Tag / Business

by anthonysmoak

Lessons from the Japanese Auto Industry

I spent seven years working at Saturn Corporation which was a truly innovative automotive company. Unfortunately, to the chagrin of Saturn-philes, the subsidiary suffered from a lack of sufficient investment from its parent entity, General Motors. Sadly, the defunct Oldsmobile brand was the recipient of funding that should have been allocated to Saturn but I digress. As an automotive industry veteran (albeit on the I.T. and data side of the house), I enjoyed discussions during my days in business school that focused upon the strategy of companies operating within the industry. In an MBA class titled Managing the Resources of Technological Firms (offered at Georgia Tech), our readings concentrated on the challenges associated with managing a firm’s resource capabilities for long-term competitive advantage.

On such article typifying the aforementioned concentration was written by business historian Michael A. Cusumano. In his article Manufacturing Innovation: Lessons from the Japanese Auto Industry which appeared in the MIT Sloan Management Review, Cusumano sets out to debunk the fact that higher productivity amongst Japanese auto firms is a result of the employment of Japanese workers. He aims to illustrate that the merits of innovative processes are the cause for higher productivity emanating from Japanese owned firms.

The article is in essence a summarization of major findings from a five year study of the Japanese auto industry focusing particularly on Toyota and Nissan. It states that some observers of Japan have assumed that Japanese firms copied US manufacturing techniques and then benefited from a better educated and more cooperative workforce. Cusumano attacks this perception by commenting that Japanese run factories located in the United States have demonstrated higher levels of productivity, quality and process flexibility than their domestic counterparts.

Japanese firms who shunned US or European production techniques were able to innovate and improve upon their native processes. Toyota in particular avoided conventional production techniques and decided to focus on developing a tailored system that met the needs of the Japanese market. Other Japanese firms such as Hino, Daihatsu, Mazda and Nissan started to leverage the techniques employed by Toyota and moved away from the US/European traditional process. Toyota and Nissan appeared to have matched or surpassed US productivity levels by the late 1960’s even though their production levels were far less than US automakers.

Cusumano does not share the Boston Consulting Group’s assessment that Japanese management’s emphasis on long term growth in market shares led to an accumulation of experience. He believes that that the emphasis on the accumulation of experience and innovation led to the rise in market share.

Toyota’s legendary Taiichi Ohno realized that firms needed to be flexible when producing small volumes. Three basic policies were introduced during post war Japan’s auto manufacturing era. Just in time manufacturing reduced buffer stocks of extra components and this small lot philosophy tended to improve quality since workers could not rely on extra parts or rework piles if they made mistakes. The second policy was to reduce unnecessary complexity in product designs and manufacturing processes. Nissan and Toyota standardized components across model lines. The third policy involved a Vertical “De-Integration”. In essence, automakers began to build up a network of suppliers for outsourced component production.

US companies stopped innovating by the early 1960’s as they perceived the domestic auto market as mature. The “American Paradigm” from an automotive production standpoint meant large production runs, worker specialization and statistical sampling. The unique market conditions of Japan after WW2 presented an opportunity for Toyota and other producers to challenge convention and become more efficient at much lower levels of production.

Image courtesy of winnond at FreeDigitalPhotos.net

by anthonysmoak

Enterprise Architecture and Business Process Management

We know that Enterprise Architecture is a logical framework that helps forge a relationship between business, strategy and technology. Within those macro concepts lies various organizational structures, processes and informational flows that help businesses meet their end goals.

With respect to business processes, businesses themselves are dynamic and must change to adapt with the latest market conditions in order to remain a going concern. Thus, proper attention must be paid to processes and the continuous improvement of those processes.

As organizations grow, they need to continuously analyze and refine their processes to ensure they are doing business as effectively and efficiently as possible. Fine-tuning processes gives an organization a competitive advantage in a global marketplace.(Project Management Approach For Business Process Improvement, 2010)

EA and business process management (BPM) are not mutually exclusive. Redshaw (2005. Pg. 3) defines BPM as “the management of all the processes supporting a business transaction/event from the beginning to the end while applying the policies/rules needed to support an organization’s stated business model at a specific point in time.” BPM offers advantages to large institutions as it enables a linkage between IT systems and business processes. Jensen (2010) offers this summarization:

“When done together, BPM provides the business context, understanding and metrics, and EA the discipline for translating business vision and strategy into architectural change. Both are, in fact, needed for sustainable continuous optimization. It is important to realize the value of direct collaboration across BPM and EA boundaries. Only when supported by appropriate collaboration and governance processes can BPM and EA roles work effectively together towards the common goals of the enterprise.” (Jensen, 2010)

EA can support BPM projects by helping project teams become better acquainted with the very processes they are trying to improve. A project manager assigned to a new project can simply access the EA repository to get up to date information on the current processes pertinent to his/her domain. With respect to EA3 framework, “The enterprise’s key business and support processes are documented at the Business level of the EA framework” (Bernard, 2012. Pg. 127).

As processes are improved and changed and project wins or losses are accumulated, this knowledge is shared back into the EA repository for reuse and can be leveraged across the organization.

Quick process improvement wins and one off pinpoint projects may embody a “silo-ed” or parochial approach not in keeping with a broader strategic outlook. Ignoring emerging business strategies can be a costly mistake. For example, energy and resources could be mobilized by a bank to architect a new customer account management or card/payments processing system within the enterprise, accompanied by revised processes. The bank could simultaneously be moving forward with emerging cloud strategies that render the new architected solutions meaningless and obsolete. This hypothetical example of creating solutions in isolation from the overall strategy would be a very costly endeavor in terms of time and money and should obviously be avoided.

By definition, business process management projects embedded within an EA framework are guaranteed to align to the overall organizational strategy. EA becomes a key enabler to ensure process improvement projects are aligned to the strategy for the existing enterprise, as well as any future state strategies.

Wells Fargo and its use of Enterprise Architecture and BPM

As with most organizations of comparable size, Wells Fargo wrestled with issues from both the business and IT (Information Technology) ends of the house. The business had to gain a better understanding of what it needed. It also had to become better acquainted with the capabilities and solutions available from IT. On the other side of the coin, IT had to remain agile enough to deliver and react to changes in business conditions. In this manner IT could be better positioned to deliver solutions that met various business needs.

Olding (2008) found that Wells Fargo operated a very decentralized structure but lacked the coordinated ability to understand what was occurring in other groups that were employing business process management initiatives. A disadvantage of not embedding the BPM experiences within an EA framework was the failure to capitalize on successes that were gained across other “silo-ed” groups. Integrating EA into the approach dramatically simplified the process of capturing those wins for organizational reuse.

At Wells Fargo, a BPM Working Group was established with EA as its champion. The business set out to capture the current state of BPM technologies and approaches around a dozen lines of business. The results indicated that there were over 20 different BPM technologies being employed, each with their own varying approaches to implementation (Olding, 2008). In order to maximize the value of BPM, coordination had to occur across these lines of business.

A seasoned Enterprise Architect within the company made use of a communications strategy to raise awareness of the duplicative uncoordinated approaches dotting the landscape. Business analysts, project managers, executives, and technology professionals were engaged and best practices from the various approaches were discussed and reworked into an EA framework.

A year later, senior executives were presented with the best practices from various approaches, which had since been re-developed using a common framework. The commonality gained from the EA framework allowed for patterns of success to be easily identified, communicated and thus ultimately standardized. With senior level executive backing, the EA framework will persist in the organization allowing the bank to quickly identify opportunities for standardization.

Burns, Neutens, Newman & Power (2009, pg. 11) state, “Successful EA functions measure, and communicate, results that matter to the business, which in turn only strengthens the message that EA is not simply the preserve of the IT department.” This dovetails into the approach that Wells Fargo’s Enterprise Architect employed; the communication of pertinent information back to various business lines to gain acceptance.

The lessons learned from Wells Fargo’s use of BPM and EA as paraphrased from (Olding, 2008. Pgs 5-6):

  • Communicate at all levels of the enterprise.
  • Build BPM adoption from the bottom up. Approach business groups with proven examples and internal successes that will help drive the willingness to adopt new approaches.
  • Facilitate, do not own. Allow business groups to manage their own processes aligned within the framework.
  • Build EA from the top down.
  • Use BPM to derive the needed context and then incorporate it into the EA

As of 2008 Wells Fargo Financial (a business unit of the Wells Fargo & Co.) currently had nine BPM deployments in production and another four projects in the works. Gene Rawls, VP of continuous development, information services, for Wells Fargo Financial has stated that not having to reinvent the wheel saves months of development work for every deployment (Feig, 2008). Project turnaround time from the initial go-ahead for a BPM project to its actual deployment, is just three months.

References:

Bernard, Scott A. (2012). Linking Strategy, Business and Technology. EA3 An Introduction to Enterprise Architecture (3rd ed.). Bloomington, IN: Author House.

Burns, P., Neutens, M., Newman, D., & Power, Tim. (2009). Building Value through Enterprise Architecture: A Global Study. Booz & Co. Retrieved November 14, 2012.

Feig, N. (2008, June 1). The Transparent Bank: The Strategic Benefits of BPM — Banks are taking business process management beyond simple workflow automation to actually measure and optimize processes ranging from online account opening to compliance. Bank Systems + Technology, Vol 31. Retrieved from Factiva database.

Olding, Elise. (2008, December 7). BPM and EA Work Together to Deliver Business Value at Wells Fargo Bank. Retrieved from Gartner October 29, 2012.

Jensen, Claus Torp. (2010, February 10). Continuous improvement with BPM and EA together. Retrieved November 13, 2012.

Project Management Approach For Business Process Improvement. Retrieved November 12, 2012 from http://www.pmhut.com/project-management-approach-for-business-process-improvement

Redshaw, P. (2005, February 24). How Banks Can Benefit From Business Process Management. Retrieved from Gartner October 29, 2012.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

 

by anthonysmoak

The Competitive Advantage of Process Innovation

This post summarizes a Harvard Business Review article entitled “The New Logic of High-Tech R&D“, written by Gary P. Pisano and Steven C. Wheelwright. The article focuses on the revelation that few companies within the pharmaceutical industry view manufacturing and process improvement as a competitive advantage. The authors assert that manufacturing process innovation is conducive towards product innovation. Companies traditionally spend money on product R&D but tend to neglect focusing on process R&D.

For example, Sigma Pharmaceuticals refused to invest significant resources to process development until the company was confident that the drug would win FDA approval. As a result, when demand for the drug increased they could not meet the higher demand without major investments in additional capacity. During this interim ramp up period the company lost two years of potential sales. Underinvestment in process development on the front end clearly put the company in a sub-optimal position to capitalize on additional revenue.

Process development and process innovation provide a litany of benefits. The first of which is accelerated time to market. According to one drug company, the time required to prepare factories for production generally added a year to the product-development lead time. Senior management was unaware of this fact while the managers within the process development organization were fully aware.

Rapid ramp up is also invaluable because it allows companies to more quickly realize revenue, penetrate a market, and recoup its development investments. Also the faster the ramp up occurs the faster critical resources can be freed to support the next product.

Innovative process technologies that are patent protected can hinder a competitor’s push into the market. Pisano and Wheelwright state that it is easier to stay ahead of a competitor that must constantly struggle to manufacture a product at competitive cost and quality levels.

Process development capabilities can also serve as a hedge against various forces in high tech industries. Shorter lifecycles elevates the value of fast to market processes. Semiconductor fabrication facilities can cost upwards of one billion dollars and depreciate at a rapid pace. For this reason, rapid ramp up is very important. Those companies with strong process development and manufacturing capabilities will have more freedom in choosing the products they wish to develop rather than forced to stick with simple to manufacture designs.

Pharmaceutical companies traditionally operated in the following manner. They delayed significant process R&D expenditures until they were reasonably sure that the product was going to be approved for launch. They didn’t delay product launch by keeping the process R&D off of the critical path. Manufacturing and process engineering were on hand to make sure the company could bring on additional capacity and didn’t stock out. Manufacturing was located in a tax haven even if it was far from R&D and process development, while process development was introduced later in the lifecycle in order to thwart the threat of generic competition. Today however, pharmaceutical companies find themselves squeezed by shorter product life cycles, less pricing flexibility and higher costs.

The article states that the earlier that a company makes process improvements the greater the total financial return. It is costly and time consuming to rectify process design problems on the factory floor. The earlier these problems are found in the development cycle the shorter the process development lead time.

Image courtesy of Areeya at FreeDigitalPhotos.net

by anthonysmoak

The Importance of Standards in Large Complex Organizations

Large complex organizations require standards with respect to developing strategic goals, business processes, and technology solutions because agreed upon guiding principles support organizational efficiencies. Without standards in these spaces, there is the increased potential for duplication of functionality, as localized business units implement processes and technologies with disregard for the enterprise as a whole. When the enterprise as a whole considers items such as applications, tools and vendors, standards help ensure seamless integration.

Examples of enterprise standards might be:

  • “The acquisition of purchased applications is preferred to the development of custom applications.” [1]
  • An example of an infrastructure-driven principle might be, “The technology architecture must strive to reduce application integration complexity” [1]
  • “Open industry standards are preferred to proprietary standards.” [1]

These hypothetical top down standards can help settle the “battle of best practices” [2]. Standards also provide direction and can guide the line of business staff’s decision-making so that the entire organization is aligned to strategic goals. Furthermore, the minimization of diversity in technology solutions typically lowers complexity, which in turn helps to lower associated costs.

Enterprise Architecture standards also have a place in facilitating “post merger/acquisition streamlining and new product/service rollouts” [2]. Successfully and rapidly integrating new acquisitions onto a common framework can be vital to success.

Here are two banking examples where post merger system integration problems arose in financial services companies:

  • In 1996, when Wells Fargo & Co. bought First Interstate Bancorp, thousands of customers left because of missing records, long lines at branches, and administrative snarls. In 1997, Wells Fargo announced a $150 million write-off to cover lost deposits due to its faulty IT integration. [3]
  • In 1998, First Union Corp. and CoreStates Financial Corp. merged to form one of the largest U.S. banks. In 1999, First Union saw its stock price tumble on news of lower-than-expected earnings resulting from customer attrition. The problems arose from First Union’s ill-fated attempt at rapidly moving customers to a new branch-banking system. [3]

Having robust Enterprise Architecture standards in place may have helped to reduce the risk of failure when integrating these dissimilar entities.

References:

[1] Fournier, R., “Build for Business Innovation – Flexible, Standardized Enterprise Architectures Will Produce Several IT Benefits.” Information Week, November 1, 1999. Retrieved from Factiva database.

[2] Bernard, Scott A. “Linking Strategy, Business and Technology. EA3 An Introduction to Enterprise Architecture.” Bloomington, IN: Author House, 2012, Third Edition

[3] Popovich, Steven G., “Meeting the Pressures to Accelerate IT Integration”, Mergers & Acquisitions: The Dealmakers Journal, December 1, 2001. Retrieved from Factiva database.

by anthonysmoak

ADP: Mergers & Acquisitions

This small sample is taken from a group paper drafted for a strategic management class (MGT 6125) taken back in the Spring of 2007. The class was taught by the esteemed professor of strategy, Dr. Frank Rothaermel. As part of the class our project group interviewed an executive from ADP, wrote a strategic analysis of the company and then presented our findings to the company (complete with Q&A). The experience was enriching but contributed to the number of late nights experienced during that semester. It should be noted that in 2014 ADP spun off its Dealer Services business into a separate company now called CDK Global.

 

Mergers & Acquisitions

ADP has become highly successful in its strategy of pursuing growth via horizontal integration. Although current CEO Gay Butler has maintained that ADP has no interest in “large, dilutive, multiyear acquisitions” [1], the company will acquire smaller industry competitors. Acquisitions give ADP the opportunity to grow inorganically, increase its product offerings, acquire technology and to reduce the level of rivalry in its industry.

A perfect execution of this strategy can be seen in its January 2003 acquisition of Probusiness. Probusiness was a much smaller California based provider of payroll and human resources services. Before the acquisition, Probusiness cited eight new large competitors who had an interest in expanding their roles in the payroll business [2]. Amongst those eight competitors were notable companies such as International Business Machines Inc. (IBM), Microsoft Corp. and Electronic Data Systems Corp. (EDS) [2]. True to form, ADP decided to react and proceeded to acquire Probusiness. The acquisition effectively prevented large competitors from acquiring approximately 600 new payroll clients in the larger employer space and reduced future competition.

The Probusiness acquisition was also a boon to the company in the fact that it offered ADP advanced payroll processing technology. Probusiness utilized PC based payroll processing as opposed to ADP’s more mainframe based technology [2].

A key acquisition for ADP in terms of increasing its global footprint was the December 2005 acquisition of U.K. based Kerridge Computer. This particular acquisition was significant in the fact that it increased ADP’s Dealer Management Services (DMS) presence from fourteen countries to over forty one [3].

ADP along with its main DMS competitors in the European market, Reynolds & Reynolds and SAP, began to realize the significant growth opportunities for the region. The European market for DMS unlike the United States market, is much more fragmented which means there are more opportunities for a larger player to standardize product offerings [4]. In 2003 the European Union lifted rules that had previously banned franchised car dealers from selling rival brands [4]. Demand for pan-European systems to help multi-brand dealers manage their stores, sometimes in multiple countries and in various languages increased dramatically [4]. ADP shrewdly realized that many smaller DMS providers would not be able to meet this demand and acquired Kerridge to bolster its position.

Strategically, the Kerridge acquisition has allowed ADP to have first mover advantage over its main competitors with respect to China. New vehicle sales growth in Asia is expected to be at 25.3% by the year 2011 [5]. By becoming a first mover in the region, ADP will have the opportunity to lock customers into its technology since it currently has a 96% client retention rate [5]. ADP will also have the opportunity to create high switching costs for its customers and make it difficult for rivals to take its customers.

Other recent acquisitions by ADP include “Taxware which brings tax-content and compliance solutions to the table; VirtualEdge, which offers tools for recruiting; Employease, which develops Web-based HR and benefits applications; and Mintax, which provides tools for corporate tax incentives. [6]” All of these acquisitions represent small fast growing companies with complimentary products and services. These products and services can be incorporated in ADP’s vast distribution network and provide potential bundling or cross selling opportunities with ADP’s current offerings.

Endnotes:

[1] Simon, Ellen “ADP chief looks at expansion, not acquisition” ASSOCIATED PRESS (7 March 2007)

[2] Gelfand, Andrew “ADP Seen Holding Off Competition With ProBusiness Buy” Dow Jones News Service (6 January 2003) :Factiva

[3] Kisiel, Ralph “Reynolds, ADP aim for European growth” Automotive News Europe Volume 11; Number 3 (6 February 2006) :Factiva

[4] Jackson, Kathy “Dealer software market is booming; Multibranding boosts demand for dealership management programs” Automotive News Europe, Volume 11; Number 21 (16 October 2006) :Factiva

[5] ADP Annual Financial Analyst Conference Call Presentation. March 22, 2007

[6] Taulli ,Tom “ADP Tries Getting Even Better” Motley Fool (November 2, 2006) Accessed 4/14/07 <http://www.fool.com/investing/general/2006/11/02/adp-tries-getting-even-better.aspx.

by anthonysmoak

An Analysis of the Pharmaceutical Industry

Innovation

Innovation in the pharmaceutical industry is driven by the protections provided by intellectual patents. In theory, these patents temporarily grant innovative pharmaceutical companies a monopoly over their new product or innovation. This monopoly in turn allows pharmaceutical companies to recoup their research and development costs. Companies are able to reap high margins on their products and thus obtain a competitive advantage in the industry. Pharmaceutical companies that participate in the innovation sector are always under intense pressure to find and develop their next “blockbuster drug” quickly, cheaply and effectively. Those companies who are not able to innovate and bring a successful new product to market will experience financial difficulties. For example, pharmaceutical giant Pfizer Inc. has not produced a blockbuster drug since its introduction of the erectile dysfunction drug Viagra in 1998. As a consequence of not successfully innovating a new product since that time, the company will have a diminishing revenue stream in the future. Generic competitors will begin to steal market share from Pfizer as it loses its exclusive monopoly on highly profitable drugs.

While intellectual property protection can encourage innovation in the pharmaceutical industry it can also hamper innovation. Pharmaceutical companies can easily obtain new patents by making minor changes to existing products regardless of whether the drugs offer significant new therapeutic advantages [1]. Typically, minor changes are made to blockbuster drugs before their patent expiration date in order to increase the lifespan of the monopoly. In essence it is much faster and cheaper to receive new patent protections on these “me-too” products than to innovate and bring “new molecular entity” drugs to the marketplace.

Alternatives to the current monopolistic patent protection have been proposed to help foster more meaningful innovation. A drug prize system has been bandied about in intellectual discussions for some time. Under a prize system, the U.S. government would pay out a cash prize for any new drugs that successfully pass FDA regulations. The drugs would then be put into the public domain thus creating a free market system for drugs. “Generic drugs (‘generic’ being another way of saying the rights are in the public domain) already do a wonderful job of keeping prices down. While the price of patent-protected drugs has been rising at roughly twice the rate of inflation, the real price of generics has fallen in four of the last five years.” [2] The prize system has its benefits in the fact that marketing costs would be significantly reduced as companies would have already been paid an upfront prize for their efforts. Large awards could be provided to the pharmaceutical innovator who produces breakthrough results while smaller rewards would be paid for incremental “me-too” innovations.

A prize system could also help increase the number of innovations concerning critical diseases that affect the third world. Government intervention can help direct R&D resources to areas where the private market has failed to concentrate. Breakthroughs are badly needed in the fight against AIDS or the search to develop a malaria vaccine. Advanced industrialized nations could pool their resources together and decide to create a large bounty for any drug that provides a real breakthrough in this area. The desired end result would be enhanced access to better medicines for the third world. Obviously the prize system would have some drawbacks. One major drawback would be the duplication of efforts encountered by firms that would compete for the biggest prizes. It is possible that R&D resources concentrated on the highest prizes would encourage a majority of companies to compete to be the winner in these races even more so than in the current patent system.

Research and Development

Pharmaceutical companies are heavily dependent upon acquiring patents and innovating in order to compete in the industry. As a consequence, massive amounts of funding are needed for research and development in order to keep product pipelines full. The Tufts center for the study of drug development estimated the average costs of developing a prescription drug to be 802 million in 2001, up from 231 million in 1987 [3]. This estimation includes the costs of failures as well as the opportunity costs of incurring R&D expenditures before earning any returns.

A price/R&D tradeoff exists in the pharmaceutical industry. If pharmaceutical companies lower prices for drugs in the marketplace it is feasible to believe that profits will fall for these drug manufacturers. As profits fall, R&D is affected which in turn lowers the amount of new drugs coming into the marketplace. Fewer drugs in the marketplace could potentially lead to future generations of less healthy people.

The pharmaceutical industry is one of the most profitable industries in our nation’s economy, thus the companies that develop new drugs are quite content with the current structure in which R&D costs are high. Of course this means that prices for consumers will continue to remain high. Consumers on the other hand need access to new drug products for illness prevention or treatment purposes. Consumers would prefer that prices fall for new drugs while innovations increase. Given the current nature of the pharmaceutical industry this outcome will remain a paradox.

EndNotes:

[1] http://oversight.house.gov/Documents/20061219094529-73424.pdf

[2] http://www.forbes.com/2006/04/15/drug-patents-prizes_cx_sw_06slate_0418drugpatents.html

[3] http://csdd.tufts.edu/NewsEvents/RecentNews.asp?newsid=6

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