Saturday, March 18, 2006

A flatter world

The world has been ‘flattened’ by globalization according to Thomas Friedman in his The World is Flat. By ‘flat’ he means ‘connected’ so that, with lower trade and political barriers and with digital technology advances, there is the ability to communicate or do business anywhere.

Friedman’s approach has been criticised as being descriptive not explanatory (here, here & here for a wikipedia review ) and Stephen Roach argues Friedman is describing a possible steady state not the world as it is – the world is not flat. But readers will get context and ideas from Friedman’s anecdotes.

Friedman distils ten major ‘flattening’ influences:

1. The fall of the Berlin wall which unleashed forces ending the Soviet empire and capitalism/socialism struggle. This, in turn, promoted common standards in business and science. This is the only major influence cited which is not technology-based.

2. The internet. Use of browser technology and the web flattened things. Netscape initiated the bubble promoting web commerciality, investment in fibre optic cables and firms such as, Goggle and eBay. Anyone could interact with anyone else on any machine.

3. Work flow software. Disparate parts of a firm were connected to other parts so when a sale was made, an item was shipped from a warehouse, a replacement item manufactured and a bill generated from a billing department. Work flow production software integrated these sorts of activities globally.

4. Open source. Much integrating software is free on the web from the 'commons' movement. Indeed the Creative Commons promotes this. The source of such innovation is partly that bright people want to show off and good ideas yield reputation awards. There is also a philosophical presumption that knowledge should be available for all. Linux and the Wikipedia are visible instances of support for free software.

5. Outsourcing. Outsourcing means taking a specific business function - such as research or running a call centre – having another company operate that for you and then reintegrating that work with a core business. Friedman writes at length about India’s IIT’s (Indian Institutes of Technology) whose graduates I taught during the 1980s. In the late 1980s, the US began to draw on these brilliant graduates in India. “India is a developing country with a developed country intellectual capacity’ (Jack Welsh) demonstrating that ‘the combination of the PC, the Internet, and fibre-optic cable had created the possibility of a whole new form of collaboration and horizontal value creation: outsourcing.’

6. Offshoring. Here whole businesses get relocated offshore to take advantage of cheap labour, low taxes or lax environmental regulation with much output exported. Textiles, electronics and car part industries have been hammered by such trends particularly in China. Alan Blinder describes offshoring as the Third Industrial Revolution.

7. Supply chaining. An example of an efficient supply chain is Wal-Mart. This monster business has carried supply-chaining – a method of horizontally collaborating among suppliers, retailers and customers to provide products at low cost by improving supply chains and cutting costs (including wages and benefits). As a retailer it has few natural resources – it can only be successful by being technology smart and by being tough with suppliers.

8. Insourcing (see here) refers to the delegation of operations from production within a business to a subcontractor that specializes in that operation. Firms like United Parcel Service (here) specialise in in-sourcing. UPS handles 14 million packages a day in over 200 countries using modern package flow technologies servicing virtually any supply chain on earth. Small firms can ‘act big’ and big firms can become local and ‘act small’.

9. In-forming. Groups like Google inform the world at low cost. Searching for information, mates and even on your own hard drive gives a supply chain of information and entertainment. Goggle now processes 1 billion searches per day globally and in a variety of languages.

10. The steroids - Digital, Mobile, Personal and Virtual - technologies turbo-charge other flatteners. Wireless connectivity means collaboration can be digital, mobile and personal. Open source will become opener, outsourcing and supply-chaining easier.

Friedman claims all these trends have recently accelerated. His views are a variant of optimistic American liberalism – it’s all so exciting but - with an occasional ‘warn your daughters’ caution. Benefits cut both ways since possibilities for progress blends with competition. This is as old as economics!

‘It doesn’t matter whether you are a lion or a gazelle.
When the sun comes up, you better start running’.

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