Globalisation of organisations is a phenomenon that has received much attention and been extensively discussed at cultural levels as well as at market and business levels. A company is considered global when more than half of its revenue comes from outside its home continent. (Gabrielsson, 2006)
In any globalisation process, distribution of goods and services between and within international industrial and consumer markets is of great importance. Globalisation removes the tangible and intangible borders. The intangible borders being the cultures and norms. Globalisation of markets and reorganization of distribution are mutually dependent processes that involve changes in market structures. Contemporary examples of this are the emergence of global supply chains, internationalisation of wholesale, retail and transportation firms and the development of sales via the Internet. In this discussion, the nature of the challenges in creating and maintaining interdependence between markets from different countries and the reorganisation of distribution is discussed. The discussion concludes with some observations on the challenges faced by globalisation.
2. Role of ICT
One of the key accelerators of globalisation is the improvement of information and communication technology. Here we can look at the call centre industry of Ireland as an example. The Irish call centre industry was a thriving business due to cheap cost of employment and the vast English speaking population of Ireland. After the improvement of ICT, Indian call centres are posing a massive threat and took a big chunk of Irish call centre market share with its highly educated call centre staff. On top of that, Germany and France are pressing for minimum EU corporate tax to compete with Irish call centres as Ireland had a lower tax threshold than most of the EU countries. (Jobs, 2006) Thus globalisation has turned the world into a small village with the help of ICT and has made different parts of the world to work together for one common goal of product and service excellence.
3. Challenges for the firms operating globally
In today’s business world, the firms that are operating globally are facing the task of getting the best possible outcome for its shareholder. The firms’ management are trying to utilise resources from different parts of the world to sustain the competitive advantage. There are quite a few challenges that are faced by the managers while trying to ensure the process of running all operations worldwide smoothly. Below are the few challenges that are prevalent in global operations management.
3.1 Product & service design
Although the attraction of expanding business to gain economies of scale is high, it is not always easy to expand globally. The products cannot just be boxed and shipped to be sold overseas. The products produced in a home country need to be modified and adjusted according to the export country need. For example, the cars produced in England are relatively smaller than their American counterparts. People in the USA like to drive bigger cars and the bigger cars are more affordable in the USA due to cheaper fuel prices. The cars in USA also have more features in the cars than that of UK cars. Automatic gear, air-conditioning and carpets are standard for American car market whereas consumers have to pay extra premium to get these features added to their cars in Europe. If European or Japanese car makers want to export cars to USA, they would have to adopt those US standards. These changes might result in reduced profit margin or even loss for the company.
According to Hofstede (1991) culture is “collective programming of the mind” that distinguishes the members of one group from another. Culture is learned and shared within social collectives. A distinction can be made between organisation and national culture. Both the cultures affect the business in some way. The national culture often force the business organisations to modify their business products/services and the procedures of running the business. It has a big impact of creating an organisation culture within an organisation which is operating in different countries. The organisation cultures sometimes vary from country to country. We can draw the same example of car manufacturers here. Since the US car market prefers bigger car, the European car manufacturers will be forced to produce bigger cars for US car markets if they wish to survive there. Here the culture of gas guzzling American cars is forcing the Europeans to adapt.
3.3 Legal issues
Legal requirements in a different country often dictate improvement and modification of the home country product. For example, it is a legal requirement in USA for the cars to be fitted with airbags and catalytic converter. But this is not often the case in the countries like china and India. So if the car manufacturers in China or India wish to export their products to American market, they would have to fit those extra features stated above. This would cause more complexity in production planning and control, thus making the process less efficient.
3.4 Supply chain Management
With the increase of global business, the global supply chain management has become a common phenomenon. The global supply chain management encounters some challenges which are not so common in a domestic supply chain management. Below are some of the challenges that are prevalent in global supply chain management.
The first thing a company needs to consider when it goes global is the cost issue. Although locally produced product may give a cost advantage for some aspect of supply chain, the company need to consider the tax implications, costs of space and other expenses related to doing business overseas. The company would need to find a balance between outsourcing and home production advantage. Sometimes it would work out cheaper to produce products in a different country due to cheap labour but then the quality of the product maybe compromised due to lack of skilled labours in a foreign country.
Time is another big issue that poses a challenge to global supply chain management. If overseas employees are chosen, they may not be equally skilled which might cause disruption in production and result in delay. Sometimes political situations, inefficiency in port may cause delay as well. Few other factors can play part in delay too, for example, red tape in some countries might mean that customs clearance take longer time. Also natural calamities can cause unexpected loss while shipping the products to different countries.
The global supply chain often negotiates the challenge of distribution across the globe. By being global the distribution process requires complex process of engaging production facilities in different parts of the world, a number of warehouses and distribution centres. If the supply chain isn’t maintained correctly it creates bullwhip effect which creates a huge gap between demand and supply eventually.
(d) Supplier selection
When the firms start operating globally, an important step is to organise the supplier selection and management processes. Some of the things firms do is to measure and rate the performance of the suppliers in terms of delivery time, prices, flexibility, improvement processes and quality.
According to Pilkington (2007), supplier development teams are another way that firms can implement lean supply ideas. Here, the central firm in the chain has a group of specialists it can send out to smaller firms in the chain to help them develop better systems and technologies. This sharing of expertise is very much part of the lean approach and benefits both sides of the relationship. However, it may be hard for some firms to develop this level of openness after having worked in the more confrontational price-dominated environment of the purchasing function.
The information is a vital component of global supply chain management. In a global company it is often hard to keep the free flow of information running. The information integration is imperative for the marrying up of systems and process through the supply chain and transfer valuable information about demands, forecasts, inventory and transportation.
(f) Location of the plants
Locations of plants are another consideration for global supply change management. It is sometimes quite difficult to supply products from just one plant in the home country. A foreign plant can save costs. Also sometimes it is easier to manage a plant which is situated where the sources of raw materials are. This saves a lot of transportation cost.
3.5 ERP & Information System
Companies with global presence also face problem when implementing enterprise resource planning (ERP) and information systems across the organisation. In a company with global presence, it is quite often found that, every country’s operations are managed differently to other. If that organisation decides to implement ERP across the organisation, it requires a serious change in the organisation culture as well as how it operates.
In a study on Nestlé by Tom Steinert-Threlkel (2006), the author examines the challenges faced by Nestlé while implementing an ERP across the organisation.
According to the case study, between 1994 and 1999, Nestle increased it’s spending on information systems from $575m to $750m. In April 2000, the CEO had enough with its SAP R/2 ERP software which was allowing thousands of different configured supply chains, multiple methods of forecasting and demand, and innumerable ways of invoicing customers and collecting payments. These inconsistencies were having a negative impact on Nestlé’s profits. So Nestle launched a $2.4bn initiative to compel its markets heads around the world to adopt a single set of business processes and systems for procurement, distribution and sales management.
The project was to be called GLOBE (Global Business Excellence) which was to harmonise processes, standardise data and standardise systems. All of the Nestlé’s business units worldwide were to use the same processes for making sales commitments, establishing factory production schedules, billing customers, compiling management reports and reporting financial results. The worldwide business units were no longer to be permitted to adhere to local customs for conducting business except in cases where the laws of a particular country required they do so. The project was launched on 4th July, 2000 and was to be implemented by December 2003.
After studying the experience of the competitors and receiving feedback from consultants at PricewaterhouseCoopers and deployment experts at SAP the project leaders found out that the parameters of the project had to be adjusted. GLOBE required a larger staff, more funding and a larger window of time than the executive board had allotted. In the end the budget was changed to $3.2bn and the target was changed to implement the new standardised system in ‘majority of company’s key markets’ by the end of 2005.
The project leader recruited 400 executives from Nestlé operations from around the world and got them to write down 1000 processes, divided into 45 sets of solutions that focused on disciplines such as planning or financial reporting. These solutions were finalised after careful scrutiny of the GLOBE managers.
The biggest challenge that came across the project was changing the culture of the organisation across the globe. The managers resisted the idea of giving up control over their business processes to participate in a centralised solution. They thought standardising the back office across the globe was impractical.
But by mid 2005 the company could see the benefits of implementing the financial reporting system and after a few more slight hiccups; the system was operational in 80% of Nestlé’s units by the end of 2006.
3.6 Quality planning and control
Total Quality Management (TQM) is an effort to improve all components of a business simultaneously. Most of the challenges faced by TQM implementation in a locally based company multiply when TQM is applied in a globally based company. One of the biggest challenges in TQM is to guide the change towards the right direction. The challenge is even bigger in an organisation with global presence. According to Huq (2005), TQM implementation requires changes in structure, system, and process as a necessary precondition to achieve improved business performance and changes in employee behaviour. As we have seen from the Nestlé case study, it is quite difficult to change the systems and processes of a company with a global presence. Moreover, it requires a lot of time to implement.
Political environment of a country can pose a challenge to a company’s globalisation initiative. If we consider IT products, some of the countries have strict control over IT infrastructure than the others. When Google and Yahoo! moved to China, they had to modify their search engine and other services according to the strict guideline of the Chinese government. In India, when Coca Cola was planning to build a water purifying plant for its drinks, there was a huge outcry as the plant was supposed to be built on a farmland and the local people opposed to the government’s decision to allocate farmland to a global soft drink giant. There were also allegations against Coca Cola that they were contaminating the water and causing damage to the environment in several parts of India. Coca cola eventually had to go to Indian high court to restore their right to operate on Indian soil.
Global business endeavour can pose uncertainty in the business infrastructure. If a company has multinational presence, one country’s economic or political condition can affect the whole company’s performance. For example, there was a recent slump in dollar valuation in the United States. If a British company has a plant in the US, when its profit is transferred from USA to UK it will be lower than expected due to the weak US dollar exchange rate.
The unexpected incidents of one country can affect the multinational and trans-national companies as well. For example, after 9/11, lot of multinational companies lost their share value in NYSE. It also forced many companies into bankruptcy.
More recently in 2007, Barclays bank of UK who had invested $1bn in US sub prime mortgage lender New Century were caught up after the sub prime mortgage crisis in the USA. The sub prime mortgage crises emerged in the USA as the interest rate rose and the price of the property decreased. (Times, 03/03/2007)
Some companies, who don’t have much international exposures, can also be affected by this kind of financial problems. For example, British lender Northern Rock faced a similar crisis when the US sub prime mortgage market collapsed. Northern Rock, who used to gain it’s fund via short term Commercial paper and used to lend for longer term, got caught up by the liquidity fear by it’s customers who had started withdrawing their savings from Northern Rock accounts. Northern Rock had to borrow $20bn to keep the bank’s liquidity.
Local companies who have global influence or heavy reliance on global political and economic climate are also vulnerable. For example, after the SARS break out in South-East Asia and Iraq war in 2003, Singapore Airlines which was the most profitable airline of Asia ran into loss of $312m. The SARS also affected tourism industry of many countries in South-East Asia including Thailand, Hong Kong and Singapore. (BBC, 30/07/2003)
Globalisation is the all pervasive phenomenon in today’s business world. Even a small company can gain the advantage of globalisation by operating its call centre from a different country and provide its customer with the required services at a cheaper cost. Although it is quite difficult to manage a company with a global presence because of the various challenges in the integration of operations management of the company’s global infrastructure and culture, the merits of globalisation in today’s business organisations can not be ignored.
(i) BBC (2003) Historic loss for Singapore Airlines [Internet] July 30, 2003.
http://news.bbc.co.uk/2/hi/business/3110251.stm [Accessed 19 November, 2007]
(ii) Gabrielsson, P. Gabrielsson, M & Darling, J. Globalizing internationals: product strategies of ICT manufacturers. 2006. International Marketing Review. Vol. 23. No 6. pp 650-671.
(iii) Hofstede, G. (1991), Cultures and Organizations: Software of the Mind, McGraw-Hill, New York
(iv) Huq, Z. Managing change: a barrier to TQM implementation in service industries. Managing Service Quality. Vol. 15 No. 5 2005 pp. 452-469
(v) Hosking, P. (2007) Barclays carrying $1bn of exposure to sub-prime lender. Times Online. [Internet] March 06, 2007.
Available at: http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article1475575.ece [Accessed 19 November, 2007]
(vi) Jobs, C & Butler, D. (2006) A case study in the globalization of jobs in Ireland. International journal of social economics. Vol 33. No 10. Pp 666-676.
(vii) Mattsson, L. (2003). Reorganization of distribution in globalization of markets: the dynamic context of supply chain management. Supply Chain Management: An International Journal. Vol. 8 No. 5 pp. 416-426
(viii) Slack, N., Chambers, S. & Johnston, R. 2001. Operations Management. 3rd ed. London: FT Prentice Hall.
(ix)Steineret-Threlkeld, T. (2006). Nestlé pieces together its global supply chain. Baseline Magazine.
Sunday, December 09, 2007