Impact of Globalization on engenireeng industry - Essay Example

? IMPACT OF GLOBALIZATION ON ENGINEERING INDUSTRY By [Due [Academic of Table of Contents Table of Contents 2 Impact of Globalization on the Strategic Behaviour of Engineering Companies 3 Introduction 3 The Concept of Globalization of Engineering 3 Aims of the Study 4 Increasing Trend of “Engineering Globalization” 5 Strategic Benefits of Globalization in the Engineering Industry 5 Changing Business Models 6 Impact of Globalization on Engineering Organizational Management and Structure 7 Refuting the Spatial Theory of Organization 7 Self Categorization Theory 8 Vernon’s Product Life Cycle Theory 10 “Unlocking” the IBM Business Model 10 Off shoring Engineering Services 11 Challenges faced by Globalization 12 Conclusion 15 List of References 18 Impact of Globalization on the Strategic Behaviour of Engineering Companies Introduction For decades the engineering industry has been concentrated in USA, Japan and Europe based on its key functional areas. These areas have been the hub for research and development and development of innovative production methods. The most primary impact of globalization has been a geographic shift in the development of technology (Ashkenas 2002). More and more multinationals continue to disperse their core activities across the continents in attempt to benefit from lower costs. This means engineering has now been shifted to the developing countries, which are developing some of the leading edge advancements. The development of Silicon Valley is the most prominent evidence. This is the reason we see most of this “cutting-edge” work being carried out in China for the telecommunication industry, software development and pharmaceutical research and development in India and advanced aerospace development in Brazil (Kinoshita 2011). The Concept of Globalization of Engineering The “new globalization of engineering” entails a proliferation of specialized firms across the globe. It seems as if the world has been undergoing a transition in its infrastructure and the traditional organizational boundaries have been expanding far beyond the concepts of physical proximity. The international trade barriers have blurred and the rapid advancement of technology and its geographical mobility has enabled the engineering industry to capitalize on low cost models and market growth in emerging economies like India, China and Brazil (Millward 2007). And this transition is still on-going with its ramifications yet to be explored. This very new concept has been coined as “unlocking” of the organizational bonds. Whereas traditionally the manufacturing was bonded to the IT infrastructure within the same organization up until early 1990s, the new millennium saw this unlocking of these activities, keeping the core competencies unlocked to attain competitive advantage (Whitaker and Mithas 2010). Globalization then can be described as augmentation of international integration of markets; an interconnectedness of cross border political, cultural, economic, environmental, and technological issues. Freidman describes globalization in respect to three eras; the era from 1492 to 1800 that marked America’s discovery by Columbus, the second era from 1800 to the new millennium, which was majorly characterised with dispersement of markets for cheap labour and resources. And the new era of globalization is the present era that has made the world shrink even further (Giachetti 2010). Hence, companies have faced the pressure to make internal decisions consistent with global competition and incorporate these decisions into their business strategy. The engineering industry has undergone these changes in terms of investing in research and development, innovation, cost savings and making the production processes more efficient in order to create a competitive edge in this highly competitive industry (Laudon 2007). Aims of the Study The aim of this study hence is to analyse the impact of globalization on the engineering industry and to examine this impact in terms of the strategic management of this sector, examining in detail the challenges it imposes these multinational organizations. The study aims to develop a deeper understanding of external influences that can impact a firm’s strategic management on a smaller scale and an industry’s strategic management on a larger scale. The study further, highlights examples from automobile, construction and telecommunication sectors of the industry and discusses the structural changes within these sectors with a special emphasis on the computer software sector. Increasing Trend of “Engineering Globalization” The research conducted by Booz Allen Hamilton for India’s National Association of Software and Service Companies (NASSCOM), “Globalization of Engineering Services,” illustrates the augmentation of global investment in engineering services. The study reports an increase in engineering investment from $750 billion in the year 2004 to an expected $1.1 trillion by the year 2020. More and more companies are now moving towards outsourcing the high value engineering services to emerging economies like India and China (Amburgey and Miner 1992). The automotive industry constituted 19% of this investment, aerospace about 8% and utilities for 3% in 2004. The fastest growing sector in this industry is the telecommunications at about 30%. The study further illustrates that $10-$15 billion of these engineering services are off shored and this is further projected to grow to $150-$225 billion by 2020. India is the hub for this off shoring with a projected market share to be 30% by the year 2020 (Whitaker and Mithas 2010). Strategic Benefits of Globalization in the Engineering Industry The recent shift in the structure of society from being a manufacturing economy to a service economy has been taken further with the prospective globalization to become the knowledge-based economy. Hence, this shift can be seen as a dramatic transition in the engineering industry. Traditionally, engineering was a process of designing individual components but now this has moved towards designing of systems (Heizer 2009). Thus engineering is highly technological in its nature, which is why it has traditionally been described as “a science by which the properties of matter and the sources of energy in nature are made useful to man.” The Internet has rendered this definition outdated (Hillebrandt 2000). The new service economy entails innovation and novelty in engineering rather than a repeated task. Globalization has enabled firms to achieve this type of globalization as companies find it more profitable to outsource and off shore their engineering tasks, generating more innovation and novelty as the pool of highly skilled and creative workforce increases. The strategic implications are that the objectives for work are more task oriented and the “less technical engineering work” like marketing, finance and management is also possible to get done from different locations. This means the work load for engineers within the United States and United Kingdom work less than the usual 60 hours a week on average (Helper 2000). Changing Business Models Friedman has further identified the changing trends of business markets in this new era of globalization that is applicable to all industries currently operative in the world. Some of the most important characteristics are as follows: Outsourcing: This refers to the business process that delegates the non-core business processes to a third party that specializes in that business process. In the engineering industry this process has been evident in the outsourcing of programming to India by the US companies to counter the Y2K earlier this millennium. Off shoring: This refers to a newly emerged business model where a significant business process is shifted to another geographical location. Much of the engineering industry has been off shored to India, China and Korea (Laudon 2007). Therefore, sourcing decisions as part of the strategic management have been an important consideration for engineering companies. The decision to in-house or outsource is detrimental to the achievement of competitive advantage. Whereas open sourcing practiced by Linux and Apache has resulted in knowledge free barriers, the supply chains have become more vulnerable to international challenges, which will be discussed later in this study (Laudon 2007). Impact of Globalization on Engineering Organizational Management and Structure Globalization has changed the political and socio-economic milieu of the new era with the move towards borderless economies. However, this has gone further. Most recently companies have been off shoring their core competencies as well. Research and development activities have been outsourced to countries like Taiwan and Japan hence globalization has resulted in a complete transition of the traditional organisational structure to this geographically dispersed business model. This is why these firms are more vulnerable to the impact of organizational change resulting from unlocking the core activities (Ashkenas 2002). Considering the US economy, significant downsizing has been done in the past few years, which have resulted in outsourcing and off shoring as fundamental policy changes for many multinational corporations in all sectors of the economy. This has changed the organizational management, contradicting the management theorists and adopting new models of virtual organizational management (Dowling and Schuler 2006). To analyse the strategic management of engineering firms and their resultant impact because of globalization and dispersed, cross border business processes have entailed a new business model for the engineering industry worldwide, it is important to understand the differences in the organizational structure and management that eventually leads to changes in strategy implications (Dowling and Schuler 2006). Refuting the Spatial Theory of Organization The very concept of globalization has refuted the very concepts of spatial theory of organization which illustrates the importance of spatial consideration in developing improved business processes and performance as opposed to the “boundary fixed” structure of traditional organizations (Rene 2008). The flattening structure of the contemporary organizational structures has posed significant changes in the business process functioning of these organizations, which are greatly impacted by the geographical boundaries. However, the “resource base” (Cornelissen 2006) view of organizations today emphasizes the need for tangible and tangible resources that enable a firm to gain competitive advantage over its competitors and these resources can follow the spatial topology; physical boundaries, social boundaries and mental boundaries (Barney 2001). Physical boundaries pertain to the flow of interaction within an organization; social boundaries are the group identification and bonding of the members of an organization; and mental boundaries relate to the organization’s culture made up of its norms and core values that are common amongst all members of the organization (Bryan and Joyee 2007). Hence, the boundaries not only provide individuals with distinct identities and bonding but also establish the threshold of its members, its ability of an organization to facilitate coming in and going out of different members. It is important for organization members to operate within these boundaries in order to increase performance (Ashkenas 2002). However, globalization has refuted this theory as companies now operate in a boundary less environment whereby outsourcing and off shoring production facilities across the globe have become normal practices. Self Categorization Theory Likewise, the theory of self-categorization highlights the conceptualization of organizational attachment and defines the process of cognitive identification which results from a physical proximity of the employee to the organization. Face to face communication is a form of physical proximity, which elicits greater interaction and thus identification with the organization (Ashforth and Albert 2000). However, the technological alternatives deter employees to form an internalization of the norms and culture of their work place as flexible hours reduce physical contact with the work place (Haslam 2004). Thus the importance of employees having to identify with the organization has gradually decreased whereby the main goal for the management is not to gain employee motivation by a provision of sense of belongingness to the organization rather, escalation in multi tasking, free lancing and flexi hours has resulted in an augmentation of group identification as a means to generate employee commitment and performance (Ashforth and Mael 1989). However, the current business model of globalization has changed this view of management. An important premise in this context is the impact of physical arrangement of the work place on the employee identification and thus performance, which is more salient to the organization success. The self categorization theory suggests that both physical as well as psychological proximity to the organization are the main driving forces of identification which also explains the current trend of highly motivates task based work force (Laschinger 2004). This means it is not mandatory that employees working in traditional organizations are prone to a greater degree of identification, as it is not just the physical involvement with the organization that develops attachment, but the psychological involvement is just as important. Thus when business processes are outsourced, they are still able to develop the involvement and attachment that is necessary identifies employees with that particular organization (Millward 2007). Despite that, some of the workforce has suffered in terms of massive downsizing as the companies move towards outsourcing to low cost countries (Loss 2011). However, the engineering industry has capitalised this practice yielding greater benefits for the US economy on the whole. The workers were shifted to other sectors of the economy and the overall cost of goods for the economy decreased whilst the productivity increased. This was because the engineering industry has been able to secure the high value added work in the home country with greater control over the operations of this area. This means the development of new product and process models, marketing and media efforts remained within the US while the production and manufacturing moved offshore (Loss 2011). Vernon’s Product Life Cycle Theory The Product Life Cycle theory suggests that as the demand increases for a new product in other countries, the firm must set up its production facilities in those locations to achieve a competitive advantage and perhaps benefit from first mover advantages (Kotler 2006). In the engineering context, this move has to be even more rigorous as the firms have to constantly innovate to extend their product life cycles. The theory then suggests that it is profitable for a firm to facilitate FDI (Foreign Direct Investment) as the foreign market then becomes sufficient to support this investment. Examples from the PC and software industry have shown how these firms face pressures to innovate their technically advanced products and these products have in fact very short life cycles. This mean that as globalization takes an upsurge, the market for engineering products continues to increase, competition has become more intense and thus consumers have become more demanding. The rational consumer now demands new products at fairly competitive prices which pressurises innovative companies to invest heavily in research and development (Giachetti 2010). “Unlocking” the IBM Business Model IBM illustrates a good example of impact of globalization on its strategic management. IBM developed as a PC manufacturing firm and over time it decided off shore the development of its operating systems and microprocessors. Microsoft took over PC development and Intel took over microprocessors and captured a dominant market share. Initially, IBM had believed its core competency to be the design and PC assembling which was made successful through their brand recognition and marketing efforts. Because of this, IBM changed its strategic discourse as the company realised that its core competence was not its PC assembling but rather the production of PCs. Hence, Microsoft and Intel captured the greatest profit in this industry (Amburgey and Miner 1992). Hence, the strategic management has shifted to adopt an approach towards “unlocking” (Dowling and Schuler 2006). He proposed the idea of organizational change as a dimension of experimentation that is experienced in the engineering industry. Thus he believed that the process of unlocking within engineering firms has been a series of fragmented experiments rather than an implementation of a planned strategy. IBM has further capitalized on its global talent pool by an investment of $6 billion in India in attempt to advantage from India’s cheap labour and engineering skills. The staff from India now constitutes for about 43,000, up from 9,000 in the last three years. Thus the modern day strategic management for engineering industry largely focus on strategies that develop technology and facilitate cost cutting solutions (Loss 2011). Off shoring Engineering Services The automobile companies including Ford Motors, General Motors, Toyota and Nissan provide good examples of how globalization has changed the strategic management of these companies. Off shoring has become a prime concern for corporate strategists who must comply with the international standards for growth and expansion, leading it to become the transformational outsourcing. For companies perusing to benefit from skilled staff, as is required for the engineering sector, off shoring presents a substantial opportunity for global sourcing in terms of productivity, efficiency, revenues and quality (Amburgey and Miner 1992). Off shoring in this sector has resulted in a reduction of cycle time by 25-30% whereas cost reductions have been experienced at a whopping 30-45%. The production efficiency has increased from 20-30%whilst the maintenance costs have been reduced from 15-20%. These statistics are on an upsurge because of the specialised suppliers, back office operations, and engineering support provided by these off shore locations (Heizer 2009). Furthermore, the management information systems have enabled firms to develop a “fibre optic infrastructure” and the engineering processes have become more digitized which means that it is easier to transfer the engineering tasks at any geographical location because of the advancement of a support system. This system allows all participants to access the global telecommunication networks and software through highly trained staff to operate these systems. According to the National Academy of Engineering (NAE), “a typical start-up company today should begin planning for global growth from its inception” (Seymour 1987). Challenges faced by Globalization Apart from telecommunication, fibre optic and automobile sectors, construction is another important sector that has been greatly impacted by globalization. The strategic behaviour of these companies elicits this impact. Bon and Crosthwaite (2000) describe international construction project to be the project that is undertaken by an enterprise outside the home country (Bon and Crosthwaite 2001). The global construction market is about US$3000 billion annually. However, globalization has induced the definition to include projects undertaken in the home country as well. This is because the advancement in management information systems and support infrastructure has enabled firms to operate in home countries and compete with foreign competitors (Bon and Crosthwaite 2001). Hillebrandt (2000) describes construction industry to be largely local in nature hence giving local firms and added advantage over the international firms. This is because most of the procurement, logistics, regulatory policies and political conditions under which the company operates are local. “language; knowledge of appropriate methods and procedures considering cultures, practices and climate; knowledge of laws, regulations, policies and administrative system; established client base and track record; political and economic policy which may offer preferences; and existing networks of strategic allies, suppliers and subcontractors” (Hillebrandt 2000). Therefore, globalization exacerbates many challenges for this sector. As the companies operate in other geographical locations, they become vulnerable to political instability in other regions. Conformance to different government policies especially in the developing countries where the business community does not possess most of the autonomy can be a strategic challenge for these companies while formulating strategies. Economic and financial instability is also a characteristic of these countries which can be detrimental to the operations of the multinational company (Ashforth and Albert 2000). This is because developing countries are usually characterised with short economic cycles and any fluctuations can deter the consumers’ purchasing power and the inflationary pressure that can disrupt the value chain. Government policies may also include price discrimination for the international players in support for local manufacturers. Some governments may also require the companies to form joint ventures with the home countries, high taxes, and currency fluctuations are all some challenges that can be faced. Therefore, the companies may be more vulnerable to the external factors and Porter’s External Forces Model is of prime importance for these (Kotler 2006). The international construction sector has been analysed through various frameworks and Diamond Analysis is one of them. Government action is an important factor in strategic management for firms in this sector. Seymour (1987) and Mawhinney (2001) have highlighted how some governments have extended support to their international contractors, which make these firms more competitive. These have also included lobbying activities by the political parties which incorporates all actions like soft loans, aids, data assistance for bidding, tax holidays and concession and credit extension for suppliers (Seymour 1987). South Korea, for example, has changed its strategic planning in accordance with the international factors affecting its construction industry productivity. The country exported its construction services as the primary source to facilitate economic development (Seymour 1987). Nevertheless, culture is another important factor that can influence the strategic management of engineering industries. Bennett (1991), and Bremer and Kok (2000) have identified the link between strategic practices of the industry with the companies therein which are greatly influenced but the culture of the country as well as the organization itself (Ofori 2003). In the construction industry, for example, the component companies are a host of different cultures and back grounds. Another important consideration is the bulkiness of material required. A firm must be able to procure the equipment and material internationally at lowest possible costs but the quality of inputs must not be compromised. Often there is a trade off between the two. The joint venture of Six Companies Inc. that constructed the Boulder Dam in the United States, construction of the Grand Coulee Dam, the San Francisco-Oakland Bay Bridge and oil pipelines are all examples of how important integration is in this industry. This is because civil engineering projects are largely fragmented in terms of raw material and supplies (Ofori 2003). The management must be vigilant and responsive to the demand conditions internationally. The strategic management of Skanska AB provides a relevant example. The acquisition of Beers Construction Co., W. J. Barney Corporation and CPI Plants by Skanska USA Inc. in 1994 and then Spectrum Group Ltd., Beacon Construction Co. in 1996 to capitalize in the US markets. The company’s growth strategy has been regressive to gain access to all potential international markets. It acquired Tidewater Construction Corp., CDK Contracting Co. and Nielsen Inc. in 1998 and Alex J. Etkin Inc. In 1999. Globalization, however, infused the company to continue its regressive expansion model and the company approached the European markets in the year 2000. Major acquisitions took place including Norway’s Selmer ASA which made Skanska the largest contractor for Europe. This also imposes performance pressures on the companies as to meet the international demands, quality must be an important part of its strategic goals (Seymour 1987). Conclusion Globalization has greatly changed the very structure of strategic management, significantly impacting the organizational structures and the resultant policy changes (Ashkenas 2002). It has not only exposed industries to competitive advantages in terms of efficient utilization of cheap resources throughout the world but has also exposed them to great challenges of quality conformance, profitability and innovation (Laudon 2007). The engineering sector in particular has faced these challenges most closely (Whitaker and Mithas 2010). This is because the engineering products demand high innovation and rapid development of cutting edge technology to survive on the global confront. The construction industry is faced with greater challenges of heterogeneous market conditions whereby there is high interdependence on various countries for material and equipment (Hillebrandt 2000). This exposes this industry to external uncertainties in terms of politics and economics (Kotler 2006). The telecommunication industry faces the challenge to constantly innovate because of the nature of its product life cycle and the increased awareness of consumers that has been facilitated by the internet and m-commerce (Dowling and Schuler 2006). This has reduced the transaction and switching costs for the consumers who can now make easy price comparisons, can have access to cheaper substitutive irrespective of the geographical distances and can trace the costs of their products. The PC industry also falls within the same bandwidth. Hence, globalization has exposed engineering industries to greater uncertainties which has directly impacted the strategic management for these industries (Bryan and Joyee 2007). This has further resulted in new and emerging business models including the virtual models where the production, procurement and service functions are dispersed to all corners of the world (Loss 2011). Off shoring and outsourcing have become common practices in the engineering industry. Examples of Ford Motor and Hewlett Packard are important relative examples (Heizer 2009). List of References Amburgey, T. L., and Miner, A. S. 1992. Strategic momentum: The effects of repetitive, positional, and contextual momentum on merger activity. Strategic Management Journal Vol. 13 , p13-14. Ashforth, B. E., and Albert, S. 2000. Organizational Iidentity and Identification. Academy of Management Review Vol. 25 , p13-17. Ashforth, B., and Mael, F. 1989. Social Identity Theory and the Organization . 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