CMI Strategic Management & Leadership

Organisational Change (Unit 7010)

Section 2 Topic 1

(Additional lecture notes on Globalisation)

Developing an International Perspective

Few years ago, a business firm could be successful by focusing only on

making and selling goods and services within its national borders.
Furthermore, until the mid-1990s a business organisation could also be
successful without using the Internet. However, nowadays things have
changed significantly. The internationalisation of markets and corporations
has changed the way business is conducted.

Globalisation
Msn Encarta defines Globalisation is a broad term referring to increased
integration, interconnectedness and interdependence of international
economic activity and social relations. It includes an increase of international:

Trade;
Investments;
Labour force movement.
Migration;
Production;
Products, services and technology usage;
Research and Development;
Exchange of ideas and knowledge;

It describes the growing economic, political, technological, and cultural

linkages that connect individuals, communities, businesses, and governments
around the world. Globalization also involves the growth of multinational
corporations (businesses that have operations or investments in many
countries) and transnational corporations (businesses that see themselves
functioning in a global marketplace). The international institutions that
oversee world trade and finance play an increasingly important role in this
era of globalization.

Although most people continue to live as citizens of a single nation, they are
culturally, materially, and psychologically engaged with the lives of people in
other countries as never before. Distant events often have an immediate and
significant impact, blurring the boundaries of our personal worlds. Items
common to our everyday lives—such as the clothes we wear, the food we eat,
and the cars we drive—are the products of globalization.

Most experts attribute globalization to improvements in communication,

transportation, and information technologies. For example, not only
currencies, but also stocks, bonds, and other financial assets can be traded

Wilfrid Flanda Lecturer in Organizational Change – wilfrid@bite.ac.uk 27/01/2010 1

around the clock and around the world due to innovations in communication
and information processing. A three-minute telephone call from New York
City to London in 1930 cost more than $300 (in year 2000 prices), making
instant communication very expensive. Today the cost is insignificant.

Advances in communication and information technologies have helped slash

the cost of processing business orders by well over 90 percent. Using a
computer to do banking on the Internet, for example, costs the banking
industry pennies per transaction instead of dollars by traditional methods.
Over the last third of the 20th century the real cost of computer processing
power fell by 35 percent on average each year. Vast amounts of information
can be processed, shared, and stored on a disk or a computer chip, and the
cost is continually declining. People can be almost anywhere and remain in
instant communication with their employers, customers, or families 24 hours
a day, 7 days a week, or 24/7 as it has come to be known. When people in
the United States call a helpline or make an airline reservation, they may be
connected to someone in Mumbai (Bombay), India, who has been trained to
speak English with an American accent. Other English speakers around the
world prepare tax returns for U.S. companies, evaluate insurance claims, and
attempt to collect overdue bills by telephone from thousands of kilometers
and a number of time zones away.

Advances in communications instantly unite people around the globe. For

example, communications satellites allow global television broadcasts to
bring news of faraway events, such as wars and national disasters as well as
sports and other forms of entertainment. The Internet, the cell phone, and
the fax machine permit instantaneous communication. The World Wide Web
and computers that store vast amounts of data allow instant access to
information exceeding that of any library.

Improvements in transportation are also part of globalization. The world

becomes smaller due to next-day delivery by jet airplane. Even slow,
oceangoing vessels have streamlined transportation and lowered costs due to
innovations such as containerized shipping.
http://encarta.msn.com/encyclopedia_1741588397/Globalization.html

Dimensions of Globalization

- Globalization of Production: encouraged by the cost advantages that

can be won by establishing an international production network.

- Globalization of Products: favoured by the significant rise in costs

generated through the constant need to present ever-newer products.

- Globalization of Markets: access to more and more foreign markets

since the fall of international trade barriers, creating new opportunities as
well as stiffening competition.

Other major dimensions that can be distinguished are:

Wilfrid Flanda Lecturer in Organizational Change – wilfrid@bite.ac.uk 27/01/2010 2

- Globalization of Services
- Globalization of Labour, work, people and talent
- Globalization of the Financial System, banking and insurance
- Globalization of Information, knowledge
http://www.12manage.com/description_globalization.html

Globalisation and Challenges to Strategic Management

To accomplish the economies of scale necessary to achieve the low costs,

and therefore low prices, required to be competitive business organisations
are now targeting a global market rather than their local, regional and even
national markets.

Over the last 50 years or so, many barriers to international trade fell and an
increasing number of firms started pursuing global strategies to gain a
competitive advantage over rivals. To create a successful global strategy,
managers first must understand the nature of global industries and the
dynamics of global competition.

• Sources of Competitive Advantage from a Global Strategy

A well-designed global strategy can help a firm to gain a competitive

advantage. This advantage can arise from the following sources:

 Efficiency
Economies of scale from access to more customers and markets
Exploit another country's resources - labour, raw materials
Extend the product life cycle - older products can be sold in lesser developed
countries
Operational flexibility - shift production as costs, exchange rates, etc. change
over time

 Strategic
First mover advantage and only provider of a product to a market
Cross subsidization between countries
Transfer price

 Risk
Diversify macroeconomic risks (business cycles not perfectly correlated
among countries)
Diversify operational risks (labour problems, earthquakes, wars)

 Learning
Broaden learning opportunities due to diversity of operating environments

Wilfrid Flanda Lecturer in Organizational Change – wilfrid@bite.ac.uk 27/01/2010 3

  Reputation
Crossover customers between markets - reputation and brand identification

• The Nature of Competitive Advantage in Global Industries

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.

The following elements determine an industry's globalization potential.

 Cost Drivers
- Location of strategic resources
- Differences in country costs
- Potential for economies of scale (production, R&D, etc.)

One reason that the facsimile industry had more global potential than the
furniture industry is that for fax machines, the production costs drop 30%-
40% with each doubling of volume; Industries for which the larger expenses
are in R&D, such as the aircraft industry, exhibit more economies of scale
than those industries for which the larger expenses are rent and labour, such
as the dry cleaning industry. Industries in which costs drop by at least 20%
for each doubling of volume tend to be good candidates for globalization.
http://www.quickmba.com/strategy/global/

- Transportation costs (value/bulk or value/weight ratio) (e.g. Diamonds and

semiconductors are more global than ice).

 Customer Drivers
Common customer needs favour globalization. For example, the facsimile
industry's customers have more homogeneous needs than those of the
furniture industry, whose needs are defined by local tastes, culture, etc.

Global customers: if a firm's customers are other global businesses,

globalization may be required to reach these customers in all their markets.
Furthermore, global customers often require globally standardized products.
Global channels require a globally coordinated marketing program. Strong
established local distribution channels inhibit globalization.

Transferable marketing: whether marketing elements such as brand names

and advertising require little local adaptation. World brands with non-
dictionary names may be developed in order to benefit from a single global
advertising campaign. http://www.quickmba.com/strategy/global/

 Competitive Drivers

Wilfrid Flanda Lecturer in Organizational Change – wilfrid@bite.ac.uk 27/01/2010 4

Global competitors: The existence of many global competitors indicates that
an industry is ripe for globalization. Global competitors will have a cost
advantage over local competitors. When competitors begin leveraging their
global positions through cross-subsidization, an industry is ripe for
globalization.

 Government Drivers
Trade policies
Technical standards
Regulations

• Modes of Foreign Market Entry

An important part of a global strategy is the method that the firm will use to
enter the foreign market. There are four possible modes of foreign market
entry:
- Exporting
- Licensing (includes franchising)
- Joint Venture
- Foreign Direct Investment

These options vary in their degree of speed, control, and risk, as well as the
required level of investment and market knowledge. The entry mode
selection can have a significant impact on the firm's foreign market success.

Wilfrid Flanda Lecturer in Organizational Change – wilfrid@bite.ac.uk 27/01/2010 5