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Driven by an intensely competitive business environment, corporations
have become increasingly dependent on global markets. Whether the
drivers are revenue growth, cost reduction, or access to new knowledge,
many of the most successful corporations already operate on a global
basis. Even domestically focused companies are finding that competitive
pressures are increasingly forcing them to expand beyond their
borders. As already discussed, the cost advantages of production in key
developing markets combined with higher growth rates and demographic
shifts moving greater consumer power to developing nations
will compel corporations to move more and more of their value chain
offshore. While offering new opportunities, such shifts will also present
a new set of challenges.
As increasingly frequent, disruptive events have made painfully clear,
companies are more vulnerable than ever to economic crises, security
threats, supply chain disruption, and consumer backlash. The major
strategies businesses have implemented with such success in recent
years—global sourcing, lean manufacturing,
outsourcing, offshoring, and
extended information technology networks
—are increasing efficiencies
enormously. But they have also created
extremely fragile networks built
on the false assumption that the world
is a predictable and stable place. In
fact, the very innovations that have
helped improve business efficiency
and profitability increasingly are
based on an integrated global business environment that also brings with
it a series of interdependent risks. Consider the following examples:
Just in time. Some manufacturers have reduced inventory almost to
zero. Chrysler, for example, keeps just two hours of inventory on hand
at its plants near Detroit. Estimates suggest that the shift to just-in-time
scheduling in the U.S. automotive industry alone has saved companies
more than $1 billion a year in inventory carrying costs. The problem,
however, is that while costs have come down, risks have increased. If
deliveries of critical components are delayed, the entire factory must
shut down. Similarly, retailers have become increasingly reliant on automatic
replenishment and vendor managed inventory. Even brief delays
can lead to empty shelves and lost sales.
Extended enterprise. Increasingly, firms depend on a complicated network
of customers, suppliers, and partners that must all work together,
and often no one person has oversight of the entire supply chain. In
addition to day-to-day problems with forecasting, security, and information
exchange, there is the increased risk of system failure if a key member
of the network shuts down, even temporarily. In some cases, the
supply chain is so complex that it is impossible to understand fully the
true risk involved at any single point of failure.
Outsourcing. While companies once outsourced manufacturing or bill
processing, they are now outsourcing IT support, customer call centers,
benefits administration, human resources, and other increasingly sophisticated
corporate functions. Although outsourcing can greatly reduce
costs and often improve service levels, it can also compound risk as critical
operations are managed outside the company, and increasingly outside
of the country.
Global sourcing. Procurement policies that rely on foreign markets
involve longer lead times, increased uncertainty, and heightened security
concerns. Although suppliers in developing economies are often the
lowest-cost producers, logistics and tariff costs can add up to 40 percent
to the landed cost of a product. Goods can pass through as many as 11
middlemen in transit, greatly increasing the risk of disruption.
Supplier consolidation. Just as companies are outsourcing and adding
complexity, they are also increasingly dependent on single suppliers.
Single sourcing and industry consolidation mean companies must rely
on one or a few suppliers for key components. Also, the trend toward
design collaboration and information sharing multiplies the time and
expense required to switch suppliers.
Information revolution. The rise of e-commerce (whether through
intranets, extranets, or the Internet) means that more companies depend
on information transfer to manage their operations. These systems are
both increasingly critical to daily operations and vulnerable to attack as
the number of access points rises. Verifiable
digital attacks are estimated to have cost more than $16 billion in
2003 alone. Attacks can come from inside the company, from hackers
targeting a specific company, or viruses that infect the entire network.
The speed at which such viruses can spread across the network has
increased from three years in 1990 to 10 minutes in 2003.
Increased competition. Tighter margins mean that even a small disruption
to operations can show up on the bottom line; shortened product
life cycles can make even small delays very costly. Companies have
improved their operations to meet the needs and expectations of increasingly
demanding customers. But most operational improvements have
been designed for a stable environment in which risks are fairly well
known. In reducing their everyday risks, companies have inadvertently
increased the potential impact of exceptional events.
None of these aforementioned factors would be a concern if the world
were a stable, predictable place. Unfortunately, it isn’t, nor is it likely to
become more stable or predictable anytime soon. No business is entirely
immune to the impact of global economic and political trends.
Global integration has increased the
volatility of the global business environment in a number of ways.
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