Peter Chen
Word Count: 1944 / PIN - 10305
Topic 3: Find the Next Wave to Ride On — New Business Strategies in the Changing World. How will trends affect businesses and how should companies respond to changes in trends? Peter Chen Globalization and the market trend dependency The world economy has experienced a strong wave of “globalization” in recent decades. Up until 2009, the global trade curve has grown unabated for twenty six years.i As trade internationalized, the economic power base has also gradually transitioned from G7 and dual superpowers to regional agreements, Asia, and G20. Over the next half century, the economies of Brazil, Russia, India, and China (BRIC) together threaten to surpass those of United States, Western Europe, and Japan.ii Globalization has created unprecedented opportunities for businesses to generate high profits. With greater trade comes greater access to financial capital, human power, and material resources around the world. Companies are able to obtain inputs and conduct transactions most advantageous to the bottom line. Today, 51 of the 100 largest economies in the world are corporations.iii The Top 500 multinational corporations account for nearly 70 percent of the worldwide trade; this percentage has steadily increased over the past twenty years.iv An important consequence of the globalization is the development of market trends and the reliance of companies on them. Previously, corporations respond primarily to government expenditures (especially during cold war era) and domestic consumptions partly due to trade barriers, production capabilities, and limitations in communication and transportation. The modern market has changed as businesses today react to shifts in global consumer desires and market trends.v Impact of market trends on business operations and management Market trends have substantially impacted business operations and management in multiple ways. First, companies have become more reactive than pro-active in developing product lines. Reactive mode of management leads to hasty decision making and inferior goods. Take for example the decision by Coca Cola to introduce the “new Coke” following a shift in market popularity for the trendier Pepsi product.vi However, the new Coke was illreceived in the market and Coca Cola failed to achieve its business targets. The reason for the failure was simply that Coca Cola panicked in light of unfavorable market testing and rushed out the new Coke to keep up with the market trend. In the process, Coca Cola failed to examine other variables important to business management such as customer segmentation, industry barriers, and duration of market trend. Second, businesses loose discipline in chasing market trends and dismiss efficiency.vii In order to capture as much profit as possible during a trend fever, companies are inclined to spend massive amount of resources toward the one or few products or services. On surface, this approach seems to make sense with the proverbial adage “capturing as much as you can while you can.” But companies often get caught up in the market faze and disregard utilization efficiency resulting in waste and deficit that negatively impact other parts of the business over the long haul. Sufficient cash flow buffers against waste and misspending. But, 1
Peter Chen
few companies have such luxury. American car makers make a compelling example of the gross failure to cut unnecessary spending and misstep in funneling resources toward limited product line during the Sorts Utility and large size vehicles market trend. Third, market trends lead to consolidation of firms generally.viii As the international market expands and customer definitions change, it is infinitely harder for any single company to produce all goods and services demanded by the market. Instead, smaller firms specialize in niche fields while larger firms outsource parts of their operations. Over time, smaller businesses evaporate or are acquired by larger businesses in the increasingly competitive market. We see this today as companies in the airline, financial, telecommunication, and many other industries merge in order to share resources/costs and accumulate customer base.ix Responding responsibly to changes in market trends It has been widely discussed that the trend of the future is based on technology, Asia, and emerging markets.x Yet, I posit that the importance is less the location of the market trends and more the manner of response to changes in trends. Learning from history, I would argue that businesses can best survive shifts in market trends by adopting four broad strategies. They are: long term sustainability, outward openness, diversification, and investment in innovation.xi First, the driver for business growth must be based on long term sustainability over short term profitability. This requires first and foremost the recognition of company’s core competence before jumping after any market trends.xii Essentially, a company needs to assess and understand what it is, what it does best, and what resources are available for its disposal. An analysis of core competence reveals the company’s competitive advantage and how it matches up with the marketplace. Such analysis reduces unreasonable risks and prepares a company for strategy shifts in response to changes to the market trend. In baseball analogy, it would be poor management to ask a team that relies on speed and defense to swing for home runs and neglect fielding. Understanding your team’s strength and weakness allows you to adjust the lineup and on-field strategies against competition. The call for long term sustainability also requires an alignment of a company’s core competence with its goals. Whether the goals pertain to profitability, efficiency, or nonfinancial targets, they should be driven by the company’s core competence. For example, a company that specializes in highly customized watches would be foolish to target maximum market share of the entire watch and clock industry. Instead, the goal should be to maximize the customer perception of product value in order to derive the highest selling price. Here, it should be noted that I am not suggesting companies cannot effectively readjust its core competence. Rather, I proffer only that companies must be honest in self assessment of competence. Moreover, companies must fully commit to any efforts at readjustment by reallocating sufficient resources to make the change permanent. Second, businesses should be open-mindedness toward external cooperation and information sharing with other entities as a part of its overall strategy. As consumer demands diversify and competition for resources intensifies in the global market, it is difficult for an individual business to be self-reliant and operate under a unilateralist business model. 2
Global Initiatives Symposium in Taiwan 2009
Conversely, businesses benefit by learning and joining with another in a partnership relationship – whether it be with a supplier, buyer, or even competitor.xiii IBM, for example, adopted vertical integration in monopolizing control over management of resources, production process, business relationships, and retail sales.xiv IBM achieved market share leadership for a period of time but disintegrated as the world market opened and the competitive environment changed. Contrast Proctor and Gamble (P&G) as a comparison. P&G was entrenched in weak earnings and poor forecast as short as nine years ago. Under new leadership, the company reinvigorated itself by reaching outside the company for innovation. P&G entered into a working relationship with external entities – even competitors – to come up with product ideas to successfully drive growth.xv By opening up the company’s insular culture, P&G not only infused energy and creativity but also put itself in the position of doing what it does best – brand marketing. Third, businesses need to diversify its approach in responding to trend changes. This is consistent with the old saying, “never put all of your eggs in one basket.” The simple rationale is to spread the risk associated with business decisions. Curiously, it is easily ignored in the general business world. Let’s examine the subprime mortgage fiasco as a brief case study. Banks, multinational corporations, and even business school students alike understand the fundamental flaw of subprime lending.xvi It is risky. There is little justification in lending money to people who has low ability to make repayments. However, the golden economic period created an appeal that many could not refuse. The trend was to get in on the investment banking and financial lending market when the going was great. Yet, when the bubble burst, businesses were left in dire shape while aware of the enormous risk from the beginning. The lesson learned is not that businesses should avoid all risks. To the contrary, businesses must engage in some risks in order to achieve higher profitability. The point is that companies needs to diversify their strategic plans while responding to market trend changes.xvii Institutions that invested their assets in several different financial schemes remained upright despite the recent financial market crisis. The fate of those that could not resist the temptation, and put all their eggs in one basket – i.e., Lehman Brothers, AIG, and Bear Stearns - is tragic. Lastly, businesses need to constantly invest internally to ready themselves for changes in market trends. As technologies improve and speed of business operations quickens, businesses are tested in their ability to react promptly to changes in customer demands and market fluctuations. To respond quickly, a company needs to have the right equipment and right people. Thus, timely upgrade and maintenance of facilities, equipments, and machineries are necessarily essential. More importantly, training and education of personnel are critical in a business’ ability to react expediently to changes in market trend. Here, employees need to be trained on both the technical aspect of business operations and the culture of innovation. Looking around the most successful businesses around the world, they are also the same companies with reputable training programs for employees. It is not surprising that household firms such as General Electric, PepsiCo, and PriceWaterHouseCoopers invest heavily in the education of personnel and upkeep of capital. xviii 3
Find the Next Wave to Ride On - New Business Strategies in the Changing World
Peter Chen
Conclusion In sum, the marketplace is an unforgiving place. It is competitive, demand, and dynamic. Companies need to react and quickly. Yet, there are different ways of response to a shift in market trends. Businesses that take reasoned and long term approaches are most prepared to face variances in market trend changes.
i
Associated Press, “World trade to fall 9% . . . ending 26-year growth cycle,” The Jamaica Gleaner (March 25, 2009), http://www.jamaica-gleaner.com/gleaner/20090325/business/business10.html. ii
Robert Bird, “The impact of coercion on protecting U.S. intellectual property rights in the BRIC economies,” Emerging Economies and the transformation of international business Chapter 16 (2006). iii
Sarah Anderson and John Cavanaugh, “Top 200: The Rise of Global Corporate Power,” CorpWatch Issues (December 4, 2000), http:// http://www.corpwatch.org/article.php?id=377. iv
World Trade Organization (Switzerland), “Poverty,” Trade Liberalisation Statistics (2009), http://www.gatt.org/trastat_e.html.
v
See e.g., “Bank mergers dependent on market trends,” Business World, Vol. XXI, No. 194 (May 5, 2008), http://www.bworldonline.com/BW050508/content.php?id=021. vi
John Greenwald, “Coca-Cola’s Big Fizzle,” Time (April 12, 2005), http://www.time.com/time/magazine/article/ 0,9171,1048370-3,00.html.
vii
Andy Barnett, “Chasing Trends Is Inefficient,” Libraries, Community, and Technology 51, (2002), http://books.google.co.uk/books?id=HPIQi8NPEvoC&pg=PA51&lpg=PA51&dq=chasing+market+trend+ineffi cient&source=bl&ots=Mk4m8_ekT&sig=7NCusMgMdZ2cMW0vLClcBAVDAWw&hl=en&ei=XEXRSd6eJ9KrjAfzlPUX&sa=X&oi=book_res ult&resnum=10&ct=result#PPA51,M1 viii
Tracey Walker, “Merger reflects trends of consolidation, strategic enterprise positioning,: Managed Healthcare Executive (December 1, 2006), http://managedhealthcareexecutive.modernmedicine.com/mhe/Newswire/CVS-Caremark-to-merge-PBMservices/ArticleStandard/Article/detail/389266. ix
Examples include: Within the last few years alone, Bank of America acquired Merrill Lynch, Northwest Airlines merged with Delta Airlines, and Lenovo purchased International Business Machinery.
x
McKinsey Global Survey, “An executive take on the top business trends,” The McKinsey Quarterly (March 2009), http://www.mckinseyquarterly.com/Strategy/Strategy_in_Practice/ An_executive_take_on_ the_top_business_trends__A_McKinsey_Global_Survey_1754?pagenum=2. xi
Among articles and publications consulted include the following: Deloitte & Touche, LLP, “Surviving the CR Tidal Wave: Start Swimming or You Will Sink,” Consulting Guide http://www.deloitte.com/dtt/cda/doc/content/ ca_en_consulting_SurvivingtheCRTidalWave_sept08.pdf; ; Douglas Hudson, ”Surviving Market Volatility with the Experts,” The Hudson Report (April 1998) http://www.rrsp.org/april.pdf; “Surviving a Bear Market,” Standard * Poor’s Financial Library (2009), http://fc.standardandpoors.com/srl/srl_v35/library_article.jsp?tid=7113#005.
xii
Ed Lahue, “The Sweet Spot,” The Elm Group (2009), http://www.heavenheck.com/clients/elmgrp_com/ resource/article_04.html
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Global Initiatives Symposium in Taiwan 2009
xiii
Boone, Ganeshan, and Stenger, “The Benefits of Information Sharing in the Supply Chain,” Supply Chain Management: Models, Applications, and Research Directions Chap. 14, (2006).
xiv
Lynch and Somerville, “The Shift from Vertical to Network Integration,” bNet.com (May 1996), http://findarticles.com/p/articles/mi_m0843/is_n5_v22/ai_18314629 xv
Innovation Speakers.com, “Proctor & Gamble – Transforming a global market leader,” Innovation Speakers (2008), http://www.innovationspeakers.com/case-details.php?aId=27 xvi
Smith and Davidson, “Analysis: Lenders, Investors, Buyers Fed Loan Crisis,” NPR News Morning Edition (May 27, 2008), http://www.npr.org/templates/story/story.php?storyId=90840961
xvii
Ian Jack, “Confidence (and How to Lose it), Guardian (September 20, 2008), http://www.guardian.co.uk/business/2008/sep/20/creditcrunch.banking.
xviii
See “Training top 100,” Training Magazine (2006), http://www.managesmarter.com/msg/resources/cp/top100_ranking.jsp; “Fortune Top 100 Companies to Work For,” CNN Money (2009), http://money.cnn.com/magazines/fortune/bestcompanies/2009/snapshots/1.html
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Find the Next Wave to Ride On - New Business Strategies in the Changing World
Peter Chen
Global Initiatives Symposium in Taiwan 2009