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The primary objective of globalisation
Stanley Subramoney
Published: 06-APR-06

Davos has been the high altar of globalisation – that catch-all phrase. For the first time ever, the World Economic Forum (WEF) will integrate sports leaders into the session to consider sport’s role as a tool for development.

Finding new customers and expanding markets – and not just cutting costs – is now the primary goal for companies tackling globalisation, according to a PricewaterhouseCoopers (PwC) 9th Annual Global CEO Survey.

It is found that across the board and regardless of industry focus, companies – large and small – in the developed world as well as in developing countries are vigorously pursuing strategies for globalisation. Indeed, globalisation has become “such an irresistible force and phenomenon, not even global terrorism will stop it”.

The views of 1 410 chief executive officers (CEOs) were canvassed in 45 countries throughout the world during the last quarter of 2005 and released at Davos, Switzerland.

The CEOs interviewed overwhelmingly agree that globalisation will have a positive impact on their businesses although resulting in increased complexities that pose significant challenges for them to manage.

The survey also finds overwhelming support from CEOs to invest resources in the emerging economies of Brazil, Russia, India and China – the so-called BRIC economies.

Support for globalisation is strong, and getting even stronger. Fifty-eight percent of CEOs say that globalisation will have ‘a somewhat or very positive impact’ on their organisations over the next year. And nearly two-thirds of the CEOs surveyed, regardless of region or income, are positive about the impact that globalisation will have on their businesses over the next three years.

The survey clearly shows that powerful forces are at work. Globalisation is a juggernaut that no company can ignore. This is the message from the CEOs we surveyed. It is also a message confirmed by independent research.

Notwithstanding their optimism, the CEOs realise, however, that going global is not easy and the road is fraught with obstacles, though not the normal conventional obstacles. They cited overregulation as the chief impediment to globalisation, followed closely by trade barriers and protectionism, political instability and social issues.

Terrorism and the anti-globalisation movement – both of which dominate news headlines – are at the bottom of the list of perceived challenges to globalisation at 48 and 21 percent respectively.

However, while CEOs in developed as well as developing economies have similar attitudes towards overregulation and trade barriers and protectionism as challenges to globalisation, significant differences exist regarding corruption, country currency policies and social issues.

Of all the challenges, developed-economy CEOs are slightly more concerned about terrorism than their emerging economy peers and about equally concerned about the anti-globalisation movement.

Furthermore, companies in emerging market economies are “full participants in, rather than victims of, globalisation”.

This year’s report focuses on the emerging BRICs economies as drivers of globalisation. China is already a major player in world trade, and India is also becoming increasingly significant in areas such as computer software and back-office processing. Although smaller than either China or India, both Brazil and Russia have experienced accelerating growth in recent years.

Clearly, the BRICs are experiencing the benefits of globalisation. The explosive growth predicted for these economies is enabling them to engage in the same globalising activities as their Organisation for Economic Co-operation and Development (OECD) peers. No longer perceived as underdogs, they are rapidly becoming fully-fledged global competitors.

CEOs involved in the survey indicate that they see promise in the BRIC economies and are aggressively pursuing the opportunities they represent. In fact, 71 percent of the CEOs plan to do business in at least one of the BRIC economies over the next three years.

Not surprisingly, given the much greater size of its economy and its recent very rapid growth, China significantly leads these economies as a place to do business over the next three years, followed by India and Brazil and then Russia. China also represents the most significant market opportunity, followed by India, Russia and Brazil.

At first glance, China’s lead appears formidable. However, the data indicates that, despite its lead, the other BRICs are very much in the running. In addition, commentators believe that because of a rapidly aging population, China’s advantages over emerging economies with younger populations, such as India and Brazil, may eventually decrease.

Respondents identified a broad range of activities in the BRICs to achieve their strategic objectives of significantly expanding their customer base and serving existing customers effectively. Forming alliances topped the list, with more CEOs from developed countries interested in doing this in China. However, India and Russia are not far behind.

Second on the list of planned activities in the BRICs by developed-economy CEOs is the opening of offices – and again China leads the way as a preferred locality. Russia and India are next in line.

Developing unique products, outsourcing and off-shoring rank third, fourth and fifth respectively among CEOs in developed economies. With regard to outsourcing, it is interesting to note that while CEOs are about as likely to outsource as to off shore to the BRICs, only about one-third or fewer of them are doing so or planning to do so.

China does not dominate the interest of emerging-economy CEOs to the same extent as it does the interest of their counterparts in OECD countries. For example, it ranks second among emerging-economy CEOs as a location to form strategic alliances, tying with Brazil and lagging behind Russia. India ranks last in this category.

Similarly, China ranks second among these CEOs regarding the opening of new offices. Brazil tops the list, with Russia and India ranking third and fourth respectively.

Whether forming strategic alliances, opening new offices and developing new products, or dealing with overregulation, barriers to trade and currency issues, an unavoidable by-product of pursuing a global strategy is increased complexity.

While complexity can be a positive attribute, it can also destroy value if not managed properly. It can be good when it involves commercial activities that add value. It can also be bad when it involves geopolitical forces that are beyond the CEOs’ control.

Respondents to the survey understand the difference but are unsure of how best to manage complexity when it is positive and how to reduce it when it is not.

Overall, 77 percent of global CEOs say that the level of complexity in their organisations is higher than it was three years ago – and 27 percent believe it is much higher. A small number (15 percent) feel that it is the same. Six percent say it is somewhat lower and two percent feel it is much lower. And an overwhelming 73 percent agree that complexity is not going away, and that increased complexity is an inevitable aspect of business today.

Topping the list of commercial activities that most CEOs say increase the level of complexity are expansion into new territories and mergers and acquisitions, followed by launching new products or services. Outsourcing functions to third parties is perceived to cause the least increase in complexity.

Interestingly, these are precisely the kinds of activities that CEOs doing business in the BRIC economies are engaged in. Seventy-one percent of them plan to do business in at least one of the BRIC economies over the next three years. Of those, 61 percent plan on engaging in three or more complexity-causing activities such as forming strategic alliances and doing mergers and acquisitions.

While acknowledging that commercial activities increase complexity, the CEOs largely maintain that the advantages of engaging in those activities strongly outweigh the disadvantages, particularly with regard to launching new products or services and to extending operations to new territories. In fact, even the most-complexity-causing of these activities are perceived as having advantages that far outweigh disadvantages.

External forces that significantly increase complexity include national and international laws and regulations, actions by competitors and changing customer requirements. Changing workforce attitudes and expectations and language and cultural differences are perceived as least likely to increase complexity.

Regarding “positive” complexity that arises from value-creating activities, 77 percent of CEOs agree (39 percent strongly and 38 percent slightly) that managing this type of complexity is a high priority.

Seventy-eight percent of the CEOs say that reducing unnecessary complexity is a personal priority, but survey findings suggest that they are not managing complexity very well. Less than 17 percent of CEOs rate their performance in managing complexity as ‘very good’, regardless of the measurement that was used.

An important aspect of complexity management is the reduction of the level of complexity. Nearly all the respondents (97 percent) are involved in at least one programme to reduce the level of complexity, and 77 percent are engaged in five or more such programmes. Only 15 percent are involved in three or fewer programmes (with only three percent in no such programmes at all).

Choosing among 11 complexity-reducing programmes, 84 percent of the CEOs rank information technology and 79 percent rank organisational structure as primary areas of focus. “Countries in which a company has operations and off-shoring receive the least attention. However, even off-shoring – the lowest-ranking area – is targeted by 26 percent of the CEOs for complexity reduction. The CEOs’ high level of interest in managing complexity is also evident in clear views they express regarding how best to accomplish this task.

We selected seven capabilities for managing complexity. They are: highly capable people; effective communications; ability to identify activities creating value; ability to identify activities destroying value; alignment of IT with business processes; ability to measure complexity; and a corporate-wide framework for managing complexity.

Having highly capable people is regarded the single most important capability, with 55 percent of the respondents ranking it as extremely important.

One big problem, the findings suggest, is that significant gaps have been identified between the individual capabilities that CEOs view as important and their organisational performance in these areas. “We were struck by how few CEOs rate their organisation’s capabilities for managing complexity as ‘very good’. For example, only four percent feel their organisations are very good at measuring complexity; five percent at having a corporate-wide framework for this purpose; 15 percent at being able to identify activities that create value; 12 percent at being able to identify activities that destroy value; and 12 percent at aligning IT with business processes.

Even in areas the CEOs rank highest as being extremely important for managing complexity – highly capable people and effective communications – only 17 percent and 10 percent respectively feel that their organisations have very good capabilities.

The lesson is clear: generally, the more important the capability, the greater the gap. To manage complexity most effectively, CEOs will need to close the gaps within those capabilities of complexity management that they rank as most important.

Stanley Subramoney is the Deputy Chief Executive Officer, PricewaterhouseCoopers.

Summary
Overall, the survey’s important findings can be summarised as follows:

  • Most CEOs perceive globalisation as a positive endeavour and are actively involved in global expansion;
  • They recognise that there are factors that threaten the progress of globalisation but acknowledge that facing those threats is worth the effort;
  • The overwhelming majority is optimistic that globalisation will have a positive effect on their companies over the next three years;
  • That positive effect, particularly to the BRICs economies, is related to accessing new markets rather than low-cost labour;
  • By inference, the CEOs recognise that globalisation contributes to both commercial and the geopolitical causes of complexity;
  • In one way or another, globalisation relates to nearly all of various sources of complexity; and
  • Nearly all of the activities involved in globalisation are characterised by the CEOs as activities that increase complexity.

    This special report was first published in Business in Africa Magazine (Southern Africa), March 2006. To subscribe click here



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