Globalization is in itself an attitude of the mind — a mindset which views the entire world as a single market so that the corporate strategy is based on dynamics of the global business environment.
What is Globalization?
Globalization refers to a process of integration of the world into one huge market. It calls for removal of all sorts of trade barriers among different countries. In true a globalization political and geographical barriers become irrelevant.
The globalization process includes:
- Globalization of markets,
- Globalization of production,
- Globalization of technology,
- Globalization of investment.
Basically globalization is the integration of national economies into a single international economy.
Globalization not only integrates economies but also societies. According to the International Monetary Fund Opens in new window, globalization means the process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies.
At the company level, globalization means two things:
- it means the company consists itself heavily with several manufacturing locations around the world and offers products in several diversified industries, and
- it means ability to compete in domestic markets with foreign competitions.
A global company views the world as one market, minimizes the importance of national boundaries, sources, raises capital and markets wherever it can do the job best.
A global company has three characteristics:
- It is a conglomerate of multiple units located in different parts of the globe but all linked by common ownership
- Multiple units are drawn on a common pool of resources such as money, credit, information, patents, trade names and control system.
- The units respond to some common strategy.
Globalization evolves as a trend toward a more integrated global economic system. It may be construed as a phenomenon where there is a free flow of capital efficiency, technology and other factors of production which promote world welfare in its strides.
Thus, globalization is a shift toward a more integrated and interdependent economy.
Impacts of Globalization
Although trade and monetary barriers continue to exist between many countries, globalization has been a major force affecting business organizations in the last many decades.
In 1960, almost all cars and televisions purchased in the US were made there.
Today, however, most of the televisions and many of the cars purchased come from elsewhere. A simple examination of the tags on the clothes you wear indicates the extent of globalization.
Shoes are made in Singapore, T-shirts in Guatemala, jeans in Cambodia, and handbags in Italy. Many products contain parts produced in many different countries.
Financial markets and ownership also extend across national borders. Economic problems in one country frequently cause ripples around the world.
The financial crisis of 2008 and the surge in demand for commodities originating from China, Bangladesh, and Indonesia had a global impact. Multinational organizations with operations in multiple countries are commonplace. The Internet has also created a global marketplace.
With the reduction of tariffs from the establishment of the European common market and treaties such as the North America Free Trade Agreement (NAFTA), Opens in new window business organizations must consider the entire world as a source of competition, a source for parts, and an opportunity for new customers.
Globalization increases competition, and drives inefficient firms out of local markets. Innovation by firms in the same country also increases competition. The entry by Wal-Mart drove many small retailers who could not match Wal-Mart’s low prices out of business.
Competition and globalization require firms to be efficient producers to survive. Efficient producers must know and control their costs. Hence, these organizations must have timely internal accounting systems that accurately track their costs.
Determinant Factors for Successful Global Economy
- Low Costs
To be successful in a global economy, business organizations must provide their products and services at a lower cost than their competitors.
With the advent of the Internet, online shopping, and mobile apps, consumers can easily compare prices for different products and services. No longer will businesses be able to sell products at high prices without offering a corresponding product or service.
With increased local and global competition limiting the prices that can be charged to customers, organizations have to find ways to control the cost of creating products and services.
One approach to reducing costs is to shift labor costs to developing countries with lower labor rates. This practice may cause temporary hardships and job losses, but an organization (and each individual) must continually reassess its comparative advantage Opens in new window in a global economy in order to survive. Corporate social responsibility Opens in new window also puts pressure on firms to consider the impacts of working conditions in developing countries and the movement for fair trade.
Although the global economy threatens those organizations and individuals unable to adapt, consumers currently enjoy the greatest diversity of products at the lowest prices and highest quality in the history of the world.
- Efficient Operations
Seeking out places with lower labor costs is one way to reduce product costs. However, shifting production to take advantage of lower labor rates does not necessarily result in the lowest costs.
Firms must also examine the efficiency of their low-cost workers compared to that of other workers who command higher wage rates.
If higher-paid employees can work more efficiently, organizations prefer to use labor that is more expensive. These workers are often more productive. Even if they are paid more, employing them can lower overall costs.
One of the basic theories of economics states that workers should be paid based on their productivity. Using mass purchasing, technology, and innovative logistics systems, retailers such as Home Depot Opens in new window and Ikea Opens in new window are able to cut costs out of their supply chains and pass these savings on to customers via lower prices.
To improve efficiency and lower the cost of providing products and services, organizations must continually re-evaluate their processes. Re-engineering refers to modifying work processes within the organization to operate more efficiently, often by adopting new technologies or streaming existing processes.
- Just-In-Time (JIT)
Just-in-time (JIT) is a process of providing products on demand. JIT Opens in new window allows some organizations to operate more efficiently and at a lower cost.
Manufacturing organizations using JIT make a product when an order is received, rather than make it in advance and hold it until it is sold or discarded.
With JIT, customers should not have long waits for delivery of the product. To make JIT work, the organizations must design systems from order entry to delivery that operate efficiently and immediately. Dell Inc. Opens in new window uses JIT and the Internet to quickly deliver tailor-made laptops to a global customer base with a minimal inventory requirement.
JIT also is used in service organizations. For example, gourmet food shops prepare orders on demand for delivery to the customer or take out. Food is fresher and less is wasted if not prepared in advance.
- Total Quality Management (TQM)
Total quality management, sometimes referred to and implemented as Six Sigma, has formalized the move to a customer orientation. TQM Opens in new window is a philosophy of continually lowering costs and improving the provision of services and products to customers.
Quality is defined by the customer and designed into the product. TQM involves everyone within the organization. The shift to TQM means that the organization seeks to continually improve its operations, internal processes, and customer services. Many firms adopt JIT and TQM jointly, as the two share a number of common principles.