Globalization and Outsourcing

 

The inspiration to this article is the little I have read about Thomas Friedman’s book, The World is Flat.

 

Globalization is something that has been going on for years. I love the analogy where Friedman says that in the 1500s Columbus went west to India in search of spices. He does not reach India but realizes that the world is round. 500 yrs later, the author goes east to India, he reaches the country but realizes that the world is flat !!

 

The British conquered much of the world and they reached India in the 18th century. While in India, they brought raw Indian cotton back to the UK made textile with it using machines (as opposed to the manual process being used in India) and sold it back to India. With time, the Indians got the technical know how and mastered textile manufacturing and now, years later, a majority of the British cotton comes from India!

 

According to the IMF, globalization is the increased integration of economies around the world as a result of trade and financial flows. It is a dream situation for economists, where the markets are open and there are few barriers. The result is increased efficiency that is shared by all.

 

The IMF link mentions that inequalities between rich and poor countries has increased further but I believe that globalization has on an average helped developing countries do better than what they would have done. There are other factors that are playing a role here, take AIDS for instance in the case of most African countries.

 

Taking this to a context of a company, globalization does help a company. Globalization promotes International Strategies. Following are some of the advantages companies can leverage through International Strategies:

  • Companies can get access to newer markets for its current products and services.
  • Firms can have access to lower cost factors of production
  • Developing new competencies and innovating existing ones
  • Diversify risks

 

International strategy can be further divided into two broad categories.

 

Multinational Strategy – where a product is customized to each market. Such a strategy leads to decentralized control and is effective when there is a large difference in the markets of each country. Coke for instance has different formula for its cola drink and the substitute drinks vary from country to country.

 

Global Strategy – involves a common product sold in each country. A centralized control is the characteristic of this strategy and it is effective when there is little or no difference in the requirements in each market. In the PC market the only thing that may vary from country to country is the operating system, the hardware is essentially the same.

 

One of the hottest trends in International Strategy and globalization is offshoring. It is not appropriate to call it latest since it has been going on for a while, but it has certainly been the talk of the management world in the recent past. In the financial services industry it is even coined an industry best practice. One of the reasons for the emergence of offshoring and the general increase in globalization is the breaking of the Berlin wall. With that, the erstwhile USSR, China and India opened their trade and commerce gates. As a result, there were additional 3 billion people in the work force of the open world and that too a workforce with great mathematical and analytical skills.

 

There are several advantages a company can get out of outsourcing, some of them being

  • Reduce costs
  • Focus on core activities
  • Improved capital efficiency
  • Speed to market
  • Flexibility of ramping resources up and down

 

 

Here is trend from a survey conducted last year.

 

 

But is outsourcing really giving companies the results they were looking for? A recently published survey  from Deloitte says no. But majority of the CEOs do not think so, at least for now.

 

Companies have got really innovative even at outsourcing; here is a very interesting article from Forbes.

 

Outsourcing is only one of the many other strategies that will emerge as a result of Globalization.

 

To conclude I would again like to again quote from the Friedman’s book: “When I was growing up, my parents used to say to me, ''Tom, finish your dinner -- people in China are starving.'' But after sailing to the edges of the flat world for a year, I am now telling my own daughters, ''Girls, finish your homework -- people in China and India are starving for your jobs.''”

 

 

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