Interdependence and integration of individual countries of the world is called globalization. The globalization integrates not only economies but also societies. The globalization process includes globalization of markets, production, technology and investment. However globalization has two important components, one is globalization of market and other is globalization of production. Today, a company can view the entire world as one country for its business operation. In fact the businessmen were doing their operations even in the past. History indicates that business operations were existing across the countries even in the old days. Therefore the concept of global business is as old as civilization. Crossing national and political boundaries for the purpose of business may be called as globalization. Globalization has the following features:
- Planning and operating to expand business throughout the world.
- Removing the differences between domestic and foreign markets.
- Buying and selling goods and services from one country to another in the world.
- Establishing manufacturing and distribution facilities in different parts of the world base on the feasibility and viability.
- Product planning and development are based on market consideration of the entire world.
- Factors of production and inputs like raw materials, machinery, finance, labor, managerial skill are taken from the entire world.
- Global orientation in strategies, organizational structure, organizational culture and managerial experience.
- Setting the mind and attitude to view the entire world as a single market for business.
Multinational companies plan for their business not only in national markets but also venture in globally and view themselves as a global company. Employees of such companies are trained in worldwide operations. They make investment based on the feasibility of world-wide projects and procure raw materials, human resources and other inputs from the various parts of the world where they are available at low prices and good quality.
Need for Globalization
When the domestic markets do not promise a higher rate of profits, the companies search for foreign markets which promise for higher rate of profits. Some of the domestic companies expand their production capacities more than the demand for the product in the domestic countries. These companies are forced to sell their excess production in foreign countries. There is a severe competition in the home country. The weak companies which could not meet the competition of the strong companies in the domestic countries, start entering the foreign markets. Again, when the size of the home market is limited either due to the smaller size of the population due to the lower purchasing power of the people, the companies globalize their business operations.
Advanced technology and managerial competence in some countries also act as pulling factors for business firms from the home countries. Companies from the developing world are attracted by the developed countries due to these reasons. Some of the large scale business firms would like to enhance their market share in the global market by expanding and intensifying their operations in various foreign countries. Companies also think to go global due political instability in the home market, nearness to availability of market, and availability of good quality labor at cheaper cost. Most of the countries in the world have liberalized their economies and opened their countries to the rest of the world which has attracted the multinationals to extent their operations to these companies. Before globalization there were high tariff and duties on imports in many countries to protect the domestic companies. Therefore to avoid tariffs and quotas, companies preferred direct investment to go globally.
Read More: Drivers of Globalization
Globalization of an existing business does not take place in one phase. It takes gradually through an evolutionary approach. Thus the following are the stages in globalization of an existing business.
- A domestic company exports to foreign countries through dealers or agents.
- A domestic company then exports to foreign countries on its own.
- Slowly the domestic company becomes an international company by establishing production and marketing operation in different countries of the world.
- After some time, the domestic company replaces the foreign company in the foreign country with all the facilities including research and development and full fledged with qualified human resources.
- Finally the domestic company becomes a true foreign company by serving the needs of foreign customers just like a host countries company serves.
Many companies pass through different stages of globalization. There are many companies which has international businesses since their very beginning including 100% export oriented companies. The development of their international business passes through different stages of evolution. A company which is entirely domestic in its activities normally passes through different stages of globalization before they become a truly global company. However, in case of many companies, the initial attitude towards international business is passive and they get into the international business in response to some external influence.
A company may start exports on an experimental basis and if the results are satisfactory, it would enlarge the international business and in due course of time, it would establish offices, branches or subsidiaries or even joint ventures abroad. The expansionary process may also be characterized by increasing the product mix in the market segments, markets and countries of operation. In the process, the company could be expected to become multinational. Thus, in many companies, overseas business initially starts with a low degree of commitment and involvement but they develop a global outlook and embark upon overseas business in a big way.
Short Case Study:
Since its founding in the 1940s, IKEA has grown to be one of the world’s largest furniture retailers, selling a “typically Swedish” mix of products in every country in which it does business. IKEA’s international expansion began in 1974, and today the firm generates only eight percent of its sales in Sweden. IKEA products are known for their European stylishness and their good value for money. Their sales volume gives the firm high economies of scale and volume discounts from suppliers. However, when the firm entered the North American market in 1985, the stores were not immediately profitable. It turns out that American tastes differed significantly from Swedish preferences, for example, in the size of beds, drinking glasses, dresser drawers, and windows. After six years of struggling, IKEA managers began to tailor products to American needs, and sales have taken off.
Hint: IKEA began its globalization efforts with a pure international strategy, in which products that were designed for Swedish customers were sold to buyers around the world. One reason this strategy worked so well is that Swedish furniture design is admired by many. However, the designs did not suit the tastes of American consumers, and the firm had to change to somewhat of a transnational strategy, in which the firm centralizes some tasks, but also learns from its regional offices. Some American firms make the same assumption when selling products overseas—that consumers worldwide will have the same taste as Americans do.