Driven by an intensely competitive business environment, corporations have become increasingly dependent on global markets. Whether the drivers are revenue growth, cost reduction, or access to new knowledge, many of the most successful corporations already operate on a global basis. Even domestically focused companies are finding that competitive pressures are increasingly forcing them to expand beyond their borders. As already discussed, the cost advantages of production in key developing markets combined with higher growth rates and demographic shifts moving greater consumer power to developing nations will compel corporations to move more and more of their value chain offshore. While offering new opportunities, such shifts will also present a new set of challenges.

As increasingly frequent, disruptive events have made painfully clear, companies are more vulnerable than ever to economic crises, security threats, supply chain disruption, and consumer backlash. The major strategies businesses have implemented with such success in recent years—global sourcing, lean manufacturing, outsourcing, offshoring, and extended information technology networks —are increasing efficiencies enormously. But they have also created extremely fragile networks built on the false assumption that the world is a predictable and stable place. In fact, the very innovations that have helped improve business efficiency and profitability increasingly are based on an integrated global business environment that also brings with it a series of interdependent risks. Consider the following examples:

Just in time. Some manufacturers have reduced inventory almost to zero. Chrysler, for example, keeps just two hours of inventory on hand at its plants near Detroit. Estimates suggest that the shift to just-in-time scheduling in the U.S. automotive industry alone has saved companies more than $1 billion a year in inventory carrying costs. The problem, however, is that while costs have come down, risks have increased. If deliveries of critical components are delayed, the entire factory must shut down. Similarly, retailers have become increasingly reliant on automatic replenishment and vendor managed inventory. Even brief delays can lead to empty shelves and lost sales.

Extended enterprise. Increasingly, firms depend on a complicated network of customers, suppliers, and partners that must all work together, and often no one person has oversight of the entire supply chain. In addition to day-to-day problems with forecasting, security, and information exchange, there is the increased risk of system failure if a key member of the network shuts down, even temporarily. In some cases, the supply chain is so complex that it is impossible to understand fully the true risk involved at any single point of failure.

Outsourcing. While companies once outsourced manufacturing or bill processing, they are now outsourcing IT support, customer call centers, benefits administration, human resources, and other increasingly sophisticated corporate functions. Although outsourcing can greatly reduce costs and often improve service levels, it can also compound risk as critical operations are managed outside the company, and increasingly outside of the country.

Global sourcing. Procurement policies that rely on foreign markets involve longer lead times, increased uncertainty, and heightened security concerns. Although suppliers in developing economies are often the lowest-cost producers, logistics and tariff costs can add up to 40 percent to the landed cost of a product. Goods can pass through as many as 11 middlemen in transit, greatly increasing the risk of disruption.

Supplier consolidation. Just as companies are outsourcing and adding complexity, they are also increasingly dependent on single suppliers. Single sourcing and industry consolidation mean companies must rely on one or a few suppliers for key components. Also, the trend toward design collaboration and information sharing multiplies the time and expense required to switch suppliers.

Information revolution. The rise of e-commerce (whether through intranets, extranets, or the Internet) means that more companies depend on information transfer to manage their operations. These systems are both increasingly critical to daily operations and vulnerable to attack as the number of access points rises. Verifiable digital attacks are estimated to have cost more than $16 billion in 2003 alone. Attacks can come from inside the company, from hackers targeting a specific company, or viruses that infect the entire network. The speed at which such viruses can spread across the network has increased from three years in 1990 to 10 minutes in 2003.

Increased competition. Tighter margins mean that even a small disruption to operations can show up on the bottom line; shortened product life cycles can make even small delays very costly. Companies have improved their operations to meet the needs and expectations of increasingly demanding customers. But most operational improvements have been designed for a stable environment in which risks are fairly well known. In reducing their everyday risks, companies have inadvertently increased the potential impact of exceptional events.

None of these aforementioned factors would be a concern if the world were a stable, predictable place. Unfortunately, it isn’t, nor is it likely to become more stable or predictable anytime soon. No business is entirely immune to the impact of global economic and political trends. Global integration has increased the volatility of the global business environment in a number of ways.