Why every aspect of your business is about to change Cars bursting into flames a
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Why every aspect of your business is about to change
Cars bursting into flames are never a good thing. So when a Tesla Model S ran over a metal object in Kent, Wash., in October 2013 and burst into flames, owners, potential customers, investors, and company executives got worried. When the same thing happened a few weeks later in Smyrna, Tenn., federal regulators opened an investigation. We all know what happens next: a massive recall, costly repairs at dealerships nationwide, and a painful financial hit to the carmaker. Yet none of that occurred. The problem was that the Model S could lower its chassis at highway speed to be more aerodynamic, and if debris hit the car’s battery pack in just the wrong way, it could catch fire. So Tesla (TSLA, +0.19%) beamed a software update to the affected cars, raising ground clearance at highway speed by one inch. The problem went away. Just four months after opening their investigation, the regulators closed it.
Using software and the mobile-phone network, Tesla avoided any need for a recall. It doesn’t have any dealerships; customers can configure and order a car online, and they can test-drive cars at company-owned showrooms. Tesla’s advanced electric technology is simpler than gas or diesel technology, so cars can be built with fewer employees and less capital. Combine those factors and here’s what happens: General Motors (GM, -3.40%) creates about $1.85 of market value per dollar of physical assets, while Tesla creates about $11. GM creates $240,000 of market value per employee, while Tesla creates $2.9 million. You don’t get differences like that just by being more efficient. Tesla, though in the same business as GM, is a fundamentally different idea.
GM is changing, but for now it’s still a 20th-century corporation. Tesla is a 21st-century corporation, built for sweeping new realities that change the rules of success. The big theme is the arrival of the long-heralded friction-free economy, a new world in which labor, information, and money move easily, cheaply, and almost instantly. Companies are forming starkly new, more fluid relationships with customers, workers, and owners; are rethinking the role of capital (as traditionally defined), finding they can thrive while owning less and less of it; are creating value in new ways as they reinvent R&D and marketing; and are measuring their performance by new metrics because traditional gauges no longer capture what counts.
Not all 21st-century corporations are glamorous Silicon Valley startups. They can be of any age and in any industry (even cars). Nike (NKE, -3.05%) is a 21st-century corporation, aggressively reinventing manufacturing with 3D printing and cannily using social media for marketing. General Electric (GE, -3.75%) is becoming one, if partly as a result of shareholder frustration and outside pressure. Every company needs to be one.
The new realities begin at capitalism’s foundation, capital. In a friction-free economy, a company doesn’t need nearly as much as it used to. Consider the world’s most valuable company, Apple (AAPL, +0.69%). Unlike Google (GOOG, +0.94%) and Microsoft (MSFT, -0.17%), the second and third most valuable firms, Apple gets most of its revenue from selling physical products. Yet the company says “substantially all” of its products are made by others. Because it can coordinate vastly complex global supply chains, it can pay those firms, mostly Foxconn, to make its products and get them where they need to be on time. Apple has even rented other companies’ servers to host its iCloud service so that it can add or remove capacity easily, paying only for what it needs.
The U.S. government classifies Apple as a manufacturer, and with some 500 brick-and-mortar stores worldwide, its total capital—$172 billion of it, according to the EVA Dimensions consulting firm—is immense. But in traditional models it would need much more. Its achievement is using that capital to stunning effect, creating a market value of $639 billion. By comparison, Exxon Mobil (XOM, -0.12%) uses far more capital, $304 billion, to create a market value, $330 billion, that’s barely half as much as Apple’s.
Those are companies that make and sell physical stuff. A friction-free economy also enables companies with virtually no physical capital to compete powerfully with capital-heavy incumbents. It’s often observed with wonder that Alibaba (BABA, +0.67%) is the world’s most valuable retailer but holds no inventory, that Airbnb is the world’s largest provider of accommodations but owns no real estate, and that Uber is the world’s largest car service but owns no cars. Each has found ingenious ways to take friction out of its industry, connecting buyers and sellers directly and conveniently, enabling new, nearly capital-free business models.
But hold on—actually, those and all 21st-century corporations own tons of capital. Accounting rules just don’t always call it that. There is intellectual capital in the form of software, patents, copyrights, brands, and other knowledge; customer capital in the form of relationships with buyers; and especially human capital. The 21st-century corporation, even if it makes or sells physical products, is above all a human-capital enterprise, which raises a profound question: Who really owns it?
It was obvious long ago that law firms consist almost entirely of human capital, so it’s illegal for them to sell stock to the public; outside stockholders couldn’t own anything of value. Are consulting firms and ad agencies any different? Even companies that own valuable patents or brands may still get most of their value from human capital. What if the hundred smartest people left Starbucks (SBUX, +0.39%) or Johnson & Johnson (JNJ, -1.19%) or Walt Disney (DIS, +0.87%), or what if a crazed CEO tried to destroy each company’s titanium-strength culture? In the 21st-century corporation, whether it’s acknowledged or not, employees own most of the assets because they are most of the assets.
That reality is affecting corporate structure. The number of U.S. corporations increased only modestly and their revenues rose 150% from 1990 to 2008, says the IRS (using the most recent available data), while the number of proprietorships and partnerships, which are owned by their managers, increased far more, and their revenues rose 394%. The 21st-century corporation isn’t always a corporation.
Most businesses will have to create value in new ways or lose out to competitors that do so, often with Internet-enabled business models. The trend is as old as the Internet’s early days, when a slew of web insurance upstarts forced term-life premiums to plunge 50% or more—and when user-friendly hotel- and airline-booking sites put some 18,000 travel agents out of business almost overnight. Now entrepreneurs are extending the trend into physical products in sophisticated ways. Warby Parker sells high-quality eyeglasses for a small fraction of what traditional retailers charge by using a low-friction online model; private investors recently valued the firm at $1.2 billion. Even an industry that seems highly resistant to online disruption, consumer packaged goods, is threatened. Harry’s and Dollar Shave Club, which make and sell men’s grooming products online, are forcing Gillette (owned by Procter & Gamble) (PG, -1.35%) to promote its wares on value, not just quality, for the first time.
Question:
Describe the impacts and challenges that a friction-free economy would have on operations management.
VISA FACEBOOK TWITTER $101.1 $53.0 $30.8 APPLE FITBIT JOHNSON &JOHNSON TESLA $30.2 WHO NEEDS PHYSICAL ASSETS? $24.2 More companies are creating high value with scant hard assets, even if-like Apple, Fitbit, J&J, and Tesla-they make tangible products. $19.9 $11.1 BERKSHIRE HATHAWAY $2.3 Market value per dollar of physical assets G.M. 1.0 Source: FortuneExplanation / Answer
In the current age of frictionless economy wherein there is a seamless movement of information, capital and labour, the operations management will be affected as there will be a paradigm shift in the way assets and people would need to be managed. With smart factories and machines, the focus will shift from just being efficient but it will transition to have an optimal mix of people with high skills to manage these smart machines. The supply chain paradigm will also change as traditional models of keeping inventory and satisfying customer requirements based on available stocks would change with now customer himself/herself being involved in the manufacturing process. The focus will shift from utilization of resources to maximize productivity to ensuring that quality remains at the forefront always and most of the new product development should have a feature of smart customization such that they can be altered at the last point – “delayed differentiation” will be the key.
All this will have its own challenges as people in operations management need to have greater data analysis skills, some of them may also need coding and a greater deal of man management abilities. And most importantly people need to become cross functional and have a holistic few so that they can take an integrated perspective on any matter concerning the increasingly interconnected economy.
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