Technological advances and liberalized economies have opened up new models of global business, says Nandan Nilekani. Successfully exploiting them will require analysis, preparation and continued monitoring
Over recent years, globalization has speeded up and is now widely recognized as a phenomenon in the world. Advances in technology, lower costs of communications and deregulated economies have made it easier for companies to gain access to large pools of highly-skilled talent in emerging economies. Markets that were closed or protected have opened to global businesses, creating significant new revenue opportunities for international companies. The playing field has been levelled and has become much bigger. However, for many of today’s businesses that operate domestically or internationally, seizing the opportunities that globalization presents requires substantial analysis, preparation, planning, strong execution and continued management commitment.
Globalization is not a new phenomenon. However, what is different about this wave of globalization is the extent to which it is affecting a broad set of industries, all at the same time. The impact is a breakdown in the traditional boundaries companies operate in, which creates complex disaggregated value chains. Globalization is changing the rules of the game, yet again.
Manufacturing in the vanguard
Manufacturing has been at the forefront in exploiting the opportunities of globalization. Initially, manufacturers sourced and produced everything close to the customer. However, as costs of sea and air transport fell, it became possible to source components from those locations where they were most efficiently made and assemble goods close to the customer. As this approach matured and supply chains disaggregated, manufacturers moved from buying components elsewhere to outsourcing whole swathes of the manufacturing process to new partners around the globe. For example, Li & Fung, a Hong Kong-based clothes maker and distributor, has 7,500 business partners in 37 countries. Through this network of specialist suppliers, it is able to manufacture a wide range of apparel for its global customer base.
Instead of being responsible for the whole process, so-called manufacturers slimmed down so that their focus became anticipating and fulfilling customer needs.
Today, a new wave of globalization is on hand. It is covering multiple functions, across multiple industries. Falling costs of communications and the new high-capacity digital infrastructure that has grown up around the world are making it possible for businesses to gain access to highly skilled talent across the globe and to change the dynamics of their operations.
Offshoring and outsourcing
This wave of globalization began with many businesses exploring “offshoring” of their functions and processes, that is, transferring them overseas to countries that offer advantages either in lower costs or higher quality of labour. This trend has grown up hand-in-hand with India’s pioneering business process outsourcing industry. In 2004 to 2005, more than 65,000 people were employed in this industry in India, generating more than $17 billion in revenues, according to McKinsey, a consulting firm. For businesses such as Wal-Mart, which has aggressively improved the efficiency of its supply chain by adopting a global delivery model for its information technology requirements, the cost of the goods is estimated to be 5% to 10% lower than that of the competition – a significant advantage in the cut-throat business of retailing.
However, most of these initial efforts were cost-focused in nature, resulting in a one-time reduction in the cost of operations. Today, things are moving on. There is evidence to suggest that a few farsighted companies are not only acquiring key capabilities in emerging markets but are also preparing to use that experience to serve segments in their home markets. These companies are wielding advantages based not on cost differences but on superior management.
There remains a large untapped opportunity for companies to take a holistic view of global resources and to think strategically across their organizations.
Telecommunications, lowered trade barriers, free-market economies and other forces have created a fundamental shift in the way organizations should think about their business. Most global companies are realizing that they will soon face competition from emerging markets players. Today, almost anyone, anywhere with ideas, ambition and capital is able to access and serve markets around the world. Global companies, therefore, increasingly recognize that serving mass markets in emerging economies is not only attractive in itself, but is a good way to acquire the capabilities they will soon need at home.
Each company will undergo the globalization transformation model: it will source talent from where it is the most desirable; raise capital where it is least expensive; produce where it is most cost-effective; and sell where it is most profitable – anywhere and everywhere in the world.
Companies that undergo this business transformation will look and act differently in every part of their operations. Take the marketing executive in Manhattan who works daily with the statistical researcher in Moscow to analyze the behaviour of customers in London. She works with manufacturing in Shanghai to modify production based on the findings – while using the business intelligence and information provided by systems developed by software engineers in India. The result of global teamwork is the creation of highly-competitive companies, able to respond faster, have lower costs and produce higher-quality goods – ultimately to improve customer satisfaction. All this happens, while freeing up funds for product innovation and for our marketing executive to invest in other initiatives, such as advanced customer analytics.
How to get there
Achieving all of this is hard and requires substantial analysis, preparation, planning, strong execution and continued management commitment. Many companies find themselves stretched in trying to globalize in unfamiliar territories.
The first place to start is assessing the value that a company can derive from globalization (a “business case” for globalization). While the main benefits, such as access to talent, business performance efficiencies, low cost and new revenue opportunities are well known by now, this exercise is aimed at identifying target benefits that, in turn, will become performance metrics for the globalization programme. Quantified performance objectives are critical for keeping the globalization programme focused and on track.
Globalizing ineffective processes will not automatically make them more effective. Companies that embark on a globalization journey must accelerate their process maturity, which includes process definition, metrics and transparency. Regardless of the ease of communication, it is difficult to work with remote teams, spread across multiple time zones, from different cultures. The lack of a high level of process maturity can result in confusion and reduce productivity. Companies should thoughtfully define the global processes, agree on performance metrics and targets, and promote process transparency through clarity of roles and responsibilities.
As operations become spread around the world, it is imperative that strong governance structures and global transparency are put in place to ensure regulatory and corporate compliance.
After the initial relocation of a business process or function, it is important to track its performance continually, relative to the objectives set at the outset. Even though the objectives and performance metrics may be refined based on experience, the process of monitoring and evaluating will help to achieve the original objectives and drive continued optimization as the attractiveness of various locations and corporate strategies change over time.
In effect, companies should create a new role – that of a chief globalization officer to design the strategy, determine the approach, execute the plan and continuously monitor the progress. They would also need to monitor the new opportunities and threats arising from the changes in the global market.
As the global playing field is levelled, the basis of competition is changing. The next frontier of competitive advantage lies in tapping emerging opportunities and responding to emerging threats – fast. Only the companies that strengthen their capabilities by taking advantage of the newly-available resources and business models will be able to stay around long enough to win.
CV Nandan Nilekani
Nandan Nilekani is chief executive and co-founder of Infosys Technologies. He has served as a director since its inception in 1981.