How Does Globalisation Influence Organisational Decision Making and Strategy?

1.0 Introduction

Globalisation, uncertainty and turbulence in the global environment has increased complexity of making strategic decisions and choices. This has in turn made firms face intense competition from domestic and global firms. As a result, firms face intense pressure to internationalise their operations. This is mainly to: reduce costs by relocating operations in countries with low labour costs; diversify operations; increase market share; and reduce risks. This implies that firms need to adapt their strategic capabilities to cope with the changing global environment.

This article discusses how globalisation influences a firm’s decision making and strategy. This is done in section 2.0. Section 3.0 draws conclusion from the discussion. Then references are provided at the end of the article.

2.0 Influence of Globalisation on Organisational Decision Making and Strategy

2.1 Globalisation, Strategy and Strategic Capability

Globalisation can be described as the removal of barriers to trade across national borders to enable increased integration of production processes and capital markets, and flow of financial resources, technical innovation/technology, knowledge, labour, cultures, goods and services among different nations thus expanding international trade and economic growth. This implies that in globalising and liberalising markets, protection of national firms from foreign competitors is reduced by removing international trade barriers to allow free trade/competition. This has intensified competition across national borders and forced firms to formulate strategies that favour lowering of costs through exploiting opportunities across borders.

Strategy can be described as:

the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations (Johnson, Scholes and Whittington, 2008, p.3).

The above description implies that the purpose of any strategy is to enable the firm achieve sustainable competitive advantage and superior performance. This involves utilisation of strategic capabilities to exploit opportunities and minimise or neutralise threats in the firm’s external environment.

Strategic capability includes resources and competences that a firm utilises to compete in its business environment. It can therefore constitute a firm’s strengths and weaknesses, and be a source of competitive advantage or disadvantage over its rivals. Strategic capability can be grouped into two categories: threshold resources and competences, and unique resources and core competences. Discussion of these categories is outside the scope of this article.

2.2 Internationalisation of Operations

Internationalisation can be described as a process through which firms consider influence of cross border trends, adapt strategies to the trends, and establish operations across national borders. This involves purchasing from foreign markets (upstream internationalisation, such as importing) and selling in foreign markets (downstream internationalisation such as making foreign sales or establishing subsidiaries in foreign countries). Both upstream and downstream activities need to be laid out in the international strategy of the firm. An example of internationalisation activities is offering of education services to students in Africa by a UK-based University through distance learning.
Firms decide to operate across national borders in order to achieve the following:

  • Reduce production costs by relocating operations in countries with low labour costs, and benefiting from economies of scale;
  • Access new markets, and increase market share and sales;
  • Learn from global operations;
  • Build a global brand, for example, Coca-Cola, Toyota, etc.; and
  • Reduce risks through diversifying operations across national borders and serving diverse customers—the firm can earn high profits while making losses in some markets. The saying goes: “don’t put all eggs in one basket”.

To meet such strategic goals, a firm needs to formulate strategies and make strategic decisions that will enable it enter foreign markets and outcompete rivals in those markets. Since this will be the focus of every firm, internationalisation strategies increase intensity of rivalry among competing firms. Therefore, globalisation has forced firms to internationalise and led to establishment of global supply/value chains with several interfirm supply chain interdependence. Whereas internationalisation may be perceived as a strategic option for large firms, small firms can use rapid internationalisation approaches whereby small firms can start international operations without first gaining experience from domestic markets—international new ventures whose main strategic capability may be embedded in the entrepreneur! This implies that competition can arise from both large and small firms located anywhere in the world. This increases complexity of decision making and strategy formulation and implementation. This is why there is a need for leadership which is discussed next.

2.3 Leadership and Decision-Making

Globalisation has increased access to information and transfer of cultural values and beliefs. This has pressured managers to change their leadership styles from traditional authoritarian to participatory transformational leadership. Employees no longer offer “blind loyalty” to the firm and its leadership—loyalty is earned from managers’ rational decisions and actions. Internationalisation and transformational leadership can lead to superior performance within an intensely competitive global environment. It is transformational leadership that will facilitate effective and efficient strategic implementation when resources and competences are allocated appropriately. This needs to be noted by a firm’s top management i.e. C-level managers, managers, and the board of directors.

Customers can easily access information and compare prices and quality of services and products offered globally. This has forced firms to pay attention to customer needs more closely. As a result, firms now localise their products and services and decentralise and delegate decision making powers to local centres. Headquarters can no longer dictate what needs to be done since customisation of products and services must be harmonised with standardisation approaches. This is when the firm can flexibly adapt to changing needs of customers—strategies must be revised and adapted accordingly. This requires making appropriate internationalisation decisions i.e. which foreign markets to enter; how to enter the selected markets; and when and how to exit unattractive markets. These decisions are taken to meet the demands of an uncertain future. Making such international decisions therefore involve risks. Handling risks is a strategic issue and it is discussed next.

2.4 Handling Risks

As already stated, making internationalisation decisions (which foreign markets to enter; how to enter the selected markets; and when and how to exit unattractive markets) involves risk-taking. This is because these decisions are taken to meet the demands of an uncertain future. This implies that a firm’s management must apply risk management principles to enable them minimise the likelihood of unexpected and undesired events happening—to reduce/mitigate risks and their effects. Therefore, globalisation and increased uncertainty has increased the need for utilisation of risk management tools in making decisions and formulating/implementing international strategies. Risk management process involves five stages: risk identification; risk analysis/assessment; risk mitigation planning; risk tracking; and risk control and decision making. Risk identification, analysis and planning stages culminate into a risk strategy. Then managers will decide whether to implement a strategic option or not: a Go-No-Go decision.
Not all risks will be predicted and their effects minimised/mitigated. This is why firms need to diversify their operations/risk as discussed in the next subsection.

2.5 The Need for International Diversification

Increased riskiness of decisions and intense competition from globalisation has forced firms to diversify their operations across national borders in order to grow and increase market share. This is in line with the saying that “don’t put all eggs in one basket”—poor performance in a certain market can be compensated for by superior performance in another. Poor performance would be disastrous to a firm’s survival and success if the firm had concentrated in that market only.

International diversification can be described as a strategic option through which a firm decides to enter foreign markets in order to grow, achieve sustainable competitive advantage, and increase its sales and market share in different countries and/or regions.
Whereas international diversification can be a shock-absorber for risks from globalisation, most diversification efforts fail to provide the expected competitive advantage. This implies that a firm must analyse markets and make appropriate decisions in formulating an international diversification strategy. Such analysis can determine whether the required resources (finance, skills, materials, etc.) are available or will need to be acquired.

Internationalisation and international diversification are similar concepts. Therefore, as stated earlier under internationalisation, motives for international diversification include:

  • Utilisation of the firm’s strategic capabilities and access to new ones such as advanced technology in foreign markets;
  • Benefiting from economies of scale;
  • Reduction of production costs through relocating production to countries with low labour costs;
  • Learning from global experience/knowledge acquisition; and
  • Improvement of overall firm performance.

Whereas these motives are encouraging to managers and shareholders, it should be noted that for developed countries, “the relationship between diversification strategies and organizational performance increases up to the medium value then shows a decrease in performance” (Anıla and Yigit, 2011, p.1494). This implies that international diversification as a strategic option should be chosen with caution.

2.6 Reduction of Barriers to International Trade

Governments have greatly reduced barriers to international trade—most countries have accepted changes from globalisation forces. However, some governments still protect their national firms from intense competition. This implies that managers must decide whether to enter a certain foreign market or not based on international trade barriers erected by the country. Otherwise, natural barriers to trade have greatly reduced since borders are now easier to cross especially when there are free trade agreements between countries. Such reduction of international trade barriers has further facilitated globalisation and intensified competition among firms. This necessitates informed decision making and adapting strategies as the global environment changes.

3.0 Conclusion

Globalisation influences decision making and strategy due to the way it has created the need to: change leadership style; utilise international diversification as a strategic option; and reduce international trade barriers. In effect, it has increased complexity of decision making and strategy formulation and implementation. This is especially facilitated by establishment of global supply/value chains with several interfirm supply chain interdependence.

The above mentioned article is a concise version of the full academic article that is available exclusively to the iQualify UK students in our Teaching Zone.

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