One of the most striking trends in recent years has been the globalisation of markets, organisations and industries. Its impact can not only be seen through the global reach of well-established brands like Coca-Cola, Marlboro or Gucci, but it is also apparent in markets as diverse as computing, automobiles and consumer electronics. Nor is the trend towards globalisation confined only to products; we see similar transformations in services such as banking, retailing and satellite TV.
The corporations that have created and developed these global brands are expanding and refocusing their operations so that they too are global in scope. What this means is that an electronics company, for example, may source some of its components in one country and sub-assemble in another, with final assembly taking place in a third country.
The motivation for this is largely economic, based upon the search for cost reduction. The cost savings may be available through lower labour rates, lower costs of material, lower taxes, lower costs of capital, or greater government assistance. At the same time, these organisations may also rationalise production so that individual country operations no longer produce a full range of products for their own national markets. Instead the company may focus production on fewer factories making a limited range of items, but for a regional or even global market. These strategies yield savings in manufacturing costs, but the logistical challenges they present are significant.
Not so many decades ago vertically integrated businesses were the norm, with large corporations active in every stage of the value creation and delivery process. Corporations like Ford and Courtaulds typified this approach. Ford owned everything from sources of raw materials (including steel mills and rubber plantations) right through to the final assembly of its motorcars. Courtaulds’ reach extended from fibre manufacturing to branded consumer goods. Whilst some companies undoubtedly benefited from control of the sources of materials or guaranteed routes to market, these corporations fared badly in the face of rapid technological change, the deregulation of markets and the on-rush of intensified global competition. These forces continue to alter the dynamics of the market place, changing the basis of competition with the ensuing shifts in channel power.
Competitive pressures have encouraged organisations to re-examine their value chains, reducing costs and improving quality at every stage. They have retained ‘core competencies’, and outsourced almost everything else to specialist, preferably lower-cost, suppliers.
This latter model required a different sort of integration with suppliers of these outsourced activities. Instead of integration of ownership and control, it is an integration that is likely to be based upon the sharing of information and the creation of compatible strategic goals. This is the concept of ‘virtual’ integration. These organisations have moved along an evolutionary continuum towards a type of network structure, thought by many to be the most appropriate way of balancing the competing demands of greater organisational specialisation and flexibility.
Commentators have also suggested that as global brands continue to develop and industries seek ever-greater economies of scale, the need to implement transnational business strategies has become ever more pressing. Some organisations have gone further still, turning to partnerships and strategic alliances with customers and competitors to expand their global reach. Manufacturers such as Unilever, Nestle and Danone have actively sought to strengthen their presence in world markets through carefully targeted acquisitions. At the same time they have attempted to improve their focus by disposing of brands that they see as marginal to their mainstream strategy.
The steady removal of trade barriers has revealed overcapacity in many sectors, and so concurrent with organisational change is the reshaping of operations and the rationalisation of production facilities. Unilever, for example, has formed two global divisions: one focused on food and the other on home and personal care. It has chosen to reduce its manufacturing sites around the globe from around 400 to under 300.
Retailers have followed the same trend to globalisation. In some cases this has been by organic growth, in others through acquisition. In recent years the UK-based Tesco has built its position in Central Europe and in the Far East, first through joint ventures and then through acquisition. Meanwhile, Wal-Mart has extended its presence in Germany, the UK and Japan through acquisition. Royal Ahold, from the Netherlands, has expanded around the world in the same way.
As retailers become global, they are moving their sourcing strategy in the same direction. Central buying from global sources is one way in which they can leverage their significant buying power.
The global business is therefore distinguished not only by its search for wider markets, but also by the tendency to source its materials and components on a worldwide basis and to manufacture in whatever locations provide optimum costs.
The logic of the global corporation is clear: it seeks to grow its business by extending its markets; at the same time it aims to achieve consistency in marketing and product ranges whilst achieving cost reduction through scale economies in purchasing and production (through focused manufacturing and/or assembly operations) and in logistics.
However, whilst the logic of globalisation is strong, we must recognise that it also presents certain challenges. First, world markets are still not homogenous; there remains a requirement for local variation in many product categories. Secondly, unless there is a high level of co-ordination the complex logistics of managing global supply chains may result in higher costs.
These two challenges are related: on the one hand, how to offer local markets the variety they seek whilst still gaining the advantage of standardised global production, and on the other, how to manage the links in the global chain from sources of supply through to end-user. There is a danger that as they globalise, companies may take too narrow a view of cost and only see the cost reduction that may be achieved by focusing production. In reality it is a total cost trade-off, where the costs of longer supply pipelines may sometimes outweigh the production cost saving.
Many other issues are raised by the spread of globalisation. Concerns have been expressed about the impact of the growth of outsourcing, leading to the emergence of the ‘hollow corporation’, and about the trend to offshore manufacturing, with the consequent implications for employment and the environment.
Further questions arise concerning the apparent contradiction between the move to globalisation — with the potential increase in lead times — and the search for just-in-time, zero inventory type strategies, which require shorter, not longer, pipelines.
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