In the auto supply sector, the mantra of becoming a “global” supplier is repeated so frequently that few question it as a core element of world-class strategy. It is quite common for even small suppliers in the <$100 million sales range to have manufacturing and engineering operations on several continents producing products for many different regional markets.
Given that so many companies are engaged in developing global business designs, we have been struck by the lack of good frameworks for making decisions about how to execute the “globalization imperative.” This is in contrast to some other dimensions of world-class manufacturing, (such as business strategy; lean manufacturing; and supply chain management), where there are well-developed frameworks and decision-making criteria. So here are some straight-forward frameworks for making these choices, with a focus on how to design global innovation systems.
Understanding the Basic Globalization Choices
Like most strategic choices, a globalization strategy needs to be rooted in the practical context of your company—in other words, your overall business strategy, your customers, your markets, your products and technology, and your company culture. Appropriate attention to this mix of factors will lead to a customized, nuanced globalization strategy that will be different for every company. Your globalization plan will be driven by your answers to the following questions:
Reason for Being in the Market—Why do you want to be in a global market:
- To sell products and services to the local market?
- To export products to other markets?
- To source materials, components, labor or knowledge?
Customers—Do your customers require that you have a presence in these markets? How are they organized globally?
Competitors—Are there key competitors in these regions? Do they compete locally, or do they compete against your home markets?
Functions Affected—Which functions in your company (sales, engineering, manufacturing, purchasing, finance, etc.) need to be present in the region?
Presence in the Region—How do you want to organize your presence in the region (facilities, joint ventures, alliances, licensing arrangements, etc.)?
Entrance Strategy—How will you enter the region? How long will it take to be operational?
Human Resources—Who will do the globalization work in your company? How much travel are they willing to do, and for how long? Are core staff willing to relocate?
Here are some factors to consider as you work your way through this analysis:
- Be wary of markets that don’t have the potential to constitute 15%-20% of your sales. Other than some modest sales representations, these regions probably don’t warrant the strategic investment any new market development requires.
- Be critical and skeptical about customer demands that you be a “global” supplier and have a presence in each major region. Many OEMs and Tier 1 suppliers make these demands on their suppliers, but then do not follow them up with contracts.
- Understand how your customers are organized and the degree to which they utilize global or regional sourcing strategies. The OEMs are very different in how they have organized their purchasing strategies, and often have different strategies on a commodity-by-commodity basis within the same company.
- Develop a good understanding of how the technical requirements differ from market to market. In some instances, these will be driven by engineering differences and consumer preferences, and in other instances, they will be driven by regulatory requirements. Just because your product is a leader in the North American market does not mean it will succeed in Europe and/or Asia.
- Be clear, in advance, about who in your company is going to manage your globalization strategy. We have seen many companies develop global strategies and then discover that they do not have the personnel to execute them. You need senior staff, with adequate technical and functional expertise, who are comfortable with (and have a family life that can tolerate) extensive international travel.
Many automotive suppliers that pursue a global business design eventually find themselves facing a fundamental business design choice: do I organize the company around regions, or do I organize it around global product groups? In a regional organizational design, there will typically be a vice president for each major region where the supplier is operating (e.g. North America, Europe, Asia), to whom the functional divisions report within that region. In a global organizational design, there will typically be a global VP for a product group or “family” who has responsibility for marketing, sales, and engineering in every major market region. Our experience is that the higher up you are on the food chain (meaning the more design, engineering and systems integration responsibility you have), the more it makes sense to be organized around global product groups.
In either design, some version of “matrix reporting” is commonplace in global companies. Staff need to be comfortable with multiple reporting relationships, each for a different purpose and set of activities.
Organizing for Global Product Development
Much attention has been paid to the potential savings companies are achieving by “globalizing” their product development process. Many mistakes have been made—and a lot of money lost—by rushing too quickly into this process. There are a number of considerations that need to be kept in mind as you make these choices. The key choices the company needs to make, that will differ according to each company’s product line and marketing strategy, include:
How much do I commonize product design across regions? Commonization of designs can save development time and money and reduce manufacturing costs, as well as customer service and inventory costs. The degree to which you can commonize depends on two factors: (1) how much customization your local markets require and (2) which elements of the product this customization affects (e.g. structural and mechanical vs. aesthetic and ergonomic).
How much do I centralize or decentralize product development strategy and decision-making? The decision on organizational structure is related to the issue of customization of products across regions. The more customized local markets are, the more it argues for local control and decision-making. (Some companies opt for a hybrid system that has global “centers of excellence” with different regions taking the lead on different product families.)
One of the choices on the centralization/decentralization spectrum is what is referred to as “distributive product development” (DPD). DPD is the process of designing your product development process so that different aspects of the process are done in different geographic locations, often by different divisions or third-party outsourcing.
The degree to which a distributive strategy is right for your company will be affected by many factors, including:
- The modularity of your product design. The more modular your design and the easier the interfaces between compon-ents, the more feasible it is to separate development of different components.
- Clarity of technical specifications. If your technical requirements cannot be clearly frozen in advance (for instance, because of the novelty of the process, materials, etc.), it is less likely that DPD will be a good option.
- Collaborative infrastructure & culture. You need a well-developed technology infrastructure as well as a company culture that adapts well to cross-boundary collaboration in order for DPD to work for you.
- Availability of appropriate talent in appropriate organizations. For DPD to work, you need to have access to the right skill bases, and they need to be in partners that you can trust, or with whom you already have a good working relationship.
There are important advantages and disadvantages to Distributive Product Development:
Implementing Your Global Design Process
There are a few simple process steps you can take to clarify your globalization strategy.
- Framework. Develop a “globalization charter” for your company. Like an Innovation Charter, a Technology Roadmap, a Lean Manufacturing Philosophy, or other framing documents, a Globalization Charter articulates how your company thinks about this particular dimension of its business, including how critical it is to your strategy; how it is likely to change over time; and what changes it will require in your company.
- Region-By-Region Analysis. Identify the key regions you believe matter to your company, and develop a written plan for them, based on the factors noted above (reason for being in the market; customer requirements; competitors; functions affected; strategy for establishing a presence; who will do the work).
- Clarify Authority for Global Strategy. Clearly designate someone on the management team as the global strategy champ-ion, and make sure you have a champion for each key region you plan to enter.
- Reduced development costs due to lower labor costs and ability to purchase capacity instead of developing it.
- Access to specialized skills that the company does not have internally.
- Shorter development cycles due to the ability to do concurrent engineering, and the ability to take advantage of existing competencies in partners.
- Improved customization of products by using talent that is grounded in the customs of the end market.
- Higher development costs due to inefficiencies in the process and more difficulty in achieving coordination.
- Difficulty achieving complex performance requirements that require close collaborative design across multiple sub-components.
- Loss of core competencies due to outsourcing.
- Intellectual property theft by partners who may be doing work for competitors.