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Five Factors For Managing In An Uncertain World: PART I – Globalization

December 28, 2007

As we enter 2008, businesses face mounting uncertainty. Political tensions, shifting economic power, threats to the financial system … it is tough to predict how the world will look a year from now. These issues add to (and to some extent result from) the underlying changes still being driven by the networked world. An era of cheap and easy communication is transforming how, where, when and with whom we do business.

While periods of rapid and unpredictable change threaten many, they also represent tremendous opportunity. Some will simply prove lucky – but others will focus on the key issues and attributes necessary to ensure their survival.  And those same factors should also influence the attitudes and behaviors of individual employees who want to not just weather the storm, but emerge with their status stronger and their career plan intact.

In this series of posts, I will highlight five factors that appear to be critical and which represent these areas of opportunity. The first is Globalization.

Globalization will not go away. It will continue to open new sourcing opportunities, not only to reduce prices but also to tap new ideas, methods and labor pools. Increasingly, sophisticated supply chain experts will look at broader issues of acquisition cost and sophisticated suppliers will understand how they can leverage the risks of extended supply chains to create competitive advantage.  Let’s look at a few of the trends that may become ‘big news’ in 2008.

For several years, globalization has placed negotiating power in the hands of the buyer. It has contributed significantly to the renewed focus on cost and the virtual blindness of many buyers to any other value factor. A combination of cheap labor and weak commodity prices created an environment where falling input costs became a norm. That era is not fully over, but the end is in sight. And in addition, the issues of quality, environment, social responsibility and rising commodity prices are limiting the options for such a simplistic and confrontational approach.

Already, some industry sectors have started to develop a more sophisticated approach to their sourcing management – better segmentation of relationships based on value and importance; greater sensitivity to future shortages and supply threats; more holistic measurements that incent a change in procurement and negotiation practices. These changes have some way to go, but they will be rapidly adopted by the winners in 2008.

Part of that shift will be for buyers to analyze the true costs of acquisition, rather than simply purchase price. They will take greater account of logistics issues – the cost of delays, shipping, customs and duties; installation, maintenance and running costs. They will also become more sophisticated in understanding the risks behind global sourcing and in considering the need for improved information flows and greater transparency.

For suppliers, these shifts represent real opportunities. After years of being beaten up over price, of being forced to move production to low-cost centers, they will be able to step back and consider how to build competitive advantage into their offerings. For example, can they take on some of the buyer’s risk in areas like transportation or export / import? Can they differentiate by offering more reliable supply? Can they create better integrated technologies that offer on-demand capabilities and information flows?

Suppliers are also waking up to the fact that globalization is creating new pockets of wealth. The markets that were yesterday’s sources of cheap labor are today’s emerging economies. Already we see major suppliers switiching their sales and marketing spend, building new alliances, partnering with the international corporations of tomorrow. Buyers who maintian their old, confrontational approaches to negotiation may soon find that their suppliers simply shrug and turn elsewhere.

Finally, what about the impacts of globalization in those emerging markets themselves? The Western press tends to focus on how globalization affects the developed economies. It may report on the opportunities that are being created, but it rarely looks at how business leaders in those fast-growing economies are handling their success.

Interestingly, many of the emerging companies appear to have learnt little; they show every sign of emulating the traditional (and crumbling) enterprise model of the 20th century corporation. Rather than thinking about lean organizations, with a center-led, outsourced approach to operations, they are building centralized infrastructures, huge facilities and campuses. It is a model built on short-term opportunities for labor arbitrage – and defies the economic forces that led to their success. So the final trend that I believe will emerge in 2008 is that a weakening economy will place some of these early leaders in countries such as India under very real pressure. They will need to rapidly reengineer and develop a business model and structure that does not depend on such high volume employment, but instead that operates with disciplined business processes and technology that allows superior information flows.   

One Comment
  1. Tim,

    Welcome to the blogosphere! Love the first topic … here’s to hoping that 2008 will be the year where procurement looks at globalization from a perspective that goes far beyond just low cost country sourcing. In the US, at least, we’ll have to unless we see a miracle turnaround of the dollar.

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