2.2 Globalisation

Globalisation gives consumers the opportunity to purchase products from the business that provides the most value for money. It is highly likely that students doing their Business Studies homework will be using a pen made by a French company and checking their social status on a Chinese laptop while having some two-minute noodles made by one of the world’s largest consumer packaged goods companies, based in Switzerland.

Businesses operate in a dynamic and highly competitive global environment, which has a marked effect on business operations. Globalisation has significantly influenced location decisions by making it possible to reduce costs, because businesses can locate closer to their sources of raw materials and where labour is less expensive. Governments of developing nations where these resources are in abundance may offer incentives, such as low tax rates, to attract businesses.

Globalisation has created many opportunities for Australian businesses to expand into overseas markets. This may be as simple as importing materials or establishing operations in a country where it is cheaper to produce goods. Therefore, the impacts of globalisation are twofold. First, there is the opportunity to reduce costs and improve quality through establishing a global supply chain. Second, there is access to a global market to sell the outputs of operations.

Global businesses

Globalisation is defined as the integration and interdependence of the economies of different countries, creating a global economy. Integration refers to the joining together of different economies through trade, technology, deregulation and development of global businesses.

As a result, there is an increasing flow of goods, services, people, finance and information around the world. Any business that has a key business function outside its home nation is part of the global economy. Geographic location and distance have become much less important issues for business. Technology, in particular, has made it easier and cheaper to communicate and transport inputs and outputs throughout the different divisions of the business that are located in different countries.

Global businesses are fully integrated into the global economy, usually with each business function operating outside the home nation. Manufacturing may be located where inputs and labour are cheapest, such as in a developing country. Raw materials may be sourced from where they are most abundant. Finance is controlled from headquarters situated in one of the world’s financial centres; for example, New York or London. Outputs may be distributed and sold to consumers in developed nations, such as Canada, Germany and the United Kingdom.

The point of a global web of operations is to force down costs and exploit the competitive advantage offered by each region. Different nations are known for having particular strengths that businesses wish to use and there can be a competitive advantage. Examples are shown in Source 2.3.

With globalisation, every function can be outsourced or relocated to reduce costs. For instance, the iPad produced by Apple Inc. is designed in the United States, using Japanese electronic parts, and assembled in China. This is an example of a high-quality and very successful product that represents the movement of businesses towards a global platform for the design, manufacturing and distribution of a product.

With opportunities to establish a global supply chain, many businesses expand into countries that offer cheaper labour, tax incentives and other benefits. This strategy will expose the business to additional influences brought about by different currencies, trade agreements, global consumers, technology and differences in cultures.

Different currencies

Operating in multiple countries, a business will have to convert currencies in order to pay suppliers for inputs. The value of different currencies is affected by the level of economic growth and confidence in the economy. This influence will principally affect the finance function of the business. Imagine an Australian manufacturing business that imports parts into Australia. A depreciation of the Australian dollar (AUD) against the currency of the country that inputs are being sourced from will lead to rising costs. The original advantage of relocating and outsourcing will be eroded by the falling value of the AUD in global finance markets. The business may be forced to seek a supplier elsewhere in the world where the AUD has a higher value, or accept higher costs for operations.

Financial risks can also occur if the AUD becomes very volatile, with frequent and unpredictable changes to its value.

A business can reduce this risk by using hedging. Hedging is any strategy used by a business to reduce financial risk. In this case the risk is from the exchange rate falling between the time a purchase contract is signed and the time payment is made. Global businesses can use hedging to eliminate the risks caused by depreciation of the AUD. Global businesses often use derivative contracts as a form of hedging to buy and sell foreign exchange to purchase inputs from businesses in other countries.

Hedging can also be achieved naturally, without contracts, by using subsidiary businesses and suppliers. A subsidiary is a business owned by a larger business. A global business may have subsidiaries in different countries, but conduct all transactions in the same currency. For example, a toy manufacturer in the United States may own an electronics company in Malaysia which exports parts to be put into the toys. Transactions are always in US dollars to reduce currency exchange risk.

Trade agreements

A bilateral trade agreement is similar to a treaty between two countries to reduce barriers to trade and promote economic integration. Multilateral trade agreements are between more than two nations. What is important for a global business wishing to enter the market is the number of barriers to trading that exist. Nations may reduce barriers between one another or they may place additional barriers to the entry of an outsider. A business may establish operations within a country that is a member of the same trade agreement. However, it may find it very expensive or prohibitive to establish operations within a country that is not part of the trade agreement.

Therefore, it may be easier for the business to establish overseas in that country than in a country with which no trade agreement exists. Some countries will develop a common trade policy against businesses in non-member countries. As a result, there is an increase in geographic regionalism in the world. As well as global trade and international flows, there are regions of the globe forming an economic alliance. Europe, North America and the South-East Asian nations (including China) are three examples of regions. All or some of the nations in a region may reduce the trade barriers between them, creating a regional trading bloc such as the European Union and the United States-Mexico-Canada Agreement (USMCA). There are important implications for Australian businesses if they are excluded from these economic ‘clubs’. For example, Australian businesses will have to source inputs and components from other countries and will find it very difficult to export to countries where Australia is not a member of the trade agreement.

With the growth of the World Trade Organization (WTO) there has been a similar growth in global business, joint ventures, strategic alliances, foreign subsidiaries and multinational corporations, all creating a highly competitive global market. By using a large-scale operations model, businesses can share costs and reduce the expense of developing, producing and distributing products to the global market.

Emergence of global consumers

Globalisation enables higher incomes, and many parts of the world have a rapidly growing middle class who wish to buy goods and services that improve their quality of life. For example, by 2025 India’s middle class will have grown from about 5 per cent of the population to more than 40 per cent, which will create the world’s fifth-largest consumer market. The demand for consumer goods such as televisions and other household goods will be enormous.

Globalisation opens up new markets and operations may need to change the features, design, quality or information for a good or service to suit these new markets. Products may need some changes to suit particular aspects of the target market in different countries. In other countries the business may not need to alter its core product at all to suit the same target market. It may be possible to supply a standardised product that needs only a small change to suit the culture of the local market.

Owing to differences in language, religion, tastes and ethics, it is very important that a business planning to sell in a new market adequately researches that market to reduce the chances of the product failing. It is also important for operations to have the flexibility to modify products as required.

Different cultures

When relocating or expanding operations, a business will encounter differences in the way the business operations need to be organised and managed. It is advisable for global businesses to use local experts who can help prevent issues caused by cultural clashes and communication problems. For example, the international organising committee for mega events must work with local government, which in turn must work with local contractors and builders to deliver a well-resourced, organised event such as the Olympic or Commonwealth Games. The 2020 Japan Olympics are being well planned using the kaizen 'continuous improvement' management approach to project scheduling, emphasising efficiency and quality control. This compares with the 2016 Brazil Olympics that appeared so disorganised during the construction phase that no amount of money was able to ensure that venues were ready for competition. The Indian government’s preparation for the 2010 Commonwealth Games equally frustrated the Commonwealth Games Organising Committee, owing to the last-minute approach to organising this mega-event. The Indian way of doing things is termed Jugaad-in-time. In the Jugaad approach, planning, operations strategy and strict project management are considered wasteful. Scheduling problems are overcome by adding more resources. Despite criticism, this approach can also be considered highly flexible, innovative and frugal.