How we compete
Worldwide business tactics for success
Description
The MIT study found globalization creates both opportunities and dangers for companies. Cheap labor is not the only path to success. There are many potential routes to excel in the global economy. Globalization does not dictate a single best approach; companies must figure out what works for them. The study challenges the notion that globalization inevitably harms certain jobs and activities.
Companies that offshore jobs may have fewer low-wage roles, but the causes are complex. The distribution of offshore jobs shows most are still in high-cost countries, though China is rising fast. Services firms offshore less but focus more on cost-cutting. Better data is needed for informed debate and policy. Targeted approaches may work better than one-size-fits-all. Globalization forces firms to transform but allows diverse successful strategies.
Table of contents
01Defining globalization
Globalization is a term used ubiquitously yet lacks a precise, universally accepted definition. At its core, globalization refers to the emergence of a unified global marketplace for labor, goods, services, and capital. In this idealized single market, workers receive equal pay regardless of location, goods cost the same everywhere, interest rates converge across borders, and flows of investment capital face minimal restrictions.
Of course, the world remains far from this vision. Major upheaval continues as the world moves closer to this integrated ideal. Some experts thus propose a more grounded definition of globalization as "the acceleration of processes in the international economy and domestic economies that operate toward unifying world markets."
While the exact meaning is debated, scholars largely agree globalization stems from several political, economic, and technological developments over recent decades:
- China's economic opening to the West beginning in 1979. - The fall of the Berlin Wall in 1989. - Policy decisions by major powers like the US to remove trade barriers and liberalize capital flows, such as the General Agreement on Tariffs and Trade in 1947 and Uruguay Round from 1986-1994. - The establishment of the World Trade Organization in 1994. - Ongoing reductions in communication and transportation costs fueled by new technologies. - Deregulation allowing unrestricted cross-border capital flows.
Globalization threatens many companies by enabling firms worldwide to access resources and incorporate them into existing markets in new ways. These resources include:
02Factors propelling globalization forward
Globalization is driven by three major forces - deregulation, shrinking costs of communication/transportation, and information technology - which enable companies to optimize operations across borders. This intensifies competition as more players from around the world compete in every market. Firms have responded by refocusing on core competencies, pursuing mergers and acquisitions, entering strategic alliances, and altering their organization.
Globalization pressures companies to raise efficiency. Competitiveness now depends on synergies from specialized skills across regions and continents. With smaller gaps between developed countries, global competitiveness matters more. Firms must now compete globally even in their home markets. Production elements are internationally integrated, making precise origin difficult to determine.
Three models conceptualize firm responses to globalization:
- Convergence Model: Firms worldwide converge on a homogenized business model that maximizes returns as globalization intensifies. - National Varieties Model: Firms in different countries respond differently based on national priorities. American firms use globalization for scale while Japanese firms preserve lifetime employment. - Dynamic Legacies Model: Firms tap unique legacy resources - experiences, skills, capabilities - to respond differently. No single best approach exists, just choices fitted to a firm's context.
03Key takeaways on adapting to globalization
There are four main conclusions from the success stories of hundreds of companies that have adapted well to globalization demands.
First, no single business model guarantees success in the globalization era. Instead, various successful models typically build on resources already part of the firm's capabilities or acquired from partners. Regarding globalization, there is no one-size-fits-all solution. A firm's own capabilities and how they are applied are what matter going forward. Overall, when it comes to globalization, a firm's existing strengths and how they are leveraged are what enable success.
There is no universal formula that guarantees results. Rather, a variety of effective business models can emerge, depending on a company's unique resources and how they are utilized. Flexibility and playing to inherent strengths are keys to thriving in the globalized economy.
Be the best yourself or be prepared to outsource to the best.
In today's globalized world, companies must constantly reevaluate their business models to remain competitive. Whereas vertical integration was once the path to success, firms now take a more modular approach.
This requires making two key decisions: what steps in the production and distribution chain should be kept in-house, and which should be outsourced. These choices must be revisited as conditions change and new opportunities arise.
The modern corporation looks very different from those of the past. Thanks to digital technology, there are countless ways to build a profitable business model. There is no single "right" approach; many can thrive given the right circumstances.
Companies must weigh the benefits of offshoring certain functions versus keeping them in-house. As a general rule, firms should retain only those core activities where they lead the industry, and outsource the rest to world-class partners overseas or domestically.
This allows them to achieve superior efficiency, even if it means relocating some jobs.
However, there are exceptions to this model. Some Japanese companies like Matsushita and Samsung choose to keep manufacturing in-house despite higher wages. By retaining these capabilities, they hope to capitalize on future innovations that may require revamped production methods.
In the textile industry, Zara bucks the trend of offshoring to China. As a vertically integrated company that makes 40% of its own materials, Zara can design and stock new fashions in its stores faster than rivals. Its customers visit weekly to see the latest arrivals.
So while outsourcing non-core functions is often advantageous, some firms succeed by taking the opposite approach. There is no universal formula for competing globally. Companies must determine at each stage of growth which activities are best kept in-house and which should be outsourced based on their unique capabilities and customer needs.
The key is remaining flexible and open to rethinking one's strategy. Success in today's economy requires constant evaluation of how to best leverage internal resources, domestic partners, and global supply chains.
Related books
