By Mohsen Moazami, Vice President, Cisco Internet Business Solutions Group, Emerging Markets and Globalization Center
Despite years as a hot topic in business schools, at financial conferences, and in corporate boardrooms, globalization remains one of the least-understood phenomena in the business world. That's largely because globalization is usually studied through a macroeconomic or theoretical lens, through which it is seen primarily as a method of cost avoidance. This is a one-way view: Globalization is driven by both cost and revenue incentives.
To ensure long-term and sustainable success, company leaders must take a global perspective. One way of adapting to this new reality, as Cisco has, is to adopt a distributed management style and to implement focused globalization efforts enabled by communications and collaboration technology. But the key is seeing new revenue as well as lower costs through globalization.
Effects of Globalization
Lowered expenses: This occurs when companies outsource manufacturing operations to countries where costs are lower, then sell the products to consumers at home and abroad at a higher profit.
New revenue: The emerging markets sector is growing fast and encompasses a large portion of the world's GDP. In fact, by 2050, the relative size of the BRIC (Brazil, Russia, India, and China) countries will be 1.55 times that of OECD countries as measured by GDP.
To be successful, companies must find ways to sell in emerging markets. Doing so requires localizing their:
- Management systems
Dealing with New Business Models
The idea of new business models may sound challenging to executives accustomed to innovating and building their businesses in one country and exporting the model elsewhere. Overcoming this challenge by investing, learning, and adapting to business models being developed in emerging markets can yield much greater profits and tremendous growth opportunities. Failure to meet this challenge can stop a business cold.
Note that globalization is not just about companies in the West seeking growth and profit opportunities in Asia. Asian businesses are growing their geographic footprints by buying assets in the West.
MRI machines in India: Despite General Electric's extensive operations in India and China and its presence in a market with a demonstrable demand for the product, the company had difficulties selling MRI machines in India and China because of the traditional mindset of "design and build in the West and sell to the East."
GE finally increased its MRI business in these countries while maintaining expected margins by using design, manufacturing, and cost guidelines it learned in the emerging markets to develop a new business model. GE then began exporting MRI systems designed and developed in China to the West with much success. GE's story is an example of business model innovation at its best.
Mobile phones in India: Another example is in the mobile phone industry. The World Bank ranks India as a low-income country, with an average annual per-capita income of about 35,000 rupees (US$810). Any company interested in selling to India's 1.2 billion consumers must consider Indian purchase price parity, which dictates that Indian consumers earn and spend in Indian rupees, not in dollars or euros.
Nokia, Samsung, and other manufacturers currently sell between 6 million and 7 million mobile phones per month in India, a big market by any standard. However, Nokia, for example, had a slow start in the Indian market because its business models were geared for Western customers and advanced Asian consumers, and its mobile phones were priced at about $100 per unit.
Success came when the manufacturers began to think differently about the Indian market, optimizing the formula for volume versus margin with products designed, developed, and manufactured for the Indian consumer. With lower-priced products (approximately $19 per unit today), the manufacturers all improved their margin structures.
Operating Locally and Globally
Coordinating a heavily localized operation with the rest of a global corporation also is a challenge. For example, Cisco operates from two headquarters: one in San Jose, California, and the other in Bangalore. Each headquarters has its own center for innovation and development, and each is tightly connected to the other so that both can operate as a single corporation.
The ability to support this distributed management style comes in large part from Cisco TelePresence, Cisco Unified Communications, and other collaboration technologies that allow Cisco executives in different parts of the world to work as if they are in the same room. Nevertheless, companies like Cisco, with customers spread around the globe, must also have a physical presence where innovation takes place to deliver products, services, and support. Otherwise, the company's ability to learn about an industry or customer is hindered.