A very commonly used term, globalization can mean different things to different people. At a broad level, globalization refers to the growing economic interdependence among countries, reflected in the increasing cross border flow of goods, services, capital and technical know how. At the level of a specific company, globalization refers to the degree to which competitive position is determined by the ability to leverage physical and intangible resources and market opportunities across countries.
“Globalization refers to the multiplicity of linkages and interconnections between the states and societies that make up the present world system. It describes the process by which events, decisions, and activities in one part of the world come to have significant consequences for individuals and communities in quite distant parts of the globe. Globalization has two distinct phenomena: scope (or stretching) and intensity (or deepening). On the one hand, it defines a set of processes which embrace most of the globe or which operate world-wide; the concept therefore has a spatial connotation…it also implies an intensification of the levels of interaction, interconnectedness or interdependence between the states and societies which constitute the world community. Accordingly, alongside the stretching goes a deepening of global processes.” Anthony McGrew 1992
International trade and foreign direct investment have grown rapidly in the last few years, driven by lower tariffs and non-tariff barriers. This has led to the globalization of production and markets.
- The globalization of production has occurred, as firms are increasingly able to disperse parts of their production operations around the world, reducing costs.
- The globalization of markets has led to decreased emphasis on national markets, and increased focus on one huge global marketplace. The tastes and preferences of consumers in different nations are beginning to converge at some global norm.
There are several implications of the globalization of products and markets that are important to managers.
- Implications of the globalization of production and markets include the need for companies to recognize that industry boundaries do not stop at national borders, and competitors can be found in other national markets.
- Another implication is that competitive rivalry will increase as relatively protected national markets are transformed into segments of fragmented global industries where a large number of companies battle one another for market share and profits in country after country around the globe.
- A third implication is that the rate of innovation will continue to skyrocket, compressing product life cycles, and perhaps, reducing the importance of static models of external analysis, such as Porter’s Five Force Model or Strategic Groups.
- A final implication is that, in spite of the increased threats due to globalization, it has also created enormous opportunities. The decline in trade barriers has opened up many once-protected markets to companies based outside those markets.
Read More: Faces of Globalization
There are a number of factors driving globalization. More and more countries across the world are embracing free market philosophy and dismantling trade barriers. Better and cost effective ways of communication are making the world a smaller place. Due to the heavy R&D costs involved in developing new products, the pressure is increasing on companies to look for global markets to quickly recoup their investments. For eg. Satellite television is playing an important role in creating global markets by promoting uniform tastes among customers across the world.
Read More: Drivers of Globalization
Globalization has created major opportunities for poor countries. In the past, poor countries remained poor and rich countries remained rich for generations. Now societies can develop skills and wealth in a much shorter time. For eg. in less than 40 years, Singapore has gone from developing country to developed country status. Taiwan and South Korea are also good examples. Globalization has leveled the playing ground for smaller companies. What matters in the global economy is not simply size; it is other intangible factors such as nimbleness, reputation and the ability to innovate.
Read More: Globalization of an Existing Business
At the same time, the more global we become, the more tribal is our behavior. John Naisbitt, author of Global Paradox, has argued that the more we become economically interdependent, the more we become possessive about our core basic identity. Fearing globalization and, by implication, the imposition of a western (predominantly American) culture, many countries have become paranoid about preserving their distinctiveness and identity. This book is more concerned with how companies globalize.
Globalization is a bottom-up phenomenon with all actions initiated by milions of individuals, the sum total of which is “globalization.” No one is in charge, and no one can anticipate what the sum of all the individual initiatives will be before the result manifest. A global economy can only be the result of “spontaneous order”. Global Paradox, John Naisbitt.
Typically, the process of globalization of companies evolves through distinct stages.
- In the first stage of globalization, companies normally tend to focus on their domestic markets. They develop and strengthen their capabilities in some core areas.
- In the second stage of globalization, companies begin to look at overseas markets more seriously but the orientation remains predominantly domestic. The various options a company has in this stage are exports, setting up warehouses abroad and establishing assembly lines in major markets. The company gets a better understanding of overseas markets at low risk, but without committing large amounts of resources.
- In the third stage of globalization, the commitment to overseas markets increases. The company begins to take into account the differences across various markets to customize its products suitably. Different strategies are formed for different markets to maximize customer responsiveness. The company may set up overseas R&D centers and full-fledged country or region specific manufacturing facilities. This phase can be referred to as the multinational or multi-domestic phase. The different subsidiaries largely remain independent of each other and there is little coordination among the different units in the system.
- In the final stage of globalization, the transnational corporation emerges. Here, the company takes into account both similarities and differences across different markets. Some activities are standardized across the globe while others are customized to suit the needs of individual markets. The firm attempts to combine global efficiencies, local responsiveness and sharing of knowledge across different subsidiaries. A seamless network of subsidiaries across the world emerges. It is very difficult to make out where the home country or headquarters is.
MTV Networks is one of the most successful businesses at globalization, with 29 distinct channels reaching 330 million subscribers, generating a profit of over $1 billion annually. In 1987, its first year of overseas operations, MTV managers naively assumed that Europeans would be interested in American pop stars and commentary. Soon, copycats began to offer local programming, spurring MTV to create separate, regional channels, including eight in Europe and six in Asia. Forty percent of the programming and 70 percent of the music videos feature local performers, and all of it is delivered by local VJs (video jockeys). Ratings are growing and the threat from copycats is much less. Even more importantly, advertising revenues are up, especially revenues from local advertisers.