Fragmented firms.

They're ubiquitous in today's business world, propelled by the broad-scale embrace of strategies that include outsourcing, off-shoring and operational dispersal.

Ned Hill Source: http://urban.csuohio.edu/faculty/ned_hill/site/

But how do companies most effectively manage themselves in an ever-more fragmented environment?

Site selection is a major weapon in meeting those organizational challenges, Dr. Edward W. (Ned) Hill asserted at IAMC's [www.iamc.org] Apr. 19-23 Professional Forum in Scottsdale, Ariz.

"A company's portfolio of facilities has to be balanced," explained Hill, vice president for economic development at Cleveland State University and interim dean of the school's Levin College of Urban Affairs.

"You have to translate the locations into value," he advised during his broad-ranging presentation, "Managing the Fragmented Firm: Facility Location in a Global Marketplace." "You have to figure out the balance."

Corporate location strategies, said Hill, currently fall along a continuum defined by two separate poles:

• "cost-driven strategies," which are centered on "reducing labor, facility and occupancy costs;" and
• "performance-driven strategies," which focus instead on "enhancing skills, market access, and proximity to decision-makers."

Businesses have widely embraced the cost-driven strategy. "But it's been taken about as far as it can go," Hill said at the Apr. 21st luncheon.

"There are some locations," he advised, "that you're wiser to pick for what they can do for your top line. Those locations are the ones that get you talent and knowledge. The driver for [those site selections] isn't labor any more; it's talent."

There are six "fragments," said Hill, that companies can chose to disperse - or not: headquarters; administrative and back office; R&D and product development; production or procurement; logistics; and sales and customer service.

"Not all of the parts for today's companies are located in the same place," he said by way of illustration. "A company may have one part in Columbus [Ohio], another part in Indianapolis and another part in Louisville [Ky.]. The various functions often break down into silos."

Many firms, he continued, have established headquarters operations that are totally separate from the other parts of the company.

"But in the long run, that's not that successful," said Hill. "Now we're seeing more co-location of other functions with headquarters."

Similarly, co-location increasingly characterizes many manufacturing operations, he continued: "We're now seeing product design positioned next to plants."

The optimal formula for allocating individual corporate fragments, said Hill, rests in balancing five "basic elements":

• the company itself, the "driver industry" for the whole cluster,
• technology,
• labor,
• suppliers, and customers.
• It's the "stickiness" between those elements, he explained, that sometimes necessitates positioning them in close proximity. That stickiness, said Hill, stems from factors that include:
• "the relationship to the income statement,"
• "talent pooling in regions with a thick supply in globally thin occupational markets," and
• "the tacit knowledge" that company employees have accrued at some locations.

Hill also examined some of the broader economic trends that are impacting business location strategies.

One of those trends is the growing dominance of exports and imports in the U.S. economy. In fourth-quarter 2007, Hill pointed out, exports and imports accounted for 29.4 percent of GDP. That's almost double the GDP percentage of 1990.

At the same time, Hill explained, the U.S. balance-of-payments deficit has exploded, while the American dollar's value has plummeted. In March of 2008, he noted, the dollar's "broad trade weighted value" was 95.77. Less than two years ago, that weighted value stood at about 111.

"The U.S. dollar," Hill noted, "is now worth less than the loonie" - the Canadian dollar. "I like to compare the dollar to the loonie because it's the best-named currency in the world," he quipped.

The growing power of Chinese exports into the U.S. is another global trend affecting location decisions, Hill noted. In February of 2008, China's exports into America had a total value of US$24.1 billion, he pointed out.

At the same time, though, China has become the U.S.'s third-largest export customer. "American exports of goods and services to China are now totaling from $4 billion to $6 billion a month," Hill said.

China's currency, in the meantime, has rapidly increased its value in comparison to the dollar. A major factor in that ascent, said Hill, was China's decision in August of 2005 to allow a limited float of its yuan currency.

"Since then," Hill noted, "the yuan's value has risen by more than 14 percent." And over the long term, the yuan's value against the dollar could possibly double that gain against the dollar, he added.

(l-r) Sponsors Ed McCallum, McCallum Sweeney Consulting; and Kenny McKay, Lubbock Econ. Dev. Alliance. IAMC Chair Pete Garra, The Linde Group, is at far right.

Hill then turned to examining the state of U.S. manufacturing.

Manufacturing's share of American GDP has declined by 8.9 percent from 1978 through 2006, Hill noted. "The current increases in GDP are in white-collar services and health care."

However, "That data distorts our understanding of the economy," he added.

Manufacturing, Hill pointed out, still accounts for 12 percent of U.S. GDP - the country's second-biggest sector. "The only larger sector in GDP value is real estate, rental and leasing, which accounts for 12.5 percent," he noted.

"The value of American-made goods and services has steadily increased in recent years," added Hill. In 2006 (the most recent year for which complete data are available), manufacturing accounted for $1.61 trillion in GDP. That's an increase of about 20 percent in real value since 2000.

Even so, though, there is "a manufacturing crisis" in the U.S., Hill asserted.

Free trade is frequently characterized as the root cause of American manufacturing's problems. Hill, however, expressed strong reservations about free trade actually being the prime destructive force in U.S. manufacturing's decline.

"That's doubtful," he said. "The U.S. is as good with non-tariff barriers as any nation."

Currency-related issues, however, are a more valid concern in keeping the free-trade playing field level, he added. "Free trade alone is not harmful," said Hill. "Free trade without a floating currency is harmful."

But, he added, there's an even more crucial problem triggering American manufacturing's worst problems.

"The root causes of the manufacturing crisis," said Hill, "are productivity growth, failed corporate strategies, legacy costs and work rules that inhibit workplace flexibility.

"The old dinosaurs [companies] lived on their market name," he continued. "Today, though, manufacturers must reinvent and innovate."

Manufacturers, Hill advised, can boost their inventiveness and innovation through "required changes in business behavior" that include:

• Watch the Revenue: "Business strategy needs to shift to top-line revenue growth, while maintaining middle-line cost discipline."
• Don't Starve Yourself: "There is a difference between a lean organization and an anorexic organization. You cannot starve yourself to health."
• Export, of Course: "If you cannot export in this dollar environment, you have a problem."
• Innovate . . . Quickly: "In product innovation, there should be no such thing as failure, only feedback. You need a system of constant and low-cost feedback."

Hill also discussed strategies for locating manufacturing operations in China.

"Don't pack up and run away yet," he advised. "It's the net that matters, not the gross cost savings. What about top-line revenue growth?"

Other major issues must be examined in considering China, he added. One of them is the move's effect on customer service and relationships; another is a Chinese operation's impact on Tier-II and Tier-III manufacturers.

Supply-chain management, however, is an even more significant issue that must be scrutinized in considering a Chinese project, Hill contended.

"Can you manage a long, thin supply chain?" he asked.

Basing a manufacturing operation in China, he said, is not advisable for plants that are going to supply customers located well outside of China. "Shipping costs are killers on the China model when you're shipping 100 percent [of output] back into the U.S. market." On the other hand, locating in China obviously makes solid business sense if the output of the plant will supply the Chinese market, Hill added.

Production volume is another China variable that must be considered.

"If you're going to be doing mid-sized volume at a low per-unit price that will be exported solely for the U.S., it's usually not a cost advantage to go to China," Hill noted.

The scenario is quite different, though, for plants that will produce "large volume at a low price point," he added. For those operations, Hill noted, locating production in China can be a solid business decision.

-- Jack Lyne