The exact definitions of globalisation may be up for debate, but its influence on global trade is unequivocal. Steve Coomber examines how this phenomenon has been critiqued by some of the leading names in business and economics.
Globalisation has many definitions. To some it means the reduction and removal of trade barriers and the flow of goods, services, capital and labour across national borders. To others it is about the greater interconnectedness of nations and markets. Some commentators see it in terms of separate elements, such as financial globalisation, social globalisation and industrial globalisation. Others view it as a holistic entity.
Whatever the definitions, the reality is that for the majority of the world, whether it has come courtesy of multination corporations or the World Bank and the IMF, globalisation in business terms has been about the export of US-style free market capitalism. And, while many people support globalisation, believing it will benefit both the developed and developing world, there are others who worry that the poorest countries will gain little, if anything.
Economist Joseph Stiglitz was awarded the Nobel Prize for his work on information asymmetry, and challenged Adam Smith's notion of the invisible hand. In an online interview, Stiglitz says:
"Unfettered markets often not only do not lead to social justice, but also do not even produce efficient outcomes… individuals and firms, in the pursuit of their self-interest, are not necessarily, or in general, led as if by an invisible hand, to economic efficiency."
It is a comment that many might have sympathy with, given the recent banking crisis and the turmoil in the global economy. Stiglitz has some strong views about globalisation too. In an MBA podcast in 2007 for The Times, he pointed out problems with globalisation as it is being played out, including the one-sided removal of trade barriers, subsidies in developed countries, depressing market prices and restrictions in the transfer of knowledge due to tighter protection of intellectual property laws, themes that Stiglitz explores further in his book Making Globalization Work.
Stiglitz even notes that if a cow in Europe, by some estimates, receives a subsidy of more than $2 a day, while some 40% of the developing world's population live on less than $2 a day (the World Bank's definition of poverty) from a financial perspective at least, it was better to be a cow in Europe than an average person in the developing world.
Others, however, are optimistic that globalisation and capitalism can still deliver benefits to the poorest people in the world. Before his death in April 2010, CK Prahalad, one of the world's preeminent management thinkers over the past 30 years, believed that the forces of globalisation could be combined with the concepts of inclusive growth and the co-creation of value between corporation and consumer, to deliver value to billions of people at the bottom of the pyramid.
Transformation of the supply chain
For many corporations and senior executives, the most obvious impact of globalisation is its effect on the supply chain. When the UK established its textile industry in the late 1700s, each enterprise inhabited a different part of the supply chain. Cotton was imported from the US via Liverpool into Lancashire. Factories turned the raw material into cloth. Garment manufacturers used the cloth to make clothes. Retailers sold the clothes.
By the end of the 19th century, this approach had been replaced by vertical integration. Steel magnate Andrew Carnegie owned coke ovens, iron ore mines, steel mills, railroads and even ships that contributed to the production of steel from raw material to consumer. Henry Ford controlled all aspects of car production, down to creating the Fordlândia prefab town in the Amazon jungle in an effort to secure a supply of tyre rubber.
By the 1970s, things were changing again. A fashion for large sprawling conglomerates, with few synergies and where value creation was often largely illusory, was replaced by a focus on competitive advantage and the value chain, a concept introduce by Harvard management guru Michael Porter in his book, Competitive Advantage. The success of Toyota and the Toyota Production System also prompted a close investigation of lean management practices and just-in time sourcing by the US and Europe.
Companies focused on core processes and began divesting themselves of other activities. Better transportation and communication links facilitated an increase in outsourcing elements of the value chain, often to low-cost, emerging economies. At first it was manufacturing, then information technology, and then business processes, including much of the finance back-office function. More recently, firms have even outsourced design and R&D.
The result is a disaggregated supply chain, fragmented and spread around the world, as well as a commensurate rise in the number of books published on how to manage your global supply chain.
Of course, with a value chain spanning the globe, the job of the finance function has become much more complex. And so, more recently, global supply chain finance has emerged as discipline in its own right, with a focus on areas such as payables, financing solutions such as open account financing, global asset based lending and receivable management services.
With globalisation and extended value chains comes greater risk. The Lancashire cotton industry increased its output almost continually from the late 1700s right through to WW1, with one notable exception: the period from 1861 to 1864. The disruption of cotton exports by the American Civil War on one side of the Atlantic quickly led to mill closures and mass unemployment on the other.
Value chain breakdown
More recently, Boeing flew into turbulent air with its revolutionary 787 Dreamliner. Boeing pushed outsourcing to its limits, contracting out much of the design work for its new aircraft, as well as more traditionally outsourced activities. The result was a two-year delay stemming from outsourcing problems and lack of oversight. Not least that many of the primary specially selected outsourcing contractors sub-contracted part of their work out to other firms.
The devastating impact of value chain breakdown should not be underestimated. Research by management academics Kevin Hendricks and Vinod Singhal, published in their paper The New Supply Chain Challenge: Risk Management in a Global Economy, reveals that disruption to the supply chain, regardless of the reason, causes long lasting damage to a corporation's profits and stock price. Firms operate at a lower level for at least two years following such disruption.
Managing the financial supply chain is only one complication of the expansion of world trade. Globalisation brings many other challenges, in financing, risk management or capital budgeting.
But there is no turning back the tides of globalisation now. There may be calls for greater governmental and supragovernmental intervention and regulation, especially after recent lessons in financial contagion. In the meantime, China, India and Brazil continue their climb to the summit of the world economic elite, increasing their influence over the world markets, while others watch in envy.
In the future, the issue for governments and corporations is less likely to be about supply chains as sustainability. As Nirmalya Kumar, a London Business School professor, pointed out at a conference in India on globalisation, many pitfalls lie ahead.
"As the developed world falls and the emerging markets rise in economic power, the danger is that the developed world turns protectionist," says Kumar. "And that the emerging powers of Brazil, India and China grow disillusioned with the existing multilateral institutions – the UN and IMF – which reflect the past glory and power of the Western world (France or the UK having a veto in the Security Council when India or Brazil does not, can hardly be sustained), and this leads to greater economic conflict. There's also a danger that the stress on resources from 2.5 billion people in India and China having rising aspirations may lead to an explosion in food and energy prices."
We can only hope globalisation offers something better; but only the brave would bet on it. In the meantime, senior executives the world over must adapt their organisations the best they can to succeed in this unforgiving global economy.