Chapter 2: Change and Transformation

Globalization Perspective

We are entering the era of new transformation, and more specifically defined as an era of wealth creation due primarily to Globalization and impact towards our society. Adam Smith accurately said that "natural effort of every individual to better his own condition is so powerful a principle, that it is alone and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred obstructions."

To begin, we need to recognize that the '90s attempted to spoil us, and in fact created a new society of consumers, customers, companies and individuals governed by new processes, values, strategies and rules. This economic trough is a natural part of the business cycle. America just came out of a very prolonged and unusual positive business cycle—ten years when they normally last six—building an information technology and equities bubble as well as unnecessary levels of excess capacity. While we were lulled by the house of cards created by the technology boom, an acceleration of the "globalization" and "exportation" of our economy occurred. The most interesting aspect is that the U.S. economy has fundamentally changed. By the end of the 20th century, most nations recognized that technology is a critical driver of economic growth.

US Government Perspective

This view is presented from the US Department of Commerce. US is very much involved with Globalization efforts. In the 1990's, technology's contribution to US economic prosperity was very visible. Innovation in new technology created U.S. jobs, has increased growth in our economy and helped to make US corporations more productive. According to the Department of Commerce and Department's Economics and Statistics Administration, for example, the information technology sector, over 1996–2000, represented only 7 percent of businesses in the U.S. but accounted for approximately 28 percent of overall real economic growth. (66)

US Department of Commerce indicates that the

United States has long been a leader in technology innovation and development. The 21st century promises the rise of new centers of technological excellence around the globe. Globalization is already a potent phenomenon in respect to the migration of people, the opening of markets, and the linking of national economies. Much the same is also now rapidly becoming a reality for essential activities leading to commerce - such as the research, manufacturing, and marketing of new technology-based products. (66)

In fact, this global marketplace and "technology globalization" is defined as an "expanding roster of nations able to conduct world-class research and development and nations' increased investment in national infrastructures for innovation which presents new opportunities and challenges for U.S. technology entrepreneurs and government policymakers." (33)

According to US Government, US human capital is major and the top element of innovation, eventually leading to economic prosperity. As such, a robust economy depends not only on growing, healthy and open markets, efficient government, innovation infrastructure, a quality education system, but also on an adequate supply of talented and skilled workers. This will be reviewed in a competitiveness report.

According to US Department of Commerce, Canada, France, Germany, Italy, Japan, United Kingdom, and the United States accounted for 67 percent of the world's Gross Domestic Product (GDP) in 2000, are leading nations in terms of R&D expenditures, and have taken steps to ensure their innovation in technology.(66)

According to US Government and Dept of Commerce, Globalization has been reviewed in 3 perspectives.

Firstly, it has to be reviewed by the supply side, the demand side, and the globalization of work. The supply-side analysis looks at the policies and approaches in-place for the development of the worker, like the primary, secondary, and tertiary education systems in each country. It highlights the "pipeline processes" in each of the seven countries. The demand side looks at the issues surrounding the S&T workforce of the government, business, and university sectors. This includes workforce size, unemployment rates, unfilled positions, and intra-nation mobility issues. Finally, the third perspective, globalization of the workforce looks at the trends and policies in national capacity in terms of immigration and emigration of S&T talent and international mobility. (66)

McKinsey Perspective

According to a recent report from McKinsey (October 2003), multinational companies are benefiting greatly from globalization, innovation and offshore trends. In fact, investment in the developing world opens up new horizons for economic development and for company strategy. McKinsey Global Institute launched an in-depth inquiry into multinational company investment in developing economies. The McKinsey Global Institute's latest report shows that the overall economic impact of multinational investment on developing economies has been very optimistic. Companies are also seeing substantial benefits but have only started to capture the large cost savings and revenue gains possible from operating in these markets. New opportunities in cost savings and revenue generation are opening up for multinational companies. These extensive report findings suggest that there are enormous opportunities for companies to create value by taking full advantage of falling barriers in regulation, transportation costs, communications costs, and infrastructure. (63)

Furthermore, according to the McKinsey report, multinational companies are well positioned to transfer their competitive products and processes, but less equipped to tailor them appropriately to local conditions. Currently, the intermix of industry characteristics, regulatory restrictions, and organizational limitations prevent some companies from pursuing further industry restructuring. However, as a result of competition, liberalization, and new technologies, new possibilities are opening up where a greater degree of specialization is possible. The opportunities for developing economies are significant, and through the application of capital, technology, and a range of skills, multinational companies' overseas investments have created positive economic value in host countries, across different industries and within different policy regimes. According to McKinsey, the single biggest effect was demonstrated through the improvement in the standards of living of the country's population, as consumers have directly benefited from lower prices, higher quality goods, and broader selection. Improved productivity and output in the sector and its suppliers indirectly contributed to increasing national income. Foreign direct investment is already having a dramatic impact on the way companies do business and developing how economies integrate with the global economy. (63)

The McKinsey report goes on to suggest that both multinational companies and developing economies could find enormous benefits through foreign direct investment. It is important to note that the global expansion has its pitfalls as well as its opportunities, and CTO/CIOs, as well as policy leaders, need to fully understand them both. McKinsey states that to find the value, companies need to rethink their entire business process. "Going global" is obviously not a recipe for success in and of itself.

The McKinsey report specifically states that opportunities for developing economies are sizable. As a background, it is important to state this from the McKinsey report.

Through the application of capital, technology, and a range of skills, multinational companies' overseas investments have created positive economic value in host countries, across different industries and within different policy regimes. The single biggest effect evidenced was the improvement in the standards of living of the country's population, as consumers have directly benefited from lower prices, higher quality goods, and broader selection. Improved productivity and output in the sector and its suppliers indirectly contributed to increasing national income. And despite often-cited worries, the impact on employment was either neutral or positive in two-thirds of the cases. Foreign direct investment is already having a dramatic impact on the way companies do business and how developing economies integrate with the global economy. Investments by multinational companies allow developing economies to share in the considerable benefits of the global economy. Official incentives, trade barriers, and other regulatory policies, though, can result in inefficiency and waste. MNC investment had a positive to very positive impact on the host country. Rather than leading to the exploitation of lower-wage workers, as some critics have charged, the investments fostered innovation, productivity, and an improved living standard. Therefore, government seeking those advantages would be advised to favor policies of openness, rather than regulation, when it comes to foreign direct investment. MNCs were shown to create substantial value for host countries, regardless of whether investments were market seeking, to seek new consumers or efficiency seeking to tap into lower local production costs. In every other case, foreign investment spillover effects stimulated supplier businesses and fostered improvements in technology and skills. Though in some cases jobs were lost through elimination of inefficient local players or streamlining inefficient production operations, benefits to consumers were significant in terms of lower prices, more product choice, and increased productivity, which in turn increased national wealth. Barriers to foreign investment and trade can create a competitive disadvantage for developing nations, rendering the considerable benefits of the global economy inaccessible to them. Governments can more effectively grow MNC investments by putting the basic building blocks of productivity in place, through strengthened power, transportation, and legal infrastructures, and the enactment and enforcement of clear and consistent official policies. Several powerful factors, from liberalized foreign investment policies to a drop in the costs associated with global operations, are making a convincing case for building truly worldwide businesses. Thanks to an increasingly mobile and connected world, global corporations stand to simultaneously increase efficiency and lower costs by taking full advantage of the growing expertise and specialization in emerging economies. For MNCs to take advantage of these opportunities, they need to recognize what aspects of their industry best lend themselves to globalization. (63)

As a result, globalization has really changed, and new rules have emerged.

This ongoing global expansion allows companies to mine new markets for their products in:

• Product specialization: Certain countries or regions take over the entire production process of a particular product.

• Value chain disaggregation: Each portion of the supply chain is located in a separate area with relevant expertise within a region. Parts are then assembled in yet another location.

• Value chain reengineering: After relocating an activity to a new location, production process can be tweaked by adjusting capital/labor ratio to capture further savings.

• New market creation: Successful global value chain management leads to the creation of better products at lower prices, which in turn can be introduced to whole new markets. (63)

It is important to note the following issues related to Globalization. Companies must balance global resources with local knowledge, and companies must recognize that there is no single blueprint that works for every sector in every country.

Information Technology changes around the world are reflected throughout the book. I have a tendency to believe that the Globalization element is very important to the survival of the CTO/CIO role. We will see in the book that companies are moving information technology to offshore locations to emerging markets like India and Russia.

We will also review offshoring as part of a global innovation strategy. I believe that this is a strategy that will change the world. Offshoring is growing at 30 percent per year and is projected to grow to more than US$200 billion by 2008. Despite widespread concerns that offshoring eliminates jobs at home, in reality the revenue saved through offshoring is being reinvested at home. India is a much needed player for global market for IT talent. India has increased the headcount of thousands of high tech jobs. The emphasis will be on value-added services. Numerous new jobs have been created, and higher value-added functions have been brought to India and Russia. (63)

Goldman Sachs Analysis Report

Another and slight larger view of emerging markets comes from a recent Goldman Sachs report. It indicates that emerging markets are continuing to grow at a very fast pace. We also seeing a major fundament shift in the world related to global economics. The relative importance of the emerging economies as an engine of new demand growth and spending power may shift more dramatically and quickly than expected. It is important to realize that emerging economies have enhanced infrastructure to deliver services in any geography based on a concept of real value-based virtual organizations.

The growth of new world's economies should reflect on how the firms are taking advantage of global innovation and offshoring capabilities. Indeed, the strategic choices are becoming very complex. Recently, Goldman Sachs, in its Global Economics paper (October 2003), has created a scenario where, over the next 50 years, Brazil, Russia, India and China could become a much larger force in the world economy. In fact some emerging economies, in less then 40 years, could become larger than the G6 in US dollar terms. The article goes further to state that by 2025 they could account for over half the size of the G6. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050. (41)

Another astonishing statistic, according to Goldman Sachs, is that as early as 2009, the annual increase in US dollar spending from emerging economies could be greater than that from the G6 and more than twice as much in dollar terms as it is now. By 2025 the annual increase in US dollar spending from the emerging market could be twice that of the G6, and four times higher by 2050. (41)

Being invested in and involved in the right emerging markets may become an increasingly important strategic choice for companies and corporations in United States. Adam Smith has accurately said that "where the inferior ranks of people are chiefly maintained by the employment of capital, they are in general industrious, sober and thriving…and where the inferior ranks of people are chiefly maintained by spending of revenue, they are in general idle, dissolute, and poor." The Goldman Sachs report also indicates a new shift of growth, investments and spending in the emerging economies. Higher growth in these economies could offset the impact of growth in the advanced economies. Higher growth may lead to higher returns and increased demand for capital. The weight of the emerging in investment portfolios could rise sharply. Capital flows might move further in their favor of emerging economies, prompting major currency realignments. Rising incomes may also see these economies move through the "sweet spot" of growth for different kinds of products, as local spending patterns change. This could be an important determinant of demand and pricing patterns for a range of commodities. As today's advanced economies become a shrinking part of the world economy, the accompanying shifts in spending could provide significant opportunities for global companies.

Natural Maturation of Markets and Efficiency

Some people even ponder to say that America is losing its drive, desire and mission to maintain the innovation we once had.

As I was putting my views together on globalization and offshoring, I had a really interesting dialogue with William Sanford from Columbia Strategy which really opened another dimension. Can emerging markets catch up with us soon, and can we continue to innovate? In the future section of current economic climate, I describe an "irresponsible optimism" of America during the internet boom. I believe the economic boom was based on speculation, rather than true economics and growth. Mr. Sanford states that "Perhaps Americans are too much of dreamers to be responsible all the time." (79) As we mentioned earlier, □Globalization is a natural evolution maturation in the economics of the world. Mr. Sanford states that "Communication across international entities is becoming more and more widespread, cost-efficient, simple and accepted, while the relative distance is increasingly closing with relatively cheap air travel, global customers, etc. Yet, it may take a 100 years or so until working globally becomes efficient." (79)

At one point in his career, he had an idea of creating a database that captures all of the work that anyone does in the company. For instance, Mr. Sanford says "if I developed a java based application that would instantly convert image files and populate a Lotus Notes picture gallery, I would have to complete a comprehensive write up, supply source code and final code, as well as anything done related into a database. This way, if a software engineer in Germany was charged with the same task, he would search this 'intellectual capital' database and find my code and simply use it. The idea is based on the same company and same property." (79) I tend to agree that information needs to permeate through everyone across the globe to become efficient.

We will state in a following section that much of the outsourcing today is for commodity products and services—where the cost advantage is the difference between a profit and loss. In terms of higher level services/ products that can be outsourced, what Mr. Sanford believes is becoming a larger challenge, a cultural challenge. There needs to be conformity of thought and beliefs. From emerging countries, Russia has the very good ability to work well with the U.S. Both countries share a work hard, achieve and dream mentality, largely sparked through the cold war.

Russia will be discussed in the next chapters. As we stated earlier, U.S. during the 21^st century was the source of most innovation in the world. Bill Sanford clearly described the US Mentality. "There was a certain mentality here that permeates throughout the U.S. in the shape of a 'crazy, lofty and dreamy' culture (i.e. cow tipping, sky diving off of a sky scraper, going to the moon). Kind of a craziness where we see now boundaries - perhaps often irresponsible." However, he also points out that in Japan, India, China and Germany to some degree, the mentality is almost robotic and it is eroding the human spirit to dream, innovate. Many governments like the Japanese come to U.S. to try and figure out how we keep sparking innovation.

Mr. Sanford believes that they push their kids so hard and they still are thinking outside the box. The problem, he believes, is that they are being taught to follow the book and make no mistakes, whereas education should be the passing of tools that one can use to build their dreams as their mind wanders. Americans never took too much too seriously, as we have thrived to break rules. That is the mentality that is required to truly innovate and change a culture/ world through product/ service offerings that are value creative across the board. (79)

Mr. Sanford sparked a thought process that clearly marks US competitive advantage. Our mentality is really required to focus on innovation. For higher level services to become outsourced, there is a lot of maturation that is going to have to occur in emerging markets. As Bill Sanford states:

"This will include the need to have years of experience in understanding customers, then their problems and only then, begin to dream up solutions. In America, employees are not expected to simply follow rules. They are expected to curtail management and provide a solution to a new problem before management ever knows about it. Many people around the world are more talented and capable than the traditional American worker, they just need time for their culture to allow them to roam free."(79)

It is globalization that will eventually enable an exponential growth in capabilities of man in creating a global economy.

Competitiveness Issues

As we conclude the globalization section, I would like to summarize important issues related to competitiveness. Very recently, Intel Chairman signaled that our technology innovation is in a challenged state, and we need to act quickly to regain the innovation momentum. Andrew S. Grove mentioned that the software and technology service businesses are under siege by emerging countries taking advantage of cheap labor costs and strong incentives for new financial investment. India's booming software industry, which is increasingly doing work for U.S. companies, could surpass the United States in software and tech-service jobs by 2010, he said. He also said that the software and services industries -- strong drivers of U.S. economic growth for nearly two decades-- are very similar to U.S. steel and semiconductor industries faced in the past. Grove calls upon a new wave of innovation in United States. (53)

The question is much deeper. Can US compete with the rest of the economic markets? At this point, we are still the most competitive nation in the world .The next section will discuss competitiveness reports. Grove states there are real challenges in the world such as plunging global telecom costs, lower engineering wages abroad, and new interactive design software that are driving revolutionary change. He also states that:

"From a technical and productivity standpoint, the engineer sitting 6,000 miles away might as well be in the next cubicle and on the local area network. To maintain America's edge, Washington and U.S. industry must double software productivity through more R&D investment and science education." (53)

Global Competitiveness Report- World Economic Forum

I am outlining a significant study from the Global Competitiveness Report. This report is published annually by World Economic Forum. (91)

In summary, the global information technology report underscores the growing relevance of information technology (IT) in national economies and the continuing need for an assessment of the readiness of countries to participate in the Networked World. The Global Information Technology Report is the most comprehensive assessment of how prepared an economy is to capture the benefits of technology to promote economic growth and productivity. The report highlights that the use and application of information and communication technologies (ICT) remain among the most powerful engines of growth. Specifically, the Global Competitiveness Report 2002–2003, which examines the growth prospects of 80 countries, remains the most up-to-date and comprehensive data source available on the comparative strengths and weaknesses of leading economies of the world.

The report states that over the last 12 months, the world economy seems to have been robust and resilient. The report also emphasizes that the global economic outlook remains clouded with tremendous uncertainty. The report outlines that the prospects of a war in Iraq, corporate scandals, the bursting of the IT asset bubble, and the uncertain outlook in some emerging markets continue to weigh heavily on investors' confidence. Considering the potential damage these shocks could have caused, the world economy and the global financial system seem to have proved surprisingly resilient.

This report measures competitiveness—"that is, the set of institutions, policies, and regulations that support high levels of productivity and drive productivity growth and sustained increases in output." (91) Competitive countries can be expected to return to a sustained growth path faster and earlier than those that are less competitive. The Global Competitiveness Report is a five-to-eight-year prospect in a large number of individual economies. The first report (see Appendix B) focuses on growth competitiveness this year covering 80 countries; the Growth Competitiveness Index (GCI) represents a best estimate of the underlying prospects for growth.

It is also important to note that the Growth Competitiveness Index is based on three broad categories of variables that are found to drive economic growth in the medium and long term: technology, public institutions, and the macroeconomic environment.

Analysis of the Report

The following is a brief analysis of the report (91):

In the high-income countries, each new technological innovation triggers yet further innovation, in a kind of chain reaction that fuels long-term economic growth.

The United States leads the Growth Competitiveness Index, swapping positions with Finland, last year's number 1 and now ranked number 2. Taiwan, Singapore, and Sweden follow. While Singapore has retained its fourth rank, Taiwan and Sweden enjoy a significant improvement of three and four positions, respectively. An even greater improvement in its relative position concerns Switzerland, however, a country that is being ranked sixth this year. The United States owes its position mainly to its stellar performance on technology-related factors. Research and development, collaboration between universities and businesses, the level of tertiary education, and a sophisticated and innovative business and academic community all contribute to the high ranking of the United States. The United States also receives high scores for its venture capital markets, receptivity to innovation, and leadership in information and communication technology.

Finland also enjoys a very high level of technological sophistication, being ranked third in this dimension of competitiveness. In addition, Finland's public institutions are perceived to be the best in the world. On the other hand, Finland has slipped slightly in terms of its macroeconomic environment. Taiwan's high overall score also results primarily from its very high position on the technology index, whereas Singapore's strengths are found especially in the macroeconomic area.

As far as emerging-market economies are concerned, China and India register substantial improvements in their relative positions, to 33 and 48, respectively. The world's two most populous countries—but especially China— have outperformed most other countries in terms of economic growth in recent years. Much of the countries' overall rankings is owed to their stable macroeconomic environment, although in the case of China, potential risks have been flagged more recently with regard to contingent liabilities for the budget stemming from problems in the banking sector.

Conversely, the overall rankings of Argentina and Turkey decline substantially, to 63 and 69, respectively. Both countries have suffered from severe financial crises that have caused real output to shrink dramatically. Relative to their overall position, both countries do moderately well on the technology dimension. Namibia at number 53, Morocco at number 55, Croatia at number 58, and Haiti at number 80. Tunisia owes its ranking to moderately good performance on macroeconomic environment variables and especially to good public institutions. Haiti, at the bottom, is known to be going through one of the most difficult periods in its history. Its competitiveness suffers from rock-bottom scores on technology and public institutions and only a slighter better position regarding the country's macroeconomic environment.

The authors of the report argue that countries that have invested in innovative capacity look set to become more competitive and achieve higher levels of prosperity. In addition, Porter and Stern express concern that those countries in which innovative capacity lags behind overall productivity are likely to find it difficult to sustain their current levels of competitiveness. (91)

According to Porter and Stern's analysis of the report, the United States continues to maintain the highest innovative capacity.