While some companies are already enjoying the fruits of globalization – e.g., Israel-based Teva in pharmaceuticals, India's Infosys in information technology, and Rolls-Royce in engines and turbines – most others are a couple of years behind the globalization curve, according to Adrian Slywotzky, a director of Mercer Management Consulting. Slywotzky points out that although many managers know that building a global business model is fundamental to success, they're not yet clear how it matters, how dangerous it can be, and how big the upside could be.
Globalization is no longer an extrapolation of the experience of the past 40 years in textiles, apparel, steel, electronics, and so on, Slywotzky says. Nor is it just about low costs, outsourcing, or engineers in India and China. The real opportunities, he says, lie in the proliferation of ways to design a better business – ways to source, create new customer segments, collaborate with other firms, and carry out innovation. "Globalization makes strong business models stronger," he says. "At the same time, it makes weak business models weaker, what with more competition, less differentiation, more risks, and greater disconnect from customers. And it will create more no-profit zones for companies and even entire industries." Mercer's research has uncovered several globalization trends that are having the greatest impact on companies.
First, new competitors are combining low cost and high technology to build market share very quickly. Apex, a Chinese manufacturer, sold its first DVD player in 2000, focusing on low price and special features as well as building relationships with major retailers such as Circuit City. Just two years later, Apex surpassed Sony to become the U.S. market share leader.
Second, the traditional sources of strategic control that protect profits from poaching by competitors – such as patent, brand, manufacturing scale, access to talent, and a two-year lead – will erode or disappear. Slywotzky maintains that companies must find and create new sources of strategic control, possibly in their ability to synchronize their activities super-efficiently or in creating a culture that retains and motivates the best and brightest.
Third, determining the right mix of common and custom business designs, products, and brands will become critical. Globalization involves greater heterogeneity (different income pyramids and customer priorities in each geography), plus greater complexity (different infrastructure such as telecommunications networks, highways, and distribution channels) multiplied over many more customer segments. Slywotzky comments: "Customize too much, and a firm will go broke. Too little, and nobody will buy – so the firm will also go broke. Customize in the wrong places, and it will go broke even more quickly."Finally, the areas where companies can create value are changing on a global economic stage, moving away from the traditional activity chain. For many established players, there will be three fundamental routes to add value:
- Customer connections – understanding and addressing local customer priorities more deeply than competitors do, as Lever does in India.
- A proprietary information chain – that is parallel to and governs the activity chain-better data (on customers, supply, service, and technology) combined with better application systems and a culture that knows how to use them.
- Science and innovation – -particularly customer-relevant innovation. Half the employees at telecom equipment maker Huawei work in development, many on the customer's site. Slywotzky argues that companies will have to step up the pace of university alliances and global talent sourcing, while inventing new ways to protect their intellectual capital in the process.
Adrian Slywotzky is based in the firm's Boston office and can be reached at 617-424-3200 or Adrian.Slywotzky@mercermc.com.