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GLOBAL BUSINESS

Globalisation - Introduction
Author: Jim Riley Last updated: Sunday 23 September, 2012

Globalisation is arguably the most important factor currently shaping the world
economy. Although it is not a new phenomenon (waves of globalisation can be traced
back to the 1800s) the changes it is bringing about now occur far more rapidly, spread
more widely and have a much greater business, economic and social impact than ever
before.

There are several definitions of globalisation. Here are two official examples:

First, from the OCED

“The geographic dispersion of industrial and service activities, for example research and
development, sourcing of inputs, production and distribution, and the cross-border
networking of companies, for example through joint ventures and the sharing of assets”

And here from the International Monetary Fund:

“The process through which an increasingly free flow of ideas, people, goods, services
and capital leads to the integration of economies and societies”

Globalisation is best thought of as a process that results in some significant changes


for markets and businesses to address: for example

 An expansion of trade in goods and services between countries (an opportunity


for many businesses; a threat for others)
 An increase in transfers of financial capital across national
boundaries including foreign direct investment (FDI) by multi-national
companies and the investments by sovereign wealth funds (e.g. Middle Eastern
governments buying assets in the UK)
 The internationalisation of products and services and the development of global
brands such as Starbucks, Nike, Sony and Google
 Shifts in production and consumption – e.g. the expansion
of outsourcing and offshoring of production and support services, which has
traditionally benefitted countries with lower labour costs & skilled labour
markets such as India, at the expense of jobs in developed economies like the
UK
 Increased levels of labour migration – which has the effect of lowering wage
costs in many industries, but for others is a problem (e.g. a loss of skilled
workers leaving an economy)
 The emergence of countries playing a bigger role in the global trading system
including China, Brazil, India and Russia

A key result of globalisation is the increasing inter-dependence of economies. For


example:

 Most of the world’s countries are dependent on each other for their
macroeconomic health
 Many of the newly industrialising countries are winning a growing share of world
trade and their economies are growing faster than in richer developed nations
 All countries have been affected by the credit crunch and decline in world trade,
but many emerging market countries have slowed down rather than fall into a
full-blown recession

Globalisation - International
Competitiveness
Author: Jim Riley Last updated: Sunday 23 September, 2012

International competitiveness

This refers to the ability of a country (or firm) to provide goods and services which
provide better value than their overseas rivals.

This is competitive advantage but on a international scale.

As there is constant threat from foreign competition it is essential for business to strive
to improve competitiveness.

Although there is a tendency to look to government to play a role in maintaining the


competitiveness of UK business, in the final analysis it is a matter for individual firms.

Some determinants of International competitiveness

 Price relative to competitors


 Productivity - output per worker
 Unit costs
 State of technology
 Investment in capital equipment
 Technology
 Quality
 Reliability
 Lead time
 Entrepreneurship
 Exchange rate
 Relative inflation
 Tax rates
 Interest rates

Increasing competitiveness
Firms can increase their international competitiveness by:

 Rationalisation output to get rid of high cost plants


 Relocating to places where labour costs are lower
 Process innovation
 Product innovation
 Incorporating the latest technology into investment
 Sourcing from abroad where appropriate
 Seeking out new market opportunities
 Improving relationships with suppliers and customer

Government’s role to improve international competitiveness


Governments seek policies which aim to:

 Encourage R&D spending (e.g. through tax breaks)


 Improve the skills base
 Improve the economic infrastructure
 Promote competition between firms
 Operate macro-economic policies favourable to business expansion
 Reduce interest rates to stimulate investment
 Reduce tax rates to stimulate enterprise, effort and investment
 Deregulation to promote competition
 Reduce bureaucracy
 Encourage sharing of ideas and best practice
 Reduce protectionist barriers to stimulate competition
 Encourage investment in human capital

Globalisation - Global Strategy


Author: Jim Riley Last updated: Sunday 23 September, 2012

A global industry

A global industry can be defined as:

 An industry in which firms must compete in all world markets of that product in
order to survive
 An industry in which a firm’s competitive advantage depends on economies of
scale and economies of scope gained across markets

Global markets are international markets where products are largely standardised.

Michael Porter argued that industries are either multi-domestic or global.

Global industries: competition is global. The same firms compete with each other
everywhere.

Multi-domestic industries: firms compete in each national market independently of


other national markets.

In general businesses adopt a global strategy in global markets and a multi-local


strategy in multi domestic markets.

Global strategy

Companies such as Sony and Panasonic pursue a global strategy which involves:

 Competing everywhere
 Appreciating that success demands a presence in almost every part of the world
in order to compete effectively
 Making the product the same for each market
 Centralised control
 Taking advantage of customer needs and wants across international borders
 Locating their value adding activities where they can achieve the greatest
competitive advantage
 Integrating and co-ordinating activities across borders
 A global strategy is effective when differences between countries are small and
competition is global. It has advantages in terms of
o Economies of scale
Lower costs
Co-ordination of activities
Faster product development
However, many regret the growing standardisation across the world.

Multi domestic strategy

 A multi-domestic strategy involves products tailored to individual countries


Innovation comes from local R&D
 There is decentralisation of decision making with in the organisation
 One result of decentralisation is local sourcing
 Responding to local needs is desirable but there are disadvantages: for example
high costs due to tailored products and duplication across countries

Comparison of the two strategies

Four drivers determine the extent and nature of globalisation in an industry:

(1) Market drivers

 Degree of homogeneity of customer needs


 Existence global distribution networks
 Transferable marketing

(2) Cost drivers

 Potential for economies of scale


 Transportation cost
 Product development costs
 Economies of scope

(3) Government drivers

 Favour trade policies e.g. market liberalisation


 Compatible technical standards and common marketing regulations
 Privatisation

(4) Competitive drivers

 The greater the strength of the competitive drivers the greater the tendency for
an industry to globalise
Stakeholders - Introduction
Author: Jim Riley Last updated: Sunday 23 September, 2012

Let’s start with a definition of stakeholders, which are:

Groups / individuals that are affected by and/or have an interest in the operations and
objectives of the business

Most businesses have a variety of stakeholder groups which can be broadly categorised
as follows:

Stakeholder groups vary both in terms of their interest in the business activities and
also their power to influence business decisions. Here is a useful summary:

Stakeholder Main Interests Power and influence

Shareholders Profit growth, Share price growth, Election of directors


dividends

Banks & other Interest and principal to be Can enforce loan covenants
Lenders repaid, maintain credit rating Can withdraw banking facilities

Directors and Salary ,share options, job Make decisions, have detailed
managers satisfaction, status information

Employees Salaries & wages, job security, job Staff turnover, industrial action, service
satisfaction & motivation quality

Suppliers Long term contracts, prompt Pricing, quality, product availability


payment, growth of purchasing
Customers Reliable quality, value for money, Revenue / repeat business
product availability, customer Word of mouth recommendation
service

Community Environment, local jobs, local Indirect via local planning and opinion
impact leaders

Government Operate legally, tax receipts, jobs Regulation, subsidies, taxation, planning

Stakeholder power is an important factor to consider whenever you are asked to write
about the relationship between a business and its stakeholders. In the context of
strategy, what is important is thepower and influence that a stakeholder has over the
business objectives.

For stakeholders to have power and influence, their desire to exert influence must be
combined with theirability to exert influence on the business. The power a stakeholder
can exert will reflect the extent to which:

 The stakeholder can disrupt the business’ plans


 The stakeholder causes uncertainty in the plans
 The business needs and relies on the stakeholder

The reality is that stakeholders do not have equality in terms of their power and
influence. For example:

 Senior managers have more influence than environmental activists


 A venture capitalist with 40% of the company’s share capital will have a greater
influence that a small shareholder
 Banks have a considerable impact on firms facing cash flow problems but can be
ignored by a cash rich firm
 A customer that provides 50% of a business’ revenues exerts significantly more
influence than several smaller customer accounts
 Businesses that operate from many locations across the country will be less
relevant to the local community than a business which is the dominant employer
in a town or village
 Governments exercise relatively little influence on many well-established and
competitive business-to-business markets. However their power is much
stronger over businesses in markets which are regulated (e.g. water, gas &
electricity) or where the public sector has a direct stake (e.g. retail banking)
 Employees have traditionally sought to increase their power as stakeholders by
grouping together in trade unions and exercising that power through industrial
action. However, in the last two decades the level of union membership has
declined significantly as has the total time lost to industrial action
Managing Stakeholder Power &
Influence
Author: Jim Riley Last updated: Sunday 23 September, 2012

How should a business respond to these variations in stakeholder power and


influence? The matrix below provides some guidance on the approaches often taken:

High level of interest Low level of interest

High level of power Key players Keep them satisfied


Take notice of them

Low level of power Communicate regularly with Can usually be ignored


them

In handling its stakeholders, a business also has to accept that it will have to
make choices. It is rare that “win-win” solutions can be found for key business
decisions. Almost certainly the business cannot meet the needs of every stakeholder
group and most decisions will end up being “win-lose”: i.e. supporting one stakeholder
means another misses out.

There are often areas where stakeholder interests are aligned (in agreement) – where a
decision can benefit more than one stakeholder group. In other cases, there is a clear
conflict of interest. Here are some common examples:

Where Stakeholder Interests are Aligned Where Stakeholder Interests Conflict

Shareholders and employees have a Wage rises might be at the expense of


common interest in the success and lower profits and dividends
growth of the business

Managers have an interest in


High profits lead not only lead to good organisational growth but this might be
dividends but also greater investment at the expense of short term profits
(retained) in the business

Expansion of production activity might


cause extra noise and disruption in local
Suppliers have an interest in the growth community
and prosperity of the business

Local community, employees and


shareholders benefit from business
involvement in the community

There are two main approaches to handling the often conflicting needs of stakeholders:

Shareholder Approach Stakeholder Approach

The traditional approach Increasingly popular


Business (management) acts in best Business takes much more account of
interest of shareholders / owners wider stakeholder interests
Principal aim is to maximise shareholder Approach based on consultation,
returns agreement, cooperation
Main focus is on growth & profit E.g. social and environmental concerns
become more important

Over the years various techniques and organisational models have been developed
which help businesses handle their relationships with key stakeholder groups. Some of
the most important are summarised below:

Approach Description

Workers Councils Compulsory for some larger firms in the EU


Brings worker representatives from across departments & activities
for regular discussion of business issues

Stakeholder Outside representatives who hold a non-executive position on the


Directors Board Many UK plcs – particularly those selling direct to consumers
and households, have taken steps to reflect customer interests on
the Boards

Arbitration / Formal processes of resolving conflicts between employer and


Conciliation employees (e.g. ACAS)
Also applies to settling disputes between firms and their suppliers
(e.g. negotiating agreement on contractual disputes rather than
resorting to legal action)
Share options & Widened participation of share ownership amongst all employees,
other performance- helps align interests of shareholders and employees
related pay