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Impact of Globalization on Engineering Industry

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Introduction

For decades the engineering industry has been concentrated in the USA, Japan and Europe based on its critical functional areas. These areas have been the hub for research and development and development of innovative production methods. Globalisation’s most immediate impact has been a geographic shift in technology development (Ashkenas, 2002). More and more multinationals continue to disperse their core activities across the continents to benefit from lower costs. This means engineering has now been shifted to the developing countries, which are developing some of the leading edge advancements. The development of Silicon Valley is the most prominent evidence. This is why we see most of this “cutting-edge” work being carried out in China for the telecommunication industry, software development and pharmaceutical research and development in India and advanced aerospace development in Brazil (Kinoshita 2011).

Impact of Globalization on Engineering Industry

The Concept of Globalization of Engineering 

The “new globalisation of engineering” entails a proliferation of specialised firms across the globe. It seems as if the world has been undergoing a transition in its infrastructure and the traditional organisational boundaries have been expanding far beyond the concepts of physical proximity. The international trade barriers have blurred, and the rapid advancement of technology and its geographical mobility has enabled the engineering industry to capitalise on low-cost models and market growth in emerging economies like India, China and Brazil (Millward 2007). And this transition is still on-going with its ramifications yet to be explored. This very new concept has been coined as “unlocking” of the corporate bonds. Whereas traditionally the manufacturing was bonded to the IT infrastructure within the same organisation up until the early 1990s, the new millennium saw this unlocking of these activities, keeping the core competencies unlocked to attain competitive advantage (Whitaker and Mithas 2010). 

Globalisation can be described as augmentation of international integration of markets; an interconnectedness of cross border political, cultural, economic, environmental, and technological issues. Freidman describes globalisation in three eras; the era from 1492 to 1800 marked America’s discovery by Columbus, the second era from 1800 to the new millennium, which was majorly characterised with the dispersement of markets cheap labour and resources. And the new generation of globalisation in the present era has made the world shrink even further (Giachetti 2010). Hence, companies have faced the pressure to make internal decisions consistent with global competition and incorporate these decisions into their business strategy. The engineering industry has undergone these changes in investing in research and development, innovation, cost savings and making the production processes more efficient to create a competitive edge in this highly competitive industry (Laudon 2007). 

Aims of the Study 

Hence, this study aims to analyse the impact of globalisation on the engineering industry and examine this impact in terms of this sector’s strategic management, looking in detail the challenges it imposes these multinational organisations. The study aims to develop a deeper understanding of external influences that can impact a firm’s strategic management on a smaller scale and an industry’s strategic direction on a larger scale. The study further highlights examples from the automobile, construction and telecommunication sectors of the industry. It discusses the structural changes within these sectors with a particular emphasis on the computer software sector.  

Increasing Trend of “Engineering Globalization”

 The research conducted by Booz Allen Hamilton for India’s National Association of Software and Service Companies (NASSCOM), “Globalisation of Engineering Services,” illustrates the augmentation of global investment in engineering services. The study reports an increase in engineering investment from $750 billion in 2004 to an expected $1.1 trillion by the year 2020. More and more companies are now moving towards outsourcing the high-value engineering services to emerging economies like India and China (Amburgey and Miner 1992). The automotive industry constituted 19% of this investment, aerospace about 8% and utilities for 3% in 2004. The fastest-growing sector in this industry is the telecommunications at about 30%. The study further illustrates that $10-$15 billion of these engineering services are offshored, and this is further projected to grow to $150-$225 billion by 2020. India is the hub for this offshoring with a projected market share to be 30% by 2020 (Whitaker and Mithas 2010). 

Strategic Benefits of Globalisation in the Engineering Industry 

The recent shift in society’s structure from being a manufacturing economy to a service economy has been taken further with the prospective globalisation to become the knowledge-based economy. Hence, this shift can be seen as a dramatic transition in the engineering industry. Traditionally, engineering was a process of designing individual components, but now this has moved towards creating systems (Heizer 2009). Thus engineering is highly technological, which is why it has traditionally been described as a science by which the properties of matter and the sources of energy in nature are made useful to man.” The internet has rendered this definition outdated (Hillebrandt, 2000).

The new service economy entails innovation and novelty in engineering rather than a repeated task. Globalisation has enabled firms to achieve this type of globalisation. Companies find it more profitable to outsource and offshore their engineering tasks, generating more innovation and novelty as the pool of highly skilled and creative workforce increases. The strategic implications are that the work objectives are more task-oriented and the “less technical engineering work” like marketing, finance, and management can also get done from different locations. This means the workload for engineers within the United States and the United Kingdom work less than the usual 60 hours a week on average (Helper 2000).

Changing Business Models 

Friedman has further identified the changing trends of business markets in this new globalisation era that applies to all industries currently operative in the world. Some of the most important characteristics are as follows:

Outsourcing: This refers to the business process that delegates the non-core business processes to a third party specialising in that business process. In the engineering industry, this process has been evident in outsourcing programming to India by the US companies to counter the Y2K earlier this millennium. Offshoring: This refers to a newly emerged business model where a significant business process is shifted to another geographical location. Much of the engineering industry has been offshored to India, China and Korea (Laudon 2007).

Therefore, as part of the strategic management, sourcing decisions have been an essential consideration for engineering companies. The decision to in-house or outsource is detrimental to the achievement of competitive advantage. Whereas open-sourcing practised by Linux and Apache has resulted in knowledge free barriers, the supply chains have become more vulnerable to international challenges, which will be discussed later in this study (Laudon 2007). 

Impact of Globalisation on Engineering Organizational Management and Structure 

Globalisation has changed the political and socio-economic milieu of the new era with the move towards borderless economies. However, this has gone further. Most recently, companies have been offshoring their core competencies as well. Research and development activities have been outsourced to countries like Taiwan and Japan; hence Globalization has resulted in a complete transition of the traditional organisational structure to this geographically dispersed business model. This is why these firms are more vulnerable to the impact of organisational change resulting from unlocking the core activities (Ashkenas 2002).

Considering the US economy, significant downsizing has been done in the past few years, which have resulted in outsourcing and offshoring as fundamental policy changes for many multinational corporations in all sectors of the economy. This has changed the organisational management, contradicting the management theorists and adopting new virtual corporate management (Dowling and Schuler 2006).

To analyse the strategic management of engineering firms and their resultant impact because of Globalization and dispersed, cross border business processes have entailed a new business model for the engineering industry worldwide, it is essential to understand the differences in the organisational structure and management that eventually leads to changes in strategy implications (Dowling and Schuler 2006). 

Refuting the Spatial Theory of Organization

The very concept of Globalization has refuted the same images of spatial theory of organisation which illustrate the importance of spatial consideration in developing improved business processes and performance instead of the “boundary fixed” structure of traditional organisations (Rene 2008). The flattening construction of the contemporary organisational structures has posed significant changes in these organisations’ business process functioning, which are significantly impacted by the geographical boundaries. However, the “resource base” (Cornelissen 2006) view of organisations today emphasises the need for tangible and tangible resources that enable a firm to gain a competitive advantage over its competitors and these resources can follow the spatial topology; physical boundaries, social boundaries and mental boundaries (Barney 2001).

Physical boundaries pertain to the flow of interaction within an organisation; social boundaries are the group identification and bonding of the members of an organisation, and mental limitations relate to the organisation’s culture made up of its norms and core values that are common amongst all members of the organisation (Bryan and Joyee 2007). Hence, the boundaries provide individuals with distinct identities and bonding and establish the threshold of its members, its ability of an organisation to facilitate coming in and going out of different members. Organisation members need to operate within these boundaries to increase performance (Ashkenas 2002). However, Globalization has refuted this theory as companies now work in a boundary-less environment whereby outsourcing and offshoring production facilities worldwide have become standard practices. 

Self Categorisation Theory

Likewise, the theory of self-categorisation highlights the conceptualisation of organisational attachment. It defines cognitive identification, which results from the physical proximity of the employee to the organisation. Face to face communication is a form of physical proximity, which elicits more significant interaction and identifies with the organisation (Ashforth and Albert 2000). However, the technological alternatives deter employees from forming an internalisation of the norms and culture as flexible hours reduce physical contact with the workplace (Haslam 2004). Thus, the importance of employees having to identify with the organisation has gradually decreased. The management’s primary goal is not to gain employee motivation by providing a sense of belongingness to the organisation. Instead, escalation in multi-tasking, freelancing and Flexi hours has resulted in an augmentation of group identification as a means to generate employee commitment and performance (Ashforth and Mael 1989).

However, the current business model of Globalization has changed this view of management. An essential premise in this context is the impact of the workplace’s physical arrangement on the employee identification and thus performance, which is more salient to the organisation success. The self-categorisation theory suggests that both physical and psychological proximity to the organisation are the main driving forces of identification, explaining the current trend of the highly motivating task-based workforce (Laschinger 2004). This means employees working in traditional organisations don’t need to be prone to a greater degree of identification. It is not just the physical involvement with the organisation that develops attachment. Still, psychological participation is only as meaningful. Thus, when business processes are outsourced, they can even create the involvement and passion necessary to identify employees with that particular organisation (Millward 2007).

Despite that, some of the workforces have suffered massive downsizing as the companies move towards outsourcing to low-cost countries (Loss 2011). However, the engineering industry has capitalised this practice yielding more significant benefits for the US economy on the whole. The workers were shifted to other sectors of the economy, and the overall cost of goods for the economy decreased whilst the productivity increased. This was because the engineering industry has been able to secure the high value-added work in the home country with greater control over this area’s operations. This means developing new product and process models, marketing and media efforts remained within the US while the production and manufacturing moved offshore (Loss 2011). 

Vernon’s Product Life Cycle Theory

The Product Life Cycle theory suggests that as the demand increases for a new product in other countries, the firm must set up its production facilities in those locations to achieve a competitive advantage and perhaps benefit from first-mover advantages (Kotler 2006). This move has to be even more rigorous in the engineering context as the firms have to innovate to extend their product life cycles continually. The theory then suggests that it is profitable for a firm to facilitate FDI (Foreign Direct Investment) as the foreign market becomes sufficient to support this investment. Examples from the PC and software industry have shown how these firms face pressures to innovate their technically advanced products, and these products have, in fact, very short life cycles. This means that as globalisation takes an upsurge, the market for engineering products increases, competition has become more intense, and consumers have become more demanding. The rational consumer now demands new products at reasonably competitive prices, pressuring innovative companies to invest heavily in research and development (Giachetti 2010).

“Unlocking” the IBM Business Model

IBM illustrates an excellent example of the impact of globalisation on its strategic management. IBM developed as a PC manufacturing firm, and over time, it decided offshore the development of its operating systems and microprocessors. Microsoft took over PC development, and Intel took over microprocessors and captured a dominant market share. Initially, IBM had believed its core competency to be the design and PC assembling, which was made successful through its brand recognition and marketing efforts. Thus, IBM changed its strategic discourse as the company realised that its core competence was not its PC assembling but rather the production of PCs. Hence, Microsoft and Intel captured the most significant profit (Amburgey and Miner, 1992).

Hence, strategic management has shifted to adopt an “unlocking” (Dowling and Schuler 2006). He proposed the idea of organisational change as a dimension of experimentation that is experienced in the engineering industry. Thus he believed that the process of unlocking within engineering firms had been a series of fragmented experiments rather than an implementation of a planned strategy. IBM has further capitalised on its global talent pool by an investment of $6 billion in India in an attempt to advantage from India’s cheap labour and engineering skills. The staff from India now constitutes for about 43,000, up from 9,000 in the last three years. Thus the modern-day strategic management for engineering industry mainly focuses on strategies that develop technology and facilitate cost-cutting solutions (Loss 2011). 

Offshoring Engineering Services

The automobile companies, including Ford Motors, General Motors, Toyota and Nissan, provide good examples of how Globalization has changed these companies’ strategic management. Offshoring has become a prime concern for corporate strategists who must comply with the international standards for growth and expansion, leading it to become the transformational outsourcing. For companies perusing to benefit from skilled staff, as is required for the engineering sector, offshoring presents a substantial opportunity for global sourcing in terms of productivity, efficiency, revenues and quality (Amburgey and Miner 1992).

Offshoring in this sector has reduced cycle time by 25-30% whereas cost reductions have been experienced at a whopping 30-45%. The production efficiency has increased from 20-30%whilst the maintenance costs have been reduced from 15-20%. These statistics are on an upsurge because of the specialised suppliers, back-office operations, and engineering support provided by these offshore locations (Heizer 2009).

Furthermore, the management information systems have enabled firms to develop a “fibre optic infrastructure”. The engineering processes have become more digitised, which means that it is easier to transfer the engineering tasks at any geographical location because of the advancement of a support system. This system allows all participants to access global telecommunication networks and software through highly trained staff to operate these systems. According to the National Academy of Engineering (NAE), “a typical start-up company today should begin planning for global growth from its inception” (Seymour 1987).   

Challenges faced by Globalisation

Apart from telecommunication, fibre optic and automobile sectors, construction is another important sector that has been dramatically impacted by Globalization. The strategic behaviour of these companies elicits this impact. Bon and Crosthwaite (2000) describe an international construction project to be the project that is undertaken by an enterprise outside the home country (Bon and Crosthwaite 2001). The global construction market is about US$3000 billion annually. However, Globalization has induced the definition to include projects undertaken in the home country as well. This is because advancements in management information systems and support infrastructure have enabled firms to operate in home countries and compete with foreign competitors (Bon and Crosthwaite 2001).  

Hillebrandt (2000) describes the construction industry as mostly local, giving local firms an added advantage over international firms. This is because most of the procurement, logistics, regulatory policies and political conditions under which the company operates are local. “language; knowledge of appropriate methods and procedures considering cultures, practices and climate; knowledge of laws, regulations, policies and administrative system; established client base and track record; political and economic policy which may offer preferences; and existing networks of strategic allies, suppliers and subcontractors” (Hillebrandt 2000). 

Therefore, Globalization exacerbates many challenges for this sector. As companies operate in other geographical locations, they become vulnerable to political instability in other regions. Conformance to different government policies, especially in the developing countries where the business community does not possess most of the autonomy can be a strategic challenge for these companies while formulating strategies. Economic and financial instability is also a characteristic of these countries which can be detrimental to the multinational company’s operations (Ashforth and Albert 2000). This is because developing countries are usually characterised with short economic cycles. Any fluctuations can deter the consumers’ purchasing power and the inflationary pressure that can disrupt the value chain. Government policies may also include price discrimination for the international players in support for local manufacturers. Some governments may also require the companies to form joint ventures with the home countries, high taxes, and currency fluctuations are all some challenges that can be faced. Therefore, the companies may be more vulnerable to external factors, and Porter’s External Forces Model is of prime importance (Kotler 2006).

The international construction sector has been analysed through various frameworks, and Diamond Analysis is one of them. Government action is an essential factor in strategic management for firms in this sector. Seymour (1987) and Mawhinney (2001) have highlighted how some governments have extended support to their international contractors, making these firms more competitive. These have also included lobbying activities by the political parties which incorporates all actions like soft loans, aids, data assistance for bidding, tax holidays and concession and credit extension for suppliers (Seymour 1987).

For example, South Korea has changed its strategic planning by the international factors affecting its construction industry productivity. The country exported its construction services as the primary source to facilitate economic development (Seymour 1987). 

Nevertheless, culture is another important factor that can influence the strategic management of engineering industries. Bennett (1991), and Bremer and Kok (2000) have identified the link between strategic practices of the industry with the companies therein which are greatly influenced but the culture of the country as well as the organisation itself (Ofori 2003). For example, in the construction industry, the component companies are a host of different cultures and backgrounds. Another important consideration is the bulkiness of the material required. A firm must procure the equipment and material internationally at the lowest possible costs, but the quality of inputs must not be compromised. Often there is a trade-off between the two. The joint venture of Six Companies Inc. that constructed the Boulder Dam in the United States, construction of the Grand Coulee Dam, the San Francisco-Oakland Bay Bridge and oil pipelines are examples of how vital integration is this industry. This is because civil engineering projects are fragmented mainly in raw material and supplies (Ofori 2003).

The management must be vigilant and responsive to the demand conditions internationally. The strategic direction of Skanska AB provides a relevant example. The acquisition of Beers Construction Co., W. J. Barney Corporation and CPI Plants by Skanska USA Inc. in 1994 and then Spectrum Group Ltd., Beacon Construction Co. in 1996 to capitalise in the US markets. The company’s growth strategy has been regressive to gain access to all potential international markets. It acquired Tidewater Construction Corp., CDK Contracting Co. and Nielsen Inc. in 1998 and Alex J. Etkin Inc. In 1999. However, globalisation infused the company to continue its regressive expansion model, and the company approached the European markets in the year 2000. Major acquisitions took place including Norway’s Selmer ASA which made Skanska the largest contractor for Europe. This also imposes performance pressures on the companies to meet the international demands; quality must be an essential part of its strategic goals (Seymour 1987). 

Conclusion

Globalisation has dramatically changed strategic management’s very structure, significantly impacting the organisational structures and the resultant policy changes (Ashkenas 2002). It has exposed industries to competitive advantages in terms of efficient utilisation of cheap resources throughout the world. Still, it has also told them significant challenges of quality conformance, profitability and innovation (Laudon 2007). In particular, the engineering sector has faced these challenges most closely (Whitaker and Mithas 2010). This is because the engineering products demand high innovation and rapid development of cutting edge technology to survive on the global confront. The construction industry is faced with more significant challenges of heterogeneous market conditions whereby there is high interdependence in various countries for material and equipment (Hillebrandt 2000). This exposes this industry to external uncertainties in terms of politics and economics (Kotler 2006).

The telecommunication industry faces the challenge to continually innovate because of its product life cycle and the increased awareness of consumers that has been facilitated by the internet and m-commerce (Dowling and Schuler 2006). This has reduced the transaction and switching costs for the consumers who can now make easy price comparisons can have access to cheaper substitutive irrespective of the geographical distances and can trace their products’ costs. The PC industry also falls within the same bandwidth. Hence, Globalization has exposed engineering industries to more significant uncertainties, directly impacting the strategic management for these industries (Bryan and Joyee 2007). This has further resulted in new and emerging business models, including the virtual models where the production, procurement and service functions are dispersed to all corners of the world (Loss 2011). Offshoring and outsourcing have become standard practices in the engineering industry. Examples of Ford Motor and Hewlett Packard are important relative examples (Heizer 2009).

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