I had the opportunity to visit Wescast Industries outside of Toronto recently. Wescast is a $450-million automotive supplier of ductile iron foundry products, including exhaust manifolds and suspension components. It has over 60% market share in exhaust manifolds in North America. Its earnings as a percent of sales have been in the 15% to 18% range for the last several years. So what makes it different from other suppliers? How has it been able to achieve such above-average performance in this very tough industry, in a pretty un-sexy product segment?
In Wescast’s case, the answer is straightforward—although not easy to duplicate, which is often the case. Over two decades ago, company management decided to concentrate their business in exhaust manifolds—to become a specialist in the niche, to the point where they know more about the product than their customers. They invested heavily in engineering and R&D, and turned what had been treated like a commodity product into a highly engineered product. They developed deep knowledge and engineering skill around those characteristics of the exhaust manifold that affect engine performance and the performance of the exhaust system, especially exhaust emissions. They discovered ways to design the manifold interior surface, mass, flow characteristics and distance to the catalytic converter to greatly increase environmental performance of the overall system. And they linked this engineering knowledge to their production process to create superior manufacturing processes and quality control.
We would describe Wescast as a “strategic” automotive supplier. This raises a question we are often asked by our customers: What makes an automotive supplier “strategic”?
They have a vibrant “theory of the business.” This is absolutely critical to strategy development. By “theory of the business” we mean a well-developed set of hypotheses about how the company can differentiate itself; what the critical success factors are; what drives growth; and where the biggest risks and opportunities lie. And here is an interesting fact—we find that in strategic companies, CEOs and other management team members approach their “theory of the business” with imagination, energy, intuition, enthusiasm, and even passion. They come to it with a liveliness and intellectual curiosity that is always pushing the boundaries of what is possible. Strategic companies are always telling and retelling their “story”—each time exploring new sub-plots, new characters and new dramas.
They seek to control the “intellectual high ground.” Strategic companies specialize in an area where they are able to dominate the “intellectual capital”—whether embodied in formal intellectual property such as patents, or simply in deeper “know how” than anyone else has. In the automotive sector, these companies usually know more about their product or process niche than their customers. And they manage this intellectual capital as a point of strategic leverage with their customers. Thus, they are often sought out for their expertise, as much as for their pricing and quality. Typically you will also find a fair number of professionals in these companies who are leaders in their professional associations—they are on technical committees, give presentations, and work to invent new intellectual property. What you feel when working with them is a sense of intellectual curiosity; a passion to know more; a lust for creative problem solving. (And not surprisingly, you get a sense that people like their work, and actually have fun!)
They avoid distractions, but are open to surprises. Strategic companies solve a difficult dilemma—they create clear boundaries without destroying creativity. They know what is and what is not within their “strategic territory.” They are only able to do this because they have a very clear “theory of the business.” Research on strategic planning has demonstrated that the most interesting business opportunities are often unplanned. One important difference between a strategic and an un-strategic company is that the former knows when to say “yes” or “no” to these unplanned opportunities. In the automotive sector, the ability to say “no” and to pass on work that does not fit your strategy—even if it is at good volumes and decent margins—is absolutely critical.
They understand what is core to their business and what is not. We believe that many automotive companies (suppliers and OEMs) have made errors in outsourcing strategic elements of their business—particularly manufacturing processes. Often the manufacturing process is a key aspect of innovation: you need to maintain your expertise in making the product in order to stay ahead on the design innovation. The interplay between your design engineers and your manufacturing engineers is critical. We have found that profitable process-oriented suppliers almost always have distinctive internal machine building and automation capabilities.* They design and build production machines and automated poka-yoke systems that their competitors can’t buy from machine tool distributors or builders. Their manufacturing engineers are part of the quoting and bidding process and often will invent new production methods that allow them to quote at very different levels than their competitors.
They understand that strategic flexibility depends on operational excellence. There is a myth in the manufacturing world that companies that are really good at innovation, creativity, new product development, intellectual property creation, etc. are usually not obsessive about “operational excellence” and vice-versa—that obsessive operational discipline brings with it avoidance of risk and a lack of innovation and creativity. (You’re either going to be the mad scientist or the boring accountant, but never both!) We fundamentally disagree with this “either/or” mentality. While these may represent really different skill sets within the company, successful suppliers have to embrace both at the same time. Operational excellence creates the foundation for flexibility, agility and adaptability that are the hallmarks of good strategy. Becoming a “strategic” automotive supplier requires hard work and scarce talent. Which means the strategic leaders will always be in the minority.
* Some companies think their manufacturing capacity is strategic, when in fact it is not. We believe that the current woes of the Steelcase Corp. in Grand Rapids are a good example of this. The office furniture business is basically a design-and-distribution model of competition. The manufacturing process has very low engineering content. Steelcase management has gotten trapped into thinking that manufacturing is critical when, in fact, the vast majority of their manufacturing could be done better, faster and cheaper by outside suppliers instead of their captive capacity. As a result, their cost structure is radically out of whack, and their profits show it.