Quaternary vs. Secondary industry

IT/Mobile vs. Manufacturing biz

2017.05

IT/Mobile business vs. Manufacturing business
Quaternary vs. Secondary industry
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1. Comparing my 5 years as a consultant with my 2 years at Stanford Business School

When I worked for a consulting firm many years ago, I recall doing all sorts of analyses. I calculated market sizes and firm market shares; I picked apart revenue models; I analyzed value chains, distribution channels, and customer bases. I remember brief moments of joy after creating particularly beautiful supply curves and “lasagna” (Mekko) charts to visualize my analyses.

However, to my surprise, I have very few memories of using these techniques at Stanford, where I was supposedly learning the fundamentals of business administration. Perhaps my experience was unique to my school, but it is still remarkable how infrequently my professors integrated such concepts as scaling, market share, and revenue to the curricula.

The topics I learned had more to do with the big picture of business: creating the best product or service, recruiting talented individuals, improving the world, communicating well with customers, establishing a healthy company culture, etc. Stanford even offered such unconventional, [1]self-actualization classes as “Spiritual Meaning at Work” and “Work and Family”.

Since leaving Stanford, I have thought long and hard about why my years as a consultant were so different from my years as a business school student.


2. The Manufacturing Industry

When I was a consultant, most of our clients were manufacturing companies. South Korea owes its “Miracle on the Han River,” a period of rapid economic growth that began in the 60s, to these manufacturing companies, many of which specialized in shipbuilding, steel, and automobile production.

Their products were created in factories via assembly lines. Building a factory and installing it with the necessary equipment takes a huge amount of capital. In addition, even a minor change to a product usually requires that the factory and the assembly lines undergo major modifications. The opportunity cost of momentarily halting production and the cost of fixing or replacing the equipment could really add up. Therefore, businesses in the manufacturing industry required a thorough investigation of the market prior to entry to minimize additional costs.

Because of these restrictions, manufacturing firms also had to develop marketing, branding, distribution, and promotional tactics in advance. I recall that these were the main sorts of analyses I conducted as a consultant.


3. The Service Industry

Stanford, however, was a hub for companies providing technical services. Previously unaware, I soon learned that were significant differences between the manufacturing industry, with which I was familiar, and the service industry, which Stanford mainly addressed.

First, manufacturing companies’ products are factory-made while services are people-made. While physical products are difficult to modify without imposing costs, services can be updated without. Second, manufacturers face higher entry costs (e.g. building the facilities, stocking shelves, managing deliveries, etc.) and service businesses require a sufficient number of people for it to take momentum. Third, while the most important interactions in the manufacturing industry occur before the products reach the customers, interactions following the release of the product are far more important in the service industry. This is because the success of companies in the latter industry critically depends on the communication and feedback they receive from their customers. Fourth, while the sale of the good indicates the termination of the transaction for manufacturing companies (excluding optional follow-ups), service companies are kept on their toes after customers purchase the good because there is always room for improvement. Fifth, for manufacturing companies, scaling up implies a reduction of the average total cost while it implies a valuable opportunity for data collection among service companies. There are several conclusions that we can draw from these observations:

Predicting the market size is not as important for service firms. Services are always evolving, and subsequent changes can potentially transform the markets in which they belong.

Analyzing the competition is not as important for service firms. The primary reasons why service firms fail are poor internal communication, unhealthy company culture, inability to update the data or technology on time, and/or misunderstanding of the customers’ needs.

Brand positioning and marketing are not as important for service firms. Product management and strategy development are crucial. Service firms must think beyond what exists in the market and think of ways to become leaders in their market.

Portfolio management is not as important for service firms. As a firm reaches a critical mass of users, it needs to know how to manage the growing data and tackle problems, big and small, as they surface. The service firms that thrive are those that take advantage of the intangible asset (data) and focus on the depth and quality of their services.

Customer surveys are not as important for service firms. Much data accrues in the day-to-day interactions between customers and the services. While intermittent surveys can be helpful in gathering feedback regarding a specific feature of the service, the success of a company ultimately depends on how well it responds to the data it collects real-time.

I realized that there were fundamental differences between the companies predominantly addressed by my consulting firm vis-à-vis Stanford. My hope is to share what I have learned with Koreans, who may not be as familiar with the principles of a service firm as they are with manufacturing firms.


4. What Korea Needs

The times are changing to accommodate more tech/data-driven firms. For example, the auto industry is being shaken up by tech firms like Google, Apple, Tesla, and Uber, which are pioneering the development of 1) electric cars, 2) car sharing, and 3) self-driving cars. Furthermore, Apple owes its sky-high valuation not to the manufacturing smartphones [2] per se, but to its establishment of a mobile ecosystem.

Unfortunately, South Korea is stuck in the past, reliant on conglomerates that specialize in manufacturing and distribution. An economy that cruises on its legacy as a manufacturing powerhouse has trouble nurturing the development of service firms. The biggest mistake such an economy might make is to think about the service industry in the same terms as the manufacturing industry. If Korea does not want to be left behind in the global march forward, we must all become more forward-thinking, observing and adapting to the changes occurring around the world.

As a final note, I hope that companies not be driven by an extrinsic pressure to “stay afloat,” but rather by an intrinsic motivation to improve the world through their services.

In conclusion, I believe that there needs to be a [3] paradigm shift in how a manufacturing-based economy like Korea views a world being transformed by a smattering of service firms. This is the point that the team at Ringle really seeks to [4] drive home. We want to provide the means through which Koreans can discuss and understand the changes occurring in our world.

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