While globalization has lost a fair amount of its aura and near-shoring or on-shoring is more in fashion than offshoring, retraction from the global economy is clearly not the answer. Careful consideration of all the risks and then creating a competitive advantage for your company is still the goal.
Let’s first examine how you enter a new market, and there are two paths that companies normally take. They can enter the market from a sales perspective and sell into the market, then slowly start buying/producing in that market. There are many historical examples of that strategy, and here’s one example: Cisco.
- CISCO
- 80% SHARE IN ROUTERS, 76% IN SWITCHES
- EXCEEDING $700 MILLION IN DOMESTIC REVENUES
- 2000 DIRECT EMPLOYEES – MANY MORE INDIRECT
- 1995 ENTRY INTO INDIAN MARKET
- 1997 GLOBAL DEVELOPMENT CENTER
- 2005 ALL CORPORATE FUNCTIONS REPLICATED IN INDIA
- 2007 GLOBALIZATION CENTER EAST
- 2009 GOAL – 20% OF SENIOR MANAGEMENT IN INDIA
Now compare that to another approach where a company can start procuring/producing in a market and then start selling into it. Here’s another historical example of that: Motorola.
- MOTOROLA
- 2800 INDIAN ENGINEERS
- 40% OF HANDSET S/W GLOBALLY IS INDIAN IN ORIGIN
- #2 HANDSET MAKER IN FASTEST GROWING WIRELESS MARKET
- 1991 R&D CENTER
- 1993 GLOBAL DESIGN CENTER
- 1994 WORLD’S FIRST CMM-SE1 5 LEVEL CERTIFICATION
- 2002 GSM CONSORTIUM – SUB $50 HANDSET
- 2005 OVER 50 INDIAN PATENT APPLICATIONS
- 2006 WW HQ FOR HIGH GROWTH MARKETS
Both of these approaches can and have been successful, and it all depends on the risk appetite of the particular organization and its core competencies. Some of the challenges that must be taken into consideration are:
- Depth of local knowledge
- Hidden Costs
- Relationship Management skills
- Local Monitoring capabilities
- Lack of dedicated resources
- Competency Gaps
There are many other challenges to operating in a globally networked economy. Some are clear, while others are not. Here are a few of the obvious ones:
- Strategy: A clear strategy on how to approach the market, structure the tactics, and a plan to make it all happen.
- Organizational Alignment: Making sure the organization is aligned with the desired outcome of global expansion.
- Economic Conditions: Contingency plans to address economic, social, and political conditions and events in a foreign country that might adversely affect buyer and seller operations.
- Capturing Value: Managing the proper balance between the need to reduce cost and become more efficient.
- The Cost: What it will cost to enter a new market, outsource, or buy offshore – is this a divestiture, joint venture, new buyer/seller relationship, etc.
Of course, there are inherent risks in globalization, but again, risk is not something to be avoided but embraced and managed. In fact, differentiation in managing risks is what creates a competitive advantage. Here are a few to be aware of and incorporate into your strategic planning and execution:
Strategic Risk:
- Offshore suppliers and operations conduct functions or offer products/services that are not aligned with the strategy or that do not provide adequate ROI.
- Offshore suppliers used without proper due diligence and creation of infrastructure to oversee activity.
- Management does not have the expertise and experience to oversee the offshore supplier and operation activities.
Compliance Risk:
- Products, services, or systems associated with the supplier not properly reviewed for compliance.
- Operations not consistent with law, ethical standards, or company policy and procedures.
Reputation Risk:
- Failure to meet customer expectations.
- Interactions not consistent with policies and procedures.
- Publicity about adverse events surrounding offshore suppliers.
Global Delivery Model Risk:
- Limited understanding of foreign government policies and procedure, as well as cultural, social, economic, and legal conditions.
- Lack of due diligence on relevant country risk factors and/or sound procedures for managing country risk.
- Unclear jurisdictional law.
- Infrastructure and business continuity.
Those that can manage globalization risks best will continue to create a competitive advantage for their companies.
