whole of the post-World War 2 period – the USA, UK, Germany, Japan. In response to this phenomenon most manufacturers in the developed world have changed the way in which manufacturing is managed. The first phase of this response was termed “Lean Manufactureâ€?, which was pioneered in Japan.
However even by the late 1980s, when the classic textbooks on lean manufacturing were appearing, the concept was already mature. Lean manufacture may be cost-effective in simple accounting terms: it is, however, somewhat inflexible. Individual lean manufacturing operations respond badly to fluctuations in demand. Therefore a concept of “Agile Manufacturing�, developed initially in the USA for defence-related manufacturing operations, emerged under the support of the United States government in the early 1990s. This concept is one of “stitching together� alliances of lean manufacturing operations. If one operation experiences a sudden surge or drop in demand, it can call on other members of the alliance to provide or accept product from any member of the alliance. For example, if we look at the despatch area of an electronics or consumer durable goods factory we will see product boxed under another manufacturer’s brand name, almost certainly a competitor’s.
Quite simply, agile manufacturing enables participants to undertake effective “operational smoothing� activity. However, it does not guarantee profitability. Manufacturers of television sets have seen profits erode year over year whilst the features of the product at a given price level have increased and product reliability has improved to the point where demand for chargeable after-sales service has fallen. In contrast General Electric has experienced considerable price erosion in its mainstream products and yet has improved profitability consistently, partly as a result of improvements in the basic operations of the company but mainly by selling related high-value services along with the products.
Manufacturing efficiency still matters: nowadays, however, manufacturing is not always the main source of added value in the total supply chain. This value has migrated elsewhere.
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