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Mendoza College of Business

What lies beyond: Managing in a Global Economy

By John Shaughnessy ('77) and Rachel Reynolds

Terry Nolan has expanded his red brick printing company building seven times since buying it in 1981, increasing its size from 37,000-square-feet to 110,000-square-feet. It’s a comfortable place in Canton, Ohio, where nearly 100 employees print labels and children’s books for customers. There’s a parking lot and a street and two churches on either end of the building. The business has been around since 1923.

Nolan, a CPA who holds an MBA, grew his company and planned to one day pass it on to his son. Several of his customers are East Coast publishers whom he visits often. One day more than three years ago, things changed.

He said he and his vice president of sales called on a customer in New Jersey, and they were told that their prices, which had previously been acceptable, were now 38 percent to 62 percent high.

“They said, ‘Well, welcome to globalization,’” Nolan said.

“I have to tell you that I thought the printing business was going to be insulated from the Far East syndrome,” said Nolan, pointing out that the American printing industry is fragmented and includes many family-owned businesses in the $3 million to $5 million revenues range. “It was like a shot in the dark.”

Economic “globalization” is a historical process that has rapidly accelerated and become more transparent because of sophisticated technology and human innovation. Globalization is an extension beyond national borders of market forces that promote efficiency through competition and the division of labor, creating specialization. “It means that they (companies) can have access to more capital flows, technology, cheaper imports, and larger export markets,” according to an issues brief by the International Monetary Fund entitled Globalization: Threat or Opportunity? “But markets do not necessarily ensure that the benefits of increased efficiency are shared by all.”

“We can’t stop globalization but we can address it,” said Jeff Bergstrand, professor of finance at Mendoza and an expert on global economics and finance. “We have to realize we’re all in this together.”

Multinational corporations have competed in the global marketplace for decades, but increasingly smaller American companies are feeling the effects of globalization.

“It doesn’t matter if you’re in Ohio or you’re in Michigan or you’re in Paris, France, you’re going to be impacted by the forces of competitiveness, lower cost and higher quality,” said Keith Sherin (’81), Senior Vice President and Chief Financial Officer of General Electric Company.

Nolan, who along with Sherin sits on Mendoza’s Business Advisory Council, said he’s telling his story to help others, and he wants business colleagues to be aware that no one is immune from globalization.

Asked if he had advice for other domestic business owners, Nolan said: “Never be complacent. No matter how good business is, never take it for granted because there is, today, probably a surprise around every corner.”

Global Management Skills

Sherin has spent 23 years at GE, a $150-billion company with 45 percent of its revenues generated outside the United States. A multinational corporation is different than a domestic or family-owned business, yet they’re both facing world competition. Sherin said it is important to know where competitive threats are going to come from globally, where technology will emerge, where services will be provided, and what the cost differences are going to be in individual industries.

“They just need to have an openness and awareness about what the global economic factors are going to be that shape the competitive dynamics in their industry or in their jobs,” said Sherin, encouraging new managers and new MBA grads to travel to other countries and experience different cultures. “It’s an openness, I think, that is the most important thing.”

Sherin said managers must understand their value chain so they are prepared to take advantage of places where they can get lower cost or higher quality and also protect their technology.

Bergstrand added that today’s managers must “be as forward-looking as they can. China will simply dominate the transformation of the world economy for the next fifty years.”

Leo Burke (’70), associate dean of Notre Dame’s Executive MBA program, spent 12 years training and developing executives and managers at Motorola, Inc. He said it is critical that managers have “an appreciation for the cultural factors that impact decision making in any given country. For instance, when do you know that you actually have an agreement?”

Nolan, an avid reader of business periodicals and the Wall Street Journal, said he wants to see his competition first-hand. He plans to team up with Mendoza Dean Carolyn Woo on a trip to China in May 2005 to learn more about Asia’s rapidly changing markets.

“I want to meet my adversary,” Nolan said.

Nolan’s near-term response to international competition is to target time-sensitive printing projects that do not allow time for shipping from abroad and to diversify into other business ventures.

“I think that there is Wall Street and then there is Main Street, and I think that Wall Street is going to make their money because they have the ability to global source or outsource almost immediately in today’s environment,” said Nolan, adding that large firms have connections and capital. “They are capable of reacting very quickly. I think that it is the entrepreneur, the family business and the $3 million to $20 million range (business) that is going to have a very difficult time overcoming global sourcing just because of their reaction time. They don’t have the skill sets necessary to react as quickly as they may need to overcome global sourcing.”

Globalization has been more gradual for some than for Nolan. The president of Emerson Electric Co., James Berges (’69), has helped direct the St. Louis-headquartered electronics manufacturing firm’s shift from a North American focus in the 1970s to a global presence in 150 countries today. Less than 10 percent of Emerson’s sales were outside North America in 1970 before expanding internationally. Today, the company’s European sales are $3 billion and Asian sales are $2 billion.

“Forty-five percent of our sales today are international,” Berges said. “We have a goal of getting our international sales up to 60 percent of our sales.”

Berges paused before delivering his key point: “I don’t think you can compete today without having a global presence. If you have a footprint in virtually every geography of the world, whatever competitive threat arises from a global standpoint, you are in a position to address it.”

A Global Education

Burke sojourned in July with 72 Notre Dame alumni and Executive MBA students to Brussels, the headquarters of the European Union (EU), for a week-long immersion study of the complex international changes going on in business.

“Our students learned that today’s issues require a worldcentric point of view,” Burke said.

To enhance MBA students’ international education, Mendoza Associate Dean Ed Conlon plans intensive study periods in Brussels, Belgium; Suzhou, China; and Santiago, Chile.

“Brussels is important because you can’t be considered a global manager without an understanding of the EU and exposure to business in Europe,” Conlon said. “ China is important because it has one-fifth of the world’s population, and it’s entering the world economy at a rapid rate as a major competitor and a major consumer as well. South and Central America are important to us for a couple of reasons. They’re important trading partners for the United States and there’s the Catholic character of South America.”

Part of a world business education is learning how to apply ethics and morals in international trade when not everyone starts with the same understanding and agreement on values.

“You need to know where there are mutual values and where there are not,” said Executive Education’s Burke. “We just assume everyone is like us—but that’s not the case.”

Sherin said GE has policies, employee orientation and training, and oversight to ensure ethics and values. He said integrity is a strong part of the corporate culture.

“We stick to our policy of not participating in anything that would be illegal, and customers, frequently in developing countries—their governments—respect that,” Sherin said.

Burke went on to say that as corporations become more complex with international networks and affiliates, their ethical obligations are more complicated and involve many more people. “There are sets of transnational environmental and health problems that cannot be solved at the national level,” he said. “Multinational corporations have to understand their responsibility here. Business leaders must think through the ethical dimensions of such global issues.”

The American Workforce

Globalization has created tremendous opportunities for many businesses. It has also created concern and heartbreak for segments of the American workforce, especially unskilled workers. Bergstrand noted that manufacturing employees in the United States have been hit hard in terms of losing their jobs to lower-paid laborers overseas. According to an Economic Policy Institute report, more than three million jobs in the manufacturing sector were lost between 1998 and 2003, and 1.78 million of those lost jobs were related to rising net manufactured imports.

White-collar jobs from the United States are also being relocated abroad. At least 3.3 million white-collar jobs in such areas as sales, architecture, business operations and information technology will move from the United States to India, China and other low-wage countries by 2015, according to Forrester Research Inc. The projected losses could be even higher—as many as 6 million jobs—according to Goldman Sachs Group Inc.

“The real dilemma we’ve faced in our economy is that we have embraced globalization in terms of its efficiency, and we have totally ignored the distributional impacts that economists say go hand-in-hand with globalization,” Bergstrand said. “We’ve embraced the specialization gains but we’ve ignored the losers. It’s tearing at society. The winners are not sharing some of the gains. The reality is that some people are worse off and that need not be the case. We have to be sensitive to that and we can all gain from globalization.”

Most discussion thus far in America related to globalization has been its affect on businesses. But an equally robust discussion needs to take place regarding globalization’s affect on all workers and the American way of life, Bergstrand said.

“As a nation the debate has not been good, and it has not been clear,” he said. “There has to be a continued discussion of this at a deeper level.”

If the education and skills level of American workers rise, everyone benefits, he said. Workers are more employable and business recruiting efforts are more efficient. But workers must understand the urgency of the changes taking place, and society must provide an avenue for upward mobility, he said. Globalization must be managed well. Otherwise, the American middle class will all but disappear, he said.

“With a withering middle class, you get a polarization of society,” Bergstrand said. He went on to add: “There are going to be huge segments of our population that are going to be very, very poor.” Bergstrand warns of people living behind gated communities to protect their wealth, while others go without.

He said that globalization itself is not the culprit—in fact, it is a force that cannot be stopped—but rather a matter of how globalization has been managed in America by business and government.

Retraining and Sharing The Gains

Bergstrand advocates “trade adjustment assistance” in which displaced workers are provided income to secure education and retraining for higher-skilled jobs. He proposes paying for this by taxing those that benefit greatly through globalization.

While experts and business leaders debate how to pay for it, most agree that

displaced American workers must have the opportunity for retraining.

GE’s Sherin said companies must make hard decisions, but they should do it with compassion. When GE closes a facility that is not competitive, the company tries to help employees get to retirement and provides retraining, he said.

“We have to protect the 300,000 jobs we have all over the world, and the only way to do that is to be competitive in every way you operate,” he said. “So you’ve got to be compassionate, but you’ve got to face reality and that’s the balance we try and strike.”

Nolan has watched the face of Ohio’s towns change as the pressures of global trade hit hard. A nearby company in Wooster, Ohio, that produced molded plastic products just closed, letting 1,300 employees go because it was no longer competitive. Nolan’s company printed packaging labels for this company.

Viva Bartkus, associate professor of management at Mendoza and a former partner in the Chicago office of McKinsey & Company, encourages those who benefit from globalization to “reinvest in those people who lose out...build a bridge to a better future.” She went on to say: “For societies to accept the dislocating effects, benefits and costs have to be shared.” She also noted that workers are being squeezed out of jobs not only in American but in countries around the world as markets shift and realign.

State universities and community colleges are systems that are underused, said Bartkus, and can be utilized for retraining and educating workers who have lost their jobs.

Added Bergstrand: “We used to think, ‘You get out of school, you train for a job and you do that the rest of your life.’ The world’s not like that anymore. Not in an economy like ours. It’s about people constantly educating themselves.”

Many assert that low-end computer programming, some manufacturing, call center, textile, and unskilled work have left the United States and will not return. Other types of work will follow. Experts suggest that American employees must prepare themselves for high-end professional and management jobs as the country converts to a service economy built on intellectual property and human innovation. American jobs of the future will rely on “human capital”—intellect and skills—rather than on “physical capital”—machinery, Bergstrand said.

He said that American growth industries of the future—so-called “export industries” in which U.S. expertise is sold to international customers—are medicine, business management, education and eventually law. At one time, engineering would have also been on that list, he said, but America is losing its dominance in that field internationally. While not everyone can be a doctor, CEO or school superintendent, healthcare and business and education offer a spectrum of jobs that a person can retrain for. The higher up the spectrum in skill, the better, he said.

“When they do get retrained, it’s shown empirically that most workers in export-oriented industries tend to make about 10 percent higher income than in a non-export industry,” Bergstrand said.

The International Monetary Fund issues brief recommends that government policy focus on two areas: “education and vocational training, to make sure that workers have the opportunity to acquire the right skills in dynamic changing economies, and well-targeted social safety nets to assist people who are displaced.”

Managing Companies in the Future

“What distinguishes really good companies and great management teams from those that will be left by the wayside is really an internal ability to debate—debate data, debate insights, and ultimately debate decisions amongst the company’s senior management,” said Mendoza’s Bartkus. “You actually have to set up a culture in which that is valued while still maintaining the discipline needed to execute business functions on a daily basis.”

If globalization is managed effectively by business and government, Bergstrand said, America will remain a land of opportunity.

“Sixty years ago, after World War II, we were a very large, closed economy,” Bergstrand said. “Large in the sense that we were 40 percent of the free world’s gross domestic product, a measure of economic activity. We are now about 20 percent of the world’s GDP. That’s because the rest of the world has grown faster, along with Europe and Japan rebounding after World War II and with the emergence of China.”

Bergstrand said that high-cost societies like America can flourish in a global economy, pointing to areas such as Sweden and Singapore as examples. “We’re becoming a nation of multinational corporate headquarters.”

Bartkus said “the U.S. market is seen as the Holy Grail...“adding that through globalization “ America should continue to be very, very strong.”

“There are 300 million of us, we are very industrious and productive, and very innovative,” she said. “And if anything, those strengths will carry us over the next 20 years or so.”

Bergstrand agreed that the efficiency created through specialization and fluidity is good. “The benefits are huge.” He even asserted that global trade can reduce wars around the world and lead to peace. “If you’re trading with someone, you’re not fighting them,” he said.

“In this country, the future is in producing ideas, and having those ideas being managed here,” Bergstrand said. “If we choose as a nation to continue to make investments in education, in research and development, we will maintain that edge in being the prominent place in the world for the export of ideas.”

—John Shaughnessy (’77) is a feature writer at the Indianapolis Star. Rachel Reynolds is the Director of Feature Writing at Mendoza College of Business and managing editor of Notre Dame Business.

 

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