Globalisation & global industries

Globalisation is an on-going & accelerating process. It breaks down economic, social & cultural barriers between nations & across the globe. it involves a whole range of changes:

• increasing exports & imports for many countries
• foreign investment- funds coming from 1 country are used to finance projects in another
• people migrate to places where there are job opportunties
• govs collaborate by agreeing new trade rules, undertaking big infrastrucre projects & co-ordinating policies (when they can)

Globalisation is however a controversial term...

It has critics (see globalisation as a flawed economic model) & Supporters (see globalisation as a positive force)

Globalisation is 'the process through which an increasingly free flow of ideas, people, goods, services & capital leads to the integration of eonomies & socities'

Critics

• the unhealthy dominance of US & European corporate culture across the globe
• a process by which rich western countries explout less well-endowed nations
• images of low-paid sweatshop workers symbolise all that is wrong with globalisation

Suppporters

• it brings wealth & development to many countries
• it has made billions of people around the world better off in both financial & material ways
• it is argued that it binds countries together & helps maintain peace & stability

Increased technological progress

• the internet & modern telecommunications have made it easier to communicate & transmit data
• computers connect markets all around the world
• conference calls & video conferencing make face to face meeting less necessary & make it easier to do business
• lower air fares make really necessary face-to-face meetings cheaper

The rise of offshoring

• in recent decades, populous, low-wage & developing economies have become more open & accessible for outsourcing
• China in particular, has undergone sweeping cultural, political & economic changes, which have seen it grow rapidly & become the 2nd larget economy in the world
• these countries have seen a large rise in the amount of FDI as many businesses see them as both a low-cost manufacuturing base & a potentially lucrative market

Increased liberalisation

• the former East European economies made the change from restrictive centrally planned economies to free market capitalist economies during 90's
• China joined the WTO in 2001 & ASEAN in 2010
• India has become more open & receptive to doing business with other countries
• Elsewhere other countries have been deregulating & generally freeing up markets & instituions. shrinking public sectors can encourage comp

Increased harmonisation of laws

• the growth of trading blocs has done much to encourage harmonisation of the many rules & regulations surrounding trade, making it much easier
• elsewhere countries have been making efforts to align their laws in such areas as Intellctual Property Rights (IPR) & patents. The threat of not being able to protect your ideas & property in another country has been a considerable barrier to trade in the past & can still be a problem

Intellctual Property Rights (IPR) are the rights to own & to exploit ideas / inventions, or literary or other cultural works. They give legal protection to the owners & originators of the ideas or inventions & prevent others from copying them

The global economyu can be a risky place to do business. before globalisation, most businesses had to contend the prssure from the activities of competing firms but they would usually be local or national. Increasingly, the comp can come from anywhere, sometimes with little warning. In addition, many govs have tried quite hard in the past twenty years to make markets more compeititve & efficient. there are rules to stop businsses from making market sharing agreements or driving small nearby competitors out of business in an unfair way.

These trends create risks & uncertainty. These can both make business planning difficlut- the best strategy depends on what actually happens in the future. But there are ways of reducing uncertainty. Businesses can diversify. They can avoid depending too heavily on any one product or any one market.

risks are threats that may or may not occur, but can be quantified using probabilities. For example. insurance companies can assess the probability of fires occuring & can offer policies that cover the risk for individuals & businesses

uncertainty relates to possibilities that cannot be quantified & may appear without warning. A new competing product could threaten a business at any time. People may change their minds about what they like to buy, reducing demand without warning

Diversifying means selling more than 1 product, or the same product in more than 1 market. if there is decreasing demand for 1 product, or generally in more than one particular market, profits can still be made with other products or in other markets.

Comp & uncertainty generally create powerful incentives for businesses to diversify into new markets in other countries. Growth in an emerging market can balance decline in a mature one, spreading risks. Also, of 1 economy goes into recession, sales may increase in another economy that still has strong economic growth. The effect on profits will be less severe.

Businesses can start to diversify by exporting; a marketing operation in a carefully chosen new country will generate orders. If this goes well, further investment in the country may follow.

There are several possible strategies:

• investing in a distrubution system in the target market, possibly by setting up retail outlets.
• setting up production in the target market, building factories & collaborating in a joint venture
• expansion by mergers & takeovers that will build up a portfolio of businesses, they may be similar to or different from the parent company.

The role of mergers & acquisitions (inorganic growth)

Mergers usually agreed between 2 businesses that want to combine operations. The term acquisition (takeover) usually applies when a larger business simply buys the shares of a smaller/ less successful business. The motive then is often to provide the weaker company with stronger manangement. In this way a poorly managed business that has potential growth may be turned around by managers from the more successful company

Inorganic growth occurs when a business expands by taking over or merging with another company. Both mergers & takeovers may allow rationalisation that can cut costs & expand markets. (in contrast organic growth occurs when a business expands its own capacity by investing directly)

merger means combining with another country on a collaborative basis

Takeover ir acquisition refers to the situation where 1 company is buying another. this may be an amicable process or it may involve a hostile bid, which is not supported by the management of the business that is being taken over

Mergers & acquisitions (M&A) may be attractive where it is possible to integrate the production process more effectively. they may also create good ways to source inputs within the business rather than from outside

• they may make horizontal integration possible. this means buying up or merging with competitiors so as to achieve a larger market share. cement makers did this over the past 20 years. there used to be many suppliers but now 4 big cement makers dominate the global market
• vertical integration also is facilitated by M&A. A business may buy one of its supplier companies. Or it may buy a distrubution business, perhaps one thatused to be a customer, so that they are already doing the joby.a fully vertically integrated business would take care of all aspects of production from sourcing raw materials to selling to final customers

Horizontal integration involves a merger or takeover where both firms are in the same line of production. they could both be undertaking just one part of the production process or the end proudct could be v.similar

Vertical integration means amalgamating 2 businesses which have specialised in different parts of the production process. Farmers who set up farm shops, instead of selling to wholesalers are integrating vertically

diagram

Entering new markets

• entering a new market can be a difficult process, with many unforseen problems. taking over an existing business reduces this uncertainity (horizontal)
• supply chains & distrubution networks are already in place (vertical)
• consumers are familiar with existing brands
• this all saves time & expense

Increased turnover & profitability

• for most global industries that driving force is the profit mtive
• increased market share means more sales. greater revenue & hopefully more profit
• some businesses may have difficult in keeping pace with global comp. they may merge with (or be taken over by) others that are already successful
• expansion in a new market can be a defensive measure in order to increase or maintain compeititivness

Economies of scale

• falling average costs can lead to reduced prices & a competitive advantage / higher profits
• these can be re-invested for more growth, which can be all-important in competitive global markets
• when 2 companies come together, there is often duplication of resources, they may no longer need 2 head offices/ 2 distrubution depots & these can be rationalised
• by disposing of surplus resources savings can be made

Economies of scale are a reduction in average costs of production brought about by an increase in the size & scale of the business

Synergy

• synergy can be gained when 2 businesses join together
• combining forces can produce a better product or business

Synergy is the idea that after a merger or takeover, the performance of a combined enterprise will exceed that of its previously seperate parts. Sometimes this is expressed as 2+2=5. some mergers are based on this expectation but do not actually achieve this outcome

Balancing investments across a range of countries

• when a business wants to diversify into new markets, the simplest way may be to acquire businesses that are already well established in the target markets
• growth in an emerging market can balance a decline in a mature/ saturated market
• investments across a range of different countries can spread risks
• inorganic growth helps to increase the product range without having to develop new products

Acquiring brand names & patents

• brands can be v.important for a global company
• they already have loyal customers & markert prescence
• new patents & processes can be acquired which can be transferred into existing markets

Global industries

some kinds of production have become global in scope while others have not, & are unlikely to become so. Clothing is a global industry because developing countries can easily get started- the technologies used do not need to so sophisticated. tourism is global for obvious reasons & the care industry has been global in scope for many years.

much of the world's manufacturting can be carried out wherever costs are low. transportcosts for many products are not high enough to affect the location of production

in agriculture, mining & service the picture is v.different

• many agriculural products come from places where lands & climate are appropriate
• mining activities occur where the natural resources happen to be
• the service sector is diff again. IT services are global but hairdressing & care of the elderly are not. there are global hotel chains bu there are many independent restraunts each with just 1 location