Advancing Global Competitiveness

The HBS Report

The Harvard Business School conducted a study on America’s competitiveness within the global economy. The study defines competitiveness this way: [i]

A nation is competitive to the extent that firms operating there can compete successfully in domestic and foreign markets while also lifting the living standards of the average citizen.

One way to measure a nation’s competitiveness is by following that nation’s balance of trade – the difference in value of that nation’s exports and imports. An excess of exports over imports yields a positive balance, while an excess of imports over exports yields a negative balance, or “trade gap”.

The Bureau of the Census has this to say about America’s balance of trade: [ii]

The trade gap in the United States increased to $42.6 billion in October 2016, up $6.4 billion from a downwardly revised $36.2 billion in September. Exports recorded the biggest decline since January due to lower shipments of food, industrial supplies and materials, automobiles, consumer goods and soybeans while imports reached the highest in 14 months. Balance of Trade in the United States averaged negative $13.521 billion from 1950 to 2016, reaching an all time high of positive $1.946 billion in June of 1975 and a record low of negative $67.823 billion in August of 2006.

This graphic puts that into rather vivid perspective:

U.S. Balance of Trade Graph

As you can see, America’s balance of trade was roughly even from 1950 until 1975, when the balance turned sharply negative following a rapid increase in imported crude oil prices. Matters got much worse after about 2000.

To beg the obvious, America’s persistently large and negative trade gap, especially since the millennium, indicates that America does not “compete successfully in domestic and foreign markets”. Accordingly, “lifting the living standards of the average citizen” has not occurred. This is not surprising, since a trade gap is paid for by exporting cash in lieu of goods, bleeding the U.S. economy. Quite obviously, this is not sustainable.

It is my personal conviction that the dramatic decrease in the price of crude oil experienced in the latter half of 2014 is the key trigger to the relative improvement in the performance in the U.S. economy since that time. That reduction in international crude oil prices is directly attributable to the corresponding sharp increases in U.S. crude oil production, due to “fracking”.

What to Do?

Crude oil imports are an important part of America’s trade gap, but only a part. Manufactured goods are another major portion. Many other economically developed countries have positive balances of trade in the manufactured goods sector – it is not impossible. Nor is it easy. Action is needed at all levels, from individual manufacturing firms to the federal governments. Many earlier posts to this blog address competitiveness, especially for smaller manufacturing firms, as will future posts.

The Harvard study mentioned above offers an eight-point plan for policy improvements at the federal level. That plan, believe it or not, strikes me as a starting point that the incoming Trump administration might actually find actionable:

Eight-Point Plan

  1. Simplify the corporate tax code with lower statutory rates and no loopholes
  2. Move to a territorial tax system
  3. Ease the immigration of highly-skilled individuals
  4. Aggressively address distortions and abuses in international trading systems
  5. Improve logistics, communications and energy infrastructure
  6. Simplify and streamline regulation
  7. Create a sustainable federal budget, including reforms to entitlements
  8. Responsibly develop America’s unconventional energy advantage

Thoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.


[i] Michael E. Porter et al, Problems Unsolved and a Nation Divided  – A Harvard Business School Survey on U.S. Competitiveness, Harvard Business School, Cambridge MA, September 2016. The study is available for download at: http://www.hbs.edu/competitiveness/research/Pages/research-details.aspx?rid=81. It is well worth reading.

[ii] This quotation is from www.tradingeconomics.com/united-states/balance-of-trade (a service of the U.S. Bureau of the Census, accessed 31 December 2016). In the interest of clarity, some figures have been restated from millions to billions and the terms “negative” and “positive” have been substituted for the corresponding “-“ and “+” symbols.

Your Globalized Value Chains

Cost, Value and Your Value Chains

Jera LogoAs a manufacturer, your products’ value chains begin with raw materials, usually as they are extracted from the natural world. The value chain continues, step by step, until each product reaches the end of its useful life. At each step, both value and cost accumulate. Your task is to accumulate and capture more value than accumulated costs. Keep in mind that accumulated cost is of an objective nature – cash irretrievably spent. Accumulated value, on the other hand, is subjective. Accumulated value is determined by the highest available bidder at any given time. Accumulated value is often highly dependent on circumstance. In a globalized economy, as we are, there are lots of uncertainties on the cost side and on the value side.

Value Chain Events, an essay posted to this blog over three years ago, explains what value chain is and how events entirely outside your control can disrupt your products’ value chains. Value Chain Events reproduced below. It is worth reading (or re-reading, as the case may be).


Value Chain Events

From 8 March 2012

For any business, Sustainability implies “thriving in perpetuity”[1]. Perpetuity, of course, starts right now, in today’s globalized, rapidly changing and innovation – driven economy. Thriving in perpetuity requires new dimensions of strategic thinking, as well as new levels of operational efficiency and agility.

For smaller manufacturers especially, confronting this can be a daunting task. Making time to attend to working on the business means taking time from working in the business. America has lost nearly six million manufacturing jobs and over 42,000 factories in the last decade, primarily due to globalization and the recent recession. Many surviving manufacturing firms have slashed staff and focused remaining resources, human and financial, on working in the business – generating the revenues necessary to stay afloat in a truly awful business climate. Unfortunately, neglecting the bigger picture, regardless of the necessity for doing so, does have consequences.

Happily, “zoom lens” thinking[2] can be applied to working on the business, as well as to working in the business.

To illustrate this, start with your Value Chain[3]:

Value Chain Diagram

The Value Chain begins with the entire business unit and provides a convenient map for disaggregating by “zooming in” on the various steps in the overall manufacturing process. This line of thinking can be extended by recognizing that the Value Chain represents a dynamic situation – each of the links in the Value Chain is constantly changing. Further, the relationships among the links in the chain may be as significant as the condition of the links themselves.

Because of the rapid pace of change in this globalizing economy, it is important to constantly “zoom out”, to recognize Value Chain events as they occur, and then to “zoom in” appropriately, in order to manage the effects of such events. Value Chain events are news events, which may be specific to your industry or locations. On the other hand, many Value Chain events make the six o’clock news.

Here are some recent examples of Value Chain events:

>> Airbus Industries and the Boeing Corporation each introduced innovative new commercial aircraft in the last several years. The Airbus 380 jumbo jet and the Boeing 787 Dreamliner both encountered severe technical difficulties in integrating their supply chains. In both cases, delivery delays were measured in years. Customers were not amused.

Point: Integration between Value Chain links cannot be taken lightly.

>> The application of hydraulic fracturing (“fracking”) to natural gas drilling has tremendously increased the supply of natural gas in the U.S. and elsewhere. In the past, natural gas pricing was effectively linked to crude oil prices on an energy equivalence basis. Now, the supply / demand balance in natural gas has broken that linkage: natural gas is much cheaper. In 2010, petroleum and natural gas each provided about 40% of America’s industrial fuel (mostly for boiler fuel). Clearly, those firms that use natural gas have a significant new – found competitive edge.

The same applies to chemical process feedstocks. For example, firms that produce ethylene from natural gas liquids now have a huge competitive advantage over those that produce ethylene from naphtha (petroleum). Almost all familiar plastics, and many other products, are derived from ethylene.

Point: Innovations upstream, like “fracking”, can dramatically affect competitive posture.

>> In February 2012, U.S. automobile sales surprised everybody by increasing by about 14% compared to last year. Consequently, auto suppliers now find it difficult to keep cars on dealer lots.

Point: Low inventory strategies are important for manufacturers, sometimes even crucial. However, low inventory levels at several links in a supply chain can severely affect manufacturers’ agility – their ability to respond to a favorable change in customer demand.

>> Many high tech products rely on “rare earth” elements to achieve critical technical characteristics. “Rare earths”, to beg the obvious, are hard to find. Today, most “rare earths” are mined and, more importantly, refined in China. Some months ago, China threatened to disrupt supply of “rare earths” to Japan over some unrelated squabble.

Point: Be constantly aware of your suppliers, and of your suppliers’ suppliers. It’s your business to understand their business.

>> Last year, a Richter 9.0 earthquake followed by a tsunami disabled a nuclear power plant in northern Japan. Although these natural disasters occurred in a region that is not particularly industrialized, some automobile parts manufacturing is clustered there. Result: critical parts shortages for Japanese automobile manufacturers.

Point: Be constantly aware of your suppliers, and of your suppliers’ suppliers. It’s your business to understand their business.

These are just a few of the recent Value Chain events that have affected many manufacturers. Many involve environmental issues. Take a moment to share some of the recent Value Chain events that have affected your industry or location.

Chuck on Wilson Mtn.Your thoughtful comments and Value Chain events experience reports will be appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about pursuing Sustainability … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.


 

[1] Werbach, Adam, Strategy for Sustainability, Harvard Business Press, Boston (2009), pg. 9

[2] See Green and the Zoom Lens Mind, an earlier post to this blog: http://blog.jerasustainabledevelopment.com/2012/02/22/green-and-the-zoom-lens-mind.aspx

[3] The term “Value Chain”, as used here, has as much in common with the Lean Manufacturing “Value Stream” concept as with “Value Chain” as Harvard’s Professor Michael Porter introduced it in his business classic, Competitive Advantage. Those interested can learn more on the distinction between “Value Chain” and “Value Stream” at: http://www.bptrends.com/publicationfiles/FOUR%2004-009-ART-Value%20Chains-Brown.pdf

 

Another Look at the Mittelstand

 

A recent article in The Economist [1] discusses the growing international interest in the Mittelstand manufacturing firms. An earlier post to this blog describes the Mittelstand: what it is, how it works and why it matters. That post, “Focus and the Mittelstand”, is reproduced below. Additional commentary, sparked by the Economist article, concludes this post.


Jera Logo white with caption centeredFocus and the Mittelstand

From: 30 May 2013

Surviving, Striving and Thriving

The 21st century has been tough for U.S. manufacturers. During the 2000s, the U.S. lost 5.7 million manufacturing jobs — roughly one job in three –, a rate of decline that exceeds even that experienced during the Great Depression [2]. The sharp decline in manufacturing jobs began well before the recent recession, although the recession did accelerate it. While there has been some mild recovery over the last year or so, the underlying downward trend continues.

For many smaller manufacturers, simply surviving remains tough. Changing focus from surviving in the present to striving for improvement is tougher still. And actually taking steps to thrive in perpetuity may seem quite a challenge. Nevertheless, tough though it may be, there is really no alternative. The global competitive environment isn’t going to get easier.

It is useful to study what others are doing in today’s global economic situation. In fact, smaller manufacturers in some developed, high wage countries are doing quite well. Consider the Mittelstand:

The Mittelstand

The term Mittelstand refers to small and mid-sized business enterprises (SMEs) in Germany, Austria and Switzerland. The size of these SMEs quite closely corresponds to “small business” as defined by the Small Business Administration in the U.S. The Mittelstand, especially the roughly 25% of German SMEs that are engaged in manufacturing, have earned much of the credit for Germany’s economic success in recent decades and today, Europe’s present economic woes notwithstanding.

Here are some characteristics of Mittelstand firms: [3]

>> Almost all Mittelstand manufacturing firms are family owned (~95%) and most (>80%) are managed by their owners.

>> Most Mittelstand manufacturers are conservatively financed through equity (including retained earnings) and bank loans.

>> Due in large measure to stable management and strong balance sheet financing, Mittelstand manufacturers take a long-term approach to business.

>> Most Mittelstand manufacturers sell to other businesses, rather than to consumers. Customer relationships are deep and durable.

>> Many Mittelstand manufacturers pursue a strategy of extreme focus. [4] Mittelstand manufacturers succeed by dominating niche markets, often on a global scale. In 2012, the German Mittelstand featured 1,307 “hidden champions” — global market leaders. Austria’s Mittelstand added 128 and Switzerland 110. By comparison, the U.S. had 366.

>> Mittelstand manufacturers are export oriented. They grow by increasing international reach, rather than scope of product offerings.

>> Mittelstand manufacturers actively innovate. About 54% of German Mittelstand companies brought a product or process innovation to market during the period 2008 – 2010, while to European Union average was 34%. German Mittelstand R&D spending increased by 71% between 2004 and 2010, compared to +19% for large German firms.

>> Many Mittelstand manufacturers produce sophisticated products, notably machine tools and electrical equipment. The skills required for such work are developed through apprenticeship training. In 2010, more than 1.35 million of 1.62 million German trainees (about 80%) received their training at Mittelstand firms. Due to the success of Germany’s Mittelstand firms and the availability of apprenticeship training that leads to high paying careers, Germany (along with Austria and Switzerland) have low youth unemployment rates. Their current unemployment rate for job seekers under 25 is under 8%, while youth unemployment in Spain is over 50%, Portugal almost 40% and Greece a crushing 64% (February 2013).

For American Firms

The Mittelstand isn’t some sort of centralized organization with rules and requirements. Instead, it is a generalization of the individual choices and behaviors of thousands of independent firms. Those choices and behaviors are rooted in and nurtured by a regional culture. There are many SMEs in countries outside of Germany, Austria and Switzerland that act and behave much as Mittelstand firms do.

The Mittelstand approach works — so learn from it and use what you find useful!


More on the Mittelstand (added 24 July 2014)

Consider these figures:

Capture - GDP Comparisons

>> Regardless of what “everybody” knows, manufacturing can prosper in developed, high wage countries. Switzerland, for example, has a higher per capita GDP than the U.S. At the same time, a substantially higher percentage of Switzerland’s GDP comes from the manufacturing sector.

>> Austria, Germany and Switzerland all export substantially more, as a percentage to GDP, than does the U.S. Manufactured goods account for a big portion of those exports. Strong export figures contend that manufactured goods from Mittelstand countries are globally competitive. China and South Korea are both studying the Mittelstand for ideas on how to continue to succeed when as their labor costs increase.

Chuck - Austrian AlpsThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is ready to pursue Sustainability … CH

This blog and website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on Wednesday evenings.


[1] Schumpeter’s column, “German Lessons”, The Economist, July 12th – July 18th 2014 issue.

[2]  Atkinson, Robert et al, Worse Than the Great Depression: What the Experts are Missing About American Manufacturing Decline, Information Technology & Innovation Foundation (www.itif.org), Washington D.C., March 2012.

[3]  The statistical information presented here is primarily from German Mittelstand: Engine of the German Economy, a set of presentation slides by the German Federal Ministry of Economics and Technology. Available for free download at: http://www.bmwi.de/English/Redaktion/Pdf/factbook-german-mittelstand,property=pdf,bereich=bmwi2012,sprache=en,rwb=true.pdf

[4] “Extreme focus” is from Karan Girotra and Serguei Netessine, Extreme Focus and the Success of Germany’s Mittelstand, Harvard Business Review Blog Network, 13 February 2013. Available at: http://blogs.hbr.org/cs/2013/02/good_old_focused_strategy.html