The rules of the game are changing

Can China beat the U.S.A. at customer service? Not quite yet according to The Economist, but they do seem to be getting there. If Chinese businesses can start to out perform the West in front office processes then China would start to be the front line seller, not the back office producer. And China has a massive, and rapidly maturing, domestic market to experiment on as it tries to get these processes right.

The Economist’s article provides us with a real sense of the shift in global business that that the current financial crises only seems to be accelerating. I’m a big believer that there’s nothing particularly special about the people in any particular country. I’ve been lucky enough to work on most of the continents and with a diverse enough range of nationalities to understand that we’re all equally intelligent, creative and innovative given half a chance. If we’re all as smart as each other then ultimately success (or not) of a country will come down to the size of its talent pool (population) and the willingness of its businesses to invest. China and India, with their massive populations, and drive to modernize are well positioned to tip the balance in their favor, if they can sort their domestic markets out. This appears to be happening.

Our current assumptions seem to be that the East (China and India) will manufacture products designed in the West (the U.S.A. and Europe) and which are sold to western customers. Most of the value is generated and captured in the West. This makes sense at the moment as the West (and the US in particular) is the largest, homogenous and rich market in the world. Western companies have the advantage of a large domestic market, and overseas companies all target the West as it offers the largest potential to grow their businesses.

However, China’s move into the front office has the potential to flip the entire balance. Western companies could be manufacturing Chinese designs for western domestic markets, with the cash generated in the West and value captured in the East. With its huge internal population Chinese business will have access to the talent it needs to invent and design new products and services. It has have a large domestic population to grow a business and tune its offering. As costs rise and the advantages of labour arbitrage are eroded, manufacturing will slowly migrate from East to West to be close to the client where it avoids currency risk (similar to how various Japanese car companies established factories in the American south).

The question on all of our lips, though, is “How does this effect me?”

The world is a more complex place than we first assumed. Not only is the business cycle accelerating, but globalization and the global financial crisis seem to be changing the underlying rules which drive the business cycle. Global supply chains are becoming yet more complex, and we’re even more tightly integrated into the global village. Plowing the same farrow as last year is no longer a viable strategy if we want to survive. We all need to think quite carefully about not just how we’re going to create good businesses in our local market, but what is going to provide out businesses with the originality they need to survive in a global market as we come under increasing pressure from competitors from all around the globe.

Suddenly it seems like The World is Flat  only scratched the tip of the iceberg.

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