globalisation and business - effects on business

The Effects of Globalisation on Business

The effects vary a lot from one part of the world to another, and from one area of business to another. Communications infrastructure is important to modern businesses, but not all countries have got one. There is also the ‘non-traded’ sector ie goods and services which are not traded internationally. Domestic services, for example, have to be provided where the house is; you can’t export a clean house.

Competition

- Foreign businesses buy into domestic markets.
- Deregulation opens up markets to competition.
- Deregulation encourages innovation in new products and markets which challenges traditional market leaders

Meeting consumer expectations and tastes

- Generally, consumers all over the world are better informed, have higher incomes and therefore higher and more exacting expectations. This forces businesses to meet higher standards.

Economies of scale

Selling into a global market allows for enormous economies of scale, although not all industries benefit from these.

Choice of location

Businesses are now much freer to choose where they operate from, and can move to a cheaper and more efficient location. In the last decade the UK has been seen by many businesses as an attractive business location, especially in financial services, and many businesses have located in the UK which has boosted the UK economy but also provided increased competition for UK businesses. This increased movement of businesses and jobs has, to some extent, forced governments to compete with each other in providing an attractive and low-cost location. Ireland, for example, offers ‘tax holidays ’ to businesses relocating there. Manufacturing businesses are increasingly relocating to low-wage countries such as Indonesia. Inputs vary in price across the world, and businesses now have more freedom of movement in moving to get hold of those cheaper inputs eg labour in developing countries, or financial advice in the City of London. One limitation on this is that managers won’t always move to some countries if living conditions are unpleasant or even dangerous.

Multi-national and multi-cultural management

This is a major challenge to businesses and their managers. A multi-national business environment is more complex with more variables, and so is more difficult to manage. A multi-cultural employment policy leads to employees of many different nationalities, languages, religions and cultures in different offices across the globe. These employees react in quite different ways to incentives, to motivation and it is very difficult to find managers who are sensitive to all these different factors. It is very easy to inadvertently give offence and demotivate workers. For example, the Japanese were initially very disappointed with their Thai employees who didn’t respond well to Japanese methods of building up corporate loyalty and motivation. Once they turned production targets into a game, the Thais worked extremely well.

Globalisation of markets

National borders are becoming less and less important. Markets stretch across borders and MNCs are well-placed to take advantage of this. The same issues of language and culture and so on arise. Consumers are more alike, but by no means the same. Many businesses have made expensive mistakes by not taking local variation sufficiently into account. Marketing, in particular, is a minefield because of its dependence on language. The marketing books are full of stories, often very amusing, of how businesses got it wrong. For example, the GM Nova failed in Spain because ‘NoVa’ means ‘doesn’t go’ in Spanish.

A good example of the globalisation is IKEA. IKEA is now one of the world's largest furniture retailers and sell a 'standardised product' worldwide.

• In 1974 there were only 10 IKEA stores outside of Scandinavia and the company annual revenue was $210m.
• In 2006 there were 237 stores in 34 countries and their sales revenue was close to 17.3bn euro.
• They have a global network of suppliers - 1,300 firms in over 54 countries.
• They have very low costs that are partly derived from huge economies of scale - large stores and a highly organised supply chain.
• The IKEA group in 2006 employed 104,000 staff - called 'co-workers'.

                                                                  Ansoff Matrix

The Ansoff Growth matrix is another marketing planning tool that helps a business determine its product and market growth strategy. Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on whether it markets new or existing products in new or existing markets.

The output from the Ansoff product/market matrix is a series of suggested growth strategies which set the direction for the business strategy. These are described below:

Market penetration

Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets.

Market penetration seeks to achieve four main objectives:
• Maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling
• Secure dominance of growth markets
• Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors
• Increase usage by existing customers – for example by introducing loyalty schemes

A market penetration marketing strategy is very much about “business as usual”. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research.

Market development

Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets.

There are many possible ways of approaching this strategy, including:

• New geographical markets; for example exporting the product to a new country
• New product dimensions or packaging: for example
• New distribution channels (e.g. moving from selling via retail to selling using e-commerce and mail order)
• Different pricing policies to attract different customers or create new market segments
Market development is a more risky strategy than market penetration because of the targeting of new markets.

Product development

Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets.

A strategy of product development is particularly suitable for a business where the product needs to be differentiated in order to remain competitive.  A successful product development strategy places the marketing emphasis on:

• Research & development and innovation
• Detailed insights into customer needs (and how they change)
• Being first to market

Diversification

Diversification is the name given to the growth strategy where a business markets new products in new markets.

This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience.

For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.  However, for the right balance between risk and reward, a marketing strategy of diversification can be highly rewarding.

                              Michael Porter (Strategy)

Michael Porter suggested that businesses can secure a sustainable competitive advantage by adopting one of three generic strategies. He also identified a fourth strategy "middle of the road" strategy, which although adopted by some businesses, is unlikely to create a competitive advantage. Each of the four strategies are di.

Cost Leadership Strategy

This strategy involves the organisation aiming to be the lowest cost producer and/or distributor within their industry. The organisation aims to drive cost down for all production elements from the sourcing of materials, to labour costs. To achieve cost leadership a business will usually need large scale production so that they can benefit from "economies of scale". Large scale production means that the business will need to appeal to a broad part of the market. For this reason a cost leadership strategy is a broad scope strategy. A cost leadership business can create a competitive advantage:

- by reducing production costs and therefore increasing the amount of profit made on each sale as the business believes that its brand can command a premium price or
- by reducing production costs and passing on the cost saving to customers in the hope that it will increase sales and market share

Low cost producers include Easy Group, Ryan Air, and Walmart.

Differentiation Strategy

To be different, is what organisations strive for; companies and product ranges that appeal to customers and "stand out from the crowd" have a competitive advantage. Porter asserts that businesses can stand out from their competitors by developing a differentiation strategy. With a differentiation strategy the business develops product or service features which are different from competitors and appeal to customers including functionality, customer support and product quality. For example Brompton folding bicycles when folded are more compact than other folding bikes. Folding bikes are usually purchased by people with limited storage space at home or on the move; a compact bike is therefore a valued product feature and differentiates Brompton bicycles from other folding bicycles. A differentiation strategy is known as a broad scope strategy because the business is hoping that their business differentiation strategy, will appeal to a broad section of the market. New concepts which allow for differentiation can be protected through patents and other intellectual property rights, however patents have a certain life span and organisation always face the danger that their idea which gives them a competitive advantage will be copied in one form or another.

Focus (Niche) Strategy

Under a focus strategy a business focuses its effort on one particular segment of the market and aims to become well known for providing products/services for that segment. They form a competitive advantage by catering for the specific needs and wants of their niche market. Examples include Roll Royce, Bentley and Saga a UK company catering for the needs of people over the age of 50. Once a firm has decided which market segment they will aim their products at, Porter said they have the option to pursue a cost leadership strategy or a differentiation strategy to suit that segment. A focus strategy is known as a narrow scope strategy because the business is focusing on a narrow (specific) segment of the market.

Are You "Stuck In The Middle"

Some businesses will attempt to adopt all three strategies; cost leadership, differentiation and niche (focus). A business adopting all three strategies is known as "stuck in the middle". They have no clear business strategy and are attempting to be everything to everyone. This is likely to increase running costs and cause confusion, as it is difficult to please all sectors of the market. Middle of the road businesses usually do the worst in their industry because they are not concentrating on one business strength.

Conclusion

To create a competitive advantage businesses should review their strengths and pick the most appropriate strategy cost leadership, differentiation or focus. Although each of these strategies are known as generic strategies (because they can be applied to every industry) they will not suit every business. For example small businesses may find it difficult to generate the economies of scale needed for broad scope cost leadership but a smaller customer base may enable them to offer a personalised service through a narrow scope focus strategy. Conversely a larger business may not be able to generate sufficient revenue through a focus strategy but be able to pursue aggressive broad scope cost leadership because of the size of the business. Whatever strategy a business decides to adopt they should make sure that it isn't middle of the road because one business can not do everything well.