Platt Perspective on Business and Technology

Globalization and the business model paradigm

Posted in outsourcing and globalization, strategy and planning by Timothy Platt on December 18, 2011

We live and work in a period of profound change and transition, and one hallmark of that is that certain words seem to rise in public attention as sources of disagreement and even discord. Two words that have taken positions of prominence in this in recent years are “globalization” and “outsourcing.” And as a general observation it is terms like these that become focal points of disagreement that can best serve as windows into the nature of the change taking place.

Right now, both terms – globalization and outsourcing are used in two very distinct and conceptually divergent ways. So very often, when people speak out in disagreement over them they are simply shouting at each other across the chasm of old approaches and visions on the one side, and new and emerging on the other. That is the case here.

I have been writing on an ongoing if periodic basis about outsourcing as a marker term in this blog. I simply note here in this posting that I have primarily posted on the new and emerging vision of outsourcing in my Business Strategy and Operations and Business Strategy and Operations – 2 directories, and about the old and traditional model approach to outsourcing at Outsourcing and Globalization. For orientation here and because the two terms are interconnected in use and meaning, I briefly recapitulate some of the differences here for the two meanings of outsourcing as a word that divides. Then I will switch to consider globalization and I will focus on that.

New and emerging outsourcing as a paradigm:

• Businesses hold their core capabilities needed to fulfill their strategic goals and priorities in close and in-house. They perform their own core functions that go into defining and creating their own unique value proposition.
• But to be lean and competitive, they outsource support functions where that would make fiscal and marketplace sense rather than diverting resources into reinventing wheels. They seek efficiencies by farming out services that they do need but that they cannot cost-effectively build and maintain from scratch and entirely on their own.
• As an example and to take this out of the abstract, a perfume maker might produce its own fragrances but it is probably going to outsource the job of having its web site designed, produced, and hosted. They would do this in the same way that for raw materials, they would turn to their supply chain to source and purchase.
• And in this they would devote their resources and capabilities to building their own core business so it can be more competitive in the marketplace – while supporting other businesses that work for them in what to them are support function marketplaces.

Old and traditional outsourcing paradigm:

• Businesses seek to lower costs by outsourcing production and other core functionalities to regions where labor and other fixed operating expenses are lower.
• They in effect outsource their own unique value proposition and in doing so make themselves irrelevant to their core markets when this approach to outsourcing is considered from a long term perspective.

The first and emergent approach is proactive, and it is designed to increase long term strength. The second is self-limiting and reactive and is focused on simply surviving in the here and now and in staying in the marketplace this quarter and this year.

Globalization is the context in which outsourcing in both forms takes place. And this term also cleanly divides into two very distinct paradigmatic meanings and in practice into two very different if homophonic words.

• According to the old paradigm, that still richly and persistently infuses the global conversation, the world is clearly divisible into have and have not nations and regions and into first, second and third world countries.
• Outsourcing and globalization, according to this approach, are processes in which boundaries between these countries and regions are exploited for short term gain based on differences in socioeconomic potential.
• The world is not truly flat, at least yet, so there are in fact a great many opportunities for gain through exploiting these boundaries, and this can be at great cost to people in the workforces on both sides of these boundaries. Workers and even entire communities loose out as manufacturing moves away. Government corruption can limit or block workers who now get this work from gaining real value from their labor, and for themselves and their families, and for their communities.
• It is fear of this side of globalization that drives protest of free trade agreements such as NAFTA when they are so challenged.
• According to the new and emerging paradigm, the world is leveling, and the value of globalization is not in local exploitation. It is in the increased scale of the marketplace, and both on the production and distribution side of it and on the purchasing and consumption side as well. This only really works when it creates win-win situations as anything else leads to long term failure.
• And this is why free trade agreements such as NAFTA have such ardent supporters too.

We are in a state and stage of transition and both paradigms are actively in play. At the very least, both will persist at least in low levels and under specific sets of circumstances long term and for a very long time to come.

I am going to follow this posting in a few days with a second posting: Globalization and the Economics Model Paradigm in which I will discuss the Euro Zone and its current and ongoing problems. Meanwhile, you can find this and related postings at Business Strategy and Operations – 2 (and also see Business Strategy and Operations) and at Outsourcing and Globalization.

I finish this posting with a final thought related to businesses that would outsource, and according to either paradigm. If you are to know what approach and understanding a business is actually taking you have to know and understand how their leadership views and understands what its core capability and product is. Does a shoe manufacturer see shoes as its core product and its unique value proposition, or does it see new and novel shoe designs and its design and branding capabilities as its core defining identity? If it is the former and it outsources shoe production to low labor cost countries it is explicitly following an old paradigm model. If it is the later and it outsources shoe production to other countries – but with its designs and its quality assurance controls, it may be following an emerging paradigm. The question then is if this is being done in a sustainable, long term manner or simply as a means of short term gain. So this is not just about vision and intent but also of operational process and impact.

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