Why Engagement Flows Will Speed Up Globalization

The McKinsey Quarterly has this excellent (and sobering) piece on how a financial crisis can accelerate global economic activity. A central point of the article is that whilst commodities and foreign exchange are truly globalized by Adam Smith’s definition (the Law of One Price which states that when markets are fully formed, all customers can get the same item at the same price, regardless of location), labor continues to offer significant arbitrage in different parts of the world primarily due to exchange rate restrictions that don’t let true currency value adjust naturally. I quote:

But it’s also important to understand that emerging-market economies have a structural advantage that is grounded in the operation of the global economy. Saber-rattling Western trade negotiators frequently focus their attention on the “unnaturally” depressed exchange rates of countries such as China, and this is a component of the structural advantage to which I refer. But its roots run far deeper—all the way down to the fundamental issue that labor can’t be freely traded on a single global market, while capital and commodities can. Any company sourcing its production or service operations in a lower-wage emerging-market country therefore can save enormously on labor costs. That’s painful for displaced Western workers, but it’s good for the company’s profits, good for consumers in developed markets, and good for the newly minted citizens of the global economy who are working in emerging-market factories and call centers. This is a dynamic we take so much for granted that it’s easy to imagine it as a semi permanent condition that will underpin global economic development for the foreseeable future.

Lowell Bryan, the author, opens with the a sharp wake up call:

This article explains why we should consider that seeming improbability and examines the possibility that financial crises may accelerate the transition to a global economy with more balanced trade, capital flows, and consumption.

The write-up is just superb and every CEO whose senses a complacent reliance on current labor arbitrage in her organization (read: her profit estimates depend on it), should think again.

A financial crisis may well accelerate the transition towards a global economy with balanced labor costs, but there are two other factors that are in play here. I briefly covered both these during my keynote at the International Forum on Enterprise 2.0 in Milan, earlier this month. Here goes…

First, it’s the developed nations that created the proverbial monster. As the western world sends work offshore, the standard of living and by extension cost of living in emerging markets are rising dramatically. More job opportunities means employees have negotiating power when it comes to wage increases. With rising wages we get shrinking labor arbitrage. So this can’t go on for ever. Labor prices will rise slowly but surely, at least in countries that are both quality labor pools as well as hot emerging markets.

Second, what needs to be taken into account is a phenomena that has far more immediate consequences that we work closely with our customers on, and that all leaders need to consider. In addition to balanced trade and perfect capital flows, we’re moving towards perfect engagement flows. And this will have a profound effect on globalization, financial crisis or not.

The web and now social network connectivity transcends geography and that’s obvious. From a business stand point, this means prospects and customers everywhere are fully aware of the global competencies of your organization (and that of your competitors) when it comes to innovation, product expertise, support and satisfaction.  If your Westin Hotels entering China, Yelp has already informed guests about the heavenly bed you offer in the U.S. If you’re Comcast and you’re entering Malaysia, new customers may want to get support from Frank’s superb team @Comcastcares and not the call center in Bangalore. That’s because the social web is putting fluid and deep engagement flows in place between markets, and possibly long before you even reached/scaled operations in some of these locales.

With emerging markets opening up, most organizations rushed to build locally relevant products and that was a great start. With open connectivity comes engagement and with that, comes knowledge sharing. Buyers today are much more aware of your global portfolio capabilities. So products will need to reflect not only local relevancy, but also global competency.

Customers expect the brightest customer support reps, product innovators, and subject matter experts to wrap around their innovation and support needs. Not where its the most cost effective for you, but where the best answers and experts reside across the globe. And so with or without a financial crisis and with or without your attention, engagement flows will accelerate global economic activity because the customer expects it.

How do you get there? You plan and design scalable 21st century collaborative enterprises that expose the talent and passion of:

  • happy customers who can be objectives advocates of your expertise and your integrity
  • sales and distribution partners who know the intimate needs of customers
  • employees and suppliers who know the true power of your products…

…..where ever they might be.

Are you ready?

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schultzybeckett
schultzybeckett

I can honestly say that I have never even thought about vacuuming my refrigerator coils. It is a genius idea! I have thought many times about vacuuming my furnace and air ducts. I did know that this was one cleaning step that would improve the efficiency of the heating and cooling in my home.

Schultzy http://www.cleanwrap.net/


chrisyeh
chrisyeh

Very thought-provoking. If labor arbitrage is going to go away, it makes the ability to increase per-worker productivity the primary object again. In a funny sense, a similar thing happened in the 1980s, as the rise of private equity and LBOs took advantage of poorly constructed conglomerates with strong balance sheets. But today, with most companies already running lean, simple financial engineering is insufficient, just as in the future, simply being the low-cost labor provider will be insufficient.

Sameer
Sameer

Agree, Chris. V1 of 'right-sourcing' was labor arbitrage. V2 will be value-based sourcing that transcends geo, thats customer centric and where cost is one of many variables to be considered.

chrisyeh
chrisyeh

And that is the key. Value, not cost.

Ellen Feaheny
Ellen Feaheny

Hi Sameer - thanks for this thought-provoker! A couple ideas to add to the discussion. One scary element of these increased customer expectations are that they can fuel increased demand and underestimated requirements at the resourcing or operational side in terms of meeting these increased demands. If the back office does not have proper crowdsourcing/sharing/collaborative processes, tools, models, and even a trusted E2.0 culture in place, the risk for good customer successes can be very very high. Organizational reputations are indeed at risk on the large social ecosphere for those unhappy customers.I love that the world is turning global - its exciting challenges, and enlightening on the human levels. And indeed - the experts are not always in the backyard. Fortunately, I have experienced that customers are quite tolerant and sometimes even intrigued to work with "experts" from another country - as long as the service and communications stays proactive and solidly providing value in delivery.

Ben Kepes
Ben Kepes

Great post Sameer. I guess the part that you've not discussed is the relative difference between organizations that outsource labor to other countries purely for labor-rate savings from those who do so because of some added technical ability.It's something I've been ranting about for years now (not surprising considering I own a manufacturing business that has purposely decided to continue with domestic manufacturing for all of its products). So your last bullet points can all be summed up by the statement that the organization of the future needs an ecosystem that has "perfect knowledge" (to quote econ101) but as part of this there needs to be equal weight and power in the transaction, something that will not occur under the current climate - I'm pretty sure Foxconn employees know full well "the power of the product and the needs of Apple customers" but until Apple (and all the other manufacturers) stop buying purely on price and forcing manufacturers to produce more, for less, no end of 21st century collaborative technologies will help the situation.Sorry for the rant, but it's something I'm passionate about. It's kind of my version of your epicurean focus!;-)

Sameer
Sameer

Awesome. You're right, the focus was on offshore outsourcing for labor rate savings and not ability or local resource constraints. Thats the focus of the McKinsey article to which I was reacting in this post. And I wanted to stay narrow :)Re: perfect knowledge - Ive been at this for a while to not talk about perfect anything in the enterprise setting. I'm talking about consumers moving to a stage where they have perfect knowledge and engagement flows thanks to the consumer social web. And the need for the organization to respond to this to the best of their abilities. So your example of FoxConn is spot on but only valid if Apple had in fact tried to create more of an open collaborative culture (which means understanding needs and motivations on both sides) with their external partners and in spite of that, failed. The produce for less argument is not going away - I agree with you, but with a move towards perfect information flows (in this case, negative PR), it may will push at least some organizations (I cant comment about Apple in particular) to understand how cheap can really be very pricey in the end.

gabriellinder
gabriellinder

Great post Sameer! Its easy to understand why to move from operational excellence to customer intimacy or even exceeding this to a Thought Leadership kind of culture - simple because its vital to respond to the "customers ownership of the conversation". Lets drill down. Gabriel

Sameer
Sameer

Thanks for the comment, Gabriel.I think customers ownership of the conversation is absolutely the spark. What the McKinsey article does well is focus on macro economic factors that organizations need to consider. I'm suggesting they look what whats in their back yard as well - and a big part of that is the changing customer dynamic. That shift needs to be made much faster than some of the macro economic conditions laid out. I abhor selling FUD but every CEO knows how expensive and in many cases downright improbably it is, to regain a customer. Re: Lets drill down - We are. Every day. -)

martijnlinssen
martijnlinssen

Interesting post Sameer! Social networks do indeed speed up globalisation, I think. Is it because we now have one main channel (tossing Facebook and Twitter together here) where the whole world taps into? A bit like we're all watching the same show on TV and see the same adsIt's the push-to-pull John Hagel talks about, and it will also affect the distribution of wealth: because it's so easy to "do a global pull", the natural local pull will be neglected / skipped - and I wonder who or what is going to push them. If they're not pushed, they can't pull themselves (or can they?)I'd turn the bullets around by the way, although it is a circle of course: your products are there because your customers want / need them. But in a context of pull, you'll only be familiar or knowing inside-out, and not outside-in

Ben Kepes
Ben Kepes

Martin - don't believe the hype - "we now have one main channel (tossing Facebook and Twitter together here) where the whole world taps into" you're making the mistake that most of us in this E20/technology/social media space do which is overstating both the power and the reach of our exciting new communication channel.</rant>

martijnlinssen
martijnlinssen

Thanks Ben, I admit that "the whole world" was highly exaggerated - tnx for the slap on the wrist ;-)I figured out in http://www.martijnlinssen.com/2010/04/face-off-... that there are 130 million Facebook users, and 20 million Twitter users - so that's 150 million altogether that are actively engaged in social networksIt's like an ocean though: only where it touches land do you see waves. But surf's up! LOL

Sameer
Sameer

Hey Martijn, thanks for the comment.I think facebook and Twitter are the vehicles to some degree that federate flow. Its the social databases (Yelp, Trip Advisor, Chowhound, StockTwits etc) that store the gold. Together we get powerful flow.i havent had the pleasure of reading John Hagel's book so cant comment in detail in that context, though I've heard him speak at Stanford and I see where you're coming from.And I agree with Ben, its not about one channel or another and these channels are far from ubiquitous.That said, Google is indexing more and more of this content and so the discrepancy between traditional and social data discovery is slowly vanishing. Even if 90% of the world is not using these social channels, they see it if they use a search engine.

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