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WCM/U1 Topic 3 Operating Environment; Globalization and International Business

Operating Environment

In order to compete in the information age, contemporary organizations are being structured on the basis of a new set of operating assumptions, as given below (Kaplan and Norton 1996).

Business Process Orientation: Industrial age organizations gained competitive advantage through specialization in functional skills in areas like manufacturing, purchasing, distribution, marketing, etc. This specialization provided several benefits but over time, it led to enormous inefficiencies, hand-offs between departments and slow response processes. Information age organizations against this operate with integrated business processes that cut across traditional business functions (Hammer and Champy 1993). They combine the specialization benefits from functional expertise with the speed, efficiency and quality of integrated business processes.

Links to Customers and Suppliers: Industrial age organizations worked with customers and suppliers through an arm’s-length transaction. Information technology enables today’s organizations to integrate supply, production and delivery processes so that operations are triggered by customer orders and not by production plans alone. An integrated system, from customer orders upstream to raw material suppliers, enables all business units of the organization along the value chain to realize enormous improvements in cost, quality and response time.

Customer Segmentation: Industrial age organizations prospered by offering low-cost but standardized products and services. However, information age customers want more individualized solutions to their wants and needs. Therefore, information age organizations must learn to offer customized products and services to their diverse customer segments, without paying the usual cost penalty for high-variety low-volume operations.

Global Scale: Information age organizations are able to compete against the best in the world as domestic borders are no longer a barrier to competition. They must combine the efficiencies and competitive honing of global operations with marketing sensitivity to local customers.

Managing Innovation: In the information age, product life cycles continue to shrink.

Competitive advantage in one generation of a product’s life is no guarantee of product leadership in the next technological platform (Bower and Christensen 1995). Consequently, companies in industries with rapid technological innovation (such as IT industry) must be capable of anticipating customers’ future needs, designing radically new products and services, and rapidly deploying new product technologies into efficient operating processes.

Knowledge Workers: Industrial age organizations created sharp distinctions between two groups of their workers. First, the white-collar managers and engineers, who used their analytical skills to design products and processes, select and manage customers, and supervise day-to-day operations. The second group, the blue-collar workers, consisted of people who actually produced the products and delivered the services. This direct workforce was a principal factor of production for industrial age organizations, but it used only their physical and not mental capabilities. In the information age organizations, the percentage of blue-collar workers has reduced considerably with a corresponding increase in the number of white-collar workers due to high competitive demands. Even the contemporary blue-collar workers are involved more in giving suggestions on how to improve quality, reduce costs and decrease cycle times. Thus all employees are required to contribute value by what they know and by the information they can provide. They are thus becoming knowledge-workers. Consequently, investing in, managing and exploiting the knowledge of every employee has become critical to the success of information age organizations.

GLOBALIZATION AND INTERNATIONAL BUSINESS

Since World War II, a number of factors have changed the manner of competition in the global business community. The particular catalyst for globalization may vary among different industries, but among the various causative factors are increased similarities in available infrastructure, distribution channels and marketing approaches among countries, as well as a global capital market that allows large flows of funds between countries (Porter 1986).

Additional causes include falling political and tariff barriers, a growing number of regional economic pacts that facilitate trade relations and the increasing impact of the technological revolution in restructuring and integrating industries. Manufacturing issues associated with flexibility, labour cost differentials and other factors also play an important role in these market trends. Widespread globalization is also evident in a number of industries, such as software, telecommunications and services. Consequently, economic activity today is becoming not merely internationalized but, more significantly, it is becoming increasingly globalize.

‘Internationalization’ refers simply to the increasing geographical spread of economic activities across national boundaries, which as such is not a new phenomenon. Globalization of economic activity is qualitatively different. It is a more advanced and complex form of internationalization that implies a degree of functional integration between internationally dispersed economic activities. Though globa1isation is a more recent phenomenon, it has already emerged as the norm in a growing range of economic activity. Almost every sector of business is influenced by global forces due to globa1isation (Porter 1986). Globalization is characterized by:

  • Tightly linked global financial market;
  • Global sourcing of inputs, marketing and distribution of production, and manufacturing of products and fina1 products;
  • Increased pressure for improved product quality and reduced product price; and
  • Evolution of business toward more comprehensive and continuous global coordination and integration.
  • To compete successfully in this dynamically changing environment, firms need to be able to address effectively several key strategic issues:

Cost-Quality Improvement through Coordinated Manufacturing: Global competitive pressures push strongly to reducing product delivered cost and at the same time to improve significantly the quality of the product and all aspects of customer service. A common strategy used by firms .for achieving this goal is to significantly tighten all aspects of the manufacturing process, which includes coordination strategy, such as ‘just-in time’ (HI) and overall quality improvement programmes (Imai 1986; Suzaki 1987).

Cost-Quality Improvement through Concurrent Engineering: Another key element is better design of the product for manufacturability. To do this, integrated design teams are formed, pulling together product design, engineering and manufacturing. The objective is to design a product for manufacturability as well as for other objectives. In some cases, packing and distribution, marketing and R&D functions are also brought into the concurrent engineering process (Dean and Sussman 1989).

The Order Cycle: In many industry sectors, such as automobiles, the product is built to customer order and customer specific. The ‘order cycle’ begins when the customer places an order and ends with the delivery of the completed product. In these sectors, therefore, a very key competitive issue is to significantly shorten the time the cycle takes, to be able to deliver the product to the customer as soon as possible after the order is placed (Stalk and Hout 1990).

After-Sales Customer Support: In many cases, customer support after the sale is a critical issue. Customers are demanding a high level of service for maintenance, including spare parts availability and technical skills in service staff. Add-on products and services, such as training, documentation and product upgrades, are also required. A high level of customer support capability is required, but it can also be profitable.

The Design Cycle: In many industries, product life is becoming shorter and shorter. Intense competition results in even shorter product lives. The time it takes to conceive of a new product, design it, put it into manufacturing, and deliver it to the market with a full support network in place-the design cycle-is becoming shorter and shorter. A shorter design cycle also means a newer technology put on the market. Thus, a company that takes six years to design a new car model today must be using 1993 technology, while a company with a three-year design cycle may be competing with 1996 technology.

Globally Coordinated Flexible Manufacturing: Global sourcing of component and subassemblies, global distribution into multiple markets and an efficient use of a network of global manufacturing and assembly parts is leading to globally coordinated manufacturing. In this new style of ‘flexible manufacturing’, the objective is to coordinate production planning and scheduling among multiple plants in many countries and across product lines, to respond to changing market and production conditions.

Globally Coordinated R&D: Global coordination of research and development” is driven by the need for product development for global markets and by the recognition that unique research competency exists in many different countries and cultures. When a company strives to tap these competencies, it also wants to take a cost effective approach so that undesired duplication and overlap is minimized. Managing R&D in a global situation is especially critical. For example, in the pharmaceutical industry, clinical trials and regulatory approval applications must be undertaken in many countries relatively simultaneously. Consequent to the above characteristics of globalization-global markets and competition the uncertainty and complexity of the environments in which firms must conduct business is increasing with time. Uncertainty and complexity, in turn, bring about the need for an organizational capacity to handle greater and faster communication and information processing. Succeeding in this information-intensive world will, therefore, require a new organizational form and information technology capabilities that operate on a global scale.

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