A number of Taiwan executives are embracing
"corporate reengineering" as a way to survive
in today's highly competitive global business
environment. How well is it working?
According to a report by the Taiwan-based Business Weekly, in 1996 Nanuen International Corp., a subsidiary of foods manufacturing giant President Enterprises, garnered US$285 million in annual sales revenues with a net profit of US$21 million, the highest investment returns registered among domestic service industries that year.
The firm, a trading company that specializes in imports of brand name wines, juices, and other consumer goods, has an enviable record of success, but Yen Po-ming(顏博明), Nanuen's vice chairman, points out that such results did not come easily. "About seven years ago, when I was put in charge of Nanuen, the company had suffered accumulated financial losses of nearly US$21 million since its establishment in 1981," he recalls. "The company also had debts of US$35 million, and a large number of employees were quitting. It was on the verge of going bankrupt."
Yen took immediate steps to put Nanuen back on its feet by conducting an overview of the company's structure and assessing current trends in the domestic market. At that time, the government was actively promoting imports and market liberalization in an effort to reduce the unfavorable balance of trade, especially with the United States. In tandem with what he saw as a strong market trend, Yen made radical changes in the company's organization and operations by drastically transforming it from being an export-oriented to an import-oriented trading company.
At the same time, Yen drew upon the parent conglomerate's abundant resources, including talented managers, financial depth, established brand names,and sales channels. He read the market right. In 1980, Taiwan's foreign trade surplus was only US$78 million; the following year it rose to $1.4 billion, and by the end of 1983 it was $3.3 billion. The trend continued throughout the decade, peaking at $14 billion in 1989. As the trade surplus increased, so did international pressureon Taiwan to open its domestic market to imports.
Yen's comprehensive overhaul managed to revitalize the company and put it on the right track to enjoy the handsome profits seen today. In contemporary management jargon, Yen had radically "reengineered" the way Nanuen conductedits business.
If anything, the pace of market change has increased since the days when Yen first took over Nanuen's reins, including growing pressure from the World Trade Organization (WTO) to reduce trade barriers. Moreover, Taiwan's commercial base has shifted markedly from labor-intensive industries to services. The new business environment is putting intense pressure on local firms, which find themselves scrambling to keep competitive internationally.
"This is an era of explosive change, and Asia is at the center of the blast area," says Casper Shih(石滋宜), senior adviser at the China Productivity Center, a quasi-governmental research institute founded four decades ago to help local enterprises up grade their competitiveness. "Unless we conduct thorough reforms to cope with the changing business environment, we are doomed to failure. "And success, according to a growing number of executives, is more possible by the corporate reengineering already embraced by many American and European companies.
"Reengineering means giving up old ways of thinking and doing things, and launching a fresh start," Shih says. "It's both destructive and constructive. Basically, businesses reinforce their competitiveness through repositioning their products and by restructuring and revitalizing their operations."
What does this mean for Taiwan firms? Shih highlights five elementsthat make up the core wisdom customarily dished out at high prices by today's reengineering guru-consultants: paradigm shift, customer-driven production of goods and services,empowerment of employees at all levels, retooling employees' attitudes toward their work, and increased use of information-age technology.
Paradigm shift, Shih maintains, means to redirect the way local companies think. "Customer satisfaction ought to be the primary objective for all businesses," he says. "Companies must be willing to embrace change, particularly when their customers express dissatisfaction. Even then, customer satisfaction is too low a goal--businesses should aim at exceeding their customers' expectations. So far, however, the shift from product-oriented to market-oriented production in Taiwan has been insufficient."
One area crying for change, Shih points out, is Taiwan's local distribution networks, from newspaper delivery to food stuffs, which have a reputation for being costly, slow, and often breaking down altogether. "As an express distributor, for instance, if your competitors offer to deliver goods to customers before ten o'clock in the morning, you mustn't be satisfied unless you make it before eight o'clock. That makes you a market winner. You have to play the game like no one has played it before--you make your own rules, and that gives you a chance to improve product value as well as service quality."
Shih stresses the need for creativity and initiative. "Solve problems rather than becoming a part of the problem. Corpo rate reengineering is an endless process, and it should be launched by the boss: 'top down' rather than 'bottom up.'"
Fine. But is it happeningin Taiwan? Like their Japanese counterparts, many Taiwan companies are faced with pressure from the imminent opening of protected markets (because of WTO regula tions), soaring operations costs (higher salaries and rent are major culprits), and market saturation (one result of globalization trends). "In such a competitive environment, enterprises have no choice but to undergo some form of reengineering just to survive,"says Kingsman Yen(嚴友民), general manager of the Human Resources and Service Management Center of Philips Taiwan, the local office of the giant multinational electronics manufacturer. "It's like sailing a boat upstream: either keep progressing, or be swept backwards."
Yen says that change naturally entails risk. "It seems that corporations have no alternative but to reengineer if they are to generate continued sales growth," he says. "The question is who's traveling faster and who can make fewer mistakes." Philips Taiwan has been actively promoting reengineering for several years. Its most concrete measure was to invert the concept of its old pyramidal management system, a hierarchical arrangement with top management at theapex and customers forming the base, into one that puts customers on top, with support from below by frontline staff, middle managers, and senior manage ment. Standing the standard model on its head represents a major shift in thinking: "The keyis customer satisfaction--all resources are focused to provide our customers with superlative service," Yen states. "A company can enjoy good business only by satisfying customers with good prices, product quality, fast delivery, and solid support services."
Philips Taiwan had previously been designated by its Netherlands-based headquarters as an international production center, but in the 1990s the company was transformed into an autonomous marketing, development, and production center(MDP), with each subunit acting as a profit center and allowed to make its own decisions about its operations. "The central idea is for each unit's business team totake responsibility for its own activities," Yen explains.
What are the advantages? "It saves the company time and raises its efficiency, because it can react rapidly to the chang ing needs of customers by substantially shortening the decision-making process," Yen points out. "Thisis especially essential for Philips Taiwan, because its leading high-tech products include electronics components and consumer products in a fast-changing market.To entrust all decision-making to top management on the other side of the world wouldput us at a great disadvantage."
The role of the Netherlands-based headquarters has therefore changedfrom giving orders to providi ng support. "The new concept empowers local management,moving the decision-making closer to the actual customers," Yen says. "Thisreduces centralized control, and it requires a great deal of trust by top-level management."
Reengineering in the United States has often been accompanied by layoffs. Is this also true in Taiwan's case? Yen thinks reducing the work force is not the best approach. "The starting point should dwell on how to improve the business process to satisfy customers," he says. "It's better to view streamlining of the work force as a result rather than a means to an end. After all, successful reengineering may boost a company's sales growth and require expansion. When that happens, the manpower is already at hand and will not have to be rehired."
It is more important, Yen explains, for a company to retrain its employees and to retool their attitudes, in order to meet new and diverse challenges."Becaus e of increased internationalization, it's essential for them to have global views and to understand different cultures," he says. Philips Taiwan has promoted this by sending employees overseas to receive advanced on-the-job training.
Yen claims that reengineering has had a major impact on PhilipsTaiwan, and statistics bear him out. "Since we started, our overall sales revenues have jumped from US$1.3 billion in 1991 to US$3.9 billion in 1996," he says.
Philips Taiwan is not alone in the reengineering field. Taiwan's remaining labor-intensive manufacturing industries are facing an increasingly difficult operating environment, one characterized by rising production costs, falling profit margins, and saturation of domestic markets. Countermeasures such as restructuring, downsizing, and streamlining operations areseen as necessary steps, not just the components of management philosophy fads.
"The diversified challenges of today's markets mean that businesses must continuously renew themselves to avoid being eliminated," says Shih Hui-tse(施惠澤),senior public relations manager of the Wei-Chuan Group. "This is particularly urgent for traditional labor-intensive industries such as textiles, petrochemicals,cement, and food manufacturing."
Wei-Chuan is one of Taiwan's leading food companies, whose main products include powdered milk and other dairy products, canned foods, deserts, MSG,soy sauce, fruit juices, frozen foods, and instant noodles. The company's product diversity does not necessarily mean that consumption of its foodstuffs will always enjoy drastic expansion, Shih explains, citing the limited increase of Taiwan's population in the foreseeable future. Moreover, the government is scheduled to launch a series of market-opening measures as part of its global liberalization and its attempt to meet requirements for the island's membership in the WTO, which is expected to trigger a substantial influx of imported products.
Added operating costs from government-mandated contributions to the National Health Insurance Program, employee retirement funds, and allotments to recycling funds for environmental protection, have also made it more difficult for local businesses to survive. These three categories of expenditures alone have raised Wei-Chuan's overall production costs by an additional US$11 million per year,Shih explains. As a result, the group suffered a deficit of nearly US$14 million last year, its first deficit in a decade.
"Experience has taught us that we must continue making improvementsin management, production, and marketing in order to keep pace with the business environment," Shih says. Wei-Chuan's board of directors is now insisting on more efficient strategies to raise profits. "The consensus reached for revitalizing the company's business activities is 'reengineering,' " Shih says. "The major guideline is for us to diversify our sources of income and to cut down on expenses."
Accordingly, the company has begun restructuring to make more efficientuse of its manpower, as well as cut back on the costs of management, production, and raw materials. One of the first steps was to merge departments in ways that fitbest with Wei-Chuan's plans for globalization. The organization is now composed offour business groups: foods, logistics, US operations, and Asia operations.
The company, Shih explains, is trying to increase its competitive edge by shifting from food manufacturing to a broader range of food services. This means more emphasis has to be put on logistics, and that means cutting the Gordiank not of distribution problems. "Wei-Chuan wants every customer to be able to enjoy its fine foods anytime, anyplace," Shih says. "To accomplish this,we have developed a computerized islandwide network of sales outlets and distribution centers." The new system allows the company to supply their outlets with direct shipments of chilled and frozen foods from plants in Taipei, Taichung, Touliu, and Kaohsiung. Other products are delivered via distribution centers also dispersed around the island. "This network allows especially efficient distribution to retailers,"Shih says.
Wei-Chuan has also embraced the concept of downsizing, offering lucrative pensions to encourage those who have served the company for fifteen, twenty,or twenty-five years to seek early retirement. Last year, some 100 Wei-Chuan employees applied. The overall number of employees dropped to 3,082 in 1997, compared with 3,387 in 1994. Based on its initial planning, the Wei-Chuan Group will scale down 40 percent of its existing work force within the next four years in an attempt to boost its operational efficiency. Nearly 1,000 employees will be transferred from group headquarters to its subsidiaries.
Similar forms of downsizing personnel in order to save on high personnel costs are being implemented by a number of private and state-run enterprises, including the Far Eastern Group, the Tuntex Group, Yulon Motors, China Steel, and Chinese Petroleum Corporation. But Casper Shih of the China Productivity Center and Kingsman Yen of Philips Taiwan point out that this measure is not always the best policy. The loss of too many experienced senior employees can seriously damage acompany's efficiency and thereby slash competitiveness to such an extent that profits fall.
For instance, Tomy Chen(陳富雄), president of Juh Lien Industrial Co.,which manufactures ceramic tiles, wire, steel beams, and a wide range of other products, puts great emphasis on the value of senior workers. "They are my company's greatest asset and a major force powering my company's growth," he says. Chen adds that after some companies dismiss senior workers, they actually find their sales performance worsens.
Wei-Chuan's downsizing of its work force, however, is coupled with greater attention to the needs of its retained employees. To enhance staff competence, vitality, and creativity, the group has invested around US$700,000 in building apark and dairy farm in Puhsin, in central Taiwan, complete with extensive facilities to serve as both a training center and a recreational resort. The group spends between US$107,000 and $142,000 a year on education and recreational programs at the site.
Management is also targeted. Weekly meetings are held to discuss sales performance and new policies, and senior executives are required to present their opinions and suggestions after reading relevant books on corporate reengineering. The company also invites experts and consultants periodically to acquaint company managers with innovative management philosophies. One of these is to embrace globalization.
"Exploration of global markets is essential," Shih emphasizes. "By internationalizing our overall operations, we will shift from being a domestic to a multinational enterprise, which will give us much more room to develop. "Wei-Chuan has established footholds in the United States, Canada, Latin America, Japan, mainland China, and Southeast Asia. The result has been a surge in the bottom line. Over the past year, Wei-Chuan has already witnessed an improvement in its business, and Shih projects a profit of US$3.6 million in 1997.
Wei-Chuan's experience, Shih suggests, represents the wave of the future for Taiwan enterprises: "Reengineering is proving to be a trend necessary not only for business expansion, but for its very survival."