Knowledge creates jobs
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Dr. Burkhard Schwenker, Chief Executive Officer |
Global value creation has become increasingly complex. A new study shows how developing global production networks create jobs both for highly-skilled and low-skilled employees. Dr. Burkhard Schwenker, CEO of Roland Berger Strategy Consultants, argues against established notions that globalization ultimately leads to unemployment in established markets.Many Europeans see globalization mainly as a big job-killer. But Burkhard Schwenker, CEO of Roland Berger Strategy Consultants, says they are wrong about this. Companies need to design systemhead units that are strategically correct. This will in turn help safeguard jobs in high-wage countries.
Germany is afraid of globalization. In 2006 the German Marshall Fund conducted a study to determine whether there was any basis to the country’s fears. As the findings showed, 83 percent of the respondents in Germany supported unrestricted international trade, although 51 percent of them were concerned that this globalization would cost them their jobs. Such concern is not unfounded. While the number of people employed by German subsidiaries in Eastern Europe increased from 31,000 in 1990 to 757,000 in 2004, 120,000 jobs were lost in
Germany as a result of outsourcing
The underlying reality is that companies that do not keep up with globalization will be left out of the race. Worldwide GDP has grown by 3 percent a year since 1990, while foreign direct investments have increased by 11 percent per year. These figures indicate that companies seeking above-average growth cannot do so without internationalizing their business.
Internationalization does indeed pay off, as for instance demonstrated by Germany’s large-scale, internationally active companies. They have grown more vigorously in terms of sales and employment than the country’s medium-size businesses, which tend to be significantly less internationalized. Globalized companies also lead in terms of profitability. For example, between 2003 and 2006, 60 percent of them achieved returns of more than 5 percent, while only 50 percent of non-globalized companies attained that figure.
Given globalization, growing markets and factor cost advantages on one hand and the pressure exerted on domestic employment on the other, does Germany as a business location offer any job prospects at all? Our approach is to look at the situation the other way around: In the future, what jobs will make economic sense for Germany to perform? What job types must we keep and develop domestically to achieve greater overall employment? We examined these issues together with the BDI (Federation of German Industries) in a study titled “Systemkopf Deutschland Plus” (“Systemhead Germany Plus”). Our hypothesis was that knowledge is not as easily transferred out of the country as one might believe. Therefore, Germany should continue to be able to host successful knowledge-intensive key functions that are relevant to competition. These systemhead functions include, for example, research and development, production planning and control, sales management, and marketing and design - but also high-quality manufacturing.
Our hypothesis rests on hard figures. Germany’s companies are tops when it comes to knowledge-intensive sectors. For example, in the World Economic Forum’s rankings, Germany is in first place - ahead of 125 countries - in the categories of “innovation capacity,” “level of production processes,” “quality of local suppliers” and “uniqueness of competitive advantage.”
Germany is afraid of globalization. In 2006 the German Marshall Fund conducted a study to determine whether there was any basis to the country’s fears. As the findings showed, 83 percent of the respondents in Germany supported unrestricted international trade, although 51 percent of them were concerned that this globalization would cost them their jobs. Such concern is not unfounded. While the number of people employed by German subsidiaries in Eastern Europe increased from 31,000 in 1990 to 757,000 in 2004, 120,000 jobs were lost in
Germany as a result of outsourcing
The underlying reality is that companies that do not keep up with globalization will be left out of the race. Worldwide GDP has grown by 3 percent a year since 1990, while foreign direct investments have increased by 11 percent per year. These figures indicate that companies seeking above-average growth cannot do so without internationalizing their business.
Internationalization does indeed pay off, as for instance demonstrated by Germany’s large-scale, internationally active companies. They have grown more vigorously in terms of sales and employment than the country’s medium-size businesses, which tend to be significantly less internationalized. Globalized companies also lead in terms of profitability. For example, between 2003 and 2006, 60 percent of them achieved returns of more than 5 percent, while only 50 percent of non-globalized companies attained that figure.
Given globalization, growing markets and factor cost advantages on one hand and the pressure exerted on domestic employment on the other, does Germany as a business location offer any job prospects at all? Our approach is to look at the situation the other way around: In the future, what jobs will make economic sense for Germany to perform? What job types must we keep and develop domestically to achieve greater overall employment? We examined these issues together with the BDI (Federation of German Industries) in a study titled “Systemkopf Deutschland Plus” (“Systemhead Germany Plus”). Our hypothesis was that knowledge is not as easily transferred out of the country as one might believe. Therefore, Germany should continue to be able to host successful knowledge-intensive key functions that are relevant to competition. These systemhead functions include, for example, research and development, production planning and control, sales management, and marketing and design - but also high-quality manufacturing.
Our hypothesis rests on hard figures. Germany’s companies are tops when it comes to knowledge-intensive sectors. For example, in the World Economic Forum’s rankings, Germany is in first place - ahead of 125 countries - in the categories of “innovation capacity,” “level of production processes,” “quality of local suppliers” and “uniqueness of competitive advantage.”
More on "System head Germany plus"
Our study confirmed knowledge’s dominant role. The companies we surveyed rely on systemhead functions being executed at home and in doing so capitalize on their strengths in quality, innovation and individuality. Moreover, the study shows how job losses can be avoided: Knowledge-intensive systemhead functions are currently much less affected by outsourcing than other company sectors, and that situation is not expected to change in the future.
One need only look at the best to see how things can be done. Companies such as ThyssenKrupp Marine Systems achieve above-average performance through systemhead strategies that are optimized in a sector-specific manner. This highly successful company manufactures navy ships, mega-yachts and container ships in Germany, and in doing so consciously groups systemhead functions of research and development and production within a domestic location. The development divisions thus gain valuable insight from the experience garnered in complex production processes. Furthermore, R&D benefits from its collaboration with top-notch research institutes on the German coast.
Bosch’s Automotive Technology Division is another example, since its systemhead units for development and production are based in Germany. Although the development of individual products may very well be done inside the respective local markets, plat-form development takes place almost exclusively in Germany. Regarding production, the primary facilities, which are based in Germany and distinguished by outstanding production-related expertise, have assumed the role of mentors on behalf of plants in low-wage countries. Other companies we studied, such as domestic products manufacturer Henkel, sportswear-maker adidas, Benteler Automotive and Loewe, makers of high-end television equipment, have been very successful in building on their systemhead functions’ specific strengths.
The study’s findings illustrate how German companies can prepare for international success while keeping and developing jobs domestically. However, in order to achieve that goal, certain steps must be taken, not in the future but immediately. Companies and governmental policies must work together in order for these businesses and Germany to maintain a leading position in the era of globalization.
Companies need to identify their systemhead functions and provide them with the best personnel and financial means. To identify these functions, companies need to thoroughly inspect their value chains, as every company has its own critical areas, which can include process control, logistics, production, design or marketing, to name a few. For other companies, R&D is a central systemhead function. In performing this identification operation, CEOs need to decide which of them represent competitive advantages. Such functions would be unique and thereby create added value, meaning it would be hard for competitors to copy or replace them. It is absolutely essential to make continued investments in these systemhead functions a top priority, in order to continue designing best-of-class products and processes.
The sales side calls for a clear focus on innovation leadership and the development of distinguishing characteristics. Outsourcing as a means to increase efficiency must not be carried out at the expense of product quality. Companies must optimize their processes and organizations so that their systemhead functions can be utilized to the fullest extent.
The guiding principle is therefore to centralize systemhead functions and decentralize all sectors close to the market. Government, for its part, is who we call on to to create the proper basic conditions. Our main calls for actions are: Increase public acceptance of new technology, because engineers are Germany’s future! Cut red tape! Invest in an efficient infrastructure! Give financial support to deserving industries and institutes in their research projects, but don’t just throw money at everyone. Rather, choose a focused approach! Make laws that give companies greater security in planning! This last request, incidentally, was expressly reiterated by leading European CEOs from the energy market sector as revealed in our 2007 Best of European Business CEO Survey. Lastly and perhaps most crucially: Keep on investing in the best education possible!
The significance of the systemhead strategy is not specific to Germany and thus does not end at Germany’s borders. In fact, it could be a success-oriented model for any and all countries that host knowledge-intensive industries and need to compete against lower-cost manufacturing bases. However, the strategy can only succeed if companies and government policies work hand in hand toward one objective. This is to preserve a country’s reputation as a top business location while keeping knowledge expertise in-country in order to safeguard jobs over the long term.
The “SystemHEAD GERMANY Plus” study
In this study, Roland Berger Strategy Consultants analyzed which parts of the value chain will hold potential in Germany in the future and why this thinking is a way for high-wage countries to participate from globalization. The research involved the German industry think tanks Federation of German Industries (BDI), the Bavarian Business Association (vbw) and the Cologne Institute for Economic Research. It consisted of two surveys of several thousand German companies as well as 13 case studies based on interviews with CEOs of well-known German companies.
One need only look at the best to see how things can be done. Companies such as ThyssenKrupp Marine Systems achieve above-average performance through systemhead strategies that are optimized in a sector-specific manner. This highly successful company manufactures navy ships, mega-yachts and container ships in Germany, and in doing so consciously groups systemhead functions of research and development and production within a domestic location. The development divisions thus gain valuable insight from the experience garnered in complex production processes. Furthermore, R&D benefits from its collaboration with top-notch research institutes on the German coast.
Bosch’s Automotive Technology Division is another example, since its systemhead units for development and production are based in Germany. Although the development of individual products may very well be done inside the respective local markets, plat-form development takes place almost exclusively in Germany. Regarding production, the primary facilities, which are based in Germany and distinguished by outstanding production-related expertise, have assumed the role of mentors on behalf of plants in low-wage countries. Other companies we studied, such as domestic products manufacturer Henkel, sportswear-maker adidas, Benteler Automotive and Loewe, makers of high-end television equipment, have been very successful in building on their systemhead functions’ specific strengths.
The study’s findings illustrate how German companies can prepare for international success while keeping and developing jobs domestically. However, in order to achieve that goal, certain steps must be taken, not in the future but immediately. Companies and governmental policies must work together in order for these businesses and Germany to maintain a leading position in the era of globalization.
Companies need to identify their systemhead functions and provide them with the best personnel and financial means. To identify these functions, companies need to thoroughly inspect their value chains, as every company has its own critical areas, which can include process control, logistics, production, design or marketing, to name a few. For other companies, R&D is a central systemhead function. In performing this identification operation, CEOs need to decide which of them represent competitive advantages. Such functions would be unique and thereby create added value, meaning it would be hard for competitors to copy or replace them. It is absolutely essential to make continued investments in these systemhead functions a top priority, in order to continue designing best-of-class products and processes.
The sales side calls for a clear focus on innovation leadership and the development of distinguishing characteristics. Outsourcing as a means to increase efficiency must not be carried out at the expense of product quality. Companies must optimize their processes and organizations so that their systemhead functions can be utilized to the fullest extent.
The guiding principle is therefore to centralize systemhead functions and decentralize all sectors close to the market. Government, for its part, is who we call on to to create the proper basic conditions. Our main calls for actions are: Increase public acceptance of new technology, because engineers are Germany’s future! Cut red tape! Invest in an efficient infrastructure! Give financial support to deserving industries and institutes in their research projects, but don’t just throw money at everyone. Rather, choose a focused approach! Make laws that give companies greater security in planning! This last request, incidentally, was expressly reiterated by leading European CEOs from the energy market sector as revealed in our 2007 Best of European Business CEO Survey. Lastly and perhaps most crucially: Keep on investing in the best education possible!
The significance of the systemhead strategy is not specific to Germany and thus does not end at Germany’s borders. In fact, it could be a success-oriented model for any and all countries that host knowledge-intensive industries and need to compete against lower-cost manufacturing bases. However, the strategy can only succeed if companies and government policies work hand in hand toward one objective. This is to preserve a country’s reputation as a top business location while keeping knowledge expertise in-country in order to safeguard jobs over the long term.
The “SystemHEAD GERMANY Plus” study
In this study, Roland Berger Strategy Consultants analyzed which parts of the value chain will hold potential in Germany in the future and why this thinking is a way for high-wage countries to participate from globalization. The research involved the German industry think tanks Federation of German Industries (BDI), the Bavarian Business Association (vbw) and the Cologne Institute for Economic Research. It consisted of two surveys of several thousand German companies as well as 13 case studies based on interviews with CEOs of well-known German companies.
This article first appeared in Roland Berger Strategy Consultants' award-winning executive magazine, think:act.
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