2 management - School of International Business and ...

417 Production in the Global Environment – Analysis and Best Practices
»Global integration is about … doing the right work in the right places at the right
cost. It’s not simply labor arbitrage. It’s not simply lower-cost skills. You must have
the capabilities in the right places and the systems, processes and discipline to
integrate the skills and systems and make them work for the client …«
There are three stages of going global, as it is shown in Figure 5. The first step is exporting the
own products to another country, which has the lowest risks and costs involved, and the company
can still benefit from the economy of scale. Assuming this is successful, the next step would be, to
build up multi-national silos or subsidiaries in these countries, which are able to develop and pro-
duce the products required by the local market, with a high level of localization. The ultimate step
would be a full global integration, where country borders are not limiting the reach of the business
processes, but there are standardized processes and applications worldwide. A big challenge in
moving to a globally integrated company, is the existing governance model of a company. The
money is earned in the local markets by the local country managers. So implementing global
processes and responsibilities, can be in conflict with the local P&Lresponsibility. These changes
are normally easier to be implemented in US based companies managed top down, rather than in
European companies. One company being fully globally integrated is IBM. Today the world is flat
again [2], so Bangalore is in the suburbs of Stuttgart, and it does not matter much, where a com-
pany is located, but it can serve the world from everywhere. Based on existing trade barriers and
to serve the local market, many international companies set up factories in Germany during the
Sixtieth and Seventieth. Taking IBM for example, at the peak they had 4 factories in Germany with
over 12.000 employees. After streamlining the product portfolio, selling off commodity products,
and moving some production to China, there is no manufacturing left in Germany today. On the
other hand IBM has build up a global service organization just in India with over 100.000 employ-
ees. Production in Germany will continue to have an important role in the business, in spite of the
high labor cost and short work hours during the year. Still Germany has the highest productivity
and is leading in technology and quality in many industries. Based on the high level of automation
the labor rate is only 15-20% in production for most industries. So moving out of Germany just for
reduction of labor cost does not make a lot of sense.
Figure 5 | The move towards Global Integration