HL OPERATIONS MANAGEMENTLOCATION

IB BUSINESS & MANAGEMENT – A COURE COMPANION, p262-267

THE IMPACT OF GLOBALIZATION ON LOCATION

• Globalization is a huge topic and there are many different perspectives.

• From a business perspective, whether it is right or wrong, the process appears to be largely irreversible and it important that we look at the reasons why businesses may want to set up organizations in another country.

GLOBALIZATION – PULL FACTORS

• There many external reasons why setting up a business or relocating globally appears to be an attractive option for many businesess.

• These can be seen as pull factors and include; Improved communications Dismantling of trade barriers Deregulation of the world’s financial markets Increasing economic and political power of

multinational companies.

PULL FACTORSImproved Communications

• With “Skype”, email and other digital services it is far easier to communicate in real time than it ever has been.

• In fact the only obstacles seem to be our body checks and time zones.

PULL FACTORSDismantling of Trade Barriers

• More than three quarters of the world’s countries are signatories to the World Trade Organization (WTO) whose commitment to reducing trade barriers makes if far easier for trade to take place.

• China became a member of the WTO in 2000 and since then it has really exploded onto the world stage with US and European companies setting up in China.

• With the money earned, China is now starting to acquire foreign banks and manufacturers and is even sponsoring football teams.

PULL FACTORDeregulation of the world’s financial markets

• This has made the transfer of vast sums of money very easy and in doing so has facilitated quicker start-ups for many businesses.

• Again the rise in Internet Banking has made it easier to keep track of company finance and, allied to the digitalization of the world’s money markets, it is much more common for investors to cross borders.

• This again helps to build up collaboration such as forming joint ventures, strategic alliances or working with venture capitalists.

PULL FACTORSThe Increasing Size of Multinational Companies

• In the past, there might have been companies like the East India company which effectively rain India for 150 years, but now the size and consequently the influence of the world’s biggest companies makes its easier for them to persuade countries to allow them to set up.

• In many ways the attraction for multinational companies is that they can.

PULL FACTORSThe Increasing Size of Multinational Companies

• The enormous power and influence of MNCs can create momentum for other businesses in the same field.

• Eg: The impressive growth of Chinese influence in Africa may have been driven by the need for raw materials, but itself has generated interest in other areas.

PUSH FACTORS

As well as external factors working for MNCS there are a number of internal factors that may help push multinational companies and other businesses to operate overseas. They may be able to:• Reduce Costs• Increase Market Share• Put Extension Strategies into place.• Use Operating Overseas as a defense strategy• Increase others awareness of them.

PUSH FACTORSReduce Costs

• By setting up production facilities abroad, businesses may be able to reduce costs by moving closer to the raw materials or using cheaper labor.

• They may also be able to achieve productive economies of scale.

• Business may also be able to take advantage of more favorable tax regimes and achieve financial economies of scale.

PUSH FACTORSIncrease Market Share

By opening up a business in a new region many organizations hope to tap into a new market.The potential is huge, but of course so are the risks, which include:Language barriersCultural practices and etiquetteLocal Law & Politics, especially labour lawTime & Complexity Being unable to find trustworthy partners.

PUSH FACTORSIncrease Market Share

First Mover Advantage• The rewards can be extremely high, especially

if the business has first mover advantage in a large market.

• Hence, the rush to China with its 1 billion customers and the costs incurred the first time round by many big name companies.

PUSH FACTORSExtension Strategies

• Some businesses may have even reached the saturation point for their product and may not be looking to extend the life cycle of a product.

• McDonalds has found increasing competition not only from other burger outlets, but from pizza suppliers, sandwich bars, Mexican and other fast food outlets.

• This increased competition has had a major impact on McDonalds profits. McDonalds has also been hit the hardest by bad publicity as a result of films like “Supersize Me” and increasing awareness of obesity.

• As result McDonalds has changed its menu.

PUSH FACTORSExtension Strategies

McDonalds-International Reach• McDonalds has targeted areas where people

are more likely to appreciate the service they provide.

• Of the 30,000 or more McDonald stores worldwide, more than two thirds are outside the US.

PUSH FACTORSDefensive Strategies

• Many businesses make the decision to move overseas, not because they need to but because they don’t want their rivals to corner the market if they don’t go for it.

• Growth and expansion are main drivers for businesses and the fear that rivals might steal a lead can act as a catalyst for many.

• The rush for oil companies to set up in Central Asia to secure oil and gas reserves is a recent example.

• At times, this resembles the “scramble for Africa” by European power in the late 19th century.

• Perhaps a modern equivalent is the emergence of China as a big player in Africa today, as China has felt the need to secure the supply of raw materials to feed its growing industries.

IMPACT OF GLOBALIZATION OF BUSINESS FUNCTIONS

• Globalization is not a one-way process.• Businesses can learn as well as teach.• Interacting in a new business environment

may bring a number of opportunities for both the business setting up in another country and also for those external to the business.

IMPACT OF GLOBALIZATIONProduction

• Globalization can lead to cheaper costs as business can locate closer to their source of raw materials or where labor costs are lower o indeed where there is a more favorable tax system.

• MNCs can stimulate training and introduce new production techniques to other countries – or they can offload obsolete practices that they would not be able to continue in their home country.

IMPACT OF GLOBALIZATIONMarketing

• Businesses can make creative marketing campaigns to make use of the “global village”.

• Eg: HSBCs popular advertising campaign – “the world’s local bank” cleverly played on local cultures with a global backdrop.

• However, businesses should also be wary of simply transferring existing marketing ploys to a new location.

• Different markets have different cultures and the need to be careful and perhaps to use local parties is improtant.

IMPACT OF GLOBALIZATIONMarketing

International Marketing Failures• When Chevrolet introduced the “Nova” car to Spain

it failed miserably – try the car’s name in Spanish!.• The Toyota MR2 in French.• A Wrigley’s chewing gum in Russian offended

sections of the Chinese community in Guangzhou because the backing music was the Chinese National Anthem.

• Sales of Chewing Gum in Guangzhou fell by up to a quarter.

IMPACT OF GLOBALIZATIONHR

• Many businesses fail to take account of cultural differences when setting up a business in a different location.

• A classic case study was why US bosses working in China could not understand why their workers would not talk to them and tell them their problems – because this is a common practice in the US, the bosses expected it in China.

IMPACT OF GLOBALIZATIONHR

• Distance learning, exchange programmes and easier access to information about the world’s universities has made more people more geographically mobile.

• In fact even for semi-skilled and manual workers it is easier to move and work in other countries.

• Parts of the UK, for instance, has been transformed since the influx of Eastern Europeans since 1990s.

• The same in true regarding people originally from Latin America now in the US, Africans in France and Spain and Asians in Australia.

IMPACT OF GLOBALIZATIONHR

• Local societies can often benefit from the absorption of different cultures and practices.

• Globalization is both a cause and effect in this case. • When deciding on a location overseas, a key decision

is how to staff it and what proportions of expatriate and local staff to have.

• Expatriates can bring expertise and transferable skills but they are more expensive and they will need much more support – eg: with family issues like schooling

• However, they may have wide contracts and better appreciation of the “big picture”.

IMPACT OF GLOBALIZATIONHR

Third Culture• There is the ideas of a `Third Culture`, where

children who have lived out of their home countries all their lives, have little identity with one place, find themselves looking for opportunities.

• In the same vein, as they will have acquired language skills from living overseas they may have advantages over others.

IMPACT OF GLOBALIZATIONFinance

• The global financial system is much more integrated these days.

• The can have advantages and disadvantages.• It is easier to finance start ups outside a home country,

but it is also easier to lose money too.• The credit squeeze of 2008 is an excellent example.• The transfer of funds is much quicker because of

deregulated markets, the computerization of the world’s stock exchanges and the introduction of internet banking.

IMPACT OF GLOBALIZATIONFinance

• Businesses need to be wary about financing a project in another location if they do not have the local knowledge.

• Also one system, that has not been integrated is the world’s accounting system and although the Enron scandal forced the US market to tighten its practices, this may not have been the case elsewhere.