What Globalization means to a business

Globalization is here to stay so you need to plan for what this means to your business.


Normally when a company starts, it doesn't go international day 1. Usually, a company starts in a regional area with clients near its location. This is normally referred to as the "home" advantage. This helps to keep costs low. Travel costs for requirements gathering and sales can be kept low until customers are more than 250 miles away. Support costs increase as the customers are more time zones away. Advertizing and Marketing costs grow as you grow the territory that you sell and service. Eventually, a company gets a "home country" advantage and then looks to expand their services outside of their home country.

But now welcome to the modern world where the playing field is being leveled among countries and dominations by a few countries is slowly falling away, allowing any firm in any country to some day be able to be a major player in the world markets.

So when a firm has achieved its home country advantage, how should it play on the world stage. If you are only considering offshoring for cost cutting for a functional area, this is only a temporary fix. Cost advantages are diminishing as salaries increase and infrastructure costs grow in other countries while deflation of costs and devaluation of the currency is happening here in the US. There is a really overhead of offshoring parts of the business especially by functional area, resulting from communication delays. Communication must be much more detailed and clear as well as followed up on to counteract the effects of queuing delays. Note that there is a lot of research that says that putting workers together in a "pod" increases productivity of the team [http://en.wikipedia.org/wiki/Cell_production][http://www3.interscience.wiley.com/journal/118487242/abstract?CRETRY=1&SRETRY=0]. When workers are a part, communications have a tendency to get queued (e.g., email) vs being direct and immediate. This queuing effect introduces delays into the process and overhead due to setting work aside and shifting to other work until you get the information you need to continue your work. In addition, use of email for queuing makes it difficult for management to see items stuck in the queue that have not be acted upon. So offshoring for reducing labor rates is only a temporary fix, you really need to find a long term solution to your company's cost and revenue issues through innovation. Real gains are made because of either disruptive technology or disruptive business models.

Globalizing the business based on market differentials and cost differentials makes more sense. For example, since each country has its own financial system and financial reporting requirements, it make sense to have an entity in each country to handle the financial requirements using staff from that country. The other advantage of this is that the staff is based on local human capital rates in that country which will be more inline with prices that can be charged in that country. Additionally, if you have to support customers in that country having support personnel in that country who know the local customs and holidays as well as the local language can add significant value. By using resources from that country, the support costs would also be more inline with local costs and pricing. There are probably also local localizations or requirements that don't exist or are low priority in the US market that must be developed locally in that country. Again the cost of doing this localization by using personnel from that country helps to keep the price more inline with what can be charged in that country. Additionally, marketing in that country may require knowledge of the customs as well as the language to be effective. The marketing costs in that country would be more inline with the the prices that can be charged in that country. So if you can move the country specific parts of the business to run from a country for which it markets, sells, and supports, this makes more sense than having each function distributed around the world for partial cost savings on just a labor basis by maximizing the profitability per country.

Note that US and other "advanced" countries have been exporting "know how" to other countries for years at the same time taking advantage of the resources of other countries. For example, manufacturing "know how" was moved offshore to Japan many years ago and then car design. But now, the US automakers are struggling to stay a live and have lost the leadership here. Similar is true of the consumer electronics business. Similarly, we hear stories now about this happening for India in its production of cars and now computers. Note that US requirements don't always dedicate global requirements. An example of this is cell phone technology. Cell phone technology grew faster in other countries because the cost of adding land line infrastructure was higher than cell phone technology. Other technologies based on cell phone was developed outside of the US because it had a "low" priority in the US market. For example, the use of SMS was strong outside of the US and was used in various applications including acting like a credit card in countries like South Africa. So success in the US market doesn't guarantee success in the global market and in fact may cause you to miss out on the global market.

So get your home country advantages solid but think and analyze carefully how best to utilize global resources to service the global markets.