(Chapter |- traduction to Business and Globlzation b) Disadvantages of a Cooperative ‘+ Lack of capital. - a) Its members are generally related to the poor group of the society and they are not in a position to invest a large amount; b) External financial resources of the society are limited; ¢) It cannot borrow money from non-members; d) It cannot issue any kind of debentures; and e) Its share cannot be transferred to non-members. ‘* Itthus suffers shortage of capital for the operation of business. * Limited scale. Due to the various hindrances behind the growth of capital, it is not possible for the cooperative society to start its business at a large scale; it therefore, keeps its business limited in the narrow field of cooperation * Inefficient management. Expert and efficient management is important factor for running the business successfully. But a society cannot afford to hire the services of superior abilities due to its limited resources. Therefore, its business cannot be carried on smoothly. «Lack of prompt decision. As all the matters are decided by the management committee and complied by another authority, it cannot act with promptness, if a chance comes to make a timely purchase or sale, they have fo wait to get others consent. c) Requirements for their formation - Organizing a cooperative can be complex and simple. It requires an understanding of the basic needs of the prospective cooperative members. It demands patience from the organizer who must make the cooperative’s long-term goals and objectives, and its visions a real part of the members’ lives. But it can be too easy because the Cooperative Code of the Philippines (RA 9520) has devised very clear-cut steps for the cooperative organizer and members Business Environment: Nature and Significance ‘The word ‘Business Environment’ has been defined by various authors as follows: ‘© Refers to the “sum total of conditions which surround man at a given point in space and time. In the past, the environment of man consisted of only the physical aspects of the planet Earth (air, water and land) and the biotic communities. But in due course of time and advancement of society, man extended his environment through his social, economic and political function.” « Encompasses the -climate’ or set of conditions, economic, social, political or institutional in which business operations are conducted. ‘* Contains the external and internal factors that create opportunities and threats to the business. is the aggregate of all conditions, events and influences that surround and affect it. environment of business consists of all those extemal things to which it is exposed and by which it may be influenced directly or indirectly” Nature of Business Environment: The nature of Business Environment is simply and better explained by the following approaches: (1) System Approach: In original, business is a system by which it produces goods and services for the satisfaction of wants, by using several inputs, such as, raw material, capital, labour etc. from the environment. (2) Social Responsibility Approach: In this approach business should fuffill its responsibility towards several categories of the society such as consumers, stockholders, employees, goverment etc.Chopter I~ intraduction to Business and Globlizetion (3) Creative Approach: As per this approach, business gives shape to the environment by facing the challenges and availing the opportunities in time. The business brings about changes in the society by giving attention to the needs of the people. Significance of Business Environment: In a globalised economy, the business environment plays an important role in almost all business enterprises. The significance of business environment is explained with the help of the following points: «Help to understand internal Environment: Itis very much important for business enterprise to understand its intemal environment, such as business policy, organisation structure etc. In such case an effective management information system will help to predict the business environmental changes. «Help to Understand Economic System: The different kinds of economic systems influence the business in different ways. It is essential for a businessman and business firm to know about the role of capitalists, socialist and mixed economy. ‘+ Help to Understand Economic Policy: Economic policy has its own importance in business environment and it has an important place in business. The business environment helps to understand government policies such as, export-import policy, price policy; monetary policy, foreign exchange policy, industrial policy etc. have much effect on business. + Help to Understand Market Conditions: It is necessary for an enterprise to have the knowledge of market structure and changes taking place in it. The knowledge about increase and decrease in demand, supply, monopolistic practices, government participation in business etc., is necessary for an enterprise. Business Environment Internal Environment External Env | | Pans & Policies Sarena Caen eens, wironment Macro Environment Financial Resources Micro Ens mo Corporate ima The customers Demographic i and Mochi The competitors Bronomic The Suppliers a Labour Management Thea Techno Relationship Pia External Environment and Internal Environment According to James Stoner, extemal environment can be defined as all elements outside an ‘organization that are relevant to its operation. According to William Glueck and Jauck, “In environment there are several factors which ‘constantly bring opportunities and threats to the business firm. It includes social, economic, technological and political conditions” Businessdictionary.com defines intemal environment as the conditions, entities, events, and factors within an organization that influence its activities and choices, particularly the behavior of the ees. Factors that are frequently considered part of the intemal environment include the nization's mission statement, leadership styles, and its organizational culture, 9CChopter I= troduction to Business ond Globalization The following are the factors of internal environment: 1, Plans & Policies: The plans and policies of the firm should be properly framed taking into consideration the objectives and resources of the firm. Proper plans and policies help the firm to accomplish its objectives. ‘The higher authority must analyse the internal environment to foresee the changes and frame appropriate policies well in time. For example: the personnel policy in respect of promotion should be based on merit rather than ‘seniority, Human Resourc ‘The survival and success of the firm largely depends on the quality of human resources. The social behavior of the employees greatly affects the working of the business. The characteristics of human resource like skill, quality, morale, commitment can contribute to the success of the organization. Ifthe employees of the organization are skilful and committed, it can take the firm to a great height. Neglecting the human resource by the management can hamper the success of the organization. . Financial Resources: Capital is the lifeblood of every business. Finance relates to money. A firm needs adequate funds to meet its working capital and fixed capital requirements. There is a need to have proper management of working capital and fixed capital. Financial factors like financial policies, financial status (position) and capital structure also influence the intemal environment of a firm affecting its performance. If the firm enjoys sufficient financial resource, it can spend on research and promotional activities. . Corporate Imag A firm should develop, maintain and enhance a good corporate image in the minds of employees, investors, customers etc. Poor corporate image is a weakness of the firm. Constant research and development activities should be undertaken by the firm to enhance the quality of the brand. This helps in creating a corporate image and strengthens the standard of the firm in the market Plant and Machinery: Plant and machinery is the intemal part of the business firm. If the machines are obsolete or outdated, they should be replaced by a new one, or that adversely affects the business firm. Labor and Management Relationship: There should be smooth labor and management relationship. The management should understand the problems of their workers and gain confidence in them. The labor force should be motivated by providing with monetary and non-monetary incentives (benefits). Better labor-management relationship helps in increasing the morale of the employees and motivates them to put efforts in the business. Such strong relationship enhances organizations development. 10Chopter|— Introduction Bushes and Gobalzoton 7. Promoters vision: The promoter should have far sight vision to forecast opportunities and threats in the business so that the opportunities are properly grabbed and threats are diffused off in time. External Environment: The environment, which lies outside the organization, is known as external environment. External factors are unpredictable and uncontrollable. They are beyond the control of the company. External environment is further cli * Micro Environment ‘© Macro Environment sified as: |. Micro Environment: Micro environment is also known as operating environment. It consists’ of company's immediate environment that affect its performance. It includes customers, suppliers, intermediaries, competitors etc. The micro environment consist the elements that directly affects the company. According to Philip Kotler, “Micro environment consist of the factors in the company’s immediate environment which affects the performance of the business unit. These include suppliers, market intermediaries, competitors, customers and the public”. 4. The customers: Consumer is the king of the market. They are the centers of the business. They are one of the most important factors in the extemal environment. Customer satisfaction has become more challenging due to globalization. Nowadays, consumer expectations are high. Therefore the firm must keep in mind the customer's expectations, their requirements and accordingly make market decisions. The success of the business depends upon identifying the needs, wants, likes and dislikes of the customers and ‘meeting with their satisfaction Businesses have different classes of customers like wholesale customers, retail customers, industrial customers, foreign customers etc. To enhance growth, it is necessary for the business firm to identify the needs of these customers and should undertake research and developmental activities. 2. The competitors: The company has to identify its competitor's activities. Information must be collected about competitors in respect of their prices, products, and promotion and distribution strategies. World is becoming a global market. Liberalization, privatization and globalization have promoted competition that has created threats to domestic units. The business must understand the strategies framed by the competitors to respond in an effective manner. 3. The Suppliers: Suppliers supply raw materials, machines, equipment and other supplies. The company has to keep a watch over prices and quality of materials and machines supplied. It also has to maintain good relations with the suppliers, aChapter !— Introduction to Business ond Globaizotion It is necessary to have reliable source of supply for the smooth working of the firm. Uncertain supplies compel the firm to maintain high inventories resulting into increase in the cost. The business should not only rely on the single supplier but also have relations with multiple suppliers. 4, Society: Society affects company’s decisions. The expectation of the society from the business is increasing. Therefore, the business firm maintains public relations department to handle complaints, grievances and suggestions from general public. The members of the society include: * Financial institutions Shareholders Government Employees General public 5, Marketing intermediaries: Market intermediaries include agents and brokers who help the business firm to find the customers. They help the firm to promote and distribute the goods to the final consumers. They are the link between the firm and the final customers. Market intermediaries include wholesalers, retailers, advertising firm, media, transport agencies, banks, financial institutions etc. ‘They assist the company in promoting and targeting its product to the right market. Il, Macro Environment: ‘The macro environment consists of the larger societal factors that affect the working of a firm. Macro environment is also known as general environment. The macro factors are generally uncontrollable, According to Philip Kotler, “Macro environment create forces that creates opportunities and pose threats to the business unit. It includes economic, demographic, natural, technological, political, political and cultural environments.” Macro Factor [Pemosraphie] [Fnom] [stots] Exe] Foto] [wr] te 4, Demographic Environment: Demographic environment relates to the human population with reference to its size, education, sex ratio, age, occupation, income, status etc. Business deals with people so they have to study in detail the various components of demographic environment. Demographic environment differs from country to country. Demographic factors like size of the population, age composition, density of population, rural-urban distribution, family size, income level, status etc. have significant implications on business, For example: If the population is large, then the demand for goods and services will be more. It will have favorable effect on the business. in the same way educational level is also an important factor affecting business. 2. Economic Environment: i. Economic environment consists of economic factors that influence the functioning of a business unit. These factors include economic system, economic policies, trade cycle, economic resources, gross national product, corporate profits, inflation rate, employment, balance of payments, interest rates, consumer income etc. Economic environment is dynamic and complex in nature. 2(Chapter ~Introucton to Business and Globlizetion A business firm closely interacts with economic environment that consist of: a. Economic conditions in the market i.e. demand and supply factors b. Economic policies of the government: monetary policy, fiscal policy, industrial policy, trade Policy, foreign investment policy etc. Economic system prevailing in the country also affects the business growth. Every country has different economic system. The economic system includes capitalism, socialism, and mixed economy. Business depends upon economic environment for their inputs and also for market. Changes in the economic factors can adversely affect the working of a business firm. 3. Technological Environment: Technology has brought about far reaching changes in the methods of production, quality of goods, productivity, and packaging. There is a constant technological development-taking place. The business firm must constantly monitor the changes in the technological environment, which may have a considerable impact on the working of a business. It also indicates the pace of research and development and progress made in introducing modern technology in production. Technology provides capital intensive but cost effective alternative to traditional labour-intensive methods. In a competitive business environment technology is the key to development. Technology helps to run the business better and faster. 4. Cultural Environment: Culture involves knowledge, values, belief, morals, laws, customs, traditions etc. Culture passes from one generation to another through institutions like family, schools, and colleges. Business is an integral part of the social system. Society is largely influenced by the culture and in tum culture influence the business firm. Culture shapes the attitude and behaviour of the society. Any change in the cultural factor affects the business in large. Business should be organised and governed, taking into consideration various values and norms of the society. 5. Political Environment: The political environment in a country influences the legislations and government rules and regulations under which a firm operates. Political environment means influence exerted by: a. Legislature: This includes parliament, legislative assemblies. They are the law making bodies that frame rules and regulations. b. Executives: They include goverment bureaucracy who implements the decision, ¢. The Judiciary: Itincludes Supreme Court, High Court who sees whether the decisions taken and implemented by the executive are within the constitutional framework. They are also known as dispute settlement bodies. Legislature, executives and judiciary are the important pillars of political environment. A stable progressive and healthy political environment is very necessary for the growth and development of business, 6. Natural Environment: Resource availabilty like land, water and mineral is the fundamental factor in the development of business organisation. It includes natural resources, weather, climatic conditions, port facilities, topographical factors such as soll, sea, rivers, rainfall etc. Every business unit must look for these factors before choosing the location for their business. a‘Chopter!~ troduction to Business ond Giobaizction The natural environment largely determines the functioning of a business firm. Natural environment has a great influence on the working of a business. The business organisation should consider the natural factors before starting their operations. Legal Environment: The state sets the formal rules, laws and regulations for the country's operational system. It creates a framework of rules and regulations within which a business has to operate. The business should have complete knowledge of laws and policies to run the business effectively. The Difference Between Internal & External Business Environments UNDERSTANDING THE DIFFERENCE between internal and extemal business environments is very important. These environments have a major effect on the operations and performance of the ‘company. To fully understand the difference between intemal and extemal business environments and how they apply to your company, you need to establish what each environment represents. As the name ‘suggests, “intemal” business environment refers to intemal factors and resources that affect the running of the business. This primarily includes the workforce. The employees play a vital role in affecting the company's performance. If you have well trained, motivated employees, you are more likely to get good output from them. However, if you have unmotivated employees who don’t work hard or dig in their heels when a new plan is proposed, this will definitely affect your company's production levels. Another factor is the company assets available, such as plants and machinery, motor vehicles, and any other equipment used in production. If you have adequate assets in good condition, your production will be better than if you don’t. Another component of the intemal business environment is your available finances. This includes your capital, if you're just starting out. In an established business, this includes all the money available to facilitate the day-to-day running of the business. The “external” business environments include factors: political, technological, economical, legal, demographic and socio-cultural. These factors may not have an immediate direct effect on your business, but they will play a role in shaping your business with time. For instance, if your country faces economic hardships, your business may not do so well. Your market's spending habits will change accordingly, your raw materials costs will also change, and you may end up reducing your production and letting go of some of your employees. Retrenchment is one of the biggest negative impacts of economic problems. Technology can have negative or positive impacts on a business. Technological developments can help make your work easier and increase your productivity; it can also allow for the expansion of your business. However, it can lead to the reduction of your workforce due machines which, therefore, means loss of jobs for some people. For instance, a job that was previously done by ten people may now be done by one person who will be operating the machines. Extemal environments may also affect your ability to acquire loans from banks or other financial institutions. For instance, when the economy goes down, financial institutions don’t lend money easily. This is because they are also affected by the economy: they may, therefore, have inadequate funds. Most institutions also consider these times very risky for lending out money Many people and businesses may not be in a position to pay back the loans that they get. Economic crisis will also affect the intemal operations of a business, For instance, the business will not have a Jot of financial resources due to the loss of a ready market. Some businesses also end up retrenching “‘Choptr— Introduction o Business ond Globalization some of their clients due to the reduction of work and inability of the company to maintain the employees’ payment packages. ‘Sometimes external and intemal environments are intertwined. For instance, political and economic issues will affect the availability of a workforce and other resources. They will also affect the availability of finances to the business. During political unrests, most businesses are not able to operate normally and some end up shutting down all together. Other extemal environments that can affect the intemal environment include legal restrictions. ‘Sometimes, laws are passed that affect some businesses. For instance, some of the laws like the increase of taxes on some goods and services affect the business. When tanning taxes were increased in America, a lot of Americans stopped going to tanning salons. The business operations were reduced and the clients decreased in numbers. The central difference between intemal and extemal business environments is that, one can be controlled while the other one can't. However, you have some control over your internal business environment. You can control your management and resources to ensure that you realize good production levels at your company. Extemal environments, on the other hand, aren't easy to control or manage. In fact, some of these factors can lead to the closure of your business. Business Life Cycle Every business goes through seven phases of a life cycle. These phases are the idea, startup, growth, established, expansion, decline, and exit stages. The knowledge of what phase a business is in makes a huge impact on strategic planning and business operations. What matters today may not necessarily matter tomorrow, and the challenges will change and will require a different approach to be successful. So, business needs to foresee the forthcoming challenges and financial sources so that they can complete each stage of the business cycle successfully. STAGES OF BUSINESS LIFE CYCLE THE IDEA OR THE DEVELOPMENT OR THE SEED STAGE ‘The idea or seed stage is the beginning of the business life cycle. This is when the business is just a thought or an idea and requires several rounds of testing in its initial stage. For testing the business idea, one needs to conduct industry research, gather feedback from friends, family, and industry specialists, etc. This helps to determine whether the idea is worth pursuing or not. fit is worth pursuing it gives birth to a new business. CHALLENGES The main challenge that the seed stage companies have in gaining business momentum is of market acceptance and to follow one niche opportunity. The money and the time resources are very few so there should be the optimum utilization of these resources. FOCUS At the seed stage, the business should focus on matching the opportunities available with the skills, experience, and passion. The other points to focus are to decide the business structure, find professional advisors, and business planning.Chapter! Introduction to Business ond Globalization SOURCE OF MONEY The business in its early life does not have the market or customers. They need to rely on the support (money) from the owners, friends, and family. The other potential sources can be suppliers, customers and the grants from the government. START-UP STAGE It has already been decided that the business idea is worth pursuing and now the business gets a legal identity. The business is now ready to sell products and services to its customers. At this stage, the business makes changes in the products and services according to the feedback from the first paying customers and the market demand. The business leams to adjust the business model to ‘ensure profitability and to meet the customer's expectations. CHALLENGES When the business is in the startup stage. itis likely that the need for money and the time to market is overestimated. The main challenge in this stage is not to bum through the little cash the business has. It is necessary to leam the profitable needs of the client and to do the reality check to see the business is on the right track. FOCUS The focus on this stage should be on establishing a consumer base and the presence in the market, besides tracking and conserving cash flow. SOURCE OF MONEY The sources of money in this stage are the same as that of the seed stage (owner, friends, family, goverment grants), GROWTH STAGE ‘The business has made it through the initial stage (the startup stage) and is currently in its growth or survival stage. The business is adding new customers and generating the revenue consistently. This revenue will help to pay the operating expenses and to open the new opportunities for the business. The business in this stage may be operating at the net loss or could be maintaining a healthy profit. At this point, the competition starts surfacing CHALLENGES The biggest challenge at this stage is dealing with the regular variety of issues bidding for more time ‘and money. Effective management is required along with the new improved business plan. The business needs to leamn to train the employees and delegate the work to conquer this stage. FOCUS Jn the growth stage of the business life cycle, the main focus is on running the business in a proper manner to deal with the increase in sales and customers. Existing accounting and management systems need to be improved. To deal with the influx of business new capable employees needs to be hired. SOURCE OF MONEY ‘The sources of money at this stage are banks, profits, grants, partnerships, and leasing options. 16‘Chapter! Introduction to Business ond Globozction ESTABLISHED STAGE ‘The business in this stage has matured into a successful company with a place in the market and has devoted customers. The sales growth is not explosive but controllable. Therefore, business life will become more of a routine. CHALLENGES It is too easy to relax on the success at this stage of the life cycle; the market is persistent and competition is cutthroat. The business should keep its focus on the bigger picture. The issues of economy, competitors, or the changing tastes of the customers can quickly end all that it has worked for. Focus The business in the established stage should keep the focus on improvement and productivity. To compete in the established market, it requires enhanced business practices along with computerization and outsourcing to improve production. SOURCE OF MONEY The banks, profits eamed, govemment, and investors are the major source of money. EXPANSION STAGE This stage is characterized by a new phase of development into the new markets and distribution channel. The business now enters into the new markets and distributes its products to new clientele. Much like the early stages of the business life cycle, this stage also requires a great deal of preparation and research as well as money. CHALLENGES Expanding in the new markets requires planning and extensive research. The focus should be on businesses that complement the existing experience and capabilites. The move into the dissimilar areas can be terrible. FOCUS The business should add new products or services to existing markets or should expand the existing business into the new markets and consumer types. SOURCE OF MONEY The joint ventures, banks, licensing, new investors, and the partners are the money sources for the business in the expansion stage. DECLINE STAGE Most businesses do not stand the trial of time- at least not the trial of all-time. Outside influences, such as societal changes and the economy, affects the business. They can send the business into the stage of decline. The business starts to lose money at this stage. It's just a matter of time before they move into the final stage of the business life cycle. CHALLENGES The challenges that the business has to face in this stage are of dropping sales, reduces profits, and negative cash flow. The major issue is how long the business can stand the negative cash flow. vChapter I~ Introduction to Business ond Globlzetion FOCUS The business should look for new opportunities and business ventures. Cost cutting and finding a way to sustain the cash flow is very important for the deciining stage. SOURCE OF MONEY ‘The suppliers, customers, and the owners are the sources from where the business can get money. EXIT STAGE Itis sad that the business cannot keep going forever. There are two things the company can do at this point: it can sell the business, or shut it down for good. If it chooses to sell the business, it requires calculating the business's worth. CHALLENGES Selling of a business requires a realistic valuation. It may have been years of hard work to build a business, but at the time of selling, we think about the real value at the current market place. if the business is to be shut we deal with the financial as well as the psychological aspects (of people involved like employees) of a business loss. FOCUS The proper valuation of the business should be done. The business operations, management, and competitive barriers should be looked at to make the company worth more for the buyers. Draw the Jegal buy-sell agreement along with the business transition plan. SOURCE OF MONEY Find a business valuation partner. The company should consult with the accountant and the financial advisors regarding the best tax strategies for selling or closing the business. Each stage of the business lifecycle may not take place in sequential order. Some businesses will be “build to flip" i.e. going quickly from startup stage to exit the stage. Whereas, others will choose to steer clear of expansion and continue in the established stage. Whether the business is a radiant success or a miserable failure depends on its ability to adapt to its changing life cycle. What you focus and overcome today is going to change. The knowledge of the position of the company in the business life cycle will help to anticipate the challenges and to make the best business decisions. THE INTERNATIONAL BUSINESS ENVIRONMENT Jotemational business is different from domestic business because the environment changes when a ‘&m crosses intemational borders. Typically, a firm understands its domestic environment quite well, ‘but is less familiar with the environment in other countries and must invest more time and resources, Jnto understanding the new environment. The following considers some of the important aspects of ‘he environment that change intemationally. ‘The economic environment can be very different from one nation to another. Countries are offen ‘Givided into three main categories: the more developed or industrialized, the less developed or third ‘world, and the newly industrializing or emerging economies. Within each category there are major ‘yafiations, but overall, the more developed countries are the rich countries, the less developed the ‘poor ones, and the newly industrializing (those moving from poorer to richer). These distinctions are ‘=sually made on the basis of gross domestic product _per capita (GDP/capita). Better education, Fry(Chapter —Invoduton to Business and Globalization infrastructure, technology, health care, and so on are also often associated with higher levels of ‘economic development. In addition to level of economic development, countries can be classified as free-market, centrally planned, or mixed. Free-market economies are those where govemment intervenes minimally in business activities, and market forces of supply and demand are allowed to determine production and prices. Centrally planned economies are those where the government determines production and prices based on forecasts of demand and desired levels of supply. Mixed economies are those where some activities are left to market forces and some, for national and individual welfare reasons, are government controlled. In the late twentieth century there has been a substantial move to free-market economies, but the People's Republic of China, the world's most populous country, along with a few others, remained largely centrally planned economies, and most countries maintain some govemment control of business activities. Clearly the level of economic activity combined with education, infrastructure, and so on, as well as the degree of government control of the economy, affect virtually all facets of doing business, and a firm needs to understand this environment if itis to operate successfully intemationally. GLOBALIZATION INTRODUCTION As access to technology skyrockets and barriers to trade continue to fall, individual economies around the world have become more interdependent than ever before. The result is a tightly woven global economy marked by intense competition and huge, shifting opportunities. Over the last three decades a fundamental shift has been occurring in the world economy. We have been moving away from a world in which national economies were relatively self-contained entities, isolated from each other by barriers to cross-border trade and investment; by distance, time zones, and language; and by national differences in government regulation, culture, and business systems. ‘And we are moving toward a world in which barriers to cross-border trade and investment are declining; perceived distance is shrinking due to advances in transportation and telecommunications technology; material culture is starting to look similar the world over; and national economies are merging into an interdependent, integrated global economic system. The process by which this is occurring is commonly referred to as globalization. What is Globalization? Globalization means the speedup of movements and exchanges (of human beings, goods, and services, capital, technologies or cultural practices) all over the planet. One of the effects of globalization is that it promotes and increases interactions between different regions and populations around the globe. Globalization also refers to the shift toward a more integrated and interdependent world economy. Globalization has several facets, including the globalization of markets and the globalization of production. THE GLOBALIZATION OF MARKETS. The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to cross-border trade have made it easier to sell intemationally. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on some global norm, thereby helping to create a global market. Consumer products such as Citigroup credit cards, Coca-Cola soft drinks, Sony PlayStation 19Chapter ~ Introduction to Business and Globolization video games, McDonald’s hamburgers, Starbucks coffee, and IKEA furniture are frequently held up as prototypical examples of this trend. Firms such as those just cited are more than just benefactors of this trend; they are also facilitators of it. By offering the same basic product worldwide, they help to create a global market. THE GLOBALIZATION OF PRODUCTION The globalization of production refers to sourcing goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By using global sourcing, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to ‘compete more effectively. Consider the Boeing's 777, a commercial jet airiner. Eight Japanese suppliers make parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture wing flaps; and so on. In total, foreign companies build about 30 percent of the 777, by value. For its most recent jet airliner, the 787, Boeing has pushed this trend even further, with some 65 percent of the total value of the aircraft scheduled to be outsourced to foreign companies, 35 percent of which will go to three major Japanese ‘companies. Drivers of Globalization The media and almost every book on globalization and intemational business speak about different drivers of globalization and they can basically be separated into five different groups: 1) Technological drivers - Technology shaped and set the foundation for modern globalization. Innovations in the transportation technology revolutionized the industry. The most important developments among these are the commercial jet aircraft and the concept of containerisation in the late 1970s and 1980s. Inventions in the area of microprocessors and telecommunications enabled highly effective computing and communication at a low-cost level. Finally the rapid growth of the Intemet{1] is the latest technological driver that created global e-business and e-commerce. 2) Political drivers - Liberalized trading rules and deregulated markets lead to lowered tariffs and allowed foreign direct investments in almost all over the world, The institution of GATT (General Agreement on Tariffs and Trade) 1947 and the WTO (World Trade Organization) 1995 as well as the ongoing opening and privatization in Eastem Europe are only some examples of latest developments. 3) Market drivers - As domestic markets become more and more saturated, the opportunities for growth are limited and global expanding is a way most organizations choose to overcome this situation. Common customer needs and the opportunity to use global marketing channels and transfer marketing to some extent are also incentives to choose intemnationalization. (Ferrier, 2004) 4) Cost drivers - Sourcing efficiency and costs vary from country to country and global firms can take advantage of this fact. Other cost drivers to globalization are the opportunity to build global scale economies and the high product development costs nowadays. (Ferrier, 2004) 5) Competitive drivers - With the global market, global inter-firm competition increases and organizations are forced to “play” international. Strong interdependences among countries and high two-way trades and FDI actions also support this driver. 20Chapter !— Introduction to Business and Globalization The Changing Demographics of the Global Economy Hand in hand with the trend toward globalization has been a fairly dramatic change in the demographics of the global economy over the past 30 years. As late as the 1960s, the global economy reflected four facts. The first was U.S. dominance in the world economy and world trade. The second was U.S. dominance in world foreign direct investment. Related to the first two points, the third fact was the dominance of large, multinational U.S. firms on the intemational business scene. The fourth was that roughly half the globe—the centrally planned economies of the Communist world—were off- limits to Wester intemational businesses. The Globalization Debate In today's global economy, everyone is accustomed to buying goods from other countries—electronics from Taiwan, vegetables from Mexico, clothing from China, cars from Korea, and skirts from India Most modem shoppers take the “Made in a foreign country” stickers on their products for granted. Long distance commerce wasn't always this common, although foreign trade—the movement of goods from one geographic region to another—has been a key factor in human affairs since prehistoric times. Thousands of years ago, merchants transported only the most precious items—silk, gold and other precious metals and jewels, spices, porcelains, and medicines—via ancient, extended land and sea trade routes, including the famed Silk Road through central Asia. Moving goods great distances was simply too hard and costly to waste the effort on ordinary products, although people often carted grain and other foods over shorter distances from farms to market towns. ‘What is the globalization debate? Well, i's not so much a debate as it is a stark difference of opinion on how the intemationalization of businesses is affecting countries’ cultural, consumer, and national identities—and whether these changes are desirable. For instance, the ubiquity of such food purveyors as Coca-Cola and McDonald's in practically every country reflects the fact that some consumer tastes are converging, though at the likely expense of local beverages and foods. Remember, globalization refers to the shift toward a more interdependent and integrated global ‘economy. This shift is fueled largely by (1) declining trade and investment barriers and (2) new technologies, such as the intemet. The globalization debate surrounds whether and how fast markets are actually merging together. We Live in a Flat World The flat-world view is largely credited to Thomas Friedman and his 2005 best seller, The World Is Flat. Although the next section provides you with an altemative way of thinking about the world (a multidomestic view), it is nonetheless important to understand the flat-world perspective. Friedman covers the world for the New York Times, and his access to important local authorities, corporate executives, local Times bureaus and researchers, the Intemet, and a voice recorder enabled him to compile a huge amount of information. Many people consider globalization a modem phenomenon, but according to Friedman, this is its third stage. The first stage of global development, what Friedman calls “Globalization 1.0,” started with Columbus's discovery of the New World and ran from 1492 to about 1800. Driven by nationalism and religion, this lengthy stage was characterized by how much industrial power countries could produce and apply. “Globalization 2.0," from about 1800 to 2000, was disrupted by the Great Depression and both World Wars and was largely shaped by the emerging power of huge, multinational corporations. Globalization 2.0 grew with the European mercantile stock companies as they expanded in search of new markets, cheap labor, and raw materials. It continued with subsequent advances in sea and rail transportation. This period saw the introduction of modem communications and cheaper shipping costs. “Globalization 3.0” began around 2000, with advances in global electronic interconnectivity that allowed individuals to communicate as never before. aChapter |~ troduction to Business and Glabalzction In Globalization 1.0, nations dominated global expansion. Globalization 2.0 was driven by the ascension of multinational companies, which pushed global development. In Globalization 3.0, major software advances have allowed an unprecedented number of people worldwide to work together with unlimited potential. How the World Got Flat Friedman identifies ten major events that helped reshape the modem world and make it flat: 11/9/89: When the walls came down and the windows went up. The fall of the Berlin Wall ended old-style communism and planned economies. Capitalism ascended. 8/9/95: When Netscape went public. Intemet browsing and e-mail helped propel the Intemet by making it commercially viable and user friendly. Work-flow software: Let's do lunch. Have your application talk to my application. With more powerful, easier-to-use software and improved connectivity, more people can share work. Thus, complex projects with more interdependent parts can be worked on collaboratively from anywhere. Open-sourcing: Self-organizing, collaborative communities. Providing basic software online for free gives everyone source code, thus accelerating collaboration and software development. Outsourcing: Y2K. The Intemet lets firms use employees worldwide and send specific work. to the most qualified, cheapest labor, wherever it is. Enter india, with educated and talented People who work at a fraction of US or European wages. Indian technicians and software experts built an international reputation during the Y2K millennium event. The feared computer-system breakdown never happened, but the Indian IT industry began handling e- commerce and related businesses worldwide. Offshoring: Running with gazelles, eating with lions. When it comes to jobs leaving and factories being built in cheaper places, people think of China, Malaysia, Thailand, Mexico, Ireland, Brazil, and Vietnam. But going offshore isn't just moving part of a manufacturing or service process. It means creating a new business model to make more goods for non-US sale, thus increasing US exports, ‘Supply-chaining: Eating sushi in Arkansas. Walmart demonstrates that improved acquisition and distribution can lower costs and make suppliers boost quality. Insourcing: What the guys in funny brown shorts are really doing. This kind of service collaboration happens when firms devise new service combinations to improve service. Take United Parcel Service (UPS). The “brown” company delivers packages globally, but it also repairs Toshiba computers and organizes delivery routes for Papa John’s pizza. With insourcing, UPS uses its logistics expertise to help clients create new businesses. Informing: Google, Yahoo!, MSN Web Search. Google revolutionized information searching. Its users conduct some one billion searches annually. This search methodology and the wide access to knowledge on the Internet transforms information into a commodity people can use to spawn entirely new businesses. |. The steroids: Digital, mobile, personal, and virtual. Technological advances range from wireless communication to processing, resulting in extremely powerful computing capability and transmission. One new Intel chip processes some 11 million instructions per second (MIPS), compared to 60,000 MIPS in 1971 ten factors had powerful roles in making the world smaller, but each worked in isolation until, man writes, the convergence of three more powerful forces: (1) new software and increased ic familiarity with the Intemet, (2) the incorporation of that knowledge into business and personal 2‘Chapter! Imtroducton to Business ond Globolzation communication, and (3) the market influx of billions of people from Asia and the former Soviet Union who want to become more prosperous—fast. Converging, these factors generated their own critical mass. The benefits of each event became greater as it merged with another event. Increased global collaboration by talented people without regard to geographic boundaries, language, or time zones created opportunity for billions of people. Political allegiances are also shifting. While critics say outsourcing costs US jobs, it can also work the other way. When the state of Indiana bid for a new contract to overhaul its employment claims processing system, a computer firm in India won. The company’s bid would have saved Indiana $8 million, but local political forces made the state cancel the contract. In such situations, the line between the exploited and the exploiter becomes blurred, Corporate nationality is also blurring, Hewlett-Packard (HP) is based in California, but it has ‘employees in 178 countries. HP manufactures parts wherever it's cheapest to do s0. Multinationals like HP do what's best for them, not what's best for their home countries. This leads to critical issues about job loss versus the benefits of globalization Since the world's flattening can’t be stopped, new workers and those facing dislocation should refine their skills and capitalize on new opportunities. One key is to become an expert in a job that can't be delegated offshore. This ranges from local barbers and plumbers to professionals such as surgeons and specialized lawyers. MANAGING IN THE GLOBAL MARKET PLACE Conducting business transactions across national borders requires understanding the rules goveming the intemational trading and investment system. Managers in an intemational business must also deal with goverment restrictions on international trade and investment. They must find ways to work within the limits imposed by specific govemmental interventions. Even though many govemments are nominally committed to free trade, they often intervene to regulate cross-border trade and investment. Managers within international businesses must develop strategies and policies for dealing with such interventions. Cross-border transactions also require that money be converted from the firm's home currency into a foreign currency and vice versa. Because currency exchange rates vary in response to changing ‘economic conditions, managers in an international business must develop policies for dealing with ‘exchange rate movements. A firm that adopts @ wrong policy can lose large amounts of money, whereas one that adopts the right policy can increase the profitability of its international transactions. In sum, managing an international business is different from managing a purely domestic business for at least four reasons: (1) countries are different, (2) the range of problems a manager confronts in an intemational business is wider and the problems themselves more complex than those a manager confronts in a domestic business, (3) an intemational business must find ways to work within the limits imposed by govemment intervention in the international trade and investment system, and (4) interational transactions involve converting money into different currencies. References: 1. Davies, W. 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