Broad Changes in Globalization Strategies

If I can tear myself away from the news about the Washington bailout of Wall Street, there are signs of a significant shift in the ways businesses think about their globalization strategies.

On the one hand, the economics of “offshoring,” of sending manufacturing, IT or business process work to low-lost locations, is becoming less advantageous.  A widely discussed McKinsey article shows that the equation is changing for manufacturing in China, with total costs for manufacturing in the U.S. going down, while total costs of manufacturing in China are going up.   The analysis is focused on manufacturing, where a major factor is the cost of fuel, and transportation overall, so it’s not very relevant for IT or other business process work.  Costs for IT and other process work done in India, though, have also risen steadily, due mostly to increasing salaries.

On the other hand, the Sept. 20 issue of the Economist has several articles on globalization, particularly on emerging-market economies and businesses.  The discussion reveals a much broader rationale for working with, or in, these markets:

• Lower “legacy costs,” such as accumulated pension plan commitments or American health insurance plans
• “Frugal engineering,” the ability to figure out how to design and build goods at lower costs.  Think of Tata’s Nano car, or John Deere’s small farm tractors, for example.
• Broad understanding of diverse cultures and economies, and an enhanced ability to be effective in multiple countries.

Both of these reports point to a different ways of looking at globalization strategies, where the key challenge is not to find the lowest cost location, but to optimize the global business model, to locate operations in order to provide the best value to the business, in both cost and return, and enhance the ability to work together effectively.  I think the example of Lenovo, although cited way too often, is instructive – its chairman and his family are in the U.S., learning about U.S. customers in the most effective way, marketing operations are centered in India, manufacturing in China, and design teams operate virtually across several physical locations around the world.  The company has mapped key regional advantages to its own business strategy, reaping significant benefits in a networked business model.

Managing the networked global business is not  easy, and will require new skills and experience from managers and employees at all levels.  Still, I believe the business success stories of the next decade will look more and more like Lenovo, with both markets and production spread across the world.