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Management Models Must Adapt to Changing Labor Market Demands

Brad Hall

NEW YORK ( TheStreet) -- Aligning business strategy to market needs is a fundamental principle for business success. Strategic management is the process of ensuring continuous alignment between company offers and market demands. Most senior leaders understand this well. But few leaders are aware of the importance of aligning their management model to changing labor market demands. Alignment enables business success.

Maintaining alignment between management models and changing labor market demands is particularly relevant in emerging countries. China is a good example.

China's first generation of business began in the 1980s. For its past thirty years the country's key to success has been low cost labor. First generation labor costs began at one tenth those of competitor countries.

When labor costs were very low companies could address problems with more people. For example, a service problem that could be addressed by one trained technician from a Western company might be tackled by five or more people in a Chinese company. Still today in China, you can watch 10 gardeners spend an afternoon manually sawing a downed tree or sweeping leaves with straw brooms identical to ones used 100 years ago. Squads of gardeners are still cheaper than a chain saw or a leaf blower.

However, labor costs are rapidly increasing. In 2012, factory worker salaries increased 7.6% and in 2013, that is accelerating to 9.2% -- a two-year net increase of 17%.

Additionally, over the past two years, the RMB has appreciated 11% against the U.S. dollar. Thus, in just two years, labor costs (in USD) are increasing by almost 30% versus 2% in the U.S. The cost gap is closing quickly and today's razor thin factory margins are getting worse.

Chinese companies that can realign their management model to these new labor market realities will survive. Those that can't will quickly die. This is a great illustration of social Darwinism. Only those that adapt will survive.

First Generation Management

Until recently, China has been led by emperors. Emperors owned everything and made all decisions -- large and small. People feared the emperor. They kept their heads down, followed instructions and did not stray into uncharted areas.

China's first generation management model the "Emperor Model" was well-aligned to its labor markets. In this model, the top leader creates strategies and plans and workers below dutifully carry out orders -- one brain with replaceable body parts. Don't think. Don't innovate. Just do what you are told.

This model is well-aligned the needs of unskilled and uneducated workers. Many don't want to think or innovate.

The primary motivator of the first generation has been money. In many Chinese businesses, the word "motivation" is often used to mean "compensation." If another company pays more, workers move on.

Today's Chinese industrial management systems are well-aligned with this labor model. Jobs are narrow and can be learned quickly. Management styles are coercive -- managers tell workers that to do and make decisions -- large and small. And employees are closely monitored to make sure they are exerting full effort. Effort is more important than efficiency.

Second Generation Management

Foxconn, a company of 1.3 million people, is currently in a gut-wrenching transformation to second generation management.

Foxconn knows its survival is threatened by accelerating labor costs. In 2011, the company deployed 10,000 robots. In 2012, that went to 300,000 and Foxconn is expected to deploy one million robots in 2013. This two-year shift from 10,000 robots to one million will dramatically change Foxconn's management model.

Job scopes will be enlarged with broader spans of control and more decision making discretion. Broader scopes and expanded decision rights will require frequent vertical and horizontal communication to understand strategic intent and to coordinate processes and technologies. No longer will employees wait for direct orders from their manager.

Expanded jobs will require a dramatic change in the profile of the typical Foxconn employee. Employees must rapidly learn new technologies and processes. They must be inquisitive and continually find new methods for improving productivity.

Once hired, Foxconn employees will require intense and frequent training in the company's unique technologies and business processes.

Most importantly, continued high employee turnover will break Foxconn's new business model. Learning proprietary technologies and business processes will require months or years to become fully productive.

Creating a new culture of loyalty will require a complete transformation of management practices and systems. The company must drive continual improvements in organization climate. The role of the manager will change from order giver and disciplinarian to team builder who can align and inspire workers. And Foxconn will need to create a free internal job market where employees have control over their careers.

The shift from first to second generation management requires, not continuous improvement, but a management metamorphosis. Changing strategies is easy. But, fundamentally changing the management model of a company is very difficult.

The key to the change is a deep commitment to personal behavior change by senior managers. Changing from a culture of coercive leadership that has been successful in the past will be very difficult for most senior Chinese managers.

Some companies will make it, many will not. The strong will likely become even stronger.

Chinese management models were beautifully aligned to a low cost labor market. The result was fantastic growth rates. But, can Chinese companies, on average, realign to new labor market realities? Only time will tell. The requirement is clear -- align or die.

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