Author: Farrell, Diana
Source: Harvard Business Review
(This is an enhanced edition of HBR article R0412E, originally published in December 2004. HBR OnPoint articles include the full-text HBR article plus a summary of key ideas and company examples to help you quickly absorb and apply the concepts.)
Companies have become aware that they can slash costs by offshoring: moving jobs to lower wage locations. According to research by the McKinsey Global Institute (MGI), by streamlining their production processes and supply chains globally, rather than just nationally or regionally, companies can lower their costs--as we've seen in the consumer electronics and PC industries. Companies can save as much as 70% of their total costs--50% from off-shoring, 5% from training and business-task redesign, and 15% from process improvements. The cost reductions make it possible to lower prices and expand into new markets, attracting whole new classes of customers. However, few businesses have recognized the full scope of performance improvements that globalization makes possible, much less developed sound strategies for capturing those opportunities. Diana Farrell, director of MGI, offers a step-by-step approach to doing both things. Among her suggestions: Assess where your industry falls along the globalization spectrum, because not all sectors of the economy face the same challenges and opportunities at the same time. Also, pay attention to production, regulatory, and organizational barriers to globalization. If any of these can be changed, size up the cost-saving (and revenue-generating) opportunities that will emerge for your company as a result. Farrell also defines the five stages of globalization--market entry, product specialization, value chain disaggregation, value chain reengineering, and the creation of new markets--and notes the different levers for cutting costs and creating value that companies can use in each phase.