Glut check: overcapacity in Europe and beyond - B-School Brain Trust

Chief Executive, The, Jan-Feb, 1995 by Ludo Van der Heyden

NEW TECHNOLOGY AND TRADE LIBERALIZATION ARE COMBINING TO SATURATE GLOBAL MARKETS WITH GOODS AND SERVICES. TO THRIVE, FIRMS MUST SELL BOTH SUPERIOR PRODUCTS AND NEW BUSINESS PROCESSES.

Perhaps the most distinctive feature of the growing global economy is its overcapacity. This is particularly true in the European marketplace. The balance of power has tipped from the producer to the consumer, and the rules of the game have been fundamentally altered.

In the post-war period, when European capital, plant capacity, and purchasing power were limited, a customer might have to wait 15 months for a new Mercedes. Today, with Mercedes locked in a fierce struggle with BMW, Audi, Honda, and Toyota for market share in the luxury-car segment, cycle and delivery times have declined dramatically. Similar conditions prevail in industries across the board.

In the coming years, the trend toward overcapacity will continue. As former Apple Computer CEO John Sculley has said, "Competition in the '90s will make the '80s look like a walk in the park." Some companies will slide into oblivion. The survivors will be those that sell both superior products and new business concepts, focus on process rather than structure, inject their organizations with entrepreneurial verve, and train their managers to coach rather than control.

IT'S A SMALL, SMALL WORLD

The three factors contributing to overcapacity are technology, trade liberalization, and "consumption indigestion," or the growing satiation in many developed economies of the demand for physical goods.

In terms of technology, the point is not only that it has improved our capacity to produce, ship, and deliver products, but that the products themselves have become better and more durable. For example, automobile tires now routinely last twice as long as they did 20 years ago, and probably cost half as much.

Trade liberalization, meanwhile, has shrunk the world significantly, dissolving geographical barriers. Companies are no longer protected from distant competitors, as geography has disappeared as a competitive barrier. Gone are the days of Ford's Baton Rouge plant, when companies could dominate all steps of the production and distribution chain. Companies must be efficient at every step of the chain of conception, development, production, and delivery. The chance for one company to dominate all areas is virtually nil. The new era is one of subcontracting, of shifting economic scope, or worldwide innovation, which implies that sustained world-class competence only can be achieved for an increasingly narrow segment of the production and delivery chain, and then only for a limited time. Flexibility and transformation impose themselves.

All this has been compounded by the increasing satiation of customers in many developed countries. How many cars can one use, how many computers can one purchase?

Some economists argue that excess capacity is a temporary, cyclical phenomenon. That is true, to an extent. But inertia, fostered by certain social and political realities - particularly in European markets - likely will prolong the supply surplus. Price supports are predicated on a desire to preserve outdated standards of living. In addition, to varying degrees, physical capacity, labor arrangements, organizational and economic structures, and the political environment have lagged behind the competitive demands of the new global economy.

Other observers look to economic recovery to help soak up demand. The recovery that seems to be shaping up, however, likely will not be strong enough to change things significantly. One also can contend that developing economies eventually will balance the supply-and-demand equation. But this will offer only limited relief in an uneven way, and certainly not in the short run. Take Japan, which historically has sold on world markets far more than it has bought. Moreover, the potential supply coming from countries such as China and India will exacerbate Western capacity problems in the coming decade and beyond.

WHERE DO WE GO FROM HERE?

From a world of resource scarcity - where the critical imperative was the efficient utilization of production and distribution resources - we thus have moved to a world of customer scarcity. Under such conditions, the key organizational imperative is to find customers, reach out to them, and cultivate their loyalty. In the coming decade, businesses will be short of new concepts and new ideas, not of technology or even cash. Formulating imaginative approaches to applying technologies to market needs - coupled with superb execution - will be the key corporate agenda.

Early examples of companies that have done this successfully include Canon, Apple, and BMW. Consider Canon. Having concluded that the market for expensive, multifeatured photographic equipment was becoming too crowded, the company shifted its focus to the photocopier industry. With its inherent advantage in miniaturization, Canon introduced a series of smaller, more reliable, and inexpensive-to-maintain photocopiers. It created a market for "stand-alone" machines that became a direct threat to Xerox, whose machines were notoriously costly to service and typically grouped in big, centralized duplicating departments. Canon applied existing technologies and competencies in high-quality manufacturing to a new business concept, and thereby secured a new approach to the market.