Impact of Globalization in Creating Sustainable Competitive Advantage

In this business environment, what does it take to win?

Globalization. For many executives, the word conjures up many emotions, not the least of which is fear and anxiety. Why? Globalization has created a market dynamic that fosters new competition, demands higher levels of efficiency and requires true expertise in supply chain optimization.

For the first time, new competitors from regions around the world with flexible supply chains are effectively competing against established market leaders that have formidable brands, customer loyalty and deep resources. If that is not enough, many of these aggressive new competitors are government-backed companies with access to lower-cost capital — a real business advantage.

As global commerce equalizes the business landscape, speed becomes even more critical and supply chains become the new competitive weapon.

In Thomas Friedman's landmark book The World is Flat he explains how companies in the developing regions of India and China are becoming part of large global supply chains that extend across oceans. David Barnes, chief information officer of UPS, commenting on Friedman's book in a November 2006 issue of the Financial Times, said that by 2010, companies will no longer compete against companies. Rather, in this new environment, supply chains will compete against supply chains. He emphasized that in the past the competitive advantage of a company's supply chain was undervalued. Companies competed on products and services, not processes. But the intensity of global competition and the increased commoditization is forcing companies to compete on the strength of their supply chains. In short, having the greatest product at the lowest price is only valuable if it gets to the intended customer before the competition.

The impact of globalization has yet to be fully realized, but one thing is clear: the business rules for engagement will never be the same. Companies can no longer go it alone and expect success. It requires collaboration. Teaming with the right partners is essential to increase speed, promote innovation and gain market share.

What's Changed

Catapulting from a Regional Focus to the Global Arena
In 1984, a small Chinese company named Legend built and marketed PCs for the Chinese market. By 1994, it had sold 1 million PCs to Chinese consumers and, with a 25 percent market share, became the dominant PC provider in China. In 2003, the company was renamed Lenovo, and in 2005 it catapulted onto the global stage when it purchased the legendary IBM PC business. Not long ago, the notion that IBM would exit the PC industry it helped create would have been absurd; even more incredible was that a relatively unknown Chinese company would someday acquire IBM's PC business and become an instant global competitor.

Time will tell if Lenovo can transfer its growth strategy success, which was perfected in China, to gain leadership in other global emerging markets. But the competitive disruption it created in the PC industry cannot be denied. Ten years ago this would never have happened, but it is happening today.

Outsourcing across Industries for Competitive Advantage
You don't have to look much farther than the German automotive industry to see how globalization is causing executives to rethink business models to improve competitiveness.

Renowned for precision engineering and manufacturing, German automakers are experimenting with outsourced manufacturing. According to a September 2006 Harvard Business Review article, luxury automakers are identifying partners that can help them become more competitive. Porsche and BMW are testing new manufacturing models to improve cost and flexibility by setting up manufacturing facilities in lower-cost regions, placing manufacturing sites close to end markets and outsourcing the manufacturing of select models to third parties. Finland's Valmet Automotive assembles the Porsche Boxter and Austria's Mägnä Steyr assembles BMW's X3.

PC makers and German automakers are not alone:

  • Boeing partnered with HCL Technologies to co-develop software to help design navigation systems, landing gear and cockpit controls.
  • GlaxoSmithKline and Eli Lilly are partnering with Asian biotech research companies to reduce the average half-billion dollar cost of introducing a new drug.
  • Even Procter & Gamble — the much admired product innovator — is looking to outside partners for new product ideas. By 2010, the company plans on having 50 percent of its new product ideas generated from outside firms.

Forming Collaborative Business Models to Win
With domestic enterprises having to accept fierce competition from foreign competitors, creating a sustainable advantage has never been harder. Companies are at risk of losing customers who have more choices and are looking — and often finding — alternative providers they think can do better. Clearly, better service will ensure repeat business and strong customer loyalty as seen by the billions of dollars that are won or lost because of a company's ability to respond quickly to customer needs.

But globalization has made it more difficult to anticipate demand. In fact, demand continues to be less predictable and much more perishable. The concept of "perishability" says that if a company does not have what the customer wants when they want it at the right price, customers will not wait. Companies that respond with the greatest flexibility to customer demand will be the market leaders of tomorrow.

Executives across different industries are asking many of the same questions:

  • How do I expand business in high-growth and emerging markets around the globe?
  • Should I build manufacturing centers close to end markets or partner with companies that have existing infrastructure?
  • How do I factor in fast-changing customer expectations by region, by country and create an effective supply chain to meet customer needs?
  • How do I optimize my supply chain to achieve the lowest total landed costs?
  • How do I quickly respond to changes in the competitive landscape to thwart the threat of losing market share in a given sector or part of the globe?
  • How do established international companies compete against fast, nimble, smaller competitors, not to mention aggressive multinationals?

Essentially, they are asking: In this business environment, what does it take to win?

The answer is as complex as it is simple. At the most fundamental level, it comes down to laser-like focus — determining what is core to your business and creating an effective network of strategic partnerships to manage what is non-core. It's an issue of determining how your company creates value for your customers. To create differentiation, companies are pursuing product innovation to enhance brands while building strong customer relationships by delivering improved service.

Companies need to rethink the structure of the modern corporation to determine what, specifically, has to be done in-house and what tasks should be outsourced to a global network of partners. Depending on the industry and products, this model might include U.S. chipmakers, Taiwanese engineers, Indian software developers and Chinese manufacturing sites.

Companies will profit from the power of their supply chain, leveraging extended strategic partners to bridge product and operational innovation to create and capture market opportunities. Jonathan Schwartz, CEO of Sun Microsystems, discussed this in an editorial on innovation in the September 16, 2006, issue of the Financial Times. Schwartz explained that collaboration — creating communities with partners, customers and business groups — is a core principle of innovation. When the entire chain is synchronized, there are dramatic improvements in the speed and efficiency of product development, delivery and service that creates true differentiation and helps OEMs build market share across products and regions.

Let's look at some examples.

High Performance Supply Chain In Practice: Collaborating at the Design Stage

In 2003 Redbox Automated Retail, a provider of DVD rentals through kiosks located in grocery stores, select McDonald's restaurants and other locations nationwide, had launched in just 12 locations. Furthermore, the kiosks in these locations had a limited capacity of 100 disks and initial tests proved that this DVD inventory of 100 was not large enough to satisfy growing interest in Redbox.

Redbox selected a partner to help re-design a new system that expanded capacity, which would in turn enhance its value proposition.

In an eight week period, the partner re-designed and built a new DVD prototype with a capacity of 500 DVDs. The two companies then worked together to quickly demonstrate and validate the manufacturability of the product. Once tests were complete, the partner ramped up production to meet a very aggressive rollout timeline with a DVD rental solution that offered a capacity increase of 400 percent.

The partnership allowed Redbox to focus on channel relationships, customer service and branding, while its partner focused on product design, manufacturing and the supply chain needs required to meet the aggressive initial marketing timeline and growth requirements.

The original production ramp was five units per week, which quickly grew to 60 units per week. Today, the partner is manufacturing more than 100 units per week. Redbox has been a tremendous success and expects to surpass Blockbuster Video in the number or rental outlets in 2007. The two companies continue to work together to develop next-generation designs with added functionality and increased capacity.

Speeding Manufacturing and Supply Chain Performance

Another issue is improving supply chain performance to reduce lead times to meet market requirements.

One example is Ericsson. Not long ago, the company was under pressure from customers to reduce lead time for its high-end network switches from six weeks to one week while meeting a significant increase in demand. These highly complex, custom-ordered, just-in-time deliveries had more than 5,000 different configurations. The products consisted of more than 2,000 different parts from 150 suppliers around the globe.

Together, a supply chain solutions provider and Ericsson re-engineered the technology company's supply chain and reduced the lead-time 75 percent and achieved ship-to-request performance of 99 percent — a dramatic improvement from previous levels. If Ericsson had not been able to meet this aggressive lead-time reduction, it would have lost sales to a competitor. Instead, Ericsson began to take market share based on the competitiveness of their supply chain.

A Lean Supply Chain

While effectively managing non-core business processes such as collaborative design, manufacturing and aftermarket services is essential, partners must also demonstrate a consistent track record of operational innovation to ensure that a company's supply chain will continue to outperform competitors for years to come.

One vital factor in improving competitiveness is a shift from forecast-based supply chains to demand-driven supply chains — no easy task. Sales forecasts, based on detailed research and analysis of customer buying patterns, are almost obsolete the moment they are created.

The most effective companies are moving from a push model to a pull model. And the results of this kind of operational innovation are tangible — faster time-to-market, improved quality and reduced inventory, waste and cost. A key element in how customers shift from a push to a pull model is the successful deployment of Lean Six Sigma manufacturing. The next frontier in Lean is moving outside the four walls of a manufacturing facility and collaborating with all members of the supply chain to create an end-to-end Lean supply chain.

Leveraging Every Advantage for Supply Chain Excellence

These examples illustrate both the challenge and the potential of globalization. Business is moving at a dizzying pace. Success requires focus on product innovation to strengthen the brand while outsourcing non-core operations. Optimizing the supply chain to reduce lead times and achieve the lowest total landed cost is critical, but truly competitive supply chains assimilate the entire product life — from product development to end-of-life — into an integrated solution that out-innovates, out-performs and out-serves the competition. Navigating the rapid changes of globalization is treacherous at best. Sustainable competitive advantage and business success depends on speed, innovation and a focus on core expertise to meet customer demand, capture new markets and beat the competition.

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