Koren Y. The Global Manufacturing Revolution: Product-Process-Business Integration and Reconfigurable Systems
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Chapter 11
Business Models for Global
Manufacturing Enterprises
Globalization has created a new landscape for industry—one of fierce competition,
abrupt changes in product demand, and short windows of market opportunity for new
products. An important question is how a manufacturing enterprise can introduce new
products in a world where competitors have equal opportunities and perhaps can offer
similar products? In order to keep up sales and create economic value for one’s
stakeholders, an innovative industry needs a business model that takes advantage of
their company’s unique strategic assets. These strategic assets and unique resources
should contribute something specific, either in the product, or in the manufacturing
strategy, that enables the company to establish a competitive advantage. Manufactur-
ing company must deploy responsive business models that can rapidly align their
strategic resources and supply chains to quickly respond to customer’s changing
needs and to new market opportunities.
11.1 EXAMPLES OF BUSINESS MODELS
To clarify the concept of a business model, we start by studying a few well-known
examples. In each of these cases the company based their model on a competitive
advantage that was aimed at benefiting the customer in a specific way.
11.1.1 Dell Computers
Michael Dell created a company with the highest sales in the industry when he
developed a business model that benefited consumers by delivering exactly the
The Global Manufacturing Revolution: Product-Process-Business Integration and Reconfigurable Systems
By Yoram Koren
Copyright Ó 2010 John Wiley & Sons, Inc.
281
computer that they ordered directly to their home (or office) in a very short time (about
4 or 5 days between order and delivery).
Each time a customer places an order (usually through the web) and pays for it, Dell
assigns a dedicated bar code that accompanies the order until the computer is
delivered. This bar code is the heart of the company’s competitive advantage. Dell
Computers has a complex web-based ordering and information infrastructure con-
nected directly to Dell’s assembly factories—a combination of strategic resources
that creates a unique competitive advantage.
In the factory, the bar code tag is attached to a tray that travels on a c omponent
kitting line of about 10 stations. At each station a laser reads the bar code and
instructs a person (or a robot) which part to select and add to the tray. At the end of
the kitting line, the tray contains a ll the parts needed to fill the order in the sequence
they go together, and the tray moves to a manual assembly station. The assembly
stations are arranged in parallel, each with either one or two pe rsons (see more
details in Chapter 6).
From assembly, the computer moves to a software installation station where again
the bar code is referenced for automatic software loading that fits the specific order.
Software is loaded in parallel (Dell can burn up to 900 computers simultaneously;
each taking about 52 minutes on average). From burn, each computer moves on to a
testing area. Again, testing is done in parallel stations. The yield is 96% after final
verification. Finally each computer is packed into a box. The bar code, now as a labe l
that includes the customer’s address, is attached to the box and the computer moves on
a conveyor to the shipping area. The total time from kitting to shipping is about 5
hours.
The bar code system, as we see, is the heart of Dell’s competitive advantage. It
assists in all steps, from building the specific computer to delivering it to the right
destination. Dell can also track the production history and customer experience with
this single database.
Another key to Dell ’s competitive advantage is that it is based on product
customization. Executing short response times for customer orders is critical to
Dell’s business strategy, which has been accomplished by its innovative use of their
information system.
11.1.2 Examples of Other Business Models
To consider how business models can vary we shall now look at several additional
examples from different industries below.
Caterpillar: It is the world’s leading manufacturer of construction and mining
equipment, diesel and natural gas engines, and industrial gas turbines. This is true
despite the fact that Caterpillar’s products are more expensive than those of its
competitors. Caterpillar products are known to be of higher quality, and customers are
willing to spend more on them. Caterpillar’s competitive advantage is not only the
superior quality of its products, but their comprehensive distribution network, with
over 250 dealers worldwide, combined with excellent after-market service that
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includes high-speed delivery (within 24 hours) of spare parts anywhere in the world.
In this example we see that competitive advantage can be created by a combination of
otherwise mundane factors.
Personal Computers: Although Apple Computer got an early start in the
microcomputer business, IBM quickly reversed Apple’s lead when it threw its
worldwide distribution network behind the PC. IBM’s network for deploying and
servicing mainframe computers was transformed into a competitive advantage as the
basis of a new business strategy. The IBM distribution network and its well-regarded
corporate reputation were strategic assets that provided tangible benefits that helped
direct the computing culture of the time.
Cosmetic Products: They are traditionally sold in department stores, with
counters and staff dedicated to each brand—one brand per counter. The manufacturer
controls all marketing at the counter, including display, sales commissions, and gifts
that are frequently provided with the purchase of expensive mercha ndise. Note that
the sale of cosmet ics makes up about 20% of store profits.
A New Business Model for Cosmetic Products: Sephora is a French chain of
large stores that sells only cosmetic products. Sephora is experiencing a global growth
surge just because of the unique way that it displays the merchandise. The products of
all manufactures are arranged by category on shelves, rather than by manufacturer in
separate locations in the store (see photo, taken by the author). For example, every
perfume in the world is arranged alphabetically along the wall in one section of the
store. Lipstick is arranged by color with hundreds of products from different
manufacturers in direct proximity. This makes it very easy to compare products and
prices. The consumer benefits by these direct comparisons and can buy exactly that
product that best appeals to them. [Sephora.com].
Printers: They are sold at ridiculously low prices, but refill ink cartridges are very
expensive. In this example the economic value to the company is not in the product,
but in supplying consumables for the product. Customers benefit in this case by paying
less for the product at the time of the initial purchase. This sort of marketing is
traditionally referred as the “razor blade” or “cartridge” model.
Jet engines, on the other hand, are not even sold. They are leased to airlines that
must sign a l ong-term maintenance contract with the j et engine manufacturer. The
customer—the air line—bene fits, since t hey do not have to buy an expensive
product that regularly wears out and must periodically be replaced. The economic
value for the manufacturer is in the ongoing contractual relationship. The
manufacturer has a lock on their respective client base and the predictable cash
flow that results from the maintenance contracts is constant compared to the up-
and-down of direct sales. The competitive advantages for the jet engine manu-
facturers (there are only three in the world: United Technologies, General Electric,
and R olls Royce) are their expertise in producing jet engines and their product’s
reliability.
Automobiles are sold in dealerships that usually sell just one brand (Cadillac vs.
Lincoln) o r sometimes two, but of the same manufacturer (Buick and Chevrolet).
This approach to displaying merchandise is not particularly for the benefit of the
EXAMPLES OF BUSINESS MODELS 283
customers that have to do their shopping by traveling to many locations. This
business model compares to that of traditional cosmetic products, rather than to the
Sephora model.
Domino’s Pizza: Domino’s Pizza started with just one store in Ypsilanti (adjacent
to Ann Arbor), Michigan in 1960. It was the first pizza-producing company to create a
new market for fast delivery to the customer’s home (30 minutes or free). Today there
are more than 7000 stores, including over 2000 outside the United States, with annual
sales of nearly $4 billion. It created economic value by addressing just one market
need—home delivery—and made its founder a multi-billionaire. The Domino’s
delivery service required an infrastructure—people, vehicles, and the ability to
rapidly produce pizzas—that became their competitive advantage. Of course this
business model benefits the customer—the product that they expect is delivered at the
right time to the place of their choice. Does the establishment of 2000 stores outside
the United States indicate that this delivery model is universal?
Domino’s Pizza Israel: November 27, 2003 was a bad day for Domino’s Pizza
Israel. On this day the Tel Aviv court declared the company’s bankruptcy. Domino’s
Pizza started to operate in Israel in 1990. Their beginning looked very bright.
The Domino’s Pizza brand name was successfully penetrated into the consumer
market in Israel; the company influenced the consumer’s habits of home delivery and
provided an excellent service. Most of its revenues came from home deliveries. So
what wen t wrong?
There were several reasons. An economic downturn, which in 2002 also affected
other similar businesses in Israel, was one cause. During that time, people started to
develop a taste for frozen pizzas, for half the price of Domino’s. Frozen pizzas
eventually became one third of the pizza market. Another reason was the high rental
fees that the company paid for stores in prime locations, even though in this type of
business the store location is not important—only their telephone number. However,
there was a third dominan t cause, particular to Israel.
Because of suicide bomber attacks on Israeli stores during 2002, many restaurants
started to offer home delivery. All of a sudden Domino’s Pizza found itself in a market
with thousands of local competitors. Their main strategic advantage—fast home
delivery of food—was no longer unique. Domino’s Pizza was slow to understand that
their market had changed and did not respond to the new conditions in a timely
manner. Domino’s Pizza Israel needed a new business plan in order to survive, and
failed to develop one.
Here are two comments written by our students on this story.
“The example of Domino’s Pizza in Israel shows how loosing strategic resources can
cause a company to go bankrupt. The only mistake Domino Pizza made was not
responding to a change in a timely manner.” Ben Kaufman.
“The lessons learned in the Domino’s Pizza example follow the ideas of the responsive
business model perfectly. Had Domino’s had a more responsive business model, it is
more likely that they could have adapted to the changes in the market.” Andrew Babian.
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11.2 BUSINESS MODEL OF MANUFACTURING COMPANIES
From this point, we will focus on business models for manufacturing companies,
rather than on business models in general. As we described in Chapter 1, manufactur-
ing compani es stand on three primary foundations:
.
Design a range of innovative products that can be customized to meet
customers’ needs in various world’s regions with different cultures and a diverse
customer’s purchasing power.
.
Make products cost-effectively by utilizing reconfigurable man ufacturing sys-
tems that are adaptable to product changes and market demand fluctuations.
.
Sell products encompassing a variety of personal features in an environment of
market changes, by implementing responsive business models that can take
advantage of market opportunities.
These three fundamental elements must work in harmony, and they must support
each other. For example, if a company produces modular products, the manufacturing
system must be designed to produce a family of modular products, and the business
model should promote and support the usage of modular products by the consumers.
The business model of manufacturing com panies must structure their interactions
among these three enablers.
Our definition of a business model is:
A business model is a strategic approach for creating economic value by utilizing
the competitive advantage of the company for enhancing the product value to its
customers.
Customer’s Benefits: Business models of enterprises should define who their
customers are and explain how to create value for these customers, including how to
guarantee long-term relationships with the customers. Customers can benefit from
more than just products they can get at low cost, but also by products with
characteristics that fit their exact need or by making it easier to select a product of
their choice (e.g., Sephora’s business model). Customers will also gravitate to vendors
who offer first-rate after-sale service. A company that is not concerned with creating
value for its customers is opportunistic; it will not exist for a long time, and absolutely
will not build a brand name.
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Unique product features (differentiating them from competitive products) or a
lower price than competing products may create a competitive advantage for one
company over another. In order to gain a competitive advantage, a company must
utilize its strategic resources and asse ts to form the foundation of its business strategy.
Strategic Resources: They are those that are essential for the success of the
enterprise. In a manufacturing enterprise these resources may be in the product, the
process, the manufacturing system operations, and/or ones business assets (e.g.,
marketing, finance, delivery, service, and human resources).
Strategic assets within a product may include unique features or functions, a novel
interface with the user, personalization qualities, aesthetic appearance, etc. The
strategic resources of a manufacturing system may include plants designed for
cost-effective personalized assembly, high-quality production, manufacturing strat-
egies for high-speed responsiveness to customer’s orders, and running at high
productivity that reduces cost and, in turn, the product price.
There are also strategic business resources that may be developed. Examples
include distributed delivery networks, efficient logistics, superior service, access to
capital, buying large quantities of parts at reduced cost, and information infrastructure
that links customers directly to the assembly plants (as done by Dell Computers).
The Business Strategy: It is the core of one’s business model. This strategy
defines the appro ach and methods by which a company’s strategic resources can be
applied to create a competitive advantage and generate economic value for a company
and its stakeholders (i.e., a larger profit margin). Economic value to one’s stake-
holders should always be a company objective. Economic value may be also measured
by the company’s potential, and not only by its current revenue. For example, patents
owned by the company or its pre-emptive (first mover) strategies are potential assets.
Figure 11.1 shows the interrelationship between components of the business model
and their contribution to both an economic value for the company and benefits to the
customers. A variety of other business models that link resources, strategy, and
customer’s benefit are discussed in the literature.
1
Based on the nature and uniqueness
of its strategic resources (Section 11.4) and the market scope and segments in which
Figure 11.1 The business model flow-chart.
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it plans to compete, the company creates its competitive advantage strategy
(Section 11.3). The competitive advantage of the company must be translated into
a revenue model that creates economic value.
The issues of supply chains and strategic alliances are discussed in Sections 11.5
and 11.6. The Global Strategy, which we discuss in Chapter 13, includes deci sion
making about factory location and product regionalization. Finally, note that a
business model cannot be evaluated independent of the industry type because the
customers and the strategic resources depend on the industrial sector.
11.2.1 Business Strategy
The business strategy at the core defines the goal of the business model and the
intended approach for achieving one’s goal. The business strategy specifies how the
firm’s strategic resources are translated to market advantage. A successful business
strategy must also focus on the value customers get from the product or service.
The business strategy should define:
1. Market Segments —market target and scope.
2. Value Added —for the customer.
3. Competitive Advantage —strategy to gain market advantage.
4. Strategic Resources —needed to achieve the competitive advantage.
5. Revenue Model —to create economic value as well as future growth strat egies.
11.2.2 Target Market Segments
Defining one’s target market and scope is the first step in articulating a business
strategy. Questions that a market analysis should answer include:
.
Who are our current customers, and who might be new customers for the
product?
.
Which customers shoul d we NOT serve?
.
What are the market segments for the product?
.
What are the regions of the globe for which our products should be planned?
.
What should we do better in these regions than our competitors?
.
What are the d emographics of the potential customers?
11.2.3 Creating Value for the Customers
Every firm must make an effort to identify ways of creating value for their customers.
Because of global competition, a quality product can now be made anywhere in the
world. Manufacturing high-quality products is no longer a rare skill that can by itself
constitute a competitive advantage or even easily differentiate competitors’ products.
In a global economy, with rare exceptions (e.g., i-pod), it is hard for an enterprise to
gain a competitive advantage based on the product alone. The key to success is
the active involvement of the customer in product design and in accommodating
BUSINESS MODEL OF MANUFACTURING COMPANIES 287
the special needs of each customer. “Customers First”—is rule #1 for a successful
business in a competitive market.
The challenge, however, is that customer needs are continuously evolving. As the
range of available products expands, each cust omer, private individuals and business
customers alike, demands a product that most closely fits their individual needs. Mass
production of generic products does not fit today’s markets. Mass-customized,
regional and personalized products are rapidly taking its place. However, for
personalization to succeed, direct interaction with the customers is required, starting
with collecting information about their needs, and meeting their satisfaction by letting
them be involved in final design of their product.
The business model should state how the customer benefits from the product.
Examples include:
.
Match to Customer Expectations —Manufacturers should evaluate how
closely their product fits the customer’s personal culture and intended use of
the product.
.
Customer Support —The method by which the firm actually reaches its
customers, and what kind of support and service the customer is offered.
.
Pricing Structure —The pricing method best suited to a particular customer
group. An Internet provider, for example, may charge per month or only for the
day that the customer uses the service. A telephone company charges for
unlimited calls by the month, or per call. A jet engine may be sold, or be
delivered at no cost if a long-term maintenance contract is signed.
.
Green —Embracing green technology and offering “green” products is a new
way of creating value for the customers. Companies such as General Electric and
Toyota have been at the forefront of “selling green.”
11.2.4 Market Opportunity—No One Here Wears Shoes
Even though they may be exposed to the same facts as competitors, manufacturers
may fail to recognize a market opportunity or its growth po tential. A typical story is
about an Italian shoe manufacturer who sends two sales represe ntatives to an African
country. After 2 days one salesman sends a fax back to headquarters: “I‘m coming
back. It’s a terrible market. No one here wears shoes!” An hour later a fax arrives from
the other salesman: “Send me as many shoes as you can! You won’t believe it but no
one here wears shoes!”
The market opportunity and its potential growth that are included in a domestic and
global strategy analysis should be identified first; only then should the business
strategy be developed. An important factor in evaluating a market opportunity is the
company’s strategic resources. Not every company will have the resources (whether
technical or financial) needed to pursue an attractive market opportunity. In these
cases, partnership or strategic alliance with another company may be necessary.
“As an additional hindrance to enter the market,” writes our student Cheng-Hung
Wu, “consider government strategies related to information technology. In Taiwan,
288 BUSINESS MODELS FOR GLOBAL MANUFACTURING ENTERPRISES
the government urges all companies to build standard data exchange systems.
Through such a standard protocol, companies can communicate with their suppliers,
banks, and customers through a single interface. This will increase the cost and
difficulties for foreign competitors to access the market.”
11.3 COMPETITIVE ADVANTAGE
An important goal of the business strategy is to define how their competitive
advantage benefit’s the consumer. After all, the best product in the world will not
sell if the consumer does not value it. Since the late 1970s, business strategists have
analyzed strategies for gaining competitive advantage. A thorough analysis of how
one calculates the cost of production came first. When greater attention started to be
paid to customers, strategists realized that just maintaining low-cost production was
not the only strategy for gaining a competitive advantage.
Michael Porter was the first to suggest “Differentiation” as another major
competitive strategy, in addition to cost.
2
In the manufacturing industry, differenti-
ation means that customers are willing to pay more for a product that is different than
that of competitors (e.g., the 2000 Prius in the United States). More than just product
performance and novel features; manufacturing quality, quick delivery, and product
service can also create a basis for differentiation. Porter propos ed that companies must
base their competition on either low-cost production or by differentiating their
products. Since that time, other strategists have shown that these two strategies
might sometimes be combined, since there are examples of companies that produce
high-performance products at lower costs than their competitors.
Differentiation to the degree of produc t personalization is a future trend that is
emphasized in this book (see Chapter 3). In our opinion, product personalization may
be classified as a third distinctive strategy of manufacturing industries (rather than a
sub-category of differentiation).
In summary, a competitive advantage is based on at least one of the following
categories:
1. Low-cost Leadership (Cost and broad scope)
2. Differentiation (Uniqueness and broad scope)
3. Product Personalization (Uniqueness and narrow scope)
Each of these may constitute a competitive advantage by offering more value than a
competitor’s product, thereby exciting the customer.
11.3.1 Cost Leadership
Goal: Gaining a competitive advantage by delivering greater value than competitors at
lower price in a broad target market
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Low-cost manufacturers compete on the basis of purchase price—using the appeal of
lower prices to generate more sales of their product. Cost leaders are not always
selling inferior products—they only truly provide greater value to customers if they
sell identical products at a lower price compared to those of their competitors. This is a
good strategy when most buyers use the product in the same way and have common
user requirements (e.g., refrigerators). To gain cost leadership, a firm must execute its
production and distribution activities in less expensive ways than its competitors do.
Low-cost leaders must attract price-conscious buyers in great numbers, and may
reduce costs even further by increasing production economies of scale.
Factors that gain cost leadership for manufacturing companies include:
.
Higher factory productivity
.
Production volumes that achieve economies of scale
.
Producing multiple product variants (models) on the same manufacturing
system
.
Purchasing leverage to reduce supply and sub-assembly costs
.
Low-cost labor
.
Specialized machines that reduce product manufacturing cost
.
Higher productivity contributed by empowered workers
.
Lean production technologies
.
Close proximity to markets and suppliers
.
The firm’s experience and knowledge of the market.
Global competition is not going away, and it will cont inue to suppress product
pricing all over the world. However, prices must keep up with costs for the company to
continue to function and turn a profit. Smaller profit margins not only reduce a
company’s stock value, but also constrain capital investment for new products.
However, if prices continue to go up, a company will eventually lose its cost
leadership position.
A potential alternative is to counter increases in production cost by improving
productivity, which enables maintaining product prices. Higher productivity is
achieved by running machines faster; productivity can also be improved by reduc ing
manufacturing idle times when switching over to a new product, shortening ramp-up
periods for new products, implementing in-process inspection, responding quickly to
customer demands, and building efficient supply chains. For this reason, implement-
ing the methods introduced in previous chapters of this book has become critical to
industry success.
11.3.2 Differentiation
Goal: Gaining a competitive advantage by delivering a product that is different from
those normally available (but still at competitive prices)
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