Analysis Of The External Forces Of Change Business Essay
Globalization: World is becoming an increasing smaller place to live. Cliché it might sound, but the fact remaining that it has become a global village. With markets are opening up, trade pacts coming up between the countries, the local manufacturers have to compete with the international players. Tata, an India based company trying to bring in Tata Nano, a car affordable by many for its cheap price into the UK markets with a minor variation is a perfect example to the increasing globalization.
The French and the German companies like Peugeot, Renault, Benz, VW have woken up to competition from companies like Nissan, Toyota, GM, Honda to name a few. To give an illustration from my stay here in Lille, I have seen a significant number of Suzuki cars if not more than say Peugeot or Renault. This shows that along with the trade pacts, the customers too don’t differentiate between national and international players and quality, innovation and technology drives the market. In such a scenario, the local European car manufacturers cannot be happy with the status quo. They need to break away from the existing technology and constantly strive to come up with new innovative technologies to stay in front of the competitors in the market.
As can be seen from the article, with Toyota coming up with new hybrid models like Prius and taking away the entire European market with it, companies like Peugeot & Renault would definitely try to change their existing technology whatever might have been the situation in the past 50 years. Hence, I think globalization is one of the main reasons for the change.
Ethical Behaviour: With increasing awareness about climate hazards and environmental degradation among the people, they have become more responsible towards the environment. An example of throwing away of fridges and coolers with CFCs given in the class is an excellent illustration of people becoming responsible. In such scenario, a customer would now prefer an electric or battery run car over a car with same specification but running on petrol or diesel. Also, with the concept of carbon credits and different other environmental regulations coming into existence, the car manufacturers would get an incentive from the governments for coming up with cars with lower emissions.
When there has been such a paradigm change in the customer mentality, environmental regulations etc., it is imperative that car manufacturers break away from their old existing technology and come up with new innovative technologies to sell their cars and consequently reduce the operating costs (in the form of incentives given by the government).
Technology: The ever changing technology and the accompanying demands of the customers forces the automobile industry to keep innovating and come up with new features and provide value for money for the customers. For example, the safety aspects of the car has increased manifold compared to the cars a decade ago, thanks to technology. Cars have become more robust now. Therefore with constantly changing technology, the automakers too need to come up with new models to stay alive in this competitive market.
One excellent example of technology bringing about a change in this industry is the low cost cars. According to a report on car innovation by Oliver Wyman, Toyota was the first to recognize that production of low cost cars as one of the enablers of staying ahead in the market and with the estimate that about ten percent of all cars in Europe, China & India going to low cost ones by 2015, many of the big car manufacturers have now jumped into this low cost manufacturing market (Oliver Wyman Report, p. 10)
Also according to the same report, due to the on-going specialization in the manufacturing industry, product differentiation in terms of technology would keep decreasing (Oliver Wyman Report, p. 10). In other words, in terms of technical specifications, there wouldn’t be much differentiation between models of different manufacturers. The innovation will move downstream in the value chain framework and the manufacturers will now concentrate on innovating in terms of features the brands are known for. For example, Volvo is known for its security, Benz is known for its comfort etc. This means, we would see more innovation/technological improvements to enhance the features a brand is known for. I believe, this explains the reason as to why the manufacturers are moving away from shared processes and practices. When it is not possible for much technological differentiation between models, to remain competitive in the market, the car manufacturers need to improvise on selling aspects of the model and for this using shared processes and practices all through the value chain would not help.
Demographics: The changing demographics too play an important role in forcing a change from the existing technology in the manufacturing industry. For example one of the megatrends which is going to impact the future innovations in the automobile industry according to Oliver Wyman is the fact is society is aging. In ten years from now, the average customer will be significantly older than what he/she is now and consequently their demand and expectations would be different. According to the same report, the current average age of customer is 40 years and it is expected to increase by four years by 2015 (Oliver Wyman Report, p. 7). This would mean that the cars’ technology and modelling also needs to change so as to accommodate the design, safety and handling features that the customer segment might find useful and value adding.
Another megatrend predicted by the same report is that:
In 2015, 40 percent of the world population will live in cities with more than one million residents, 17 percent will live in megacities with more than five million residents. The cruising speed in these cities will average not more than six miles per hour (…). (Oliver Wyman Report, p. 8)
This would mean a paradigm change in features of the car that people living in these megacities would expect. Reduced speed would mean spending an increasing amount of time in the car (assuming the distance does not change) which would in turn mean better and innovative passenger entertainment facilities inside the vehicle and better and improved comfort levels within the car etc. To remain competitive, these kind of changes need to be perceived by the automobile manufacturers and this would in turn mean, a change from the existing technology.
INTERNAL FORCES OF CHANGE:
Increasing Costs/Decreasing Effectiveness: Automobile industry is a kind of sector wherein there are constant cost pressures due to different factors like legislation, competition, ever changing customer demands, fickle nature of the prices of raw materials and overall economy of the country. This is has led to various cost cutting measures like offshoring of engineering, reduction of complexity, usage of more standardized and modularized processes, development of low cost cars etc. These in addition to the traditional cost cutting measures would not suffice and automobile industry has to keep investing in R&D to come up with new technologies to undercut the manufacturing costs by increasing the efficiency of process.
With such constant cost pressures, a company cannot rely on existing technologies but has to constantly look out for new technologies and processes which increase the effectiveness and subsequently provide more value for money to the customer.
All the above discussion explains the reasons for the change mentioned in the question.
Given the fact that the automotive market is already beset with the problem of excess capacity, along with technological differentiation, we can expect to see a global perspective from these European manufactures. With economies of countries like China, Brazil and India growing at a very fast pace and opening up of these markets, I believe this would lead to competition among the manufacturers to capture these new emerging markets.
According to International Organisation of Motor Vehicle Manufacturers' (OICA) head Dave McCurdy, “Asia pacific markets-China & India-are the backbone of the global automotive industry. These two countries would sell enough vehicles on their own that would take the global markets out of red this year” (“China, India to drive global auto industry back on growth track” - Economic Times report dated 28th Oct., 2010). This has led to many major manufacturers like Volkswagen AG, BMW, Audi to set up their local plants in these Asian countries. Two more news items which illustrate the point being made here are –
“Volvo plans to set up three Chinese car plants for about $1.5 billion and intends to double its cars sale to 800,000 cars in 10 years” – Automotive News Europe Dated 28th Oct., ’10.
“Volkswagen Group company Bugatti Automobiles launched its super premium sports car Bugatti Veyron 16.4 Grand Sport, with price starting at Rs 16 crore (around 2,700,000 Euros when converted using the exchange rate), the most expensive car to hit the Indian roads” – Economic Times Dated 29th Oct., ’10.
Other change which I think is relevant is today’s context is moving away from traditional collaboration between the manufacturing companies to coevolution. When the companies are moving away from existing technology, shared processes and practices, they are in fact moving towards a process of coevolution – collaborating and competing. The fact that the recent economic crisis is yet to fade away completely would mean more addition to the already existing huge costs of manufacturing. Hence, it is imperative that the companies collaborate with each other at one stage or the other of the value chain. Coevolution in this context would mean sharing of raw material or inputs higher up in the value chain (Collaborating) and differentiating using technology as we move down the value chain (Competing).
Peugeot – Citroen which has an engine alliance with BMW would use the carbon fiber parts that the latter brand would be developing for its battery powered vehicle is an example to explain the point being made. Peugeot could use this carbon fiber parts to develop its own model which would be very different from battery powered vehicle developed by BMW – technological differentiation using collaboration up the value chain.
A third change which I think is inevitable would be huge exponential increase in the R&D spending by both car suppliers and OEM (Original Equipment Manufacturers). Given the reasons explained above under the heading “internal reasons of change”, for creating technological differentiation and adding value to the customer, increased spending on R&D is a must. This presumption of mine is gains credibility by the “Car Innovation 2015” report by Oliver Wyman which says that by 2015, around EUR 800 billion will be a spent on R&D. In 2005, automotive industry spent EUR 68 billion on R&D – a mind boggling 1076% increase in spending in a span of ten years.
When there is such huge spending on R&D, it is important to make sure the innovation is on the right track and ultimately meets the end needs of the customer. Being a part of a part of cartel for more than fifty years and focusing on keeping the technology unchanged only makes things more difficult for the automotive manufacturers to make sure that new innovations be efficient and effective. According to the Oliver Wyman report, 40 percent of all investments go towards innovations which are never used in the car model or are never manufactured in sufficient number due to non-acceptance by the market. Therefore, it is important that the manufacturers and OEMs carefully observe the trends and changes that are likely to happen in terms of technological standards, government regulations, customer needs and according come up with technological differentiation which will justify the huge R&D costs.
Technological differentiation and moving away from shared platforms and processes need to be accompanied by corresponding Organizational Changes. Organizational changes can be discussed in terms of two aspects:
As explained by Machiavelli, promoting new way of doing things is the most difficult thing to carry out. Along with the intention and strategy of the company to come up with technological differentiation, it is important to change the way things are done, the structure of the company, the culture the company believes in and the way employees are treated. These things are the most difficult to change and it needs strong leadership team at the helm to guide the organization and handle the transition phase.
The following are the determinants of organizational structure:
Strategy: Coming up with technological differentiation would need innovation for the company and constant investment in R&D. Till date, the industry was focused on using shared platforms and common production processes which mean cost minimizing was a priority which in turn mean having a mechanistic structure. Therefore, the automotive industry needs to change from having a mechanistic structure to an organic structure. There would also be a need for increased work specialization as automotive companies try to bring out technological difference using modular approach to manufacturing – there would be need for specialized knowledge with people trying to bring out innovation in their respective parts of the value chain.
Organizational Size: As discussed previously in the report, the car manufacturers would constantly look out for new markets to sell their products and this would mean I believe departmentalization in terms of geography. A single marketing strategy cannot be used to sell the product across all the countries in the world and there would be a need to produce and market the models which fit in with the values, cultures of the customers and economic scenario in a particular geographical region. Therefore, there would be a need to departmentalize the company in terms of geographical regions giving them empowerment.
Also, looking at the situation from technological differentiation point of view, we might find companies coming up with different models with different specifications. Toyota coming up with hybrid models and low cost models is an example of using technology to come up with two different products. So, there might a need for departmentalization in terms of product also.
Technology: Routine technology would lead to more formal and departmentalized organizations. Therefore, with rapidly changing technology and constant innovation, there would a need for a change from a formal organizational structure to a one with low formalization (Mechanistic to Organic).
Environment: With constantly changing raw material prices, ever demanding customers, continual cost pressures and complex environmental regulations, we would need more organic structures with decentralization and empowerment to the individual teams so that decisions and strategies could be customized to the local environment and also changed immediately depending on the changes in the environment. It would also mean less hierarchical structures with wider Span of Control.
In terms of matrix with respect to two variables complexity and pace of change, the environment is highly complex with highly demanding stakeholders (and all the other reasons explained above) and even the pace of change is dynamic with ever changing technology and corresponding changes in customer demands and needs. Therefore an appropriate structure would be one of Adhocracy (Mutual Adjustment).
Therefore, for the change (mentioned in the question) to happen, the automotive companies need to move towards an organic model which encourage innovation, dynamic decision making, boundary-less organizations, cross functional teams with highly decentralized set up.
Looking at the four corporate cultures which are explained in terms of four parameters namely, Hierarchy vis-à-vis Egalitarian, Person vis-à-vis Task, I think for this change to be possible and sustainable, the following should be the culture of the organizations:
In terms of Hierarchy-Egalitarian continuum, the organizations should move towards egalitarianism. The reasons which explain the suitability of egalitarianism as the appropriate structure has been explained in the previous discussion.
In terms of Person-Task continuum, it would be difficult to point to a particular culture as there needs to be a shift between both person and task orientations depends on the situation and context. For innovation to flourish, it is important to have person orientation whereas in case of an ever changing dynamic environment, task orientation and management by objectives are the appropriate means. Since, for an automotive industry, we come across both the contexts, an appropriate culture would be one which shifts between person and task orientation effortlessly.
Therefore, in terms of the matrix definition of the culture, the suitable cultures for the change to flourish would be Fulfilment orientation (Incubator) and Project orientation (Guided Missile) cultures.
In general terms, an appropriate culture would be a one which promotes the following values & beliefs:
For continuous technological differentiation to be possible a culture of innovation is a must and people should keep looking out for new opportunities to come up a new technology than be satisfied with existing process & practices. Automotive manufacturers can in fact look at the way culture of innovation is practiced in 3M – with an image that 25% of the sales should be from new products very year. Such practices promote the culture of innovation.
Highly responsive to dynamic environment
With constantly changing environment, it is important for the company to accordingly change its strategy and outputs to sustain in the market. A company which refuses to accept the changing market conditions would lose out in the long run and hence promoting a culture of accepting change and being responsive is paramount for automotive industry of today.
Culture of execution
For most of the companies, the problem lies in the fact that they are not able to execute the plans and strategies made. According to Larry Bossidy (Former CEO of Honeywell), inability of execution today is the biggest problem being faced by the corporate companies. “Many leaders fall victim to the gap between the promises made and the results their organizations deliver – In the year 2000, forty CEOs of top two hundred companies in Fortune’s 500 were removed – not retired but fired or made to resign” (Bossidy & Charan, 2002, p. 14)
Hence, there is a need for promoting a culture of execution – ability to focus on whats and hows, following through with the plans made and ensuring accountability.
Ability to deal with ambiguity
The environment along with being dynamic, it is also highly ambiguous. With fast moving technology, what is a highly innovative and successful model might tomorrow become old & obsolete. With Peugeot launching diesel electric car to take on Renault’s all electric cars; the latter model might become obsolete and there would be a need for Renault to come up with even better technology to undercut Peugeot’s sales. Also, in spite of huge R&D spending, as explained previously, around 40% the new technologies delivered are not accepted by the market. In such uncertain market conditions, it is important to promote among the employees, ability to deal with such ambiguity.
Flexible and informal work environment
Being responsive to dynamic environment, ability to deal with ambiguity and flexible, informal work environment go along together. In order to be responsive to a highly dynamic environment and to deal with ambiguity, it is necessary to have an accompanying work environment which promotes innovation, empowerment to individuals down the value chain, free flow of communication between the work teams and faster decision making. In other words, a flexible and informal work environment is the order of the day for the paradigm change in automotive industry to be sustainable.
PROCESS OF CHANGE
As described above, for companies to move away from shared processes to practices to developing models with technological differentiation, both the structure and the culture of the organization has to change. In addition to change in strategy, it is important that people/employees of the organization change the way they interact and work both in teams and individually. In other words, for all the above discussed necessary changes to happen, the most important thing is the buy-in from the employees of the company towards the new practices.
The very fact that the reporting relations and the subsequent span of control might change (threat to status), more innovation and less dependence on others is expected, employees have more responsibility on them (competency fears), balance of power is changed (threat to interpersonal relationships), there is lot of uncertainty in the decision making leads to resistance to change from the people of the organization. For the process of change to happen and be an easy one, the following process needs to be adopted:
Creating a vision and a statement explaining the need for change
Creating a partnership between the higher management and the Trade Unions/ work force by trying to address their fears and reaching a common agreement on the ways things have to be done. Also, giving additional training if the employees need more skills and abilities to adapt to the new processes and practices.
Need for transformational leadership at the senior management levels. Leaders who believe in the change and can inspire the people and get their commitment are the need of the hour. These leaders at the top of the organization would act as change agents.
Once the new strategy has been put in place, it is important to drive for results. The new improved changes create further acceptance among the organization and the new culture becomes the accepted and default culture of the organization.
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