Sourcing Plus

Debates on Supplier Topics

Comments on recent news, follow up on discussions, etc.

Les Acheteurs, des Salopards?

Ma réaction à l'article de l'hebdomadaire "Marianne" Confessions d'un salopard Grande distribution : "Comment j’ai tué des petits producteurs"

Low Cost and Government Policy

The low cost fever is everywhere, from retailers to car manufacturers. And the mass of consumers is rushing to buy. Few realize that low cost is not the same as great value, as specifications are adapted to deliver the same profitability to the members of the value chain. Yes, there are productivity gains, but those do not explain all the cost gains. Another explanation comes from the relentless relocation of activities from the western countries to countries with a lower labor cost. After the manufacturing, it is now the support activities that are relocated. So less and less value is created, for instance in Europe. The US is in a somewhat better situation as more innovation allows to replace low value creation activities by higher value creation activities. What is right? Reducing trade? Returning to protectionism? Reducing benefits for those unemployed to reduce the transfer of cost from enterprises to the public sector and future generations? More efficient encouragement of innovation? I will not set government policies in 10 lines written casually, but the question needs to be addressed with more courage. Low cost is a double edged sword.

What are the consequences of the quest for performance on the management of a firm or other type of organization?

This is a summary of a paper written by Michel Philippart for his admission at the Paris Dauphine EDBA program. A PDF version can be downloaded. Here is the table of content.

The quest for performance is primarily a demand for financial performance from the institutional investors. The management of a firm will strive to satisfy them by creating value. Their primary objective will be to develop competitive advantages that will allow them to generate economic rents and profits above the normal profits.

When the firm’s management cannot create value through economic rent, they will devise strategies that will transfer value to the firm from outside the horizon of the analysts that follow them. While both strategies deliver the performance demanded in the short term, the second one, value transfer, is not sustainable in the long term: it does not create value in the system and can even destroy value for the firm because it destroys the firm’s capacity to deliver sustainable competitive advantages based on the resources it needs to access.

If the objective of shareholder maximization is to be retained, a more accurate measurement of performance must be used to better evaluate the long term impact of strategies that can deplete or damage resources available to the firm. This will preclude practices that push firm management to engage in strategies unsustainable in the long term.

The consequences of the quest for performance on managers will be to spur them to deliver more value to the firm, and to its shareholders. Management will be selected for its ability to design and implement value delivering strategies to generate profits.

The value creating option is to exploit resources to better create rents that will deliver competitive advantages and the ability to price products or services at a level that will deliver economic profits. The value is created for all the participants in the value chain.

When the demand for performance is superior to the ability of the management to create value, the second venue is to transfer value to the firms from outside the horizon of the people measuring that performance, primarily the institutional investors.

In both cases the objective of the firm remains to maximize shareholder value, because shareholder value maximization is inconsistent with exploitation or alienation of other constituencies . So why are the value transfer mechanisms rewarded even as we have seen that they can destroy value in the long term?