“Bumpy roads around the globe (1st of 2 parts)” by J. Carlitos G. Cruz (March 5, 2012)

SUITS THE C-SUITE By J Carlitos G. Cruz
Business World (03/05/2012)

(First of two parts)

Around 330 B.C., Greek philosopher Aristotle proposed that the earth was a sphere — and not flat — as was commonly believed at the time. For thinking this way, he was called a heretic by many. Yet the very concept of the world being a globe took root. And over the centuries, the process of globalization, aided by leaps in technology, communications, business and politics, has become inexorable.

Globalization has become a part of our everyday lives — from shopping at your local supermarket to browsing online, from talking to a neighbor on the street to video-chatting with a family member in another country, from local goods making their way to world markets and vice versa. The world continues to shrink each day. Companies that once occupied nearby streets now straddle adjacent continents while competing on an unprecedented scale.

But there is also a downside. Our greater level of interconnectedness as peoples, companies and nations also means that we are more vulnerable to shifts and changes in other economies, such as possible defaults in the Euro zone, fears of slowdowns in China, India and Brazil, and socio-political instability in the Middle East, among others. With growing fears of a double-dip recession striking the world economy, some might argue that the benefits of global integration are outweighed by the increased, shared risks.

In the 2011 Ernst & Young Globalization Report, analysts and global executives foresee a bumpy road ahead for all of us, with the expectation of even greater volatility and economic slowdowns to come. Organizations must grapple with new concepts, models and solutions. Size and strength no longer determine success; speed, agility and unconventional thinking will steer companies to survive or flourish in the new global landscape.

Some may say that, living here in the Philippines, we’re no strangers to bumpy roads and potholes. However, the report makes some points that are worth considering both in our local context and our roles as global citizens.

SUCCEEDING IN RAPID-GROWTH MARKETS IS HARDER THAN IT USED TO BE

In the West, growth has been sluggish lately due to the economic troubles plaguing the US and the Euro zone, prompting mature companies to seek growth opportunities in emerging or rapid-growth markets.

This strategy, however, may not be as effective as in previous years; companies have discovered that rapid-growth markets have become harder places to do business in, with higher investment costs, longer time horizons and lower growth potential due to stiff competition, both from other multinationals and strong domestic companies. Recent studies have shown that more and more emerging-market companies are taking the leap onto the global stage as the next generation of multinational corporations. Other factors that companies must also take note of include inflation, wealth inequality, lower exports to developed markets, destabilizing capital inflows and lower infrastructure.

One way by which global companies can try to compensate for these risk factors is to return to their roots: to think like a start-up again. Leadership needs to understand that what has worked for decades in their home market may simply not work in others. Companies will need to rethink their strategies and processes from the ground up, adapting quickly to local conditions. They also need to consider innovative strategies that will result in quick returns, because the slowdown in most developed economies mean that most companies no longer have the funds to invest on a long-term basis. Some companies will need to invest in emerging markets just to maintain market share. On a positive note, this can encourage local managers to come up with innovative business solutions and strategies to develop a self-sustaining model.

One point that the Globalization Report makes is the view that multinationals are seeing the value of investing, not just in the economy of a country, but also in working with stakeholders such as government, local communities and local businesses. In fact, many companies that enter rapid-growth economies often have to build infrastructure, thereby investing in the development of the country.

This thinking ties in neatly with our own administration’s focus on public-private partnerships as a means of elevating our infrastructure and business viability. Based on reports, P154 billion in projects will be launched this year, paving the way for more foreign investors to take part in our national development. If more companies can come to the realization that investing in external stakeholders is just as critical as creating value for shareholders, then this can hopefully create more mutually beneficial opportunities both for country and for multinational investors.

ONE SIZE DOES NOT FIT ALL MARKETS

Companies moving globally will, naturally, encounter added complexities and an extended value and supply chain. To address this, some companies have taken steps to reconfigure their operations to achieve economies of scale and reduce duplication at the local market level.

Leadership will need to assess every function, and determine whether to carry these out locally or globally. For example, a company may produce the core elements of their goods centrally before shipping them to local markets for localization. Leadership needs to assess the risks that come with concentrating their supply chain, including reduced visibility over the performance and ethics of stakeholders. However, changes in recent years have put into question the conventional practice of setting up operations in emerging markets as a way to reduce costs. The costs and inefficiencies in some rapid-growth countries, volatility in oil prices, fragile supply chains, and the lack of employment in local markets, are prompting companies to relocate back home, even if it is a high-cost country.

The important thing to remember is flexibility, the ability to move quickly to capture opportunities and respond to new and unexpected risks. Outsourcing or creation of shared service hubs for local, in-country operations is a great way of creating this flexibility. Through outsourcing, key services such as procurement or recruitment can be provided from a regional hub that is still close enough to end-customers to understand their specific needs.

For example, last year, we in SGV established our Asia-Pacific Talent Hub to provide professional talent and services to Ernst & Young offices in the region. Through our Talent Hub, we are able to support our worldwide organization while at the same time providing our local professionals with more international work exposure. This is particularly significant, due to the increasing lack of global talent.

The massive growth of the outsourcing sector in the Philippines is giving global companies greater adaptability when it comes to shifting resources and costs. It must be noted, however, that outsourcing does not mean abdicating responsibility over one’s goods, services, or even operational processes. In fact, the reverse is true — one has to be even more vigilant and observant when outsourcing to distant locations, particularly in areas such as the ethical treatment of employees, sustainability and environmental responsibility, because accountability ultimately rests on the organization’s leadership.

Next week, we will look at two other significant challenges facing global companies: policy risks and the lack of global talent.

J. Carlitos G. Cruz is the deputy managing partner and assurance head of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.