Too often business leaders put a key fact on their mental backburner – their business is surrounded by a “containing system” that shapes their company’s opportunities, risks and outcomes. Not only should leaders align their business models with external market trends, they should try to influence or shape their containing system to best support their businesses.
Here are two cases in point.
As supply chain gurus, Boeing and GM have already assessed the impact of Japan’s recent natural disasters and are scrambling for parts. Less astute companies will discover over the next six months that their supply chains are more dependent on Japan than manufacturing managers ever understood. Journalist Barry Lynn predicted these disruptions in his 2005 book End of the Line: The Rise and Coming Fall of the Global Corporation.
According to Lynn, America’s manufacturing sector has undergone a twin revolution. The first is outsourcing. Corporations used to be vertically integrated, manufacturing their smallest sub-assemblies. Today, they are final assemblers and packagers, outsourcing significant manufacturing content in order to lower labor costs, remain price competitive, and focus instead on higher-value activities. For example, Nike specializes in marketing and design here at home but outsources shoe production.
The second revolution is an unprecedented globalization of the industrial supply chain. Advances in technology and growth in free trade have resulted in global economic specialization that both lowers costs and raises global income. Taiwan now dominates semi-conductors; China’s Gross Domestic Product (per capita) increased 156% (i.e., way more than doubled) between 2000 and 2010.
The net result, according to Lynn, is a global system of production on which the U.S. is totally dependent because we’ve lost knowledge, skills, and capacity to produce goods domestically. The reward? Significantly lower consumer prices and record corporate earnings. The price? Much more risk.
We have collectively created a specialized, highly efficient global supply chain lacking redundancy — and therefore resiliency — in the face of disruptions. A natural disaster or political uprising in Taiwan, for example, will easily and quickly stop the flow of repair parts into US hospitals according to Lynn, a fact not obvious to hospitals when they purchase radiology equipment. As for post-crisis Japan – forecasts include higher supply prices and shortages across developed nations.
The risk is avoidable. For example, nations formally collaborate to ensure no single disruption will collapse financial and energy market systems. And financial services companies created duplicate record centers following 9/11. Will it take a repeat economic crash to ensure manufacturers reduce supply chain risk through geographic diversification?
My second case in point pertains to government. Businesses have largely “outsourced” political affairs to Chambers of Commerce and their industry associations, just as government workers have outsourced their voice to unions. The platforms of most business associations argue for cutting government costs and regulations. In so doing, these associations implicitly discount the importance of containing system elements other than taxes and regulations. The hidden (and mistaken) assumption is that all their members are pursuing a Wal-Mart business model, in which any cost should be driven as low as possible. (My chamber, The Greater Madison Chamber of Commerce is a wonderful exception to this rule, as is The Wisconsin Technology Council, both adopting a more holistic approach to economic development.)
What if you’re a business owner smart enough to compete on terms other than price? Or you want to pass your business onto your children? Then, factors such as more efficient infrastructure, the quality of public education, quality of life to attract and retain talent, social legislation which influences where young people locate, predictability and perhaps your local university’s research will affect your business’ success, and not just taxes and regulations.
In addition to membership organizations to which you belong, the big bucks business campaign donors – be they hedge funds, global banks, state and US Chambers or the multi-billionaire Koch Brothers, are perceived by politicians as the “voice of business.” But just as the teacher’s union voice does not truly represent the best interests of many teachers, these business lobbyists often have a different set of motives than to optimize success of your business.
For example, sixteen members of the US Chamber of Commerce contribute 55% of its income, so you can bet these 16 companies have a huge say. As my European friends tell me, the US has an industrial policy – it’s called “Whoever gives the most money to the politicians.”
Relying solely on associations therefore to influence the government-shaped part of your business’ containing system may not therefore be in your best interests. You are the most informed and passionate advocate for your business. Sit down with your leadership team to describe how national, state and local government could best help you build a thriving, profitable business and attract the talent you’ll need to replace retiring baby boomers. Then call your elected representatives and advocate for your business from this perspective.
If you want to reduce the risk of supply chain shocks find out where your supplies actually come from and build redundancy into your supply chain decisions. And if you want to create the best external environment for your business, write or directly contact local, state and national elected government officials directly.
Improve your containing system, not just your business.