As globalization incubates scores of new business designs that can unseat established companies, it is putting pressure on the middle of the value chain -- production, office functions, IT and so on. In turn, more and more companies are finding that their greatest opportunities to create growth and new value lie at the two ends of the value chain.
Downstream, companies are creating these opportunities by forging deeper customer connections -- understanding and addressing local customer priorities more deeply than competitors do. Upstream, companies are generating new value by pursuing higher-impact, customer-relevant innovation -- stepping up the pace of university alliances and global talent sourcing while finding new ways to protect intellectual capital.
At the customer end, for example, 3M Co. has built one of its most profitable businesses selling specialty dental materials for wealthy consumers in Brazil. In South Africa, Capitec Bank Ltd. has been highly profitable by designing a consumer-banking model that matches the needs of the poorest stratum of the market.
At the innovation end, smart firms are focusing their resources on the highest-impact activities by shifting their thinking from "not invented here" to "invented elsewhere, monetized here."
Reckitt Benckiser plc, based in the U.K., has taken this approach to product development in household products such as cleaners. The company tends to go for less expensive, low-tech innovations. Although Reckitt's R&D budget is just 1.5% of sales (while rivals spend 3%), its profitability is higher than competitors', and it has posted average annual growth of 20% for the past four years.
Most companies have not yet recognized this shift. Although they may know that building a global business design is fundamental to success, they're not yet clear on how it matters, how it's dangerous and how big the upside could be.
What do I mean by "globalization"? Hasn't it been occurring for the past 50 years? Yes, but globalization is no longer an extrapolation of past experience in textiles, apparel, steel and electronics. It's not just about low costs or outsourcing. Instead, it's more useful to think of globalization as the second modern wave of value migration -- the flow of value from old, obsolete business designs to new, more economically effective ones.
Globalization will tend to make strong business designs stronger (through global sourcing, global selling and global science). It will make weak business designs weaker (through more competition, reduced differentiation and greater disconnect from customers). For many companies, their current position is sobering: They have the wrong business design to take advantage of opportunities at either end of the value chain.
| Don't get caught in the middle |
| Globalization is pushing opportunity to opposite ends of the value chain |
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The New Age of Segmentation
In a radically globalized world, managers will have to excel in the full array of customer connections owned and managed by the firm. These include activities in sales, service, solutions, branding and other areas touching customers.
There will be many more customer connections because globalization involves greater heterogeneity (different income pyramids, behaviors and customer priorities in each geography) plus greater complexity (different infrastructure such as telecommunications networks, highways and distribution channels) multiplied over many more customer segments.
Looking for growth in the exploding number of new market segments engendered by globalization is a new game. If you're now addressing 12 to 15 truly different segments, expect to manage 90 to 100 before long.
Incomes among the huge populations of countries such as India, China and Brazil remain relatively low, with the majority of people there earning less than $2 per day. But as C.K. Prahalad of the University of Michigan points out, there's gold to be found at the bottom of the pyramid if you get the business model right.
Moreover, the customer segment structure of many markets will change radically during the next five years as income generated from global sourcing finds its way into the middle of the pyramid and ignites the growth of different segments within the middle class.
Strong, sophisticated segmenters will find abundant new opportunities for profitable growth, if they are prepared to adjust their business design. They know that the right offerings for the base and the peak of the pyramid will not be the right ones for the rapidly expanding middle tiers. Thus a leading office equipment company is flourishing in China as the "one step above low price" brand.
High-Impact Innovation
At the other end of the new value chain is the innovation network -- not just R&D on product and process, but any mode of innovation that creates value for the customer and the investor. This includes innovation in science, product, production process and infrastructure as well as business design, business process, channel, service and demand innovation.
Companies will carefully adjust the balance of their investment among these categories, based on which ones will be the most productive in the next two to three years. Breakthroughs in product and infrastructure innovation may be followed by channel innovation. Production process innovation may give a company the highest returns over the next year or two, followed by several years of high returns in service innovation. Therefore, companies will periodically rebalance the investment mix to generate the highest returns.
General Electric Co. was one of the first established companies to see the innovation gap and to move to fix it. GE managers recognized they had been "squeezing the orange" of existing technologies for the past two decades. It was time to get some new oranges. CEO Jeffrey Immelt started to pump new levels of investment into R&D.
The shift in strategy was not just about more dollars, but also more leveraged dollars that were put to work. The impact of R&D dollars was magnified by changing the source of talent. New talent markets such as India, Russia, Ukraine and China provided world-class technical talent at steeply discounted prices, and GE took advantage. For example, its R&D center in Bangalore, India, is staffed by 1,800 scientists who work in fields as diverse as optics, jet engines and imaging. It is the largest GE R&D facility outside the U.S. and still growing rapidly. GE's Shanghai R&D center was the next to open, in 2003, and the process is just beginning.
Choosing Your Spots
With far-flung facilities, customers and suppliers, value creation becomes so complex that no firm can master all the activities required. So a key decision for managers is what to keep in-house and what to outsource.
Rolls-Royce plc, for example, makes gas turbines for aircraft, ships and power plants. Once a largely U.K. company, it now has customers in 120 countries and employs people in 50 countries. It outsources and offshores about 75% of its components to its partners in a global supply chain.
Because so many components are outsourced, CEO Sir John Rose defines one of the firm's strongest capabilities as partnering. Just a decade ago, for instance, Rolls-Royce did 98% of its research and technology in the U.K. Today, it does less than 40% there, and the rest is done abroad, including many partnerships with universities.
The 25% of components that Rolls-Royce continues to make in-house "are the differentiating elements," as Rose notes in the book "The World Is Flat" by journalist Thomas Friedman. He goes on to explain that the company continues to own the crucial elements of value creation, including the key technologies and the ability to identify and define what product is required by customers.
STARTING UP
How much time do companies have to make the transition?
The answer depends on the rate of economic evolution in your industry and how it compares with the speed of your internal organizational clock. Externally, the time to market takeover by emerging competitors can be as short as two to four years (DVD players) or as long as 15 to 20 years (automotive).
To start getting ahead of the game, ask:
• Do we have the right global business design to play? What is our current investment and outsourcing plan?
• What changes do we need to make in our mix of people and our organizational structure?
• What is our performance level for customer connection activities? What is our performance level for all of our innovation activities (economic as well as technical)?
The global world is a riskier world, so it will be harder to protect your business. In fact, globalization will turn established companies into startups again, with no cushion from yesterday's success, just a focus on creating new success tomorrow. - Adrian Slywotzky
Adrian Slywotzky is a Boston-based director of Mercer Management Consulting Inc. and co-author of "How to Grow When Markets Don't." He can be reached at adrian.slywotzky@mercermc.com.
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