From outsourcing to globalization – 2011 and beyond
December 22, 2010
Outsourcing started in the early 90’s as a revolutionary phenomenon of sending unskilled work from developed countries to developing countries and is now transformed into globalization. Globalization fundamentally changed the structure of business, consumers, and the political landscape that revolves around us. Goldman Sachs predicts that the Chinese economy will overtake the American economy by 2020 and Indian economy will overtake the American economy by 2043(see graph below). Whether China and India can overtake the United States might be a different matter, but it is a fact that both countries are growing faster than the US.
Companies all around the world are taking notice on the fundamental shift in global balance and are adjusting their business models and strategies to take advantage of the emerging markets. Below are some of the changes that started a couple of years back that will accelerate in 2011 and beyond.
1. Localized Innovation
Late C.K. Prahalad predicated in his landmark book how companies can innovate for low-income people, companies in China and India are innovating products nd services that target the world’s poorest population. For example:
- India’s Hindustan Lever invented water purifier for India’s rural population
- Godrej’s refrigerator for $60 targeting people living in village. The low-cost refrigerator keeps the water and vegetables cool but does not produce ice which is not important for the rural population.
- Airtel created a business model to produce cheap wireless minutes for the growing Indian population and became the largest telecoms provider in India.
- China’s Haier invented washing machine for rural customers that is capable of washing both cloths and potatoes. Haier also invented rodent-proof refrigerator that keeps the food rodent free for their rural customers.
- China’s Lenovo created Chinese language card for its products and services.
- Joyoung Co. invented Soybean milk processor that was a big hit among the Chinese consumers.
All of the above examples shows that the Indian and Chinese companies have started to innovate new products and services targeting low-end customers.
In the early 90’s, American companies started outsourcing their back office work to India and their manufacturing work to China, considering the two countries as a source for cheap labor. As the economy of these two countries started growing, American companies saw the opportunity and started offering their products and services to its wealthier consumers. Initially the products and services were repackaged with reduced features, after seeing the success of Indian and Chinese companies in targeting consumers in middle and lower income levels. Not wanting to be left out, American companies started offering their products and services targeting middle and low-income consumers. Following are some examples:
- John Deere India started manufacturing tractors in India for Indian farmers which feature a complete redesign of their American products, services, and technology.
- Indian’s food habits are different from western countries, each religion and culture has its unique flavor and cooking style. So the food has to be customized for each regions of India. American food companies McDonald’s corporation, Domino’s Pizza, and KFC created research and development center to innovate food products and services for the Indian customer’s taste-buds.
- GE Healthcare invented a portable ultrasound machine for rural China population.
2. Reverse Innovation
Generally innovative products and services from America move to other countries, particularly to China and India. Now the trend is changing-innovation from China and India are started coming back to America . GE started marketing its innovative products such as the aforementioned ultrasound machine and the ECG developed for China and India to American customers.
Likewise, John Deere tractors developed for the Indian market has been sold to hobby formers in US. In the coming years the reverse innovation trend will accelerate and US companies will have dedicated innovative centers located in China and India creating world class products and services to both local and world markets.
3. Globalized business value chain
When outsourcing started in the early 90’s, American companies identified low-end activities from their value chain and outsourced to cheaper countries, and finished products or services was integrated back into their value chain. The value chain was broken down based on low-end activities and tasks with the focus to reduce the cost. But now with growing emerging economies, companies like Cisco, GM, Sony, etc, started disintegrating their value chain based on customer needs in emerging countries and moving it to locations where it can be executed through their own subsidiaries or through third-party vendors. In the coming years this trend will accelerate and the need for physical locations to complete the activities will decline. The control for managing the activities for the value chain will move from US to other emerging countries. Companies will reconfigure their value chain in real-time based on local market trends and market shifts. American companies like GE, IBM, Microsoft, and Cisco have already started this process by opening branches in China and India and have given full control and decision making authorities to their heads in those countries.
4. Multi-country Sourcing & Globalized Supply chain
Traditionally for American companies global expansion means either exporting their finished products to other countries (E.g. IBM, Pfizer, Microsoft) or manufactured locally in each country (E.g., Procter & Gamble, Texas Instruments). The former strategy works when the transportation cost and tariff are low and the latter strategy works for companies when they are high. In both cases companies sourced all the raw materials in a few countries and manufactured it in one location. In this process some low-level tasks were outsourced to cheaper locations for cost arbitrage. Today due to technological innovations (read: the Internet) any company can create a web site, source their raw materials from several countries, manufacture it in multiple countries and sell it through the Internet all over the world. For example, Apple designed the iPhone and wrote the software for it. The final assembly, however, is assembled in China-but the raw-materials for it comes from 30 companies on 3 continents. The multi-country sourcing made American companies supply chain truly global and this trend will accelerate in the coming years.
5. Personalized Products and Services
Personalization (Mass customization) started in the manufacturing industry, and after the invention of web, it moved to websites like myYahoo and iGoogle that allows any individual anywhere in the world to customize the websites based on his/her personal preferences such as language, location, and services.With a single click anything can be changed from anywhere. Now with the globalized business value chain that spans all over the world, companies across the industry will embrace the personalization to all of its product and service offerings. Customers in China and India are not different from those in America but they are different within their provinces and states. So products and services created for American customers cannot be repackaged to emerging countries. Global corporations that wants to tap into this new market will have to adjust their business models to show finer customer segmentation and offer personalized services and products that will vary on a daily basis.
6. Global Collaboration
In the outsourcing era, American companies sent mostly low-level tasks to developing countries-and then the trend started to send higher-end tasks through BPO and KPO. American companies outsourced tasks and the outsource vendor’s responsibility is to complete the tasks and give it back to American companies who merge them back into their value chain. For American companies the collaboration with the outsource vendors are not deep enough to share the knowledge between the two entities. American companies viewed their outsource vendors as a source of cheap resources and they divided the value chain based on the cost of executing the activities on cheaper locations.
As explained earlier, globalization changed everything; companies in emerging countries are growing their knowledge and moving up in the value chain by offering innovative products and services to local customers. In this process they have gained unique knowledge that American companies will never have. In the coming years American companies will start using their vendors’ knowledge base in emerging countries to gain competitive advantage and show product and process differentiation to attract and retain customers. They will use either their own subsidiaries or other vendors to gain global market share by making fundamental changes in their organizational structure and control to foster global collaboration.
7. Global Organization
During the outsourcing era American companies either sent low-level work to offshore locations or hired programmers from India to come to US either in H1B or L1 visa to work in their company headquarters. American companies viewed the outsource workers as low-level programmers. Next, during the KPO era, American companies opened branches in India and China to perform high-level works based on the instructions given by the American companies. These branches in India and China operated on the command and control of American headquarters. This did not give the independence and autonomy for the knowledge workers in India and China to make their own decisions using their research work that is needed to capture the local market. Now with the booming economy, knowledge workers are either staying in their home countries or leaving US he United States to go back to their home countries. This globalization will change (and have already changed for companies like Cisco, Microsoft, etc.) the American organizations’ command and control approach of managing their branches with the cooperate and coordinate model. In the near future instead of one headquarters located in America, companies may have multiple headquarters located in the United States, China, India, Europe, and Africa making decisions based on local consumers and market trends.
Started with outsourcing for cheap labor, globalization changed the entire world. The pace and scale of international economic integration is unprecedented. Both China (1978) and India (1990) opened their market and integrated their economy with the developed economies and made significant changes in their policies. This lifted the people in both countries from their poverty levels and their overall GDP increased, paving way to higher living standards and more disposable incomes to spend. Indian and Chinese companies successfully used the opportunities to deliver innovative products and services targeting local customers and during that process moved their positions in global companies list.
For over a century America has been the single largest economy, American companies dominated in creating innovative products and services to the rest of world-and still, the United States dominates in innovation. But, both China and India are catching up with and started competing aggressively with American companies to gain customers and market share. Initially, American companies did not respond to this competition and mostly ignored the middle and lower market in India and China. But sensing the competition, American companies changed their strategies to compete with Indian and Chinese companies to gain the local market. Though not all the big corporations in America have fully embraced the shift towards emerging countries fully, in the coming years the trend will accelerate.Tomorrow’s winning corporations will have changed their business models, making their corporate strategies based on China and India.