The selection of the right skills and capabilities is therefore a strategic task.
Peter Carney, global leader of supply chain advisory and analytics at Aurecon discusses how by collaborating, companies can improve performance and succeed.
For many decades competition has been strongly adversarial, with business practices based on free market behaviours and survival of the fittest. We have been trained to win at all costs, participating in business transactions as if they were a kind of zero sum game. Our win is someone else’s loss and most critically, someone else’s win is our loss. Sometimes this is true, but more often it’s not.
When thinking about traditional business models, we tend to think of a business as a highly vertically integrated set of functions. Traditional businesses typically maintained their own manufacturing and transport groups, IT, accounting and HR functions, and other departments. They did this because the cost of coordinating between functions was high and it was simply more efficient than any alternative model.
Wind forward to today. In a large part due to new technologies and their reducing cost, the cost of coordinating between business elements has become very small. Email, messaging, telephone and video conferencing and internet based applications are readily and globally available. With these technologies, the rationale for companies to hold all functions within their walls has diminished.
Thinking about a modern business then, we might think of a business that does not necessarily manufacture in-house, does not own its logistics assets and possibly outsources many of its functions. Numerous modern businesses have this form and the decisions about which functions to hold close, which to source from the broader market place and which to share are important ones.
In this environment a more nuanced relationship with competitors than a zero sum game would seem possible, appropriate and desirable.
When it comes to the supply chain, the notion of collaborating seems a natural way of operating. Supply chain managers have for many years been synchronising supply with demand along the supply chain between supplier and customers. Technology is making this easier over time, as it is possible to propagate demand signals to suppliers now virtually instantaneously.
More broadly however, companies have been poor collaborators. They have tended to act as distinct entities, and be measured on their discrete activities.
To act more collaboratively is an area of opportunity going forward. It requires companies to conceive of themselves as managers of skills and capabilities, some of which they hold in-house and some of which they source from elsewhere.
Quite obviously, companies that create value for their customers tend to stay in business.
In the logistics world, a collaborative model of business might therefore see businesses combining their freight tasks to achieve higher than individually possible utilisation of assets such as warehouses and trucks. They could achieve this by exploiting a backhaul opportunity or a cyclical opportunity, where one company may require the assets for the winter and another for the summer.
It is easiest to consider such a collaboration occurring for regionally located businesses, where critical mass might be difficult to achieve. In this case, it is the companies that deliberately choose not to act as distinct entities driving value from discrete activities, that deliver the best value to themselves and the customers they serve.
It seems clear that companies might think about pursuing collaboration opportunities with some vigour. Equally it is possible that collaboration might occur between non-competing companies as well as competing companies. Along the supply chain, the most common form of collaboration has been in action for years – the sharing of order books and forecasts. This could be characterised as essentially transactional.
A more powerful model of collaboration is where a company shares more than the transactional. Companies have knowledge, personnel, relationships, systems, facilities, suppliers, competitors and customers. How valued would the company be that can support its customers by providing knowledge, systems and facilities and services; or the one that can support a web of related businesses along a supply chain? And in turn, how efficient, effective and profitable might such a company be?
Good examples of elaborate collaboration are evident in food cooperatives. New Zealand has Fonterra and Australia has Murray Goulburn as examples of collaboration by farmers in marketing, milk production and milk product distribution.
The New Zealand fruit industry comprises companies that are mutually supportive. They collaboratively conduct research and marketing and jointly use pack-houses and further distribution networks.
Two organisations that demonstrate this level of cooperation are Zespri, which in 2012 had sales revenues of NZD 1.6 billion and AVOCO, which recorded sales of NZD 130 million in the season ended 30 April 2014.
Zespri is a corporatized cooperative with origins in a single desk system established by the New Zealand Government. The Zespri system, supported by all growers, is an integrated production and distribution system, underpinned by a history and practice of planning, scientific and technical research and practical developments.
The New Zealand Avocado Company Ltd, which exports avocados under the AVOCO trademark, resulted from the coming together of the two biggest avocado exporters in New Zealand, Southern Produce Ltd, and Primor Produce Ltd.
A reason for success in New Zealand is perhaps the realisation that an individual organisation does not have all the skills, knowledge and resources it might need to be successful. In today’s complex world companies need a great range of skills and it is unlikely a single organisation can hold them all.
Technology improvements have significantly lowered the coordination costs between company functions, throwing into contention the capabilities that properly constitute a company. Similarly, due to technology, inter-company coordination costs are very low, and more than ever, the opportunity exists for companies to share some of their skills and capabilities and similarly to leverage those of other companies.
The same technologies have brought global competition closer – this is the threat that drives a need for companies to get smart and collaborate.
The challenge for managers is to select the skills and capabilities they need to create sustained competitive advantage. They can achieve some of this with intuition, and some using mathematics to indicate where they might find efficiencies amongst the web of customers and suppliers in which they operate.
Drawing from Michael Porter, Professor at Harvard University, we would argue that to be sustainably successful, the nature of the collaboration chosen should be unique. The result will be an organisation that has access to sets of skills and capabilities that are difficult for competitors to replicate. Such an organisation is likely to maximise its efficiency, effectiveness and profitability over the long term.
To collaborate an organisation has to be a little bit socialist and many writers have written on the significance of industry clusters, particularly for manufacturing.
It is worth contemplating the opposite, the non-collaborative model. There are many examples of organisations with market power that draw more value from the supply chain than they add to it. Australia is prone to this, with its oligopolistic industry structures.
In these instances, non-collaborative behaviour may well stifle growth. We would submit there is short term gain for these particular companies, but at the risk of slower growth of the industry or the supply chain overall and therefore in the long term suboptimal profit for the particular companies concerned. It would be smarter to act in ways that promote growth.
Technology is driving changes in company and market structures. It is potentially redefining what occurs within a company’s walls. To extend the analogy, it suggests that a company’s walls are becoming quite porous. In this environment a nuanced approach to competition and collaboration is highly desirable and may be a more sure way to create sustainable competitive advantage.