Rising competition from developing economies is putting pressure on global companies, according to the head of Boston Consulting.
Globalisation is only in its infancy and the threat from emerging nations is only going to become more intense. That is the warning of Hans-Paul Burkner, chief executive of the Boston Consulting Group, one of the world's largest consulting firms. Burkner believes globalisation is both underestimated and over-estimated. Businesses typically are too optimistic about how long it takes to reap the benefits of developing global operations. But they are also too sanguine about the long-term impact of globalisation on their competitive conditions.
"Despite all the talk about globalisation, most managers are quite domestic or national in their thinking," Burkner says. "Factories are quite global. Are products global? Have they really adjusted? How much is their value added really spread across the world? Have they optimised their supply chains? We are really in early times."
Globalisation, he says, is not a linear process. Neither is it a one-way street with all the factories going to China and all the service centres to India. "It is a much more complicated process than that.
You see some companies pulling back some of their activities closer to home because they find it very difficult to manage from afar. "They also find it difficult to have local talent who they really trust. Yes, you can move factories, you can have your supply somewhere else. But for it to become an effective and efficient supply chain takes years."
Developing effective global operations is as much about creating effective cross-border teams as taking advantage of low-wage costs. While it solves one business problem - wage costs - it creates equally challenging management issues.
"People have to get to know each other and also be able to work with each other and be able to work together on projects," Burkner says. "Everyone talks about doing research and development 24 hours [a day]. In theory, that is do-able because of the technology. But in terms of human interaction, it is much more complicated. For some it works, for others it doesn't. It takes three to five years to have established processes."
Burkner says government investment in infrastructure varies between countries. India, for example, is lagging. In Europe, investment typically takes place over 10 to 20 years. Even in China, there is growing resistance to infrastructure developments that are necessary for the country to continue its growth.
At the same time, there is a tendency to extrapolate from emerging problems in global supply chains and assume the worst. Globalisation is a messy process, but there is cause for optimism. "There will be drawbacks along the way but I don't think it will be something that will stop people," he says.
An organisational implication of globalisation is the need to decentralise, to create a network of managers who are able to communicate effectively, and who trust each other. Burkner says the era in which all the crucial decisions are made at a central headquarters is fast becoming obsolete, although he acknowledges that it is still a common approach with multinational firms.
It is crucial that the problems are understood at the local level, which in turn places great emphasis on human resources development, even in markets that appear to have bountiful population pools.
"If you think of the top business schools in India, they have 3000 graduates. In the top engineering schools, they have 6000. There are new ones developing now, but these numbers are really tiny compared with what people have in mind when they think of India. Of course, they have 50,000 engineers but they vary in quality. If you think of Infosys looking for 30,000 to 40,000 people every year, they [quickly] reach limits. In China, you have a lot of people quantity-wise, but [are they of the requisite] quality?"
Another consequence of globalisation is the growing importance of competitive threats from unexpected areas, such as South Korea, South-East Asia, Russia and Latin America.
Burkner says it puts pressure on global companies to look continually at where they are finding value, and to focus on what business they are in. The reason is simple: "If you do not do it yourself, in the hyper competition created by globalisation, someone will do it to you."
At one level, globalisation is creating a high degree of rationalisation. In many industry sectors, global oligopolies are developing among the firms from developed economies.
At the same time, new threats are emerging from firms from developing countries. "There are more competitors than meets the eye," Burkner warns. He nominates Indian iron ore companies and Chinese forays into Africa as examples of where new competitive threats are emerging.
"The market is much more fragmented. Local companies are appearing that you have never heard of. It is the same in consultancy. People always focus on the same number of names, but actually the market is very fragmented. In the automotive industry, the numbers are declining, but the Koreans are coming, the Chinese, the Indians.
"What we will see is the constant rejuvenation of industries. I think it is important to see that new players are coming. In pharma, for example, you see big companies merging and acquiring but the small boutiques are quite successful in their R&D efforts."
To thrive in this context, it is necessary to be clear about the company's commercial advantage. This does not necessarily mean being the best at everything. "Everyone talks about being world class. It is not about necessarily having the best ideas, the best strategy. It is also about being very good at execution. There are lots of ideas; the issue is to know who can really execute them. Can you focus on the things that make you stand out in one way or another?"
Burkner has been at BCG since 1981. He was elected president and chief executive in 2003, becoming the firm's first chief executive from Europe. He is based in Frankfurt and New York. The firm has worldwide operations, but like many would-be global entities, has some way to go before it is integrated completely. Boston Consulting "is international", Burkner says, "but is it seamless? Definitely not."
Three globalisation lessons
■ Developing effective global operations is as much about creating effective cross-border teams as taking advantage of low wages.
■ An organisational implication is the need to decentralise; the era in which all the crucial decisions are made centrally is fast becoming obsolete.
■Companies are forced to continually assess where they are finding value and to focus on what business they are in.
© Fairfax Business Media
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