Executive Summary Globalisation can be viewed at the country, industry, or firm level, according to Anthony Giddens, a sociologist, globalisation is defined as “the worldwide interconnection at the cultural, political and economic level resulting from the elimination of communication and trade barriers” Introduction Every organisation dreams to be multinational enterprises (MNEs), and if it’s not the global environment is forcing companies regardless of their location or primary market base, to consider the rest of the world in their competitive strategic formulation.
Firms cannot isolate themselves from or ignore external factors such as economic trends, competitive situations, or technology innovation in other countries if some of their competitors are competing or are located in other countries. With the world becoming a global village firms are faced with competition from foreign companies who have operations across geographies, in their local markets. At the same time, firms are no longer catering only to the customers in their local markets. They are increasingly catering to customers from various markets and geographies.
These changes in business environment made globalisation of operations a must for firms to sustain their competitive advantage. Today firms need to have diverse operations to be fast and flexible to demands of customers from different geographies. They also need to become multinational to exploit all possible advantages in terms of cost and technology available to foreign firms to sustain in their business and continue the growth. The classic example of multinational operations can be seen in the automobile industry.
The major competitors (Diamler Chysler, Ford, GM, Toyota, Honda, Nissan and Volkswagen) all compete in the major world markets and manage their value chains from a global perspective. The globalisation at the original equipment manufacturer (OEM) has forced the large component manufacturers such as Bosch, Delphi and Denso to globalise their operations. Why globalise operations In changing business environments the global operations are helping firms to sustain their growth and increase profitability of business. We now examine hat motivates firm to expand operations globally. The factors that shape global environment for a firm and drive its operation to global destinations can be grouped in to four categories as per Four Forces Framework for globalisation of operations. These forces are discussed below: Global Market Forces: Customer demand in various countries may call for a firm to have local experience of production and customise products for various markets. This also helps firms to be able to respond quickly to customer orders and customisation needs in any market that they serve.
Further to sustain growth of the firm it has to look for newer markets. The size of economy of a country may act as a limiting factor for saturation in growth of the firm. Nokia is a classic example in this case. The population of its home country Finland is 5. 3 Million which is lesser than new mobile phones sold per month in Indian market (around 8 Million per month). Technological Forces: Competitive success depends more and more on how quickly and effectively a firm incorporates new product and process technology in to the design and production of its products.
This needs for speed has prompted companies to locate more production and R&D facilities abroad, closer to suppliers of advanced technological knowledge in production. Firms have gone for collaboration for technology sharing or located operations in to countries with cost effective technological resources. Tata Motors looking for globalisation of their operation acquired high end technology operations of Jaguar and Land Rover. This gave them access to access to sophisticated technologies in high quality automobile production which they can use for their operations in India as well.
Global Cost Forces: Global cost advantages can be obtained by concentrating operation activities in countries where costs are relatively low. Countries differ greatly in terms of cost of factors of production, productivity levels, infrastructure and availability of skilled workers. Various firms are diversifying their operations in to India and China is for gaining cost advantages. Political and Macroeconomic Forces: Fluctuating global macroeconomic factor such as exchange rates, regional trade agreements, managed trades etc. hape global environment which force firms to hedge risk of operation by locating in multiple locations. Recent fluctuation in Indian Rupee rates with respect to dollar affected those export oriented firms less which had operations American and European locations also. Firms also tend to take advantage of political opportunities such as trade promotion, tax supports, safe investment opportunities etc.. Hindalco has a globalised operations in Carbon black and textile business to take advantage of conducive investment opportunities in East Asian countries. Various modes of globalising operations
Now we consider various options that a firm has for globalising its operations. A firm can globalise their operation in several ways depending upon the forces for globalisation that it is faced with. To have an operation presence in any country the firm can either go for organic expansion, mergers, collaboration or outsourcing. Organic growth gives opportunity for the firm to carry its own tradition and best practices to build operations from scratch whereas mergers gives it an opportunity to scale up operations rapidly with existing infrastructure and expertise.
Collaboration gives the firm a readymade network of suppliers and customers in new market whereas outsourcing can give the firm access to cost advantage or technical expertise without committing huge long term investments in capacity creation. These modes are discussed below in detail. Organic Growth When firms have expertise in operations and want to go global to exploit environmental opportunities such as macroeconomic factors or resources in destination geography, it can go for organic growth in new location.
The firm can build its own operation with in-house knowledge and expertise. Hindalco is a good example of such a globalisation where in it has built several carbon black and textile plants in several Asian nations to get advantage of political and macroeconomic benefits. Mergers and Acquisitions A firm looking for access to existing assets and expertise in destination country can go for acquisition of an operation facility of another firm. This will give it ease of fast scaling up of operation using already available capacities and even supply chain in some cases.
Hindalco’s acquisition of Novelis is an example in this regard wherein Hindalco got access to plants and supply chain of Novelis in several geographies in the world by acquiring it. After acquisition Hindalco has become world’s leading manufacturer of aluminium products with presence in all major markets. Collaborations: When a firm wants to enter in to new country, it can do that by collaborating with an existing player in the target market. The existing player can provide the firm with access to its network of logistics and other support functions to sustain operations.
To enter in to a new market, a firm has to become part of existing network of suppliers and producer in the target market. The entities in the network prefer entry of domestic player in to the network rather than an outside firm entering. This resistance can be overcome by partnering with a local firm and using its network for supporting operations. The collaborating firm also gives access to its logistics which can be a differentiator for the globalising firm. Collaboration can also give access to new technology to the firm, such as in Pharmaceutical Industry, firms collaborate together for development and use of technologies.
Outsourcing: Outsourcing is refers to the process of determining how and where to procure manufactured goods and raw materials. Manufacturers adopt an outsourcing approach to reduce the amount of material they actually manufacture themselves. This may give them several benefits. Outsourcing may result in reduction in cost of production for the firm. Access to lower cost economies through outsourcing called “labour arbitrage” generated by the wage gap between nations helps reducing costs.
Organization would be free to focus on their core business achieving much required competence, leaving non-core responsibilities to the outside party. Outsourcing gives access to operational best practice that would be too difficult or time consuming to develop in-house. This also results in overall quality improvement. . With Just in Time (JIT) concept coming in, outsourcing has also helped firms reduce net inventory levels in the plant and thereby reducing working capital costs. Global Operations Strategy to build competitive advantage
In crafting its global operations strategy, organisation must make explicit choices about locating value-chain activities, their product offerings, various collaborators and the activities to be outsourced. Each activity along the value chain has to be matched with locations that offer the best combination of comparative advantages that can be translated into competitive advantages in global markets. Firms may decide to locate complete value chains in each country in which they do business, or disaggregate their value activities and operate in specific locations that offer comparative advantages.
To understand the various approaches let’s look at the application of the AAA framework to decide the global operations strategy. Adaptation approach: (Adjusting to Differences) Adaption approach center on the potential for customising offerings to address the local market variations. Such variations range from differences in customer needs and taste to dissimilarities in local technology. Typically, these local markets are often the product of distinct differences in local cultures and traditions; however, they can just as easily be created by protective local regulation.
For eg in India the electrical distribution industry segments that targets power transmission within commercial and residential buildings in highly local. It has local codes that are unique and, hence, defy any attempt to standardise. Aggregation approach: (Overcoming Differences) The aggregation view is exemplified by Ted Levitt, who synthesized that “Everywhere everything gets more and more like everything else as the world’s preferences structure is relentlessly homogenized” .
He believes, It is possible for manufacturers to produce products in scale-efficient plants, distribute them around the global marketplace, and reap the benefits of scale related cost benefits that would follow. The argument for aggregation is based on the notion of convergence of commonalities in aspirations of people everywhere. Industry characteristics that favour a standardisation approach usually centre on the beneficial between economies of scale and economies of scope. Industries that exhibit higher levels of capital intensity usually reflect a higher incidence of scale economies than those that are less capital intensive.
Global industries such as automobiles, fine chemicals, petrochemicals, and steel are very sensitive to volumes of throughput. Settings such as these usually have ideal characteristics for implementing aggregation strategies, provided the barriers to cross-borders trade are absent or relatively insignificant. Arbitrage approach: (Exploiting Differences) Arbitrage approach implies seeking absolute economies, rather than the scale of economies gained through standardisation. It treats differences across borders as opportunities, not as constraints.
Arbitrage is the exploitation of differences between national or regional markets, often by locating separate parts of the supply chain in different places—for instance, call centers in India, factories in China, and retail shops in Western Europe. For example a global fashion retailer might leverage design expertise in France; optimise low-cost production in countries such as China, Sri Lanka, or Bangladesh; and source its fabric inputs in India. Most companies will emphasize different A’s at different points in their evolution as global enterprises, and some will run through all three.
IBM is a case in point. For most of its history, IBM pursued an adaptation strategy, serving overseas markets by setting up a mini-IBM in each target country. Every one of these companies performed a largely complete set of activities (apart from R&D and resource allocation) and adapted to local differences as necessary. In the 1980s and 1990s, dissatisfaction with the extent to which country-by-country adaptation curtailed opportunities to gain international scale economies led to the overlay of a regional structure on the mini-IBMs.
IBM aggregated the countries into regions in order to improve coordination and thus generate more scale economies at the regional and global levels. More recently, however, IBM has also begun to exploit differences across countries. The most visible signs of this new emphasis on arbitrage are IBM’s efforts to exploit wage differentials by increasing the number of employees in India from 9,000 in 2004 to 74,000 by the end of 2007 and by planning for massive additional growth.
Most of these employees are in IBM Global Services, the part of the company that is growing fastest but has the lowest margins—which they are supposed to help improve, presumably by reducing costs rather than raising prices. The Future – Globally integrated enterprise: The multinational corporation (MNC), often seen as a primary agent of globalization, is taking on a new form, one that is promising for both business and society. From a business perspective, this new kind of enterprise is best understood as “global” rather than “multinational. The globally integrated enterprise is a term coined in 2006 by Sam Palmisano, CEO of IBM Corp, used to denote a company that fashions its strategy, its management, and its operations in pursuit of a new goal: the integration of production and value delivery worldwide. State borders define less and less the boundaries of corporate thinking or practice. The globally integrated enterprise can locate functions anywhere in the world, based on the right cost, skills and environment. This new organisational form has emerged because everything is connected, and work can move to the place where it is done best.
The barriers that used to block the flow of work, capital and ideas are weakening. Activities of the firms can be broadly classified into four categories support, strategic, utility and partner component. With the infiltration of information technology and the world going flat, firms will focus on their core competencies and look in for partners/collaborators to outsource non-core activities. The ability of the firm to meet the customer requirement will largely depend on the manner in which the firm handles its complex operations which is as suggested earlier going to get much complex than this.
It won’t be far off when we see more of the firms following unique supply chain model as that of Nike which focuses on the design and brand building; sources its raw materials from other part of the world, get it manufactured at countries having low cost for its factor of production, outsources its non-core activities, utilizes collaborators to manage its global logistics and creates value for its shareholders and customers. Refrences ?Andrew Inkpen & Kannan Ramaswamy, Global strategy – creating and sustaining advantage across borders (New York: Oxford University press, 2006) ?
Pankaj Ghemawat, Redifining Global Strategy – crossing borders in a world where difference still matter (Boston, Harvard Business school publishing corporation, 2007) ? Darnier, Ernst, Fender & Kauvelis, Global Operations & Logistics – Text & cases (New York:John Wiley & Sons, 2002) ? Bidanda, Cleland & Dharwadkar, Shared Manufacturing – A global perspective (New York: McGraw Hill,1993) ? Channon & Jalland, Multinational Strategic Planning (London: The Macmillan press, 1979) ? www. wikipedia. org ?www. hbsp. harvard. edu/hbsp/hbr/articles