June 1, 2003 By Pulp & Paper Canada
What do Nucor, Chaparral Steel, Southwest Airlines, Anheuser-Busch have in common? Each has successfully embraced a small-scale or niche business model that is different from an established large-scal…
What do Nucor, Chaparral Steel, Southwest Airlines, Anheuser-Busch have in common? Each has successfully embraced a small-scale or niche business model that is different from an established large-scale, capital-intensive, cost-minimizing standard. Strategy in the small-scale business model is different and not easily adapted from that of a large-scale enterprise. For a large-scale business to adopt a small-scale business unit
model, critical trade-offs and choices must be made to ensure success. Information technologies offer new strategy options for the small-scale business to compete effectively against the traditional large dominant providers.
The decline of the integrated steel producers shows how different ways of thinking about scale can generate opportunities based on new technology. Integrated mills have extremely high fixed costs, and high utilization of capacity is critical to lowering production costs; does this sound like the paper sector?
Beer has long been driven by scale economies of larger pipes and vats. However, high-volume processes yield higher-volume products, which must be shipped long distances. A low-volume niche product can bypass the high capital processes and moreover cater to a new consumer trend for personal statements in their beer choices. As today’s teens put it, “Drinking Ex is like buying your clothes from Wal-Mart.” Thus the new phenomenon of microbreweries, which eliminate the key components of the beer-making process: storage, grinding, cooking, mashing. These are supplied by a large-scale facility.
Southwest Airlines have pioneered low-cost commuter air travel and they have shown how to make money in the capital intensive, high-risk airline business. Interestingly, not one of the major airlines has been successful at duplicating the Southwest model. This is because they have not recognized that the Southwest strategy is about a strongly linked network of strategy elements requiring trade-offs that the major carriers have been unable or unwilling to make [e.g. no checked luggage, secondary airports, new work rules etc.]. Wal-Mart is another colossus that is experimenting with small local neighborhood business models and uncovering radically new technologies and managerial approaches.
Large-scale retailers, manufacturers and service providers are benefiting by re-examining the size of their typical “interface” with customers while still maintaining scale elsewhere in the value-chain. Small-scale enables access to local knowledge networks, customer responsiveness, monitoring of disruptive technologies and faster people development [Pil and Holweg, Sloan Management Review].
Why is this important?
When looking internally, companies should review their smaller operations to see if they are obtaining all available benefits. For example, cost sharing of engineering talent across multiple operations is facilitated by information technologies, small operations can be co-located with large customers. In rethinking scale, it is fundamental that new business models apply – small-scale activities will add value only if they are an explicit self-consistent part of the company’s overall strategy. In the paper sector, there is the recycle mill, the niche paper producer, the stand-alone coater/finishing operation, NewspaperDirect, and other concepts that might be uncovered with new technologies. In all cases, an independent strategic model with the required “trade-offs” is mandatory for success. Meanwhile in the steel sector, Nucor are not finished. They are now experimenting with even smaller facilities that directly cast molten steel into its final shape and thickness, bypassing the need for any rolling at all.
Alan Procter is a senior consultant working with organizations to find creative solutions in a rapidly changing business environment. He can be reached at firstname.lastname@example.org#text2#
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