Competitive Advantage

Two articles in the Financial Times point to the challenges of maintaining competitive advantage in today’s global economy.

The first relates to a decision by Microsoft to relocate its European logistics center from Germany to the Netherlands. This has been prompted by a lawsuit filed by Motorola Mobility alleging patent infringement by several Microsoft products. A judgement is due later this month and, fearing a possibly adverse decision, Microsoft has decided to move its operations to a new jurisdiction.

I find this story interesting from several perspectives. First, the fact that two US-based corporations are engaged in litigation in an overseas country. This is driven, apparently, by the patent-friendly laws in Germany and represents a spill-over from the patent battles that have been the norm in the US over recent years. Second, the fact that Microsoft has decided to move its operations to another country, to avoid the possibility that its products could be seized if the German courts grant an injunction.  The ease with which this can be done is itself interesting and illustrates the extent to which jurisdictional borders are becoming significant in corporate decision-making. Third is the extent to which this reflects the complexities of international competitiveness and the role of regulation in determining investment and location decisions. While the number of jobs involved in this case is relatively small, the wider impact on investment in Germany could be considerably greater as other companies weigh up the risks of locating operations in that country.

The other article highlighted a decision by GE to ‘reshore’ manufacturing of domestic appliance manufacturing to the US, from outsourced operations in China and Mexico. The decision has several elements. One is the fall in relative cost advantage as wage rates in many off-shore locations escalate. Another is the steady increase in logistics costs, in particular the price of oil, that undermines the cost advantages of offshoring. Third, there are US Government incentives, plus more flexible attitudes by the trade unions with regard to worker wage rates. And fourth – perhaps most interesting – is the belief that ‘lean production’ can deliver greater long-term benefits than a cost-reduction strategy based on labor arbitrage.

This final point is of particular importance because it challenges many of the purchasing theories of the last decade. Essentially, lean production depends on co-location of core functions so that they can work as teams in driving continuous improvement and innovation. This concept is based on a belief that process improvement and the ability to respond fast to market changes depend on levels of collaboration and integration that cannot be achieved through outsourcing to low-wage economies. Arguably, the same can be said of many other aspects of price-driven procurement decisions, which have themselves forced many suppliers to outsource or offshore their production activities.

Together, these stories illustrate the pace of change in thinking, the importance of continually challenging our assumptions, and the need to explore and understand market trends and developments, especially in an international context. They are excellent examples of the primary issue highlighted by CEOs in the 2010 IBM study – ‘global complexity caused by growing interconnections and interdependencies’.  The calculations in these two stories are all commercial in nature – and therefore areas in which the contracts and commercial expert should have knowledge and understanding, the ability to alert senior management to the threats and the opportunities that drive better business decisions.