This definition of a disruptive innovation is an apt description of Apple’s first iPhone.  When it was launched in 2007, the iPhone underperformed against benchmarks that were standard in the smartphone industry. As a result, just 1.5 million units were sold in its first two quarters. Here is how the original iPhone stacked up against existing smartphone competitors, using measurements that were considered important at the time:

However, Steve Job’s creation was not just a cell phone; rather, it was the world’s first, handheld computer. Its data processing capabilities—not voice—are what disrupted the cell phone market. Although other smartphone manufacturers offered web browsers, they were clumsy and difficult to use. In contrast, Apple’s web browser made surfing the Internet easy. Compared to its rivals, the iPhone’s user interface was simple, intuitive and uncomplicated.  At the swipe of a finger on touch sensitive glass, one could get access to e-mail, text messaging, video, photography, maps, books, music, games and mobile shopping. The iPhone was a game-changer, the industry’s Swiss Army knife.

After having introduced a product that was revolutionary in some respects, but lacking in others, Apple began a structured process of enhancing features—and adding functionality—that satisfied customer needs. This is the essence of continuous improvement. For example, in 2008, iTunes was introduced, which solidified the iPhone’s role as a multi-function device that could seamlessly provide music and video on demand.

Unveiled on September 12, 2012,  the iPhone 5 is the current iteration of the iPhone. In his Wall Street Journal column All Things Digital, Walt Mossberg describes the differences between the iPhone 5 and its predecessor model, the 4S, which was introduced a year ago:

The incremental improvements described in the previous table are not radically new. In fact, some commentators have described the iPhone 5 as a catch-up device, adding features that are already resident on the leading Android and Windows phones. For example, many of the Android phones already feature larger screens.

In conclusion, Apple’s product development strategy does not involve releasing breakthrough technologies, year after year. Rather, disruptive innovations—such as the iPod, iTunes, iPad, and the iPhone—are unleashed, upending entrenched market competitors. Then, the worlds’ most innovative company improves upon its breakthrough product by implementing stable releases, adding features and functionality that delight its customers.

I need to bring this blog post to an end, because I have to go down my local store, and place my order for an iPhone 5. The current backlog is 4 weeks, and I don’t want to wait any longer than that!

The post What Apple Can Teach Us About New Product Development appeared first on Business Theory.

In addition to having read several of Covey’s books, I saw him present at a Lessons of Leadership conference. Here are the two most important take-always from his body of work:

Lesson 1: Point Your Compass Towards True North

In his book First Things First, he differentiated between the clock and the compass. The clock represents our commitments, appointments and activities. In contrast, the compass represents our vision, values and direction. Angst occurs when there is a gap between what we do, and what is most important in our lives.

This distinction painfully struck home. Once, I was scheduled to attend a Board meeting during a day when my 4-year old son had to undergo major surgery. I elected to attend the Board meeting, rationalizing my decision by telling myself that my wife and father-in-law were at the hospital.

Although the surgery was successful, I regret my decision, realizing that I did not put First Things First, which is to be there for my son. Had I spoken up, the Board meeting could have been delayed.

Lesson 2: Invest in the Goose That Lays the Golden Egg

This lesson is based on one of Aesop’s fables.  A farmer and his wife had a goose that laid a golden egg every day. They assumed that the goose had a great nugget of gold in its inside, so they killed it. They discovered that the goose was no different from other geese. Instead of becoming rich, the coupled deprived themselves of the gain of which they were assured day by day.

Covey argued that we must invest energy in increasing our productivity. Using the metaphor of a saw, he suggested that we must sharpen the saw, otherwise the blade becomes dull. And a dull blade results in reduced output.

There are many ways of nurturing the goose. In a previous post, I described how playing bridge enhances one’s memory and mathematical skills. Is it surprising that Warren Buffet and Bill Gates are avid players? In tennis, I know that if I fail to do strengthening exercises, pulled muscles are the end result. My physical therapist can attest to that!

In terms of business, at Frito Lay’s Orlando,  Florida plant , the largest inventory investment is not in the potatoes, corn oil and salt seasonings that are needed to make the company’s snack products. Rather, the biggest inventory item is in parts that are required to maintain the expensive machinery. Management knows that the costs of production downtime far outweigh the investments in inventory that are necessary to keep the machines in good condition.

Conclusion

Some of Covey’s notions are commonsensical—they will not put him at the table with the pantheon of self-improvement thought-leaders. For example, his 7 habits include advocating “being proactive; begin with the end in mind; think win-win, etc.”

But the ideas of nurturing the Goose That Lays the Golden Egg, and setting ones compass on true north, will stand the test of time.

The post Two Lessons That Stephen Covey Can Teach Us appeared first on Business Theory.

Given that its name was once synonymous with photography, a Kodak moment, the disintegration of this iconic corporation is particularly poignant. As recently as 1976, the company held a 90% market share of film sales and 85% of camera sales. It was the Google of its day, attracting the best technical talent from across the country. During lunch, the company played movies for its employees.

©Kodak used with permission

A disruptive technology—the digital camera—killed off the film business. Ironically, Steve Sasson, a 25 year-old Kodak electrical engineer, invented the first digital camera in 1975. This fact begs the question: how could a great company like Kodak, flush in the 1970’s with abundant resources and some of the most talented people on the planet, fail to take advantage of a product that was invented in its laboratories?

A failed business strategy and management myopia both contributed to Kodak’s downfall.

Kodak’s Failed Business Strategy

When there is a disruptive technology, firms are often unable to capitalize on the invention for fear of cannibalizing existing product sales. Kodak’s primary strategy was to sell high margin film. Known as the razor blade strategy, the company developed inexpensive cameras as a means to an end: their purpose was to facilitate lucrative film sales. In summary, its digital camera invention was held back because of management’s concerns about the negative impact on film sales.

When Sony launched a filmless digital camera in 1981, fear permeated Kodak’s executive suite. Specifically, over the next decade, Kodak invested approximately “$5 billion—or 45% of its R&D budget—in digital imaging,” according to a 2005 Harvard Business School case study. Unfortunately, with disruptive technologies such as digital cameras, the first-mover advantage is too great for late entrants to overcome. By the time Kodak realized that their razor-blade business model was dead, the horses were already out of the barn. The company was unable to catch-up to the competition.

Earlier this month, Kodak’s announced that it was exiting the film and digital camera business altogether. Sadly, all that remains of this once august corporation is the intellectual value of its patents, resulting from decades of belated investments in digital technologies.

Management Myopia

Not only was the first digital camera unwieldy—it weighed over 8 lbs.—but it didn’t even save images. Instead, they were projected onto a TV screen. It is difficult to imagine how Kodak’s mainstream customers—Mr. and Mrs. Jones from Kansas—would have bought that first, clunky digital camera.

Conventional wisdom suggests that good management involves staying close to your customers. And that is what management at Kodak did. Rather than allocating resources towards the internal development of a risky, digital camera that their mainstream customers had little interest in, the company funded projects that enhanced its position within the lucrative film market. Management at Kodak was constrained by the needs of their established customers. That is fine when making incremental improvements to existing products, but it is fatal when dealing with disruptive technologies.

In retrospect, management ought to have spun off its digital camera business to an independent subsidiary. The small business unit could have focused on meeting the needs of the customers who would have embraced it, such as hobbyists and leading-edge photographers. Apple followed this strategy with its first, Apple computer. I remember buying mine from a Chicago-based, electronics shop that catered to technical enthusiasts (techies) who were far removed from the mainstream, consumer marketplace. Over time, Apple developed its product offerings, introducing features and functionality—such as the mouse and Graphical User Interface (GUI)—that made it attractive to Mr. and Mrs. Jones from Kansas.

In his book The Innovator’s Dilemma, Clayton Christensen describes numerous instances where companies have failed at internally developing disruptive technologies. In contrast, firms that set up separate subsidiaries have been able to grow game-changing innovations into full-fledged businesses. HP did this with the invention of the ink jet printer in the 1980s. It set up an autonomous subsidiary in Vancouver, Washington, far removed from the influence of corporate headquarters in Palo Alto, California. Initially, the ink jet printer market was small and limited; over time, the company turned it into a significant business.

Small is Beautiful

I worked as a product manager at a small company that manufactured food-processing machinery for the beverage industry. New product development was the key to its success. In 1980, a large conglomerate acquired it. Within 7 years, innovation, the life-blood of the firm, dried up, and the conglomerate sold off the business.

When it comes to winning the new product development race, small entrepreneurial-driven firms will usually beat the behemoth corporation, especially when dealing with disruptive technologies.

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Occasionally, a new technology is introduced that disrupts the natural order of things. Apple’s iPad represents just such an innovation. The touchscreen display and navigation options make this computer a radical departure from the PC. [In this context, I am broadly defining the PC as either a desktop or laptop computer.]

With the iPad, you don’t have to use a trackpad—or mouse—to move a cursor around a screen. Instead, you use your fingers to touch and swipe the screen. In addition, the iPad is very light, weighing only 1.5 lbs (680  grams), and has a battery life of  9-10 hours, which is far greater than the battery life of the typical laptop computer. Combined, all of these features provide the user with a more direct and immediate relationship to computing: all cables, mice and other devices are gone. The iPad facilitates a “magical” experience, according to Steve Jobs. Certainly, it makes life easier for the customer.

Ease-of-use is one of the many reasons that the iPad has caught on like wildfire, becoming the biggest selling device in Apple’s history. For the quarter ending Dec 31^st2011, the Cupertino-based juggernaut sold 15.4 million tablets, accounting for $9.1 billion in revenues or about 20% of the company’s total revenue. Compared with last year’s holiday quarter, tablet sales doubled.

We are witnessing what Harvard Business School’s Clayton Christensen calls a disruptive innovation.  Typically, inventions that fall into this category have characteristics that are radically different from existing products; however, initially, they offer lower performance in areas that are important to mainstream customers. For example, compared to a laptop or PC, the original iPad’s processor was slow; storage space was limited; and it wasn’t equipped with a keyboard. But over the past couple of years, Apple has significantly improved the performance of its tablet computer. Here are some of the features contained within the new IPad, which was released today:

• High resolution retina display–2048×1536 pixels more than on an HD TV
• A dual core CPU twice  as powerful as the A5 found in the iPad 2
• A rear iSight camera with 5MP sensor and advanced optics, including IR filter, autofocus, face detection, and white balance
• HD video recording (1080p resolution)
• Voice dictation (there’s a new key on the keyboard for speaking into the iPad)
• 4G LTE support: HSPA+ for up to 21Mbps or dual-carrier HSDPA for up to 42Mbps or LTE for a max of 72Mbps connectivity
• Battery life is 10 hours (9 for the 4G models)

How do you weigh in on this issue? Will Apple’s improvement of features and functionality enable the tablet computer to become a PC  replacement?

The post Apple’s New iPad: A Disruptive Innovation appeared first on Business Theory.

When we study supply chain management, I engage my students in a discussion of this topic. Here is the scenario:

Industrial size textile factory in developing country, workers on lunch break

“Major corporations with overseas subcontractors (such as Ikea in Bangladesh, Unilever in India, and Nike in China) have been criticized often with substantial negative publicity, when children as young as 10 have been found working in the subcontractor’s facilities. The standard response is to perform an audit and then enhance controls so it does not happen again. In one such case, a 10-year-old was fired. Shortly thereafter, the family, without the 10-year-old’s contribution to the family income, lost its modest home, and the 10-year-old was left to scrounge in the local dump for scraps of metal.” —adapted from  Principles of Operations Management

A student of mine from India said that the decision to hire the child was ethical; and the judgment to fire him was unethical. My student defended his position by stating that Americans do not understand the depth of poverty in India. In many circumstances, families rely on child labor, so that the family can survive. When he grew up, there was no compulsory education, so working did not deprive Indian school-age children from going to school. [In 2009, the Indian parliament legislated a compulsory education law for elementary school children.] Other students of mine who have grown up in developing countries—such as China and Bangladesh—have agreed with this line of reasoning.

After all, during the 19^th century, the U.S. was once a developing country. For many years, we condoned the practice of employing children in the workplace. Once our standard of living improved—and universal, public education became a realistic objective—we passed child labor laws that prohibited this practice. So, in the present, does showing outrage at Ikea, Unilever and Nike amount to hypocrisy?

It is useful to examine public policy decisions through the lenses of utilitarianism. This philosophy states that, in all situations, you should act in a way that generates the greatest benefit for the greatest number of people. Everyone’s interests are considered equal. Thus, if utterly poor families are only able to survive when the children can work, it is unethical to prevent them from doing so. By permitting child labor, we are promoting the greatest good for the greatest number of people. The family remains intact as a result of the income received, while U.S. and European consumers obtain inexpensive goods from their retailers.

Although the philosophical justification for child labor is convincing, major corporations cannot withstand the negative publicity associated with these practices. Just this week, Apple indicated that they are going to have an independent firm audit its suppliers, because of criticisms over conditions at its overseas factories. So, from a public relations perspective, not a moral perspective, we cannot condone this practice.

Do you think that it is ethical to employ underage children in factories located in developing countries? If a multinational corporation also provided educational opportunities, would that be acceptable?

The post When Child Labor Is Ethical appeared first on Business Theory.

Unethical mortgage origination practices precipitated a $25 billion settlement with banks over alleged foreclosure abuses, including the use of forged and shoddy paperwork, a practice known as “robo-signing.” The deal will provide financial relief to an estimated one million at-risk borrowers, as described in today’s Wall Street Journal. This is a step in the right direction:  holding the financial institutions accountable for the dubious practices that they perpetuated. However, millions of mortgages owned by Fannie Mae and Feddie Mac are not covered under the deal, thereby excluding more than half of the nation’s mortgages. Moreover, the real culprits in causing the worst economic crisis since the depression are not just the banks. The government, non-bank lenders, and Wall Street are also responsible.

Paying money—rather than aggressively prosecuting wrongdoers—is never a good idea. Specifically, the settlement is poor compensation to the public for the unethical practices and crimes that were committed against it. In 2001 and 2002, members from senior management at Enron and WorldCom were prosecuted and convicted for performing various criminal acts against their stakeholders. Why have we not prosecuted the wrongdoers who precipitated the current financial crisis?

The immoral acts that I am referring to are well documented in the book Reckless Endangerment, written by Gretchen Morgenson and Joshua Rosner. Since today’s settlement pertains to mortgages, let’s look at some of the shenanigans that surrounded these products. In 2004,  lenders came up with two new types of toxic loans:

1) interest only mortgages, where borrowers simply had to pay off interest, but not principle. As a result, borrowers didn’t build up any equity.

2) negative amortization loans where the borrower paid as much interest as he wanted—any amount not paid off was simply tacked on to principle.

These two products accounted for just 6% of loans in 2003, but by 2005 they represented 29 percent of the market. They were particularly profitable for the lenders: Countrywide made 5% profits on every interest only loan between $100,000 to $200,000. Wall Street’s investment banks made even more money, by subsequently packaging them into investments called CDOs (collateralized debt obligations). Ratings agencies—such as Moody’s and Standard & Poors—then rubber stamped the securities as being AAA rated; however, they didn’t look under the hood to see what was really there. Moody’s could earn as much as “$250,000 to rate a mortgage pool with $350 million in assets, versus $50,000 in fees generated when rating a municipal bond issue of a similar size.”

Morgenson & Rosner described the entire process as being akin to a drug deal where the mortgage originators were drug pushers hanging around the school yard. The ratings agencies were the narcotics cops looking the other way. And the brokerage firms were the overseers of the cartel providing the capital to the “anything goes” lenders.

A coke dealer—who cuts their product with impure substances—knows the harmful effect that the drug will have on clients. Similarly, wall street firms that packaged impure, sub-prime loans into mortgage pools knew, well before their customers did, that the loans inside the CDOs had begun to go bad. The authors describe how in the third quarter of 2006, the traders at Goldman Sachs made bets against the same securities that their brokers were selling to their clients!

How do you weigh in on this issue?

The post Is the Announced $25 billion Settlement with Homeowners Ethical? appeared first on Business Theory.

–My Kindle: Lost in Chicago & Found in Ashville, North Carolina

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For service businesses, quality is all about customer service. When there is a customer service issue, companies that rise to the challenge create a bond between the firm and its customers. As such, customer service is the new marketing. This I learned from an experience that I had this summer.

Since we are passionate about tennis, in August we took a trip to Cincinnati where we saw an ATP tournament. We booked our round-trip flight from Chicago with United Airlines.

When we got home and unpacked, I realized that my Kindle was missing. I last recalled having it in my possession on the return flight, when I had put it into the seat-back pocket in front of me. I immediately got on the Internet, and attempted to look up United’s customer service phone number.

I found an 800 number, but became increasingly frustrated as I navigated countless phone trees, unable to successfully make contact with a human being. My frustration turned to anger when I learned that to communicate with United’s Customer Service department about a past incident, I either had to email customer relations or post a written letter.

The next day, I played golf and recounted my story. I ranted about the quality of customer service in the U.S. One of my fellow golfers mentioned that he knew someone who worked in a management position at United. He offered to intervene on my behalf. I accepted his kind gesture.

The next day, I got an email from a senior customer service representative at United. She did everything within her power to locate my Kindle. I got the sense that if my e-reader had found its way to Brazil, she would have tracked it down.  I learned that there were dozens of Kindles in the lost-and-found at United’s Chicago O’Hare terminal. In addition, I discovered that many travelers leave iPads and other electronic gadgets on airplanes.

Despite United’s valiant efforts to track down my errant, electronic device, the company was unable to find it. However, three months later—during the Christmas holidays—I got an email from Amazon, indicating someone had found my e-reader. Amazon gave me the individual’s phone number, and informed me that we would have to work out the terms of its return. I contacted the individual. He told me that he bought my Kindle at a flea market in Ashville, NC. He had paid $25 for it. He said that he tried to download a book from Amazon, but was advised that his newly purchased device had been stolen. Thus, he was unable to use it to buy books.

I agreed to pay the cost of shipping, if he would return it to me. He consented to this offer. I asked him how I would know where to send the check. He told me to  “look at the return address.” Within a week, I got a package containing my Kindle. The return address stated:

Santa Claus

Ashville, NC

My customer service contact at United was delighted and amazed at the story of how I got my Kindle back. She said that she would pass it along to those who needed to know. Two weeks later, I got a $100 voucher from United applicable to any flight that I book.

There are several lessons that I learned from this experience:

• E-mail is an impersonal, frustrating medium for expressing customer service issues
• In the final analysis, customer service is about customer satisfaction—on this count, United Air Lines won me over.
• Most—but not all—people are honest
• NEVER place anything of value within the seat-back pockets of airplanes.

What is your experience with the state of customer service in America?

The post State of Customer Service in America appeared first on Business Theory.

Chinese export manufacturers in the Hong Kong area expect that the increase will result in the downsizing—or complete closing—of 1/3 of Hong Kong’s 50,000 factories in China. These suppliers are critical links in the supply chain that stretches all the way from China to Europe and the U.S.  In addition to the wage increase, another reason for the anticipated decline in Chinese production relates to the general downturn in global economic activity.

The gap between U.S. labor costs and Chinese labor costs is narrowing. In fact, a recent article in the New York Times described how GE is bringing back jobs to the U.S. at GE’s Appliance Park in Louisville, KY. In return, the union agreed to a two-tier labor structure, where the U.S. employees who are hired will be paid $10 to $15 per hour less than what the current union workers are making.

Let’s do the math.  The offshore jobs that are being backsourced to GE’s Appliance Park will result in U.S. workers making between $20,000 to $38,000 per year. The workers in China, who will receive the 13.6% increase in their minimum wages, will be making $2,880 per year. Thus, G.E.’s workers will be paid approximately 700 to 1,300 per cent more than their Chinese counterparts.  Jeffrey Immelt, GE’s CEO, is spearheading the U.S. government’s campaign to bring jobs back to the U.S. Are these new, Appliance Park jobs being brought back because of lower labor costs? Or, are political factors affecting the decision?

As discussed in an interview with a U.S. manufacturing executive who lived in China for 13 years, global manufacturers who are looking to minimize their labor costs are locating factories in Viet Nam, not China.  This strategy—chasing every cent of labor savings—requires rejiggering the supply chain every few years. Vietnam’s minimum wage is only US$85 per month (or $1,020 per year). Thus, Chinese workers are paid 282% more than Vietnamese workers. 

Although the labor differential gap between the U.S. and Asian countries is narrowing, it is still significant. Offshoring will continue to be attractive to firms with products that have

• High labor content
• Large Production volumes
• Low variety
• Low transportation costs

Products that meet these criteria—such as electronics assembly—will most likely never return to the U.S. Furthermore, in certain industries—for example, in computer and cell phone production—most of the companies that comprise the supply chain are situated in Asia.  Given this reality, moving production to the U.S. would be uneconomical. In these industries, hoping for backsourcing to happen is like waiting for an airplane to touch down that is simply not going to land [on U.S. shores].

In conclusion, the key determinant in terms of where to produce is based on total cost, not just labor cost. One must begin by looking at the manufacturing process to determine where the most economical location is. Although China’s increase in its minimum wage is significant, it is just one of many factors to consider.

What do you think? Is there a future for manufacturing in the U.S.? Given the labor differential between China and the U.S., do you think that we can still compete?

The post China’s Supply Chain Rocked by 13.6% Labor Cost Increase appeared first on Business Theory.

• Horrendous occupational safety violations
• High suicide rates due to stressful working conditions
• Long working hours:  repetitive 60-hour, 7-day weeks
• Employment of children as young as 15 years-old

Although Apple has responded to problems in its Asian supplier base by conducting supplier audits, the worlds’ largest company—in terms of stock market value—has been reluctant to put its foot down.  The fate of a 22 year-old college graduate, Lai Xiaodong, is a case in point. He moved to Chengdu in southwest China to take a job at Foxconn, an electronics supplier that employs 1,000,000 people. He was quickly promoted to oversee a team that polished iPad cases. This process generated dust, which is a known safety hazard.  Mr. Lai and 3 teammates died from a ghastly explosion, which also injured 14 other workers.  After the accident, which seared 90% of Mr. Lai’s body, Apple contacted “the foremost safety experts in process safety,” and assembled a team to make recommendations to prevent future accidents. In December, 2011—7 months after Mr. Lai was killed—another iPad factory exploded due to aluminum dust.  As a result, 59 workers were injured; and 23 hospitalized.

I was initially shocked after reading about the story of Mr. Lai, and Apple’s apparent lack of commitment to correcting poor worker-safety practices. Although allowing unnecessary accidents—resulting in worker injuries and deaths—cannot be condoned, we must take a more nuanced view regarding Apple’s predicament, from both a historical and cultural perspective.

In a supply chain management class that I recently taught, we discussed the ethics associated with the use of child labor in developing countries. One of my students grew up in India. He indicated that poverty in India is severe, and compulsory education is not mandated by law.  To survive in this environment, some families require that their children work. Were we to impose our ethical values and prevent children from working in Indian factories, we would be depriving Indian families of sorely needed income. It is easy—but wrong-headed—to believe that our ethics and moral values are superior to the moral values held by other societies.

The reasons against using child labor are not moral as much as they are practical ones. It is bad business to permit children to build Apple’s products, if young people are simply being used as a means to an end.  Consumers in the west will no longer think that it is “cool” to own i-Phones, if they have been built by Chinese teenagers.   How many parents would want to be part of a 21st scene, taken from a 19th century Dicken’s novel?

In Viet Nam, Nike has implemented an innovative solution to this dilemma.  Although some of Nike’s Vietnamese suppliers employ children, they also provide employees with a regular wage, free or subsided meals, free medical services and training and education. Nike, as well as western consumers, benefit from low labor costs. At the same time, the workers improve their standard of living and also receive access to education.

Regarding the various safety issues that were described by the New York Times, one has to put them into a cultural context. I recently interviewed an executive who lived in China for 13 years, setting up factories and growing American businesses. During the course of our conversation, he made the point that public safety is non-existent. When walking down the street, you have to always be on the lookout for possible hazards. There may be a big hole in front of you, which is not blocked off with barriers. Or, there could be an electrical wire dangling at eye-level. If unaware, you could walk right into it. If a lack of public safety is the norm in China, how can one expect the private sector to be any different?  Would we be correct to impose our ethical standards—as relates to public safety—onto the Chinese?  Specifically, should we preach that barriers should be placed in front of Shanghai’ s sinkholes?

Getting back to Apple, from a business perspective, the company must enforce strict, safety practices for all of its suppliers; otherwise, more articles—such as today’s scathing indictment in the New York Times—will appear, tarnishing Apple’s brand. Only by adding teeth to Apple’s supplier responsibility reports and recommendations, will the company avoid future, public relations disasters.

In conclusion, with global competition, superior supply chain management results in consumers receiving products at low prices. But our western ethical tastes are repulsed at stories of worker abuse. Apple must take strong, corrective measures against suppliers who use workers solely as the means to an end, namely, achieving low, production costs. In supply chain management, good ethics makes for good business.

The post The Price of Your iPad Is Higher Than You Think appeared first on Business Theory.

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Interview by TIM MOJONNIER

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You lived in China for 13 years. When did you live there?  I arrived in January 1997 and returned to the U.S. in November 2010, with occasional trips back to the U.S.  During my time in China, I spent 8 years in the Shanghai area, and the balance in the south, Guangdong area.

What was it like living in China for all those years? What were the biggest challenges in adapting to the local culture?  Initially, my wife and I felt uncomfortable going into the streets, and shopping by ourselves. Because we were foreigners, the prices were higher and the Chinese way is to negotiate for everything. We also had to acclimatize ourselves to being long term expatriates (expats). Most expats typically live in a country for 2-3 year assignments. Since we lived in China for over a decade, we always had to make new friends. In addition, dealing with a translator was a challenge, because the translator would just translate the words, but not the meaning.  Furthermore, the Chinese do not always speak their mind, and they do not speak directly.  After being there several years we were able to understand the meaning of Chinese conversations. We also learned how to communicate basic things and feel comfortable shopping in local open air markets and moving with the flow in the crowded streets. In conclusion, once we got over the initial shock of living in a different culture, we realized that the Chinese are a warm people, who enjoyed being around Americans, in part because it provides them with an opportunity to practice their English. Chinese business people are all educated and very smart. It was a pleasure working with them, and we have developed many friends who visit us when they pass through Chicago.

What did you do before you lived in China?  After graduating from the university, I worked in the Chicago area for 7 years in construction and design engineering. Later, I held manufacturing management positions such as V.P. Manufacturing and General Manager. I was employed in industries that produced air pollution control equipment, pumps, industrial testing equipment, laboratory testing equipment, etc.

What did you do during your stay there? I had three primary engagements. First, I managed a joint venture between an American ball valve manufacturer and a Chinese company. The assignment entailed overseeing the relationship between the two organizations as well as running the business. Second, for Sloan Valve Co., a global manufacturer and distributor of flush valves and faucets for high end commercial buildings, I developed a business plan that described a strategy to enter the Chinese market selling American products in the China market. The plan was funded, and I started up the operation in China, where I worked for 6 years. Third, I worked for Weber-Stephens, establishing a supply chain management company. The focus was on finding suppliers, qualifying suppliers, and monitoring their performance. I traveled to many places in China for all 3 companies, and gained an understanding of what products are made in various locations and the Chinese customs to do business.

Given ever increasing levels of inflation and local labor rates as well as the appreciation of the Renminbi, is China still an attractive country to outsource production to? If so, why?  $1.90 per hour is the highest Provence minimum wage (Guangdong Providence), which includes all of the employer costs to put an employee on board. However, the City of Shenzhen recently announced increases for the minimum wage effective starting Feb. 2012 = $2.17/hour including burden. Skilled Chinese workers can command more. Still, outsourcing work to China provides a manufacturer with significant labor savings, but you need to have the correct strategy for why you are doing business in China. Companies trying to penetrate the local market have the best opportunity. The Chinese like western products; they desire the things and life style we have. Look at Apple’s phones; they had a sale on their latest model and the demand was so great that they cancelled the sale, and shut shops down. Demand for these types of products is unbelievable. But outsourcing labor-intensive work to China—while developing channels to enter the local Chinese market—is not an easy thing to do. However, the return can be great. Finally, if you are only focused on reducing labor costs, then outsourcing work to places like Viet Nam may be a better option. However, this strategy involves chasing a few cents savings and moving to new factories or new vendors every few years.

What are the main challenges associated with running a business in China? That’s a big question. It depends on whether you are just sourcing components from China or making product for the local Chinese market.  If you are only manufacturing and exporting, then quality is especially important. Also, retaining good employees is always a challenge, especially given wage inflation. Pirating good employees is an issue. You need to have cultural sensitivity, understanding what people expect from an employer. Having a first-rate Human Resources policy and activity is important in order to retain good employees. Also, it is very difficult for small manufacturers. The Chinese think that bigger is better. They believe that it is better to work for a big company, which is especially an issue when dealing with the government. The bigger the company, the greater the likelihood that officials will work with you. If you are a small guy, it is difficult to attract their attention.

What are the main opportunities associated with running a business in China? For the years 2007, 2008, and 2009, the American Chamber of Commerce in Shanghai and Booz & Co. conducted a survey of about 1,000 manufacturers to understand why they came to China. The following is a list of the major reasons, ranked from most important to least important:

1. 83%:  Access to the local Chinese market
2. 66%:  Labor cost savings
3. 51%:  Access to the broader Asian market—having a business in China provides you with
   the ability to export to other Asian countries without import duties
4. 44%: Material savings
5. 41%: Strategic move against key global competitors

In November 2011, you returned to China for a month. How have things changed since you were last there? Previously, China put a lot of effort in infrastructure projects, but at the time I left, there was a downturn in this activity. I was surprised to see a great amount of construction still going on. Housing prices are finally coming down, enabling the middle class to buy their own apartments.  Business in general is just booming; people are busy, hustling, you can just feel the energy in the streets. You don’t feel that here [in the U.S.] at all.  Nevertheless, the Chinese business people are concerned. Previously, the economy was growing at a 10 % clip, but it has slowed to 7% projected GDP growth in 2012. However, the government is committed and will make the 7% growth happen. Inflation has increased, and there is concern about an anticipated leadership change in the highest levels of government.

What does your firm do?

Ops-Asia helps businesses to be successful in Asia and/or the U.S. We focus on small to mid-sized companies that don’t have the resources to do this type of activity. The primary market segments served are industrial products, building materials, household appliances & automotive components. We assist firms in 4 areas: business development, operations competitiveness, project management, and supply chain management.♦

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James L. Waite is President of Ops-Asia, which has offices in Shanghai, China and Northbrook, IL

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