Managing performance is the foundation of competitiveness and success. The virtualization of the supply chain and extreme out-sourcing has changed the center-of-gravity for performance concerns from an internal focus to a supply-chain-wide view. This mandates a re-examination of each of the core drivers of performance for a firm: it's people, power position in the supply chain, processes, and policies. We will look at these issues, examples of these drivers, and the critical role they play-not just in performance, but in the firm's very definition of itself.

Chapter One: People

Though 'people' as a driver of success is often underestimated, the fact is that the skill and motivation of the people in the firm have the greatest impact on performance--in fact a direct impact on revenue, reputation, customer preference, and profitability. To compete effectively, a firm's employees need

• Exceptional expertise
• A passionate understanding of the customer
• Morale and motivation

Expertise
Here is an example that hits home. In the home improvement retail market, the knowledge and consumer-friendly service orientation of store associates is crucial. Home Depot's early growth can be attributed significantly to its strong emphasis on training and excellent knowledge base of store personnel (they frequently hired experienced do-it-yourselfers). But Home Depot has increased the percentage of part time help in their workforce and placed more emphasis on new store expansions, often without adequate training for new personnel. A survey of their customers in the Washington D.C. area showed the percent of sales associates advice rated as "superior" declined from 67% in the early 1990's to 33% recently. Home Depot's same-store sales performance fell 6% in Q4 and is expected to decline a further 2% - 4% in early 2003. In contrast, Lowes' same-store sales have been rising and are expected to increase by another 2%-4% in the same period. This concept can be seen in many business processes, where lack of attention to personnel training, morale and compensation creates poor results. Until Home Depot addresses this fundamental issue of employee expertise, their performance will surely continue to suffer.

The Virtualization Twist on Expertise
In a virtualized world, it is no longer just about your employee's expertise. Your customer's point of contact with your company is often through one of your trading partners. Help desks are frequently managed by a third party. Products are regularly delivered, installed, and serviced by an independent service provider or third party service network. Your products are sold through channel partners. Managing the expertise of your partner's customer-facing employees is as critical to your success as managing your own employee's expertise. These partnerships must include investments in training and superior hiring practices. If your partner fails to meet the customer's needs, you fail.

Understanding the Customer
Great companies are made by employees that have a deep understanding of their customers and markets. Employees are a powerful driver of higher performance when they speak the customer's language, know and feel the customer's pain points, and understand exactly what facets of products and services the customer values the most. It is the management team's prime duty-through education, hiring practices, and every act of communication-to infuse the organization and its employees with these customer-centric sensibilities.

The Virtualization Twist on Understanding the Customer
The dynamics of being customer-centric change in subtle but important ways in the virtualized supply chain. A firm is often part of a multi-company team, delivering a total service to a different customer further down the chain. The employees need to understand not just their immediate customer, but also the real end-customer or consumer. Strong trading partner coalitions are increasingly based on a shared vision and common understanding of the ultimate end-customer. Being selected for participation in these partnerships depends on your employees understanding of the ultimate end-customers and markets.

Employee Morale
Employee morale has a profound impact on corporate performance. Productivity plunges during layoffs or bankruptcy filings as employees worry about their own security and future. Leadership is key in bolstering morale. In his first week at the helm of troubled WorldCom, Mike Capellas went on a 6-city tour to talk openly and frankly with employees and directly answered many hundreds of employee emails. Building trust and confidence and inspiring employees is critical for any company's performance, but especially one that is trying to turn around.

The Virtualization Twist on Employee Morale
Of course your management team does not have direct responsibility for the employee morale of your customers and channel partners-but now more than ever your firm will suffer if their morale suffers. If they're not selling, you're not selling. Programs to compensate, motivate, and build confidence and enthusiasm for your products in your channel partners' employees will propel your performance.

Chapter Two: Power

No discussion about performance would fly without addressing the power position in the market and supply chain. Companies with a powerful position realize many performance advantages just by being powerful. Selling is easier. Margins are higher. Contract terms more favorable. Shelf-space more plentiful. Prices lower. Suppliers more compliant to your requirements. It's a self-fulfilling upward spiral.

Firms lacking power tend think this performance advantage is not available to them. They should think again. A firm can increase its power within the chain. Companies achieve a position of power in the supply chain through:

• Brand - improving customer mind share and preference
• Unique Value - focusing on differentiation, providing something that everyone wants and no one else can match
• Market Share - this may mean compromising other goals until the target share position is attained

Brand Strength
Strong brand examples abound. Intel and AMD both make processors for PCs. Intel has gross margins in the 50%-60% range. AMD gross margins are usually between 30%-35%. This difference is largely due to Intel's brand strength and power position in the chain. Consumers are still looking for that Intel inside!

The Virtualization Twist on Brand Strength
Intel and others have proved that it is possible for a player deep in the supply chain to "reach around" the intermediaries and create a compelling brand that has pull with end consumers. Dupont fibers are an example in sports clothing, where sport enthusiasts are looking for CoolMax. Mimicking this approach won't work for everyone, but many companies can look past their immediate customer in the chain to create preference; for example with the design engineers at your customer's customer, or educating the markets about your differentiation advantage. When your customer's customer is asking for your product, you have more power in negotiations with your direct customer.

Unique Value
Power is not just about size. A smaller firm may possess a powerful brand, unique, high value capabilities, intellectual property, or other key resource. One small maker of custom semiconductors chips has unique, high-value technology, which gives them power in negotiations with their customers. Unlike most other suppliers, they don't do VMI for customers. They realize a performance advantage by avoiding the expense of 2-3 weeks of inventory and managing dispersed inventories at numerous customer locations.

Market Share
Wal-Mart's sheer size is a tremendous source of power for them. Suppliers have to jump through hoops to comply with Wal-Mart's myriad and rigorous requirements and continual price reductions. This results in higher supply chain performance and cost advantages for Wal-Mart. But you knew that.

The Virtualization Twist on Market Share
The more interesting story is how virtualization can bring dramatic shifts in the very definition of markets and the meaning of size, creating new "800 lb gorillas". Worldwide sales of the Cherokee Group's "Sideout" and "Cherokee" brands of clothing through Target, Carrefour, and various other retail channels exceeded $2.3 billion last year. Yet if you look at Cherokee's annual report, you will see net revenue of only $33 million. How can that be? In 1996, Cherokee closed its manufacturing and distributions operations, to focus exclusively on a retail direct licensing strategy. They do not manufacturer or take possession of any of their products. All products are sourced by the retailer, while Cherokee approves graphics, quality and advertising. The Cherokee brand is one of the fastest growing and largest family brands in North America. Cherokee is a huge power player with a tiny footprint. Incidentally, Cherokee's net profit last year... a stunning 40%!

Virtualization has made it possible to achieve huge market presence and share without huge investments in manufacturing, distribution, and inventory assets.

Conclusion

Virtualization opens new vistas and dramatically change the performance game. Firms must look beyond their four walls to find the performance advantage. By creative and bold thinking, firms can play and win at the power game without casting a long shadow.

In next month's Parallax View, will continue the discussion of creating and sustain supply chain performance (Chapter 3).