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Some effects of globalisation on business

effects of globalisation on business

The global economy is steadily integrating. This is leading to globalisation of various national economies. Some of the effects of globalisation on business can be seen in for example the automobile industry. There was a time when importing foreign-made cars were rare in the US, and such imports were either exotic or exorbitant. The 21st century, however, is witness to globalisation in this industry. Fiat-Chrysler, for example, has its manufacturing units, management, sales divisions, etc., in many countries across the world. There are American brands that develop and manufacture cars in China and Mexico. Again, there are Japanese brands building their models exclusively in the US. Surprisingly, almost all cars on the road today are made of components manufactured in more than just one country.

The only expected result of this drift towards globalisation is the snowballing interdependence of economies. To cite an example, in spring 2018, the US government amplified tariffs on about $50 billion Chinese goods. This caused the Chinese Government to increase tariffs on American goods. As a result, stock markets across the world took a nosedive. Due to such paradigmatic shifts, globalisation has made significant impact on various aspects of strategic business management. Some of the more noteworthy changes are discussed below.

 

Impact of global competition and the need to reassess competitive strategies

The new millennium has redefined innovation for global competition. Today, the global economy has thought leaders who are driven by the desire to attain competitive advantage via human capital. It has been a decade since the global financial crisis. The world economy has exhibited promising signs of recovery. The Global Competitiveness Report 2017 states that there has been a GDP growth of 3.5% in 2017. In the face of growth, leading economies are also facing major hurdles in terms of economic policies.

  • Uneven distribution of profits
  • Divides between generations
  • Increasing disparity in income in the developed economies
  • Rising environmental degradation

All of the above have intensified the sense of insecurity. Society feels that the economic policies have not served citizens well over the last decade. All the above-mentioned factors have triggered decision-makers to find new ways for economic progress.

A unanimous response to such economic situation is the need to focus on human well-being. Economic progress, with human welfare as the key concern, is quite intricate in nature. It consists of:

  • Benefitting a large number of people
  • Environmentally sustainable and equitable opportunities for all
  • Furthering the future generations

In the light of the above-mentioned points competitiveness remains of utmost importance. To have an edge, an economy needs to create resources for augmenting education, security, health, and per capita income.

A progressive economy has leading organisations creating wealth and contributing towards the overall development and well-being of the economy. Standing out among the crowd by way of performance, innovation, understanding customer requirements, and enhancing the human capital, are all part of being a leader. The modern business landscape poses a tough challenge to such organisations. Nevertheless, an organisation can survive by devising new strategies by:

  • Creating an open innovation culture
  • Developing dependable partner relations
  • Focusing on innovation-based ecosystems

What are innovation ecosystems: These are the pillars of organisational growth. Technology-based ecosystems emphasise on innovation and idea conversion, such as high-tech, automobiles, consumer electronics, and machinery industries. Science-based ecosystems work best in the idea-conversion cycle such as the life sciences (biotech, pharmaceuticals, and medical devices industries) and semiconductors industries. Service-base ecosystems are concerned with solution adoption. This ecosystem offers asset optimization. Insurance companies, banks, consultancies, engineering firms, retail, and contract manufacturing industries are part of this ecosystem.

Smart organisations are aware of the strength of global competition, the changing market demands, and structures, and the switch to real-time business. Even a few years ago, innovation meant development of new ideas. Today, innovation creates strategic options that enable an organisation to react to transformative and unstable conditions.

Innovation necessitates a firm to develop trustworthy partners. Open innovation cannot function in isolation. Diverse partners are able to offer fresh ideas and resources to help an organisation survive the competition and ride against the tide.

 

Organisation and structure of businesses

Largely, organisations are steered by a hierarchical structure. This structure consists of different positions and job roles. Decisions are made while keeping organisational objectives in mind. The structure of an organisation is based on the nature of the business, the tax consequences, and the business requirement. To survive in the business environment, an organisation must structure itself in order to fit in. It must provide sufficient information for control and coordination while directing workforces on specific products, functions, and/or geographic regions. The managers must be able to choose and decide whether to lay emphasis on national responsiveness or global standardisation. For example, Coca Cola works on customer preferences and requirements, and is able to sell the same beverage in different cultural economies. They do though change the logo slightly and the bottle style to fit local cultural values and consumer interests.

In order to keep up with globalisation, managers must design an organisational structure that is adaptive to the changing global market. There are three common organisational structures:

  • Divisional structure:
    • Global product division
    • Global geographic division
  • Functional structure: This structure groups people into various functional departments like research and development (R&D), operations, finance, marketing, etc. This structure is very common and is used domestically.
  • Global matrix structure: This structure groups its employees by product division and geographic division. This is a complex structure and is used by many international organisations such as Nestle, Colgate, ABB, Eaton Corporation, IBM, etc.

Adopting the right structure for an organisation is vital. A wrong structural implementation may lead to poor communication, product development, and customer service.

 

Changing managerial roles in global organisations

An organisation has five distinct roles to play:

  1. Allowing people to specialize and creating equal division of labour
  2. Using large-scale technology
  3. Managing the external environment
  4. Economising the cost of transaction and
  5. Exerting control and power

These roles enable an organisation to boost its value creation. Again, over the past years management has been functioning based on the following five pillars:

  • Planning: This involves the management deciding on the course of action that would provide the rulebook for an organisation to follow.
  • Organising: This involves the instituting of a global organisational structure with appropriate roles for all employees, while working towards the common organisational goals.
  • Directing: This involves effective leadership wherein the managers command and influence the staff, who in return work towards achieving the group and organisational goals.
  • Coordinating: This involves the management striving towards the realisation of staff congruence, who work in tandem with each other to accomplish a group goal.
  • Controlling: This involves correction and measurement of performance of the staff against their committed goals while confirming the execution and completion of plans.

While management follows these pillars, managerial functions are affected by the various changes across the organisation and beyond. The following are the changes that affect the managerial functions:

  • Dynamic environment: Various changes in the economic, social, political, cultural, or environmental scenario, affect the running of an organisation. This has a direct impact on the way the organisation manages and functions
  • Demanding consumers: Today, consumers are more informed. They seek better products and services at best prices. They look for convenience, flexibility, and evolvement.
  • Learning and knowledge management: Global corporations these days have adopted a knowledge-based approach towards the functioning of business. Therefore, an organization must create a learning environment, harbour knowledge, and store it. This knowledge reservoir adds value to an organisation, propels its growth, and encourages the employees to create and innovate while mobilising a learning environment.
  • Reinventing organisation: The current need is to keep updating and modernising an organisation. The best way to do that is to trim down without losing the strengths. Organisations need to build a spirit of entrepreneurship filled with flexibility, agility, and high responsiveness.
  • Being ready: Due to the highly dynamic global business environment, it is imperative for an organisation to try to foresee the future. This can be done via research, market study, and adopting proactive services for the customers of the future. The organisation has to keep reinventing itself in terms of services, products, and customer relationship.
  • Effective leadership: Keeping an organisation moving in terms of inspiration and guidance is the job of the leadership. This role is usually associated with an individual and their skills of motivating and influencing others instead of focusing on maintaining their own position. However, a growing organisation cannot run under the leadership of one individual. To compete in the global scenario, organisations must make a paradigm shift from individualistic leadership to a collective style. It is vital to adopt a collaborative culture and a teamwork mindset to remove the silos between departments.

Management also encounters various environmental challenges in the area of organisational behaviour. These issues are relevant to competitive strategy, productivity, quality, and service and manufacturing technology.

Competitive strategy: A competitive strategy shows how an organisation intends to compete in the same industry and globally. Usually, an organisation adopts a differentiation approach wherein it attempts to make its services and products look different from their market competitors. Organisations can also adopt a leadership strategy wherein they offer a product or service at a lower-than-market rate. This allows an organisation to gain higher market share. A third competitive strategy would be to target products and customise the same to meet the customer requirements. This is known as focus strategy.

Productivity and quality: Quality is another challenge and it attracts immense attention. More and more organisation is using quality as their USP and their basis of staying in competition. This increases productivity by producing high-class products at lower costs.

Technology for manufacturing and services: Managers need to keep abreast of new technology that can be used to transform resources into products and services. This requires investing in technology and the latest manufacturing equipment. In addition, managers need to train employees to handle the newly created jobs.

 

Impact on growth opportunities

Many economists agree that globalisation offers a net benefit to global economies by creating efficient markets, increasing competition, spreading wealth equally, and controlling military conflicts. However, non-economists assume that globalisation brings more problems than profits. The “Globalization of the World Economy” report by Milken Institute highlights the benefits.

  • Foreign Direct Investment: This increases faster than the growth in world trade. It boosts technology transfer, growth, and industrial restructuring
  • Technological innovation: New technology adds to economic output while making the processes smoother and more efficient
  • Economies of Scale: Globalisation empowers multinationals to realize this. Economies of scale reduce costs and promote economic growth. This however may hurt smaller domestic businesses.

The risks are:

National Sovereignty: Some economies find it threatening to witness the rise of multinationals, global organisations, and many other international corporations. This may lead political leaders to become xenophobic.

Interdependence: Local economic fluctuations may affect a large number of nations that are dependent on them. Globalisation creates interdependence between countries and therefore, any local instability affects the whole group as one.

Equity distribution: The profits of globalisation can easily be lopsided and tilted towards the rich nations and even individuals. This can lead to greater financial rifts and potential conflicts, both locally and globally.

 

Impact of globalisation on the organisation’s value chain

Today, global corporations make products and market them across the world. This transformation has been possible due to minimised shipping cost, technological improvements, and trade liberalisation. Most countries are keen on encouraging global trade, investment, and innovation. According to an OECD (Organisation for Economic Co-operation and Development) research, this enables the organisations to incorporate global value chains (GVC). These value chains trigger growth in the interconnected economies.

A value chain system usually consists of:

  1. Research, design, and the product development
  2. Inputs
  3. Production process
  4. Sales, marketing, distribution, and after-sales services

International investments, trade, and production today, are highly organised within the GVC’s. The multiple production processes of an organisation are located across various countries. Globalisation inspires these organisations to restructure their international operations via offshoring and outsourcing.

There have been various major improvements across the world in terms of information technology and communications systems. These improvements reflect more in logistics automation, supply chains, technology-aided component and product designing tools, and computer-controlled production management equipment. These technological advancements have allowed a higher volume of information flow through the GVC’s while using the least amount of governance.

Since the advent of the internet, the world has literally shrunk. It has lowered the barriers for businesses to cross thresholds and participate in GVC’s. These businesses create low-cost and standardised linkage mechanisms to survive within such value chains. One more change that is notable has occurred in the domain of value chains. This shift has happened in particular in the apparel, electronics, and auto industries.  Most leading organisations have put all their energy and focus on marketing and product development. They have not only outsourced the production system, but have also given the production-related functions to their suppliers. The most successful suppliers offer these services to many leading organisations while pushing for major external economies of scale.

This change is associated with rising costs and brand development. The latter consists of advertising, marketing, and product development. This entire scenario stems from rising product diversity, very high international competition, and shorter product life cycles. The supply base, and its capacity to offer strong services, has only improved, while the capacity of the manufacturing units have gradually commoditised.

 

Overall therefore globalisation has had a range of impacts, although whether these are positive or negative depends on how they affect the organization concerned.

 

References

https://www.forbes.com/sites/christopherskroupa/2017/10/04/competitive-advantage-how-innovation-is-shaping-the-21st-century-company/#3a859e336a4c

https://www.ncbi.nlm.nih.gov/books/NBK100306/

https://www.strategy-business.com/blog/What-It-Takes-to-Stay-Ahead-of-the-Competition?gko=efdf2

https://www.entrepreneur.com/article/75118

http://smallbusiness.chron.com/meaning-business-organization-41925.html

http://smallbusiness.chron.com/strategic-management-concepts-competitiveness-globalization-65146.html

http://smallbusiness.chron.com/globalization-affect-organizations-business-approach-20077.html

https://www.thebalance.com/globalization-and-its-impact-on-economic-growth-1978843

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3982958/

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International Bank for Reconstruction and Development, The World Bank , 2017, MEASURING AND ANALYZING THE IMPACT OF GVCs ON ECONOMIC DEVELOPMENT, GLOBAL VALUE CHAIN DEVELOPMENT REPORT 2017

Gary Gereffi, John Humphrey, Raphael Kaplinsky, and Timothy J. Sturgeon, G.G., J.H., R.K., T.J.S., 2001, Introduction: Globalisation, Value Chains and Development, Institute of Development Studies, IDS Bulletin 32.3