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Driving & Restraining forces
Prof Bharat Nadkarni
Globalization : Definitions Economic Definition Globalization may be defined as the process of integration of economies across the world through cross-border flow of factors, products and information.
Corporate Definition Globalization in its true sense is a way of corporate life necessitated, facilitated and nourished by the transnationalization of the world economy and developed by corporate strategies. Globalisation is an attitude of mind which views the entire world as a single market so that the corporate strategy is based on the dynamics of the global business environment.
Globalisation Globalisation is an attitude which looks at the world as one market and corporate strategy is based on the dynamics of global environment. Globalisation has the following characteristics features: 1. Operating and planning to expand business globally. 2. Renunciation of distinction between domestic and foreign markets and developing a global business attitude. 3. Establishing production and distribution facilities in various parts of the world based on global business dynamics. 4. Product development and production planning are based on global market environment.
Global sourcing of productive factors. Global orientation in organisational structure, culture, strategies and management techniques.
Approach towards Globalisation 1. Ethenocentric 2. Polycentric
Driving and Restraining Forces of Globalisation There are number of forces which induce and propel globalisation and thereby expand the scope and importance of international business. On the other hand there are also forces which restrain globalisation. Driving Forces • Liberalisation Universal economic policy of liberalisation fostering a seamless business world. GATT/WTO policies Revolutionary policy changes as in China (turn of the century), RPA countries(late 80’s) LPG – surge in M&A, FDI resulting in greater global economic integration
Linking resources and objectives with world market opportunities taking advantage of liberalisation • Technology Powerful driving force Technological breakthroughs are substantially increasing the scale economies and the market scale required to break-even • Transportation and Communication Revolution Reducing disadvantage of distance and cost Development in the field of air and sea cargo- containerisation, Referigeration (cryogenic tanks), LNG, LSWR, Perishable goods, Floral, Food stuff, quick changes in fashion and design. IT & Telecommunication Revolution
• Product Development cost and efforts Huge R&D and development cost/ investment - huge global market Fast technological changes- Risk of obsolescence-quick payback • Quality and Cost The two most important determinants of demand. Can be better achieved when a firm is global in its operations • Rising Aspirations and Wants Innovative ideas, breakthrough improvements-3 dimentions- bottom line, customer satisfaction, reduction in cycle time. • Competition Exploring new markets, risk taking, diversification, new ownerships • World Economic Trends Difference in growth rates – developed and developing countries
Domestic rapid economic growth-large number of playersexploiting opportunities outside the country- China • Regional Integration The proliferation of regional integration schemes European Union(EU), South Asian Association for Regional Cooperation(SAARC), North American Free Trade Agreement (NAFTA) Creates a borderless region between the members Financial flows • Leverages A global company can leverage its experience to expand its global operations. According to Keegan “ Leverage is simply some type of advantage that a company enjoys by virtue of the fact that it conducts business in more than one country “
Global company posses the following four important types of leverages. 1.Experience transfers 2.Scale economies 3.Resource utilisation 4.Global strategy
Keegan observes that “ the global company’s greatest single advantage can be its global strategy. A global strategy built on an information system that scans the world business environment to identify opportunities, trends, threats and resources. When opportuninities are identified, the global company adheres to the three principles identified earlier. It leverages its skills and focuses its resources to creates superior perceived value for customers and achievecompetitive advantage. The global strategy is a design to create a winning offering on a global scale. This takes great discipline, much creativity, and constant effort. The reward is not just success – it is survival and sustainance.”
Restraining Forces. There are two types of factors, which hamper globalisation. • External factors Government policies and controls Social and political opposition against foreign business etc • Internal factors Factors within the organisation – myopic approach-nearsightedness Organisational culture – may hamper or pamper
Mike Porter’s Diomond Theory
Porter’s National Competitive Advantage Theory
Competitive Advantages Competitive superiority is derived from four factors, viz., factor endowment, demand conditions, related and supporting industries and firm strategy, structure and rivalry. All the four factors need not always be favourable for a company to get global supremacy. But the interactive effect of these four factors need to be favourable if an industry/ company in a country is to gain a global competitive advantage. 1. Factor conditions Factor conditions include factors of production, viz., land, labour, capital and organisation. Porter emphasises other factors like educational level of labour and the quality of the country’s infrastructure. Country’s ability to compete globally depends upon the country’s factor resources, viz., research, innovation and training. The USA has rich factor endowments and enjoys top position in world trade and world economy.
Position of USA in World Trade and World Economy Its unique position includes: • Large size of the country
• Largest GDP with approx. $ 10 trillion
• Largest exporter and largest importer in the world • Has world’s largest financial market • Large in having MNCs (around 20) out of top 500 MNCs (2006) Now, it started losing its position due to rapid development of some developing and recently emerging countries including South Korea, China, Malaysia and India.
2. Demand Conditions The existence of a large number of sophisticated domestic consumers who are economically able and willing to consume create and improve the demand for various products in the country. Companies improve the existing products and develop new products to meet the increasing demand. In addition, domestic companies compete with each other in developing existing and new products. As such some of the processing domestic companies would be ahead of the international companies and export to other countries. For example, Japanese companies developed camcorders, big screen TVs and VCRs better than the international companies and exported them to European and North American countries after meeting the domestic demand.
3. Related and Supported Industries The emergence and growth of an industry provide the scope for the development of suppliers of raw material, market intermediaries, financial companies, consulting agencies, ancillary industries etc. These supporting service agencies compete among themselves leading to high input quality and lower prices. Availability of high quality inputs at lower prices in the domestic country enhances competitive advantage of the firm internationally. 4. Firm strategy, structure and rivalry Firms continuously improve the quality, product design, invest in R&D in order to compete domestically. Firms also invest in human resource development, technology etc., in the domestic market. These developments result in high quality and lower prices in domestic country which are transferable to international markets. Intense competition for Japanese automobile
manufacturers and electronics goods manufacturers led to their success in international markets. The same theory holds good in case of Indian garment manufacturers and US personal computer manufacturers.
Also discuss :
Concept of Born-Global Firms
Strategies for the Bottom of the Pyramid
Future of International Business
There are several trends that would make globalisation and international business more pronounced in future. 1. Globalisation of supply chain and operations management. 2. International Investments. 3. Information surge and consumer choice. 4. World growth 5. Domination of the world economy.(decline of the power of nations
like US to pressurise policies and behaviour of other nations)
Trade cycle decision rule.(The old trade cycle model which implied
that as a product matures the location of production must shift to low wage countries. For any product in which labour is less than say 15 to 20 % of total costs, the location of production of mature products may be anywhere in the world. ex. Automobile industry.)
7. Pervasiveness of free markets. ( The fall of communism and socialism
and the resultant ubiquitous market economy and globalisation are stupendously expanding the scope of international marketing.)
8. Accelrating growth of Global markets. 9. The rise of the Internet and Information Technology.