Challenges of Globalization

Human Rights Dialogue 1. 11 (Summer 1998) “Toward a “Social Foreign Policy” with Asia” John W. Sewell June 5, 1998 Globalization poses four major challenges that will have to be addressed by governments, civil society, and other policy actors. One is to ensure that the benefits of globalization extend to all countries. That will certainly not happen automatically. The second is to deal with the fear that globalization leads to instability, which is particularly marked in the developing world.

The third challenge is to address the very real fear in the industrial world that increased global competition will lead inexorably to a race to the bottom in wages, labor rights, employment practices, and the environment. And finally, globalization and all of the complicated problems related to it must not be used as excuses to avoid searching for new ways to cooperate in the overall interest of countries and people. Several implications for civil society, for governments and for multinational institutions stem from the challenges of globalization.

Civil society organizations concerned with development have traditionally focused on aid and resource transfers; they now are going to have to broaden their agenda to deal with the much more complex issues of trade and investment, international financial flows, environment, and migration, among others. Civil society organizations in the old industrial countries also will have to deal with the backlash against global ization, which is producing a growing unwillingness to support multilateral cooperation.

Governments are going to have to decide what they mean by “civil society” and to identify new ways of dealing with its organizations. At the Overseas Development Council, we define civil society broadly to encompass not only development and advocacy groups, but also corporations, financial institutions, think tanks, foundations, and a range of other groups that are not part of government. But governments and other actors need to decide whether civil society is simply an effective—and even cheap—way of delivering social programs, or whether it is good in and of itself, an essential component of a democratic society.

In other words, they are going to have to be much more precise about the purposes of working with civil society groups and about how they fund them. Then, there is a whole set of critical questions for the multilateral institutions, particularly concerning participation and transparency. These issues are extremely difficult because these remain governmental institutions, and governments often do not welcome the participation of civil society in decisions.

Finally, there is a need for high-level political discussions among leaders from the old industrial countries, the emerging economies, and the countries that risk marginalization by globalization. We are urging the Group of Eight this year in London to call for a new summit on globalization in order to begin a discussion of maximizing its benefits and minimizing its costs. then that the subject receives so much attention. As Jack Welch, former chairman and CEO of General Electric put t, “Globalization has changed us into a company that searches the world, not just to sell or to source, but to fi nd intellectual capital—the world’s best talents and greatest ideas. ” This report, conducted by the Economist Intelligence Unit on behalf of EquaTerra and World 50, examines corporate attitudes to the risks and opportunities presented by global competition and the challenges that come with expanding one’s global footprint. The main fi ndings of the survey are outlined below. Executives see globalization as an inevitable but largely positive force, the pace of which is accelerating. Respondents are optimistic about the prospect of increased sales and are eager to capitalize on new branding opportunities. • They also feel that organizations must adapt traditional ways of doing business to the new global environment by streamlining processes, expanding markets, and hiring and retaining qualifi ed local staff. • Executives in the developed world must respond to global competitors that can bring products to market quickly and heaply. As they do, companies must remember that local players do not always play by the same rules as developed countries, and must understand how to respond in those situations. • Respondents believe that the opportunities created by globalization outweigh the risks and view the trend as having a long-term positive impact on their business. As they gear up, executives will focus internally on making their business processes more effi cient and externally on investing in new Mini Case Study: World Economic Forum

As companies expand into foreign markets, they should consider the cultural fi t between those markets and their organizations, says Simon Mulcahy, head of the World Economic Forum’s (WEF) Information Technology industry group, based in Geneva. “On the basis of McKinsey’s work (a strategic consultancy and WEF partner), when comparing high and low performance companies, culture is a key differentiator—more important than such factors as strategy and idea generation. To examine the infl uence of local culture on innovation, Mr Mulcahy brought together a diverse group of executives focused on technological innovation. “The overall intent,” he says, “is to identify what factors most infl uence innovation and discover where these factors are concentrated around the world. ” Mr Mulcahy worked with many leading organizations to create an interactive online tool they call the “Innovation Heat-map. The tool, he explains, “gathers innovation data from all sources, visualizes it through a Heat-map, and exposes it to a community of leading innovation minds to gain insights. It is designed to be as open-source as possible, aiding researchers, students and decision makers at all levels. ” A sample of the insights gleaned so far show that at a local level, the presence of top management schools and access to risk capital play surprisingly little role in the innovation output for most segments of the high-technology industry.

With respect to Asia, the Heatmap also revealed that China and South Korea have advanced their research capacity more quickly than previously thought, and are now catching up with the technical sophistication of longer-established innovation hubs. The hope is that such intelligence will one day help companies understand the leading indicators to innovation and which local markets are better suited to supporting specifi c business needs. Access to new sources of innovation is also causing some fi rms to re-think their trategies. Many multinationals now choose to play a “fast follower” role rather than being a leading innovator. “In the past,” Mr Mulcahy says, “large companies set the game themselves. But advances in technology, such as open source and web 2. 0, and the emergence of innovation hubs in India and other developing markets are changing that pattern. ” Today, many multinationals get some of their most interesting business ideas from outside sources.

Mr Mulcahy says that with respect to emerging markets, the big players, are tracking new developments closely—“so closely that many are moving important parts of their operations to these locations. ” Through joint ventures, acquisition or the establishment of their own in-country R&D units, some of these large companies believe that it is more effective to piggy-back off the innovation around them rather than grow such entrepreneurship organically. As executives tackle these issues, they remain aware that globalization is creating other new challenges.

Chief amongst them is the emergence of new, lower-cost competitors (see Figure 6). Nearly half (48 percent) of all participants highlighted this as one of the main challenges posed by globalization. Others cited the diffi culty of navigating markets where weaker regulatory, governance and legal regimes prevail. Thirty-seven percent of respondents said that they felt challenged by the differing rules that exist in some local markets, which allow some competitors to benefi t unfairly from government subsidies, trade dumping, currency manipulation or intellectual property violations.

In fact, more than half of respondents (56 percent) said the potential rise in trade protectionism is the most serious threat to the spread of globalization over the next three years, even more serious than a global economic downturn or geopolitical risks While the degree to which protectionism will increase is uncertain, companies need to make contingency plans in case it does. Such plans could involve developing fl exible sourcing arrangements that draw on multiple countries and regions, as well as owning captive operations in new markets.

It also helps to establish relationships with local and state authorities, a strategy used by Caterpillar Corporation, a global manufacturer of construction equipment. “Our approach in countries like China is to go in through state-owned enterprises and form alliances and relationships,” says CIO, John Heller. “We work very closely with the governments in these respective countries to ensure that we’re not going to market in an opposing direction to the way these governments want their economies to grow. ”

After trade protectionism, CEOs and other C-suite executives say that a global economic downturn is the second-greatest risk, cited by nearly half of C-suite respondents (49 percent). Mini Case Study: BT Global Services With growth comes added scale and complexity, two factors that Chris Halbard, CFO of BT Global Services (BTGS), the London-based subsidiary of British Telecom, deals with every day. BTGS operates digital and fi ber-optic networks around the world. Revenue has doubled in recent years through a combination of organic growth and acquisitions, and is expected to reach nearly ? bn (US$16. 1bn) this year. With so many new businesses and processes to integrate, Mr Halbard is constantly focused on ensuring that the business remains scalable. “We are at risk of our infrastructure becoming so layered, that it takes too long to release new products globally,” he says. “Too much money goes into getting things done instead of investing in how to service our customers in new and better ways. ” To offset this risk, Mr Halbard and his team identify core processes across the company’s global operations and work to standardize as many as possible.

To reduce the number of online sites for such things as HR, training and collaboration, BTGS created one of the world’s largest consolidated intranets, a centralized system for document and content management. To bring order to a tangle of IT network technologies, BTGS streamlined overlapping systems to create an automated network. In an organizational culture built on personal networks, these are not easy undertakings. “Our biggest asset is the quality and responsiveness of our people.

They know who to go to [in order] to get things done. Yet it can also be one of our biggest weaknesses as we look to change processes and create scalable delivery on a global basis,” he says. Many multinationals face similar challenges. The solution often requires a bit of honest self-refl ection to assess one’s true competencies. Sometimes it is easier to experiment with business model changes in emerging markets where the organizational culture may be more entrepreneurial and open to change than back at headquarters. You can often be more radical deciding what’s core or non-core in an emerging market than at home because you haven’t got entrenched culture and working practices,” says Mr Halbard. The right conditions help as well. At BTGS, Mr Halbard relies on “low-cost economies, globalization, and labor arbitrage to drive hubs that foster standardization more naturally. ” To sharpen its customer focus, BTGS outsources many back-offi ce processes. “We To sharpen its customer focus, BTGS outsources many back-offi ce processes. We rationalize the back offi ce to pay for investments in the front offi ce because we know that’s what will give us sustainable growth,” Mr Halbard says. This transformation is modular, and Mr Halbard hopes that it will spread to the way his systems work—and how BTGS employees think. “In the face of an acquisition or signifi cant organic growth, we’ll be able to integrate far better than we do today,” he says. In this way, standardization may be as much about changing the way people work as it is about changing the processes that they use.

Mini Case Study: Caterpillar Corporation John Heller, CIO of Caterpillar Inc. , the US$45bn global heavy equipment manufacturer based in Peoria, Illinois, believes that IT can change the way his company competes. He sees it not as a support tool but rather as a core strategic function. “We have a strong realization within the company that IT will change the principles and rules that govern how we go to market,” he says. Caterpillar has been a global player for decades and today sells into nearly 200 countries.

This legacy has given management wide exposure to the benefi ts and challenges of globalization. Acknowledging Caterpillar’s explosive growth (company revenue has doubled since 2002), Mr Heller is quick to point out that the company had to stretch all aspects of its supply chain to make such growth possible, a shortcoming he is now addressing. “We are an introspective company and we’re never satisfi ed with where we are,” he says. Caterpillar enters few markets directly, instead doing business through its vast dealerdistributor network.

The arrangement spares Caterpillar the cost of direct investment and provides advantages in the form of established local infrastructure, relationships and knowledge. This provides fl exibility and scale: Caterpillar can enter and leave markets relatively quickly, and use its dealer network to increase or spread capacity as demand changes. Keeping roughly 200 separate entities aligned can be a challenge, however. To overcome that obstacle, Caterpillar deployed its Vision 2020 corporate strategy to all of its dealers and strategic suppliers.

That strategy lays out the fi rm’s near-, mid-, and long-term agenda in a series of three fi ve-year plans. Strategy is one thing, execution another; this is where IT comes in. Mr Heller’s Process Excellence Council brings together production, HR, global purchasing and fi nance, and after-market support. “Our mission is to fi nd the right balance between what processes to standardize versus what decisions to leave with the local business unit,” he says. “We believe the customer should dictate whatever choices we make. If they require differentiation, we’ll recognize it. If not, our default is common. To deviate from global system standards, local units must submit a business case explaining why they can’t be “common” rather than why they need to be unique. “When you have as much vertical integration as we do, having disparate processes creates challenges,” says Mr Heller. “Globalization makes us better. We don’t just survive it; we embrace it. ” Conclusion Information technology, trade and economic liberalization have combined to create greater access to more markets than ever before. This creates new opportunities, but also a much broader surface area for executives to manage.

While eager to leverage an expanding foreign presence, survey respondents acknowledge that they will have to redesign many internal processes in order to keep up with the rate of change. With such a remit, the job of managing a global company may be the biggest challenge for developed and developing companies alike. Leaders of tomorrow must stay on top of best practices—whether marrying process to strategy or helping a people-based culture to automate its knowledge base. In the midst of so much change, one thing is clear: in a globalizing economy, talent may be the most important competitive differentiator of all.


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