Why The Obsession With The Bottom Line Needs To End

Business management as it has been taught during the 20th century uses relocation as the universal solution to improving the bottom line. It only focuses on three of the five cornerstones of running a successful business:

1. Increasing sales
2. Improving the bottom line
3. Giving the shareholder a good return on investment

However this picture is leaving out two other critical aspects:

4. Securing quality
5. Retaining competence

But time after time, this method has shown to create three long terms problems:

• Firstly, premium material require qualified workers. Qualified workers are retained by creating a decent workplace and offering decent wages. When you relocate to a cheaper country, you cut down on qualification and if you have premium products, they will not longer be processed with the same care as they were in the original country.
• Secondly, it sets up your company for competing with rivals on same terms (If you can relocate your factory, so can I), and this is what has led Western countries to the current predicament, in which almost all non perishable goods are manufactured in China.
• Thirdly, if you are moving jobs overseas and eroding your own working class, who will ultimately be left to buy the goods that you went through the trouble of manufacturing overseas?

In the early 2000s I was working for a Web development company and we deployed a web site for a globalisation lobby. The buzz was about loosening regulation to make it easier to relocate factories to cheaper labour countries, under the pretence of creating a working class there.

However it did not voluntarily create better conditions for workers in places like China. Workers were offered lousy workplaces and lousy wages, until they themselves demanded better working conditions. I did business in China between 2013 and 2019 and wages were rising as a consequence of the 2012 workers protest. Chinese industrialist were now starting to relocate to neighbouring Vietnam or Cambodia the factories that had once been relocated to their country from the West.

In 2020 it has been the turn of Indian workers to demand better working conditions, by violence. I wager that in 10 or 15 years it will lead to better workplaces and higher wages, ultimately making India a less attractive destination for factory relocation.

As long as industrialists keep taking the easy way, there will be a conflict between lowering the bottom line and giving the good end of the stick to workers. However as history shows, there are more than one way to “cook and egg”.

BUILD SMART

This was a century ago, but Henry Ford rethought the whole production process. At a time when a lot of goods were still manually produced one by one, he broke down each step into an assembly line and used interchangeable parts.

The money saved on production costs gave him plenty of wiggle room to double salaries to retain workers. As a byproduct, his cars were affordable enough that his own employees could consider buying one. In today’s money it would be like offering factory workers double of the US minimum wage.

DEFY CONVENTION

Thirty years after Henry Ford’s upstream innovations, a 17 year old budding Swedish entrepreneur named Ingvar Kamprad introduced downstream innovations by rethinking the way consumers purchase furniture and indoors decorations. Instead of using wholesalers, storage warehouses and individual brick and mortar retailers, Kamprad bet on the fact that more households of the working class could afford a car.

Not only did he set up a direct sales model by which goods went straight from the factory to the store, that served as a warehouse, but he also had the goods left unassembled and packed in a compact carton that customers could pick up themselves and bring home. Kamprad had managed to improve his bottom line without sacrificing quality, by cutting out the middle man and transferring to the customer the cost of delivery and assembly.

ACCEPT TO BE CHALLENGED

The rest of the world did a copy and last of Ford’s ideas until Japanese industrialists decided to allow workers along the assembly line to give feedback. In turn, this allowed to make the production process leaner (lean manufacturing) to raise quality without compromising the bottom line.

EXPLORE NEW AVENUES

Between 2003 and 2007 I had the pleasure of working for one of the marketing executives behind the Swatch store concept. The idea was to have the whole catalogue on exhibit while allowing the customer to see and touch each one of the stock keeping units. The store also has several items of the same units so it would act as a street corner warehouse.

HARNESS TECHNOLOGY

Speaking of Swatch, even though the Swiss Made label allows to command a 30% premium compared to similar non-Swiss products, Switzerland has by far the highest wages of the European continent and possibly the World’s. During the 1980s, the watch industry has been guilty of relocating some of its subcontracting to lower wages area. Most of the country’s industrial hubs are located near its borders, which allow to use lower paid cross-border commute workers.

Swatch AG is the country’s biggest single exporter of watches (15.5 millions at its peak), and heir products are paradoxically among some of the cheapest Swiss Made watches. They are only outranked by the M-watch brand, which is only sold in national Migros supermarkets.

Swatch managed to reduce their bottom line without delocalising nor cutting down on quality, by shifting its production to a nearly fully automated one.

These examples show that even after 100 years it is still possible to push the envelope. American Apparel Inc., which has been at the center of controversies with their dubious work environment, has nevertheless demonstrated the viability of producing reasonably priced apparel within the USA.

I mentioned Foxconn, who has been manufacturing for Apple, and there have been studies about the cost of producing an iPhone in the USA: How Much Would a ‘Made in America’ iPhone Cost? Too Much. | Mark J. Perry. However it can be argued that these conclusions are skewed by assuming a similar production process and distribution as the models made in China.

Being myself from the metalware industry, I suspect that if Apple was willing to learn design simplification from the watch industry and if they were willing to use metal injection moulding instead of the expensive CNC machining that they are currently using they would reduce the cost of some metalware components tenfold.

Just like Swatch AG has managed to deliver the same quality while manufacturing in one of the most expensive countries, other companies could try to think outside of the box. After all, if consumers no longer have jobs that allow them to pay for all those non perishable goods, it will no longer make sense to manufacture them…