(c) Oleg Cheremnykh (Lions), freelance consultant on strategic management. All rights reserved.

Globalization: the name of the game in the XXI century

Definition of globalization

By definition, globalization of business means globalization of its operations – structures, business processes and corporate projects; flows – material, financial, information and workflow and of its stakeholders – shareholders, clients (customers), suppliers, partners, government entities, interest groups, NGO/NPO , mass-media, stock market, community and competition.

From another perspective, globalization of business means that purely geographical and cultural barriers between nations have been so significantly reduced (weakened) that operating international (transnational) businesses is almost as easy and “natural” as operating a purely “domestic” business (i.e. business confined to the borders of a single country), although it does require certain “global business management know-how” in addition to “classic business management”.

Consequently, globalization of business means that in the XXI century practically any business has to view itself as an international business (“from the global perspective”) and, therefore, has to acquire all know-how required to compete globally – with global competition in its “domestic” markets and in markets in other nations (i.e. worldwide). In other words, in this century every business is already a global business (whether it wants it or not).

Inevitability of globalization

Globalization is inevitable because its potential benefits for businesses, consumers and governments worldwide far outweigh its costs and risks.

The most important globalization benefit for businesses is access to global markets which significantly (often by orders of magnitude) increases the growth potential for each and every business. In addition, globalization of business operations creates ‘diversification effect’ which, in turn, significantly increases the stability of business, reduces risks and, therefore, increases the shareholders’ value – the most fundamental objective of business management.

Another important benefit for business growth is access to global financing – loans, corporate bonds and direct investment which allows businesses to undertake large expansion projects which would have been impossible had the business been limited to strictly domestic sources of financing.

Globalization of business opens access to a much broader pool of qualified personnel which is one of the three key resources of business, together with capital and information (knowledge). In addition, globalization of business means also globalization of knowledge (further enhanced by state-of-the-art computer and information management technologies) which is also highly beneficial for business growth.

Naturally, globalization of business means also increased competition and increased opportunities for acquisition of business by more powerful global rivals (cross-border mergers and acquisitions are almost as frequent as domestic ones). However, these factors can be viewed as ‘blessings in disguise’ that create powerful incentive for business owners and managers to ‘be the best of the best’ radically increase the effectiveness and efficiency of their businesses and thus – profitability and shareholders’ value of their enterprises.

For consumers, globalization of business means wider selection of products, lower prices, better quality and better service due to increased competition. For governments, globalization brings higher economic growth (due to higher business efficiency), more taxes and higher living standards of the population.

Advances in electronic business technologies (more precisely, in computer and business information management technologies) create another important factor that makes globalization inevitable (because they make it already possible to form and manage completely borderless ‘electronic marketplace’ and electronic business community).

Three key challenges of globalization

However, as we will see below, these benefits (at least for businesses and governments) will not occur automatically. Globalization processes present significant challenges for businesses and governments and, as was vividly demonstrated by several financial crises, globalization process needs to be very carefully managed by both commercial enterprises and government entities to get the most out of its potential benefits and to keep both risks and costs of this process under a tight control.

Three key challenges of globalization process are:

  • Management of individual businesses (internal business processes and structures)

  • Management of ‘external business interfaces’ – B2C (Business-to-Consumer ), B2B (Business-to-Business), B2G (Business-to-Government), B2O (Business-to-cOmmunity), B2M (Business-to-Media), B2S (Business-to-Stock market), B2IG (Business-to-Interest Groups), B2N (Business-to-NGO/NPO) and others

  • Formation and management of global ‘Electronic MarketPlace’ (EMP) and ‘Electronic Business Community’ (EBC)

Management of Individual Businesses

The key challenge in managing individual businesses in the globalization era is development and implementation of adequate business models. Existing business models are based on ‘classic theory of management’ which worked well in relatively stable, mass-market and mostly domestic industrial and post-industrial economies but no longer works in the fast-changing global economic environment and ‘information economy’ that had to be tailored to the needs of a large number of increasingly sophisticated ‘individual markets’.

Computer hardware and software technologies developed during the past decade created a potential for a significant increase (by an order of magnitude and even more) the efficiency of businesses and economics worldwide and, therefore, in the GDP growth.

Unfortunately, this potential still remains mostly a potential (which was amply demonstrated of the burst of the “Internet bubble” on the stock market a few years ago). And the major reason for that is that existing business and management models and technologies (including knowledge management and IT management) still lag a couple of generation behind the capabilities of hardware and software computer technologies.

In other words, while recent advances in computer hardware and software development make it already possible to make a successful transition to the “electronic business community”, “electronic society” and “knowledge-based economy” where “every human being is an entrepreneur and a celebrity”, existing business management models and technologies are still “stuck” in the “post-industrial” (if not industrial) age which makes them incompatible with the state-of-the-art computer technologies and thus prevents the society and the business community from utilizing the latter to the fullest.

Managing a global business requires that all business structures – business units, regional branches, etc. speak the same internal language – regardless of the cultural specifics of each individual country. Therefore, new business models have to be (1) uniform and universally acceptable for all dominant business cultures (American, European, Eastern, Russian, etc.) and (2) include the mechanisms for “translating” business concepts, rules, procedures, objects, etc. from the universal ‘internal corporate language’ into the specific ‘business languages’ of each constituent business culture of a global company (i.e. interpreting global concepts in local terms and local concepts – in global terms).

Management of ‘External Business Interfaces’

Management of ‘external business interfaces’ is another key globalization challenge because it is exactly ‘at the border’ (boundary) between the business and its stakeholders (customers, suppliers, government entities, etc.) where a lot of resources (time, effort, money, etc.) is lost (sometimes up to 90% of time and effort). Therefore, radical improvement in “management of business boundaries” (i.e. management of business interfaces) present an enormous opportunity for improving the efficiency and profitability of individual businesses and of the whole international business community.

The primary reasons for such significant ‘border losses’ can be easily understood if we look more closely at the technicalities of the “cross-business-border transaction” process. Each cross-business-border transaction (CBBT) is an integral part of a ‘transbusiness process’ (‘value creation chain’) which, for example, in consumer goods industry corresponds to a complete distribution channel – from manufacturer to individual consumer.

Graphically, CBBT can be shown at the following diagram:

… -> Internal business process (1) -> B2B Interface-> Internal business process (2)-> …

Efficiency of the CBBT is maximized under the following conditions (‘business processes compatibility conditions’):

  1. Internal business processes in both businesses are highly formalized and optimized

  2. ‘Process description languages’ (PDL), used for formal description of ‘business process constructs’ (inputs, outputs, activities, documents, information blocks, etc.) in both businesses are similar (ideally, identical) to each other (in other words, all companies ‘speak’ similar business languages – and completely understand each other)

  3. Functionally similar business processes in both businesses are structured in a similar way

  4. B2B interface is formalized, optimized and described in the PDL similar (ideally, identical) to the PDL used for describing internal business processes Currently, none of these conditions is met which explains the sorry state of CBBT efficiency. Therefore, the key challenges in management of ‘external business interfaces’ (EBI) are (1) development and implementation of “common PDL” for business processes modeling – worldwide (“lingua franca” of business process modeling) and (2) development and implementation of common B2B and other business interfaces.

In other words, EBI management requires (1) tight integration (through e-business technologies) of ‘cross-border’ business processes in B2B systems (ultimately into the electronic marketplace and into the electronic business community); (2) their integration with behavioral patterns of individual consumers and (3) their integration with activities of government entities, NGO/NPO, interest groups and communities. Naturally, interfaces with stock market and media are simply two special cases of B2B interfaces.

Formation and Management of Global EMP and EBC

Practically all ‘transbusiness’ processes (with the exception of physical transfer of materials or material products) involve either information exchange or information processing or both. Therefore, the efficiency of these processes (provided that they are optimized beforehand) can be greatly improved by the utilization of the state-of-the-art e-business and other computer and information management technologies.

Therefore, globalization of business combined with already existing e-business technologies will inevitably lead to formation and growth of the global electronic marketplace (EMP)and electronic business community (EBC). Consequently, the last key challenge of business globalization is the optimum structuring of both EMP and the EBC (in terms of maximization of financial, functional and emotional value created by these entities).

Case for Formal Business Engineering

СВВТ maximization requirements can only be met when business and its interfaces are properly engineered (not reengineered!). The difference between business engineering and business reengineering is that the latter denotes radical restructuring of business constructs (business processes, plans, job descriptions, etc.) in order to make a quantum leap in business effectiveness and efficiency while the former denotes structuring the business (creating formal, all-encompassing and coherent structure out of a chaotic state that most business currently are in) although with essentially the same objective as business reengineering – a radical increase in business effectiveness, efficiency, profitability, competitiveness and shareholders’ value.

Naturally, business engineering is a permanent process which starts with a one-time project of “business structuring” and continues with the process of permanent improvement (sometimes radical) with the structures (processes, documents, assets, personnel) for permanent business improvement being created and implemented during the initial phase of business engineering.

In other words, if the current business structures can be described as 80% of chaos and 20% of order (and usually a rather inefficient one), business engineering (BE) means formation of business structures that are comprised out of 80% of order and 20% of chaos (necessary for achieving the degree of flexibility essential for the survival of business in current rapidly changing environment). This optimal combination of order and chaos can be called ‘dynamic business flexibility’ (the term derived from the military aviation term ‘dynamic aircraft instability’) that will be explained in more detail later.

Prior to the ‘globalization era’ and the ‘e-business revolution’ businesses could afford to exist (and even prosper) as loosely coupled internally and externally and mostly chaotic structures where 90% and more effort, time and money was lost – directly or as and ‘opportunity cost’ at the border between internal and external business constructs.

In the EMP and EBC this situation (‘business state’) is no longer acceptable. In order to get the most out of the business resources – capital, personnel and knowledge and out of the inevitable and relentless globalization process (in other words, to ‘fit into’ the upcoming EMP and EBC) business has to become a properly and efficiently engineered system, compatible with upcoming ‘business engineering standards’ (ideally, to play a major role in setting these standards, to become the market and industry leader in business engineering and in the formation, development and implementation of EMP and EBC).

As the development of the EMP and EBC is inevitable (due to its risk/reward profile replacement of the current – ‘real’ marketplace and business community with the EMP and the EBC is only a matter of time) only those businesses will be able to survive and prosper that will engineer their internal constructs and interfaces according to the inevitably upcoming BE standards. Others will either go out of business or will be acquired by stronger rivals, who managed to ‘fit into’ the new marketplace and business community faster and better than their rivals.

‘Post-industrial’ paradigm (that the overwhelming majority of existing businesses still adhere to) neither applied any serious outer ‘engineering pressure’ on businesses nor provided the resources – external or internal – necessary for successful implementation of BE projects.

Fortunately, the ‘e-business era’ that started to dawn on the business world in late 90’s (as well as certain advances in the ‘post-industrial age’), has developed the internal and external resources and experience which make it possible to undertake and successfully complete corporate BE projects.

First, by the end of the XX century two lower levels of business engineering – software development and information systems (IS) development – developed and standardized their engineering methodologies and tools.

The dominant methodology for both software development (software engineering) and IS development (IS engineering) became the object-oriented methodology (OOM) with the dominant tool for IS modeling (IS engineering) being the Unified Modeling Language (UML) and for software engineering – a set of object-oriented programming (software development) languages (C++, Visual Basic and its various implementations, XML, Delphi and others).

Second, both company management and employees and external consultants developed significant experience in development of formal business structures - modeling of corporate business processes (for business process reengineering, ERP system implementation and other purposes), BSC implementation and other purposes.

Third, current advances in computer software technologies and especially in software and data integration (Microsoft Office and its extensions, Web site and corporate portal tools, hyperlink mechanisms) provided the tools for rapid development of even the most complex business structures which can be almost instantly converted in knowledge, information system and software constructs.

And, finally, these advances created a pool of highly qualified personnel – internal and external – capable of undertaking and successful completion of even the most complex business engineering projects.

Obviously, the ‘business engineering era’ requires formation and development of the whole new business discipline – business engineering – and of the whole new category of business employees – business engineers.

Key Steps in the Business Engineering Process

As one can expect from the arguments above, business engineering sequence consists of the following five consecutive steps and is typically undertaken iteratively, much like software or IS engineering (which form an integral part of business engineering).

These five consecutive steps are:

  1. Establishment of fundamental business objectives (this step will be discussed in detail in the next section of this article)

  2. Business Engineering – formal description of business constructs (business and functional units, workgroups, processes, personnel, internal and external products, objects, interfaces, etc.). Business constructs can be divided into three broad categories – business objects (products, indicators/parameters, personnel, assets, tools, etc.), business activities (processes, projects, jobs, steps, etc.) and business interfaces (internal, such as process-to-process interface – P2P, and external – B2B, B2C, B2G and others)

  3. Knowledge Engineering - formal description of knowledge constructs, that can also be divided into three broad categories – knowledge objects (structured and unstructured documents and knowledge formation and processing tools), knowledge processing activities and knowledge interfaces (user and other internal interfaces and external knowledge interfaces)

  4. Information System Engineering - formal description of IS constructs, that can also be divided into three broad categories – IS objects (structured data and information processing tools), information processing activities and IS interfaces (user interfaces, other internal interfaces and external interfaces)

  5. Software Engineering - formal description and implementation of software constructs, that can also be divided into three broad categories – software objects (data structures), software activities (programs, procedures, modules or methods) and software interfaces (user, transactions, modules, etc.)

Business Engineering Languages

It has long been known that formal description of complex systems requires development and implementation of more or less formal system description language. And the more detailed is the description, the more formal and complex is the language required for adequate description of the system. Therefore, successful implementation of the business engineering sequence requires development and implementation of four languages (or at least classes of languages)

  1. Business Description Language (BDL) – does not exist yet; needs to be developed

  2. Knowledge Description Language (KDL) – does not exist yet; needs to be developed

  3. Information System Description Language (ISDL) – the standard ISDL is the above-mentioned UML

  4. Software Description Language (SDL) – there is no single SDL yet (and will probably never be), already we already have the standard software development methodology - OOP implemented in a number of programming languages – C++, Visual Basic, Delphi, Java and a specific Web-oriented data description language – XML (extensible Markup Language – one of the ‘document markup languages’)

Because UML and all SDL are object-oriented, it is a natural requirement that both BDL and KDL should be (1) object-oriented and (2) UML-compatible.

Business Engineering Toolboxes

These are the practical electronic tools that will be used by business engineers for initial and subsequent business engineering (one tool for each BE step). Naturally, these electronic tools are:

  1. Business Engineering Portal (BEP) – does not exist yet; needs to be developed

  2. Knowledge Engineering Portal (KEP) – does not exist yet; needs to be developed

  3. Information System Engineering Portal (ISEP) – there are quite a few tools on the market, mainly as parts of ERP system tools; therefore, BEP and KEP (as well as BDL and KDL) have to be compatible with the most common of these tools

  4. Software Engineering Portal (SEP) – there are quite a few tools on the market, mainly as parts of ERP system tools; therefore, BEP and KEP (as well as BDL and KDL) have to be compatible with the most common of these tools

A combination of these tools can rightfully be called Computer-Aided Business Engineering (CABE) toolbox and the implementation of the complete BE process using these tools – CABE process (or CABE methodology).

Individual Business Management: New Paradigm Models & Technologies

Reusable Business Constructs

New paradigm for individual business management in the globalization era is based on the idea of “reusable business constructs” borrowed from object-oriented software engineering and information systems engineering – now standard in the world of software development and IS engineering.

For a long time software developers knew that most of the elements of a software program (in most cases, up to 80%) were standard and, once developed by one software engineered, can later be reused by others.

Unfortunately, the traditional – ‘structured’ – software and IS engineering paradigm did not provide software and IS engineers with convenient tools, methods and techniques that allowed for fast and efficient reusability of already created components (‘critters’).

To remedy this problem, software and IS engineering community developed and perfected a radically new – object-oriented – paradigm for software engineering and later – for IS engineering which significantly increased the efficiency of the reusability of software and IS components. Which, naturally, made object-oriented paradigm and methodology a standard way of doing business and software engineering.

The same is true for business engineering and, by extension, for knowledge engineering. Investment bankers, management consultants and systems integrators (ERP vendors) learned from their experience that within large groups of businesses (commercial banks, “real sector”) most of the business components (constructs) are structurally identical (or at least similar). The same is true not only for individual businesses but for the whole industry sectors as well.

In other words, up to 80% of business structures in different companies are similar (and it is exactly this similarity that allows investment bankers and management consultants to create value for their clients by offering business improvement solutions). In many investment banks, a corporate finance professional has to be able to go ‘from zero to expert’ in practically any industry sector within a month (because the abovementioned similarities make it possible).

Although the structure of 80% of business constructs is practically identical, the contents sometimes is not. And it is exactly this contents and the remaining 20% of structures that create unique core competencies and competitive advantages of each business and thus allows it to occupy a unique position – niche – in the global business community and marketplace.

Therefore, it is possible to make a conclusion that if most of the business constructs are fundamentally similar, it is possible to create a standard and optimal implementation of each business construct and of each group of constructs (combined into a ‘business engineering kit’ or ‘business components repository’) and then offer them to individual businesses for adaptation, fine-tuning and implementation (by the same token as standard software modules are offered by vendors of software and IS development tools to software engineers).

This idea is the centerpiece of business engineering – the new business structuring and management paradigm for a globalization era and electronic society. In other words, it allows each business owner and manager to avoid ‘reinventing the wheel’ and to take the most applicable business constructs – developed and optimized by other business managers and consultants and to build his or her very unique business mostly from standard components thus significantly increasing the efficiency, profitability, competitiveness and shareholders’ value (as well as stakeholders’ value) of the business.

Consequently, modern business engineering will look very much like modern IS and software engineering and will be implemented in the following four stages which will usually be done in both consecutive, parallel and iterative fashion:

  1. Selection of the most appropriate standard business components

  2. Adaptation of standard business components to the unique needs of a particular business

  3. Development of the unique (business-specific) business components (adhering at the same time to certain business engineering standards to make the compatible with standard business components)

  4. Integrating standard and business-specific components into a coherent business system (business structure)

In this section of an article I will present a brief overview of a ‘business engineering blueprint’ which covers the most important (strategic) business constructs similar to practically any business (whether a manufacturing, distribution or service company or a commercial bank). Naturally, practical implementation of this blueprint will be more or less industry-specific. It is very important (and will be later discussed in detail) that these standard business constructs (which can also be called “universal business critters” – UBC) are usually ‘transfunctional’ (in other words, each construct typically includes elements of several ‘traditional’ business functions, such as marketing, logistics, personnel).

This happens because it has been proven beyond a reasonable doubt by the developers of the reengineering methodology (Hammer, Davenport & Champi) that an optimal business structure simply has to be transfunctional as too much effort and time is lost ‘at the borders’ of various ‘traditional’ business functions.

Fundamental Business Objectives and Functions

Not surprisingly, business engineering starts with defining the fundamental business objectives – financial and emotional. As the most fundamental idea of doing business is creating value – financial for its shareholders and functional and emotional (which can also be expressed in financial terms) for its stakeholders, it is no surprise that financial objectives of the business enterprise are directly tied to creation of financial (shareholders’) value which for public companies is translated into the price of a corresponding stock on a stock exchange.

More precisely, the fundamental financial objectives of a business enterprise are as follows:

  • Desired amount (in dollar terms) of shareholders’ value to be created

  • Desired time period, during which the desired amount of shareholders’ value has to be created

  • Preferred method for transforming created value into cash flows (payment of dividends, repurchase of shares by the company from its shareholders, initial and/or secondary public offerings, sale of business to a strategic investor or a combination of abovementioned means)

For better measurement and management, these fundamental financial business objectives are combined into a financial value function (FVF), maximization of which is then the sole fundamental financial objective of a business enterprise.

Naturally, establishment of a target value of an FVF is carried out based not only on the views and desires of company shareholders (which form a starting point for the development of FVF), but also on internal (views and abilities of company employees and management and other company specifics) and external business factors (general economic situation, industry factors, stock market tendencies, etc.)

Fundamental emotional objectives of a business enterprise refer mostly to implementation in the corporate culture and in the ‘internal company legislation’ of certain general and specific values, principles, morals, beliefs, ethics, etc., initially formulated and established by the founder(s) of the enterprise and later carried on as a ‘company tradition’. In other words, the fundamental emotional objective of a business enterprise can be called ‘self-implementation’ or ‘self-actualization’ of the founder(s) in their company (the highest level of human needs, according to the proverbial Maslow hierarchy of human needs).

Again, for better measurement and management, fundamental emotional business objectives are combined into an emotional value function (EVF), maximization of which is then the sole fundamental emotional objective of a business enterprise. Naturally, establishment of a target value of an EVF is carried out based not only on the views and desires of company shareholders (which form a starting point for the development of EVF), but also on internal and external business factors.

A combination of FVF and EVF forms the sole fundamental business objective – maximization of the ‘corporate happiness function’ (CHF) which combines both of these functions into a single coherent whole.

General Business Strategy

In the BE paradigm, general business strategy refers to the strategy of achieving the fundamental financial objectives (and to a lesser extent – fundamental emotional objectives). Therefore, for every business (public or closely-held) only a very limited set of such strategies is available.

For a private business, only two alternative strategies are available: aiming at an IPO at a certain moment in time (going public) or a strategic sale of a business (to a strategic investor). For a public company, also only two alternative strategies are available: existing as a going concern (which requires occupying and keeping a position of an oligopolist in the corresponding market) or a strategic sale of a business (to a strategic investor).

Other (‘traditional’) strategies are only the means to implementation of general (fundamental) business strategies.

Key Business Portfolios

In the BE paradigm, each individual business enterprise can be represented (viewed) as a system (portfolio) of interconnected and interrelated (interlinked) portfolios, each representing a different (and complementary!) ways of looking at and managing a business enterprise. Naturally, the business as a whole can be viewed as a ‘superportfolio’ (or ‘portfolio of portfolios’).

Each portfolio (including business as a whole – ‘corporate superportfolio’) and each item in each portfolio (including sub-portfolios) creates value – financial, functional and emotional – for shareholders and other stakeholders of a business enterprise.

Key business portfolios are:

  • Corporate projects portfolio

  • Business processes portfolio

  • Strategic business units (SBU) portfolio

  • Brands portfolio

  • Products portfolio (sometimes including also product groups portfolio)

  • Workgroups portfolio

  • Personnel portfolio

  • Target markets portfolio

  • Customer (client) portfolio

  • Knowledge portfolio (which also includes documents portfolio)

  • Tools portfolio (including both tangible and intangible tools or assets)

  • Stakeholders portfolio (including partners, suppliers, NGO/NPO and media and in some cases also a portfolio of shareholders)

Therefore, in the ‘portfolio-based’ business management paradigm managing a business enterprise means creating, measuring and managing financial, functional and emotional value in each business portfolios and in the ‘integrated corporate portfolio’ (business as a whole). Engineering of a business means engineering of each portfolio and of the interrelationships within each portfolio and between portfolios. Therefore, this approach to business management and BE can rightfully be called a portfolio-based approach.

Naturally, the most important business portfolios that practically define the business and play the most important role in value creation, are product portfolio, brand portfolio, target market portfolio and customer portfolio.

Appendix 1. Business Engineering Stages, Languages and Software Tools

Appendix 2. A Comprehensive System of Corporate Portfolios

changed January 7, 2008