Businesses are fishing with a new line and are finding that at every level there are advantages to being caught in the nineties net. By Lucinda Schmidt
That 1980s buzzword, networking, is back. This time around, however, it means more than an occasional breakfast or lunch. The business world is increasingly made up of networks, ranging from e-mail links to the internal trade between divisions of multinational companies. Managers who ignore the networking of the 1990s risk being left behind by the revolution.
According to the McKinsey Quarterly, the world economy is in the early stages of a profound change, comparable to the effect of the Industrial Revolution on methods of production and distribution. That change is the rise of networking, which McKinsey calls “interactions” (other names include “supply-chain management” and “business linkages”). It says: “As in all major economic shifts, the successful innovators will be those who develop the best understanding of the underlying change and act upon it. Success in the next five to 10 years will require a deep understanding of the power of interactive capacity in both your own industry and the economy at large.”
Networking boils down to people and companies coordinating with one another to exchange goods, services and ideas. At its simplest level, networking begins in the workplace, where colleagues interact with one another to achieve their company’s aims. Generally, the more senior the manager, the more time is spent internally networking. According to a survey of Australian business executives by Price Waterhouse Urwick, The Business Menu of Change, more than 40% of a chief executive’s time is spent communicating with employees. McKinsey estimates about 80% of a manager’s time is interactive. Further down the pyramid, more time is spent “doing” than interacting.
Internal networking is also about self-promotion. Dexter Dunphy, professor of management at the University of NSW Graduate School of Management, says this means keeping the right people informed about how successfully you are doing your job, staying up to date and building personal support. He believes that informal systems, such as after-work drinks, are as important as formal ones, and that the new, quick networking tool is e-mail.
A more sophisticated form of intra-company networking is the flow of trade between different divisions or subsidiaries, particularly in multinational companies. An estimated one-third of world trade is in shipments from one division of a company to another. William Greider estimates that, in the United States, more than 40% of exports and almost half of imports are goods that travel not in the open market, but through intra-company channels. For example, a US-based computer company sends components to its assembly plant in Malaysia, then distributes the finished products back to the US.
This intra-company traffic is counted in national trade statistics, but national identities and borders are increasingly irrelevant. As Greider observes in his book One World, Ready or Not: The Manic Logic of Global Capitalism: “Though many of them know better, economists and politicians continue to portray the global trading system in terms that the public can understand – that is, as a collection of nations buying and selling things to each other. However, as the volume of world trade has grown, the traditional role of national markets is increasingly eclipsed by an alternative system: trade generated within the multinational companies themselves as they export and import among their own foreign-based subsidiaries.”
As a consequence, the multinationals increasingly shape the trade and industry policies of governments. According to Robert Kaplan, writing in The Atlantic Monthly (Was Democracy Just a Moment?), 51 of the world’s hundred largest economies are not countries but companies, and the 500 biggest companies account for 70% of world trade. This gives them enormous sway, and Kaplan refers to “the increasingly dense ganglia of international corporations and markets that are becoming the unseen arbiters of power in many countries”. Greider goes further, describing governments in most advanced economies as “mere salesmen promoting the fortunes of their own multinationals in the hope this will provide a core prosperity that keeps everyone afloat … The multinational corporations are, collectively, the muscle and brains of this new system, the engineers who are designing the brilliant networks of new relationships”.
Dying for information
Another increasingly important form of intra-company networking is the intranet. This can loosely be described as secure mini-Internets, accessible only to company employees, and used for distributing company information and other business intelligence. A Reuters survey of 1300 executives in Europe, Asia and the US, Dying for Information, found that corporate intranets are likely to provide the most effective solution to the problem of business information overload. It said most large companies across the globe will implement an intranet in some form, in the next three to five years to distribute information about markets, competitors and consumer preferences. The survey concluded that intranets are likely to become as accepted a part of corporate life as the personal computer, and they will have the same kind of effect that spreadsheets had on the desktop PC.
Already, most businesses rely on some form of intra-company computer network for basic functions such as document editing and transfer, telephone messages and databases.
Beyond the internal networking of people, trade and computers, is networking with the outside world. At a personal level, this is like the networking of the eighties, where business people strive to meet others who may be of use to their company or career. There are now thousands of business networking organisations in Australia, catering for executives (for example, The Executive Connection); women only (Chief Executive Women, The Australian Businesswomen’s Network); gays and lesbians (Fruits in Suits); alumni of schools, colleges, universities and companies; and many other combinations of interests.
Because the idea has been around for a while, it is easy to overlook the importance of personal networking. Don’t. As well as generating business for your company, networking may be the key to your next job. Human resources consultants estimate that at least three-quarters of jobs are never advertised, because they are filled by word of mouth recommendations – the most basic form of networking.
It may also be the key to stepping out of day-to-day management and into the boardroom. The managing director of A. T. Kearney’s Australian operations, Robert Nason, says board membership is the most intensive field of networking in Australia. “You’ve got to be better at networking than anything else to get on a board, because most are selected by word of mouth.”
One of the first things Nason did when he moved to Kearney in November was to accept an invitation to join The Economist Intelligence Unit, a networking organisation for chief executives of Australian subsidiaries of foreign companies. It is run by the British magazine The Economist. As well as providing an opportunity for high-level shoulder rubbing, the unit has senior government and industry speakers at its lunches; recent guests being the Minister for Workplace Relations, Peter Reith, and the Victorian Treasurer, Alan Stockdale.
A newer form of networking is between companies: alliances with competitors to achieve a joint aim, or special arrangements with suppliers to make the supply network more efficient.
Alliances between erstwhile competitors can be lucrative. According to figures released by the Australian Bureau of Statistics in September (Small and Medium Enterprises, Business Growth and Performance Survey), companies involved in business networks were more likely to have growing income and employee numbers than those on their own. The ABS defined business networks as “special relationships formed between two or more parties with a view to increasing capabilities or performance”. It excluded more formal business networks such as franchising or subcontracting.
These findings reinforced results from an earlier survey, by the Bureau of Industry Economics (Beyond the Firm). The bureau found that about 75% of companies that co-operate with others get major or critical benefits from their links and networks (defined as “special relationships between at least two firms that are beyond normal market transactions and have some permanence, for sharing information and resources and jointly undertaking tasks”). More than half posted higher profits, and three-quarters increased sales, as a direct result of the network.
The companies most likely to benefit from co-operation did so through finding new markets, customers and suppliers. But many benefits were unexpected spin-offs, such as improved market knowledge, quality and product development. The survey also found that co-operation with overseas companies was the most beneficial and that formal network arrangements had more to offer than loose or one-to-one links.
The survey showed a high level of co-operation between companies; about one third have core forms of co-operation such as joint ventures, and two-thirds have marginal forms such as forecasting. About 30% of companies had only one key arrangement, almost half had two to four arrangements and 25% had five to 10. Most of these arrangements were with only one other company; only one-third of companies were in networks with many partners.
BIE concluded that “business co-operation has become another strategic tool for managers to use to increase their firm’s capabilities and improve performance … Overall, inter-firm cooperation in Australia is alive and well. It is clearly beneficial and effective for most firms that participate. It improves their capabilities and competitiveness. We believe there is a role for governments in greasing the wheels of co-operation by encouraging the development of closer inter-firm linkages and business networks.”
A four-year Federal Government program to encourage such co-operation will finish next year. The AusIndustry Business Networks program brings together a minimum of three companies to undertake an activity they cannot do alone. For example, the Ambulances to Asia project links a company that builds ambulance bodies, two companies that supply the communications equipment and the NSW Ambulance Service, which supplies training. Another project linked eight motor-trimmer businesses in Adelaide to bid for and win a $6-million contract to cover steering wheels with leather.
The head of the program, John Dean, says it has created 250 networks encompassing about 1200 firms. He says the program has been very successful, but it is hard work and may take a few more years before many of the networks are fully operating. Dean says it is not easy for managers to think of their company as part of a network, and it usually takes about 18 months for the program to build up trust between the parties.
The second form of inter-company networking, covering arrangements with suppliers, is often called “supply-chain management”. This refers to companies managing their suppliers as a network of interactions, rather than just a cost at each point of supply, and to suppliers being more conscious of their position in the whole chain, not just their individual role.
Robert Nason says that supplier relationships are changing in two main ways. On the one hand, some are becoming closer, using joint ventures, cross-shareholdings and strategic alliances. One example is the recent deal between EDS (Kearney’s parent) and the Commonwealth Bank, whereby the bank outsourced its IT to EDS and bought a shareholding in EDS.
On the other hand, companies are also ending some cosy, long-term relationships with suppliers. Nason says the first wave of cost reductions in Australia, staff retrenchment, has moved to a second phase – strategic sourcing. Companies are reviewing every step of their supply chain; eliminating some, or putting others out to tender or making the arrangement more formal. “They are ending that cosy relationship-you have always used this company; they take you to the cricket on Boxing Day every year.”
This focus on the supply network means that managers have to understand it better. Nason says buyers should think about how important they are to the supplier and about constructive ways in which the supplier can help their business. “It’s no longer just X number at this price. Purchasing is increasingly seen as a core competency of a business and more attention is paid to it. It is now board-level decision making, whereas it used to be a backwater in the finance area.”
Ernst & Young partner Peter Dowling says the manager’s role is twofold: to identify key costs in the chain and to devise a strategy to reduce them. First, managers must trace the flow of products, cash and information, so they are better able to challenge deficiencies in the supply chain. Woolworths, for example, worked back through its supply chain from China, and found many unnecessary middlemen.
The second step requires the manager to match the type of supplier relationship with the commercial needs of the business. Dowling says: “Ask do I want an on-going relationship or just a one-off transaction? Figure out those you should be close to and co-ordinate more closely with them.” Examples of closer co-operation are: eliminating the need for both the supplier and purchaser to count products, and having the supplier deliver goods straight to the production line, rather than to a warehouse.
Global customer base
The biggest network of all – and growing – is the Internet. As security improves through encryption technology, its business use is changing from a vast marketing tool to a direct link between producers and their customers. Producers have access to a global customer base, but are exposed to international competition. Tiny garage operations can export. Goods ordered over the Internet can arrive on a doorstep just about anywhere in the world within three days. Consumers can search the world quickly and cheaply for exactly what they want. Companies, therefore, must learn to communicate and distribute their products differently.
An equally powerful network is formed by global capital markets, which are effectively an Internet for money. Technology allows vast flows of cross-border capital to occur in seconds. As Greider observes in his book, the capital markets are networking in a way that dominates world politics and commerce. “Capital has wings,” he writes.
So this is the networking of the 1990s. Colleagues shoot documents to each other electronically or e-mail each other the latest gossip. Multinationals trade billions of dollars of goods and services within their own divisions. Executives join social and business groups and companies team up with their competitors to win contracts and conquer new markets. Suppliers are expected to think and act as a part of a customer-supply network, not as a discrete entity. A reader in Darwin tracks down a hard-to-find book using the Amazon Bookstore Web site. And global investors lose confidence in Asia and abruptly shift huge amounts of capital elsewhere.
Networking in the 1990s means that individuals, companies and economies are increasingly linked. Technology will speed up the process and make interacting with others cheaper and more efficient. Because the costs of interaction influence whether a company produces something itself or uses an external supplier, the organisational structure of the company, and the way it deals with customers, then a reduction in those costs has fundamental implications for all businesses.
McKinsey predicts that the interactive capability of modern economies will at least double in the next five to 10 years. It concludes that traditional assumptions about the natural form of economic activity will fall by the wayside. For example, vertical integration will become less valuable, intermediaries between buyers and sellers will disappear and workers will do their jobs in less than half the time.
“Doing business in a world of plentiful and cheap interactions will clearly require new skills and a new mindset.”