Global Restructuring-Path to a successful global business*

According to Farell (2004), most managers focus on globalisation as a lever to reduce costs. Yet, they should be viewing it as a means to generate new revenues too.

In order to realize the full potential of globalisation, the place where the industry falls along the globalisation spectrum should be assessed first. To do this, the ratio of annual value of global trade to the annual value of industry sales should be considered. Ratios over 100% indicate that these industries are global.

Next, globalisation’s full potential for your company should be defined. In this case, it is difficult to figure out how different forces will strenghten or weaken your business over time and how to capitalize on that evolution.

Three types of factors usually determine the course of globalisation in an industry.

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  • production
  • regulatory
  • organizational

Production

In this case, there are two factors which determine an industry’s potential for disaggregating its value chain.

  • relocation sensitivity- how feasible and attractive it is for an industry to relocate parts of its production process
  • location specific advantages

Relocation senstitivity can be figured out using metrics like

  • bulk to value ratio(currency value per pound of production material)
  • ease with which your company can ensure quality standards remotely
  • how quickly your products or components become obsolete
  • volatility of the demand for your service
  • sunk costs

Location specific advantages can be determined using

  • labor intensity
  • skill requirements
  • natural resources intensity
  • economies of scale and scope

Regulatory

Particularly countries’ efforts to restrict imports or foreign investment are among the biggest constraints to globalisation in many industries.

  • tariffs
  • quotas
  • minimum content from local production
  • ban foreign investment outright
  • failure to invest in regulatory and legal infrastructure

Organisational

The main organisational factors that can limit globalisation for a company or an industry include

  • internal management structures
  • incentive systems
  • unionization

Yet, all production, regulatory and organisational forces evolve over time. Along the line, the full potential of globalisation for companies and industries change with the geopolitical and macro economic environment.

Thereby, with escalating competition, steady trade liberalisation and continuous introduction of new technologies, the pressure on companies to globalise tend to increase.

Then, the options to capture value in the new global environment should be considered.

According to Farrell (2004), industries and companies both tend to globalise in stages and in each stage, there are different opportunities for creating value.

Stage 1: Market Entry

This is when companies enter new countries using production models that are very similar to the ones they deploy in their home markets. In this case, typically companies need to establish their production presence due to the nature of their businesses or due to local tariffs and import restrictions.

Stage 2: Product Specialisation

This is when companies transform the full production process of a particular product to a single low cost location and export the goods to various consumer markets. For example, GM now manufactures all Pontiac Azteks in Mexico ad all Chevrolet TrailBlazers in the U.S.

Stage 3: Value Chain Disaggregation

This is when companies start to disaggregate the production process and focus each activity in the most advantageous location. Eg: Recent trends for U.S companies to offshore business processes and IT services

Stage 4: Value Chain Re-engineering

This is where processes are re-engineered to suit local market conditions. For example, Indian car makers have a manufacturing process tailored to take advantage of low labor costs. They also design and build the capital equipment for their plants locally.

Stage 5: Creation of New markets

This is the expansion of the market.

However, these 5 stages are not necessarily a rigid sequence that all industries follow. Companies can skip or combine steps.

If the business wants to shape rather than react to the industry’s evolution, it is necessary to size up the opportunities that emerge for your business at each stage of globalisation. This means determining potential cost savings from global industry restructuring and identifying new market opportunities which it can create.

  • Labor
  • Re-engineering their production processes
  • Utilizing capital equipment more intensively
  • Hiring local engineers in low wage environments to design and build cheaper capital equipment
  • Manage other fixed costs of doing business

For example, Maruti Udyog, an Indian carmaker designed its won robots for its assembly lines. This cost the company a fraction of what Suzuki, its Japanese partner paid a third party vendor for similar machines.

However, experiences of French retailer Carrefour and U.S. retailer Walmart in Brazil and Mexico indicate the need for both optimism and caution in the pursuit of globalisation.

In order to ensure success as your industry restructures along the global lines, a sound strategy, consistent execution and new ways of viewing the business and managing people are required.

Accordingly, the following are some lessons drawn from the experiences of companies that have ensure success.

  • Abandon incremental thinking- Adopt bold performance targets sooner rather than later
  • Use global assets effectively and efficiently- Get the best mix by increasing labor resources to better use expensive capital, improving shift utilization, developing cheaper capital equipment.
  • Tailor your best practices to local conditions- Leverage the best practices in ways that fit conditions in the host country. For example, in Mexico, Walmart uses the same trademark “Everyday low price” strategy which it uses in U.S.
  • Aim for higher quality

Stay tuned with Zeeable for more of such updates!!

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