Will The West Survive Globality

PGPABM 2008-10

PAPER PRESENTATION ON

“Will The West Survive Globality?”

SUBMITTED BY Kiran Kumari

NATIONAL INSTITUTE OFAGRICULTURAL EXTENSION MANAGEMENT RAJENDRANAGAR, HYDERABAD-30

Introduction: Videsh Sanchar Nigam Limited (VSNL), Reliance Gateway Net, Gujarat Heavy Chemicals Limited (GHCL) and Goodbaby are not known commonly in the US, but they may be the beginning of many greater things to happen in the times to come. This is nothing but just an example of rapidly expanding reach of developing countries outside their own borders into the developed markets of the west. The more exhaustive and inclusive phenomenon of this, marked by rapid rise of companies of developing countries throughout in the world economy, is what we know as GLOBALITY. Globality is an advance state of a very popular phenomenon called “globalisation”. Globalisation is mainly a one way process of transfer of various resources as finance and technology from developed countries to the developing ones. And when this tendency takes a multidirectional form, it becomes what’s known as “globality”. It not only includes competition among different companies of both east and west for capturing more and more markets, but also for talent and financial support. The companies in the rapidly developing economies which are known as “challengers companies” are growing at an accelerated rate and are giving the big developed corporate of the west a difficult- to – fight challenge. These large firms of western counties and Japan are known as “incumbents companies”. These incumbents and challengers are going to face many different challenges & competition for everything be it resources, talents or customers. The three major factors characteristic of global challengers are: 1. Origin of their home economy which is very unique: As the per capita income of an average household in a developing country is less, thus the products should satisfy the customer needs and also be cost effective. Also, there is always the presence of competitors from other countries which keep the local players under intense pressure. That’s why, they always have a bent to produce cost effective custom built products giving them an edge in the international market. 2. An unparalleled access to resources and market: These companies have an unprecedented access to expert talents, technology and best of business practices from in the world and they utilise their reach according to their needs and competitive requirement. 3. Hunger and drive for achieving an everlasting recognition: The challenger companies want to leverage all the resources available to them as soon as possible by using their enormously educated talent pool and expertise and thus this desire to be the world’s best is causing them to grow at an exponential rate. Today, the world is replete with around 3,000 such challenger companies that are gaining prominence rapidly.

Thus, globality is basically marked by following characteristics change in the way commerce and businesses take place in the world. 1. Firstly, the competition has spread across the globe with companies across the world giving the biggies good run for their money. 2. Secondly, instead of a bunch of few companies controlling the global market, now the hub of activities is shifting and the rapidly developing economies are taking up the leadership position. 3. And finally, there is an upsurge of new business tactics and governance which includes changing the strategy of operation, quickly expanding to new markets and reallocating assets to strengthen their commercial position within such emerging markets. Rise of Globality: How the global scenario is changing In the era of globalisation, the world economy was largely dominated by companies of the West and Japan and the developing countries like India, China, Brazil, Mexico, Turkey, Indonesia, Egypt, Russia, Malaysia, and Argentina were merely a means to minimize the manufacturing cost by acting as a source of cheap and abundant workforce and other resources. But today the world economy is experiencing an advance stage of globalisation with the ascension of developing economies to result into the rise of a new phenomenon called as globality. This has been marked by many changes, to the extent that it resulted into a seven fold increase in the value of foreign acquisitions (115 acquisitions worth $7.4 billion) made by Indian companies from 2000 to 2006.On the same lines, a Brazilian company is controlling the biggest nickel miner in Canada. Johnson Electric of China is the world’s largest manufacturer of micro motors producing 3 million motors per day. A Chinese baby stroller maker, Goodbaby, owns 80% of the Chinese market and 28% of market in the US. Embraer, a Brazilian jet maker is at the top position in small jet aircrafts in the world. Arvind Eye Care of India performs 2,50,000 cataract surgery in a year. Though 60% of these are free, still company manages to earn profit and attracts patients from west. How do they do it? A. Let’s start with the example of Johnson Electric of China. This is an excellent case of how scale can be used to annihilate the competition. In early 1980’s the company moved to the impoverished areas of China to get the advantage of abundant cheap labour and land. In addition to this about 80 odd supplier companies existing around the city further lowered the logistics costs and thus the production, cost enabling the company to produce high quality products at lower costs. B. Another success story is of Brazilian jet maker company, Embraer. Today the company boasts of $15 billion order backup. This is attributed to the fact that the company designs being responsive to the customer needs. ERJ145 family of jets were evolved by the company giving more width on top of the plane than the bottom to provide more comfortable seating space. C. Arvind Eye Care of India presents another example of ingenuity to act as a challenger company. It reduces the cost per surgery by running all its expensive surgical equipments 24 hours. In addition to this it employs only nurses to take pre and post operation care leaving the doctors exclusively to operate hence increasing their efficiency as well as the number of surgeries per day. D. Or, we can take the case of the Logan, a joint venture between Mahindra & Mahindra and Renault. In Romania, this car was built at cost 40% lower than its initial cost. Mahindra and Mahindra went a step ahead to manufacture the same at a cost cheaper by 15%.

So, we observe that the challenger companies are not only reacting to the competitions in the global market but also strengthening their capabilities and using their potential to the best extent to give rise to a sustainable model rather than just giving a fierce competition. And, in making this a sustainable one, many attributes are playing the key role. Some of these are the level of education in these countries, the innovative skills which they are continuously developing and using to get optimum out of available resources and many more. In the developing countries like India and China, education is given the top most priority which can be easily gazed from the fact that about 1.5 million science and engineering graduates pass out from India and China together by 2010, which will be 12 times that of United States of America. They are also using this in various industries for creating rapid fire innovation. For example, Goodbaby, a baby stroller maker company of China designs a new product in every 12 hours. Thus, the big question now arises that whether the west would be able to survive globality? The answer to this question lies in the way the west is going to react to the threats which the rise of globality is posing to the incumbent companies in these developed countries. There are several issues that these companies need to look into and consider seriously to sail through the turbulent waves that globality is creating. Some of the important issues among these are discussed as follows: 1. Controlling and maintaining the cost gap: Low cost products with fairly good quality remain the single most important factor for the tremendous success and strengthening of the challenger companies and if the incumbents want to in this they need to develop innovative product branding and complex services with low cost.

2. Understanding the customers and increasing market penetration: Incumbents generally enter the rapidly developing economies to tap the huge market potential but often do so without much understanding of the local customers. They are not able to recognize the impact of culture and often take it for granted. It is only when these incumbents get exposed to it they become aware of it. One instance where right understanding of the customers and customising the products along with reaching deep into the market gave rise to success of the company can be explained by taking the example of a Brazilian cosmetic company Natura Cosmetica. It was successful in capturing the customers by promoting the Brazilian ethos and culture emphasising on physical well being and gifts of nature. Along with this they also adopted the direct selling as was done by Avon. They used more than 60,000 part time commission paid consultants to reach deep into the market with remarkable speed as well as unique ideas. The incumbents should also take lesson from such example to survive and grow. 3. Developing innovation using ingenuity: The challengers are continuously using many innovation techniques to come out with business solution which are posing threat to incumbents by attracting major customer base. One of the best examples of innovation can be the Chinese appliance maker, Haier. The Company was getting numerous calls for clogged water pipes used in their washing machines. They discovered that people used the machine to wash sweet potatoes, so they added the vegetable wash cycle to the machine to make it customised according to the end users.

4. Thinking differently and spreading fast: The challengers are not only growing, they are doing it at a very fast pace and this is posing a great threat to the incumbents. This speed can be inferred from the various mergers and acquisitions made by challenger companies in the West and Japan. For example, Tata motors acquired Jaguar and Land Rover from Ford motors for $2.3 billion in March, 2008. Another major acquisition took place in February, 2006 when the Indian firm, GHCL acquired Dan River; a Danville based Textile Company for $93 million.

5. Abundance of skilled human resource: In the rapidly growing economy, skilled workers are in abundance with an enriched talent pools and thus are also available at lesser wages than the West. In the US, wages are $25 per hour and are growing at 2.5% a year. Similarly in Germany, wages are about $50 an hour, but contrary to this in developing economies wage rates is about $1 an hour with 8% rise every year. Thus this situation is throwing the incumbents into a disadvantage which they need to consider and find solution as soon as possible. 6. Increasing efficiency in the value chain: In this era of globality, the challenger companies are continuously scrutinising the various elements of its value chain putting them at right places and at right time to harvest maximum benefit out of it which can be referred to as pinpointing. This is resulting into a business process which the West needs to study and consider seriously before this hurts them. 7. Rising concept of multidimensional strategy making: Now, in the present situation, the global challengers, instead of going with a single strategy, are embracing the concept of multiple strategies for capturing market in different locations, economies and competitive situations by customising different product and services suiting to different cultures and customers. This multidimensional approach is also a big threat for the companies in West. Measures to be taken by West to face these challenges: 1. Establishing an efficient value chain to earn customer intimacy and increase profit margin: The West needs to develop a globally advantageous value chain and should help them in gaining a strong bonding with their customers. This value chain should allow them to reconstruct the various parts if they are susceptible to any risk, mobility or customer intimacy. As most of the US and European ports are highly congested, so there is also the need to reconfigure the products according to the nearest market available to strengthen customer relationship as well as to avoid risks of delays.

2. Need of multiple business model: In the world of dynamism sticking to a single standard process is not at all advisable, because any company need to be more customer-driven than process-driven and this requires a multidimensional approach to blend the best of both east as well as west. 3. Going for continuous innovation: To fight against rising competition and low-cost factors, the incumbents need to go for continuous research and development, to come up with new products so as to create a point of differentiation. Taking the example of world’s largest mobile phone maker, Nokia, the company faced severe competition from the local companies in China that produced mobiles at cheaper rates. Nokia decided to customise to the needs of Chinese people and improve upon its distribution system. Today Nokia enjoys 30% market share in China. 4. Finding out right location and sector of growth: If the incumbents wish to survive in this era of globality, they need to tap new potential market for their products. Together India and China account for 3.5 billion populations which is an attractive proposition to spread into these regions. This is what Bharti Airtel did when it ventured into Sri Lanka which is a very promising market for telecom industry. According to TeleGeography’s GlobalComms database, the growth rate from 2005 to 2006 in mobile subscribers was about 53.3%.

Conclusion: Considering all the issues discussed above, it can be concluded that surviving globality is possible for West if and only if they device and execute proper strategies to match the pace at which the challenger companies are growing. For this, they need to understand the lacunae in their business processes and act fast to rectify them. They need to restructure their value chain and create new distribution channels to make the system more efficient so as to reach up to the customers. The approach should be holistic with special emphasis on proactive market orientation. Continuous innovation is one of the most critical challenges which the incumbents need to consider seriously if they wish to fortify their position and rise against the odds placed to them by globility. Challengers are continuously spreading their arms into new potential customer base and also in the western countries, so if the West want to combat this expansion there is an urgent need to discover the unmet and underserved customer segments. The core operating process needs to be redesigned to improve efficiency and effectiveness. But, if these imperative actions are not given due considerations, then it would become very difficult for the West to cover up for the lost grounds and survive “globality”.

References: 1. Article: BCG’s Hal Sirkin on “Globality” and the new two way street of global business, Published: September 22, 2008 in Knowledge@Wharton, http://knowledge.wharton.upenn.edu/article.cfm?articleid=2058. 2. Article: Globality as a revolutionary transformation, Chapter 11 of “Politics and Globalization”, Author: Shaw, Martin http://www.sussex.ac.uk/Users/hafa3/politicsch.htm 3. Article: Globality: Challenger companies are radically redefining the competitive landscape, Author: Harold L Sirkin, James W. Hemerling , Arindam K. Bhattacharya, Year 2008,Volume 36, Publisher: Emerald Group Publishing Ltd., http://www.emeraldinsight.com/Insight/viewContentItem.do?contentType=Article&hdAction=ln khtml&contentId=1747640&dType=SUB&history=false 4. Sir Hans Singer,Neelmbar Hatti, Rameshwar Tandon, “Globalization, Technology and Trade in the 21st Century”, New World Order, Vol.19, Part 1, B.R. Publishing Corp. 5. Peter F. Drucker, “Managing in a time of great change”; Trueman Talley Books-Dutton, NY, Published by Penguin Group. 6. Article: Indian Companies Are on an Acquisition Spree: Their Target? U.S. Firms; Published: December 13, 2006 in Knowledge@Wharton, http://knowledge.wharton.upenn.edu/article.cfm 7. Philip Kotler, Kevin L. Keller, Abraham Koshi, Mithileshwar Jha, “Marketing Management”, 13th Edition; Publisher: Pearson Prentice Hall. 8. http://resources.bnet.com/topic/globality.html 9. Article: “Whether You Agree with Globality or Disagree, Don't Ignore It” Published: August 20,2008 in Knowledge@Wharton, http://knowledge.wharton.upenn.edu/article.cfm