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Globalization and its impacts

GLOBALIZATION AND ITS IMPACTS

 

since 1945, the volume of world trade has increased. There have been several factors at work.

 

(a)             Import substitutions: A country aims to produce manufactured goods which it previously imported, by protecting local producers. This has had limited success.

 

(b)            Export-led growth: The success of this particular strategy has depended on the existence of open markets elsewhere. Japan, South Korea and the other Asian    ‘tiger’ economies (e.g., Taiwan) have chosen this route.

 

(c)             Market convergence: Transnational market segments have developed whose characteristics are more homogeneous than the different segments within a given geographic market. Youth culture is an important influence here.

 

 

This has meant a proliferation of suppliers exporting to, or trading in, a wider variety of places. In many domestic markets it is now likely that the same international companies will be competing with one another. However, the existence of global market should not be taken for granted in terms of all products and services, or indeed in all territories.

 

(a)             Some services are still subject to managed trade (for example, some countries prohibit firms from other countries from selling insurance). Trade in services has been liberalized under the auspices of the World Trade Organization.

(b)            Immigration. There is unlikely ever to be a global market for labor, given the disparity in skills between different countries and restrictions on immigration.

(c)             The market for some goods is much more globalized than for others.

 

(i)              Upmarket luxury goods may not be required or afforded by people in developing nations.

 

(ii)            Some good can be sold almost anywhere, but to limited degrees. Television sets are consumer durable in some countries, but still luxury or relatively expensive items in other ones.

 

(iii)          Other goods are needed almost everywhere. In oil truly global industry exists in both production (e.g., North Sea, Venezuela, Russia, Azerbaijan, Gulf States) and consumption (any country using cars and buses, not to mention those with chemical industries based on oil).

 

 

Sitara Peroxide Limited.

Here in this thesis the information is provided on the company manufacturing the product called “Hydrogen Peroxide” and other by products that is used in the process of cloth dyeing and printing and other qualities of paints and colors. The name of the company is “Sitara Peroxide Limited” based in Pakistan listed on Karachi Stock Exchange in that country. The actual and potential impacts of globalization on this product as well as on this company are discussed here under.

 

The company believes that Sitara Peroxide plant presents an excellent opportunity for high growth based investment. There are a number of factors which can make the success of the company and based on the reputation of Sitara Group and the supply-demand of Hydrogen Peroxide in Pakistani industry as well as on global level; following are the opportunities highlights for the expansion of our business of the Sitara Peroxide Limited.

We may describe five stages in the evolution of global business operations. These may be related to per mutter’s classification of orientations.

 

1.         Exporting: The product is saleable in overseas markets and they are exploited by means of foreign intermediaries such as agents and distributors. Foreign sales are a profitable extension of domestic operations. Little or no adjustment is made to product in order to reap economies of scales. The adjustment in the sense of packing of Peroxide (the main product), otherwise it is easily and immediate available for its proper use or sale. So we can start this market in international level by exporting our main product. This is a low risk strategy, since there is little financial commitment, but the company is very much dependent on the effort and motivation of its foreign intermediaries. The management orientation in ethnocentric.

 

2.         Overseas branches: Existing and potential export sales can be high enough to justify largely replacing the foreign intermediaries with the company’s own foreign sales and service branches. The company aims for a stronger presence in its overseas markets and to be more responsive to their requirements. Financial commitment increases with increasing business, as does exchange rate and political risk. If the company is aiming to achieve globalization, it is at this stage that it begins to acquire the local knowledge and experience that it will need. By making overseas branches Sitara Peroxide Limited has to increase its revenue and it have to increase its marketing costs to gain new business to expand it at global level. However, the management orientation is still ethnocentric.

 

3.         Overseas production: Export sales are now so high that shipping and other exporting related costs represent a substantial opportunity for savings by establishing overseas production. At the same time, overseas production can exploit cheap labor and other resources. The company’s management orientation is still largely ethnocentric. Some functions, such as R & D and marketing are centralized and there is centralized control of manufacturing operations with regular reports to headquarters. World-wide synergies and economies of scale are sough and decisions on adapting to local conditions are made at headquarters. Products are still largely standardized. But we can make huge benefits by overseas production in the term of investment and financing in the relevant country. The Government may give preference to the foreign investors for the financing purposes on non-repatriation basis.

 

4.        Insiderisation: The Company clones itself in its overseas markets, completing the corporate functionality in each location rather than restricting itself to marketing. The aim is to develop a full marketing capability and offer products suited to local requirements. The management is shifting to a polycentric orientation and likes to think of itself as a multinational. The approach reduces exchange rate and political risk but requires substantial financial commitment. Economies of scale are likely to be lost and there may be inefficiencies of coordination. The company can gain the same benefits which may be achieving the local companies of that particular country. For this purpose the company has to put more resources to the business to gain economies of scale. So as we step forward towards the more globalized company we have to put more our resources in the business.

 

5.         The global company: The global company differs from the multinational company in that it has a geocentric management orientation. It takes a world view while recognizing local differences and similarities. It minimizes its local adaptation of product and the rest of the marketing mix to those things that actually add customer value and it makes use of the best of its global facilities and people to promote overall excellence. It is likely to centralize functions such as R & D, Finance and Human Resource, though not necessarily all in the same place. At the same time its operations will be controlled locally. The primary skill of the global company is to integrate learning skills, competences and technologies in order to achieve global efficiencies combines with local responsiveness. It manages the value chain so that each part is centered in an optimal location. So Sitara Peroxide Limited has to invest a lot more resources to make itself global company. It is subject to a number of problems.

·       Differing cultural values may undermine the global corporate identity. So the company has to make a great time to expand its business at this level.

·       Senior executives with the right mix of attitudes and skills are likely to be scarce. So the company has to employ heavily paid employees at the senior level to expand the business at the global level.

·       It is subject to a wide range of environmental risks, particularly political ones.

 

 

There are five reasons why the Company ‘Sitara Peroxide Limited’ is moving towards the global stages. That is called 5Cs by Ohmae.

 

(i)              Customers: Market convergence is driven by widespread customer demand for products with similar characteristics. The product of our company is used in cloth and paint industry and globally this product has very much demand in all over the world and that demand driven by the customers.

 

(ii)            Company: The search of economies of scale drives expansion towards the global scale. We can’t meet our economies of scale by selling our product in the local markets that it has a big capital investment.

 

(iii)           Competition: The existence of global competitors motivates our company to expand for reasons of prestige and competitiveness. They may also be amenable to cost-reducing strategic alliances and the company is considering it in depth.

 

(iv)           Currency: Exchange rate risk can be managed most easily when a company has major cash flows in the countries in which it operates. Now days the price of dollar is increasing day by day in Pakistan so the Company is managing the price fluctuation at the global level.

(v)            Country: Multiple locations enable the Company to exploit both absolute and comparative advantage. They also enable the Company to promote itself as locally oriented in each country, thus enhancing its image with the local government and markets.

There are other factors encouraging the globalization of world trade and impacting the Company.

 

(a)            Financial Factors such as the home country of the Company (Pakistan) is going into economic as well as financial crisis for instance taking loans from IMF which cause the increase in interest rates of borrowings increase in the rates of foreign currencies and inflation etc. so in such situation the Company has the options to switch its major business to another country which has not such type of financial and economic crisis.

 

(b)            Legal regulatory factors such as industrial standards and protection of intellectual property, which encourage the development and spread of standardized technology and design.

 

(c)             Markets trading in international commodities, commodities are not physically exchanged, only the rights to ownership. A buyer can, thanks to efficient systems of trading and modern communications, buy a commodity in its country of origin for delivery to a specific destination at some future time. It will be more difficult to such buyer to import our product in the country of origin that will cost to the buyer at higher prices.

 

(d)            The internet the company is developing its line system of internal co-ordination and procurement which will be very beneficial to the company. Such as :

 

(i)     Integrate Our Internal Order Information. By having this information on one software system, rather than scattered among many different systems that can’t communicate with one another, the company can keep track of its internal orders more easily, and coordinate manufacturing, inventory and shipping among many different locations at the same time.

 

(ii)    Reduce Inventory. Internet can improve visibility of the order fulfillment process inside the company. That can lead to reduced inventories of the staff used to make products and it can help user’s better plan deliveries to customers, reducing the finished good inventory at the warehouses and shipping docks.

 

(iii)   Standardized Human Resource Information. Human resource may have a unified simple method for tracking employees’ time and communicating with them about benefits and services all over the world through the use of internet.

 

(iv)   Advertisement. It may be used as advertisement of our products at a consistent basis or it may be provide little preferences on the basis of the country’s environment and customers or industry and segregate information at one website.

 

 

So internet itself has a lot of benefits for a global company and it is playing a major role in the age of globalization.

 

(e)            Government policy in many countries seeks to control the balance of payments by discouraging imports. Government policy towards importers will also reflect their quite proper desire to expand their economies and hence employment and the local standard of living. Local manufacture may thus be the only way to access some markets. So the Company will localize in the purchase of the raw material rather than imports in major amounts.

 

The pressures driving globalization exist independently of the need for local responsiveness; and that both vary from industry to industry. The relationship between these pressures influences both the management orientation and the structure of the company that operates internationally.

 

(i)              The Company may if active in more than one industry, is likely to be organized in product divisions with global scope. So it may invest in the industry of a particular country according to its financial or economic position or it may invest in the security markets as the case may be.

 

(ii)            The Company is operating in industry that requires little local differentiation but at the same time is not subject to pressure for globalization will trend to be structured with an international or export division.

 

(iii)          The transnational environment is particularly difficult to respond to. Global scale is desirable but local conditions require differentiated approaches. The structural response may be the global hierarchy. Each regional or national unit achieves global scale and influence within the overall organization by exploiting its specialized competences on behalf of the whole company. Some headquarters functions, such as R & D may be diffused across the organization. The role of the global strategic apex is to promote a corporate culture a shared value that will promote co-operation and co-ordination.

 

 

 

Global Strategy and Its Objectives

Before going into the world of globalization the company should develop the global strategy. The starting point for all successful strategic planning must be the formulation of objectives. Failure to define objectives clearly may lead to the company attempting activities that conflict with or detract from the firm’s principal objectives. If there is a mismatch between corporate objectives and foreign market opportunities then either plans must be modified or objectives reconsidered.

 

Modeling the strategic planning process:

Macro-level Research → Preliminary Opportunities → General Mmarket Factors → Possible

Macro-level research → Probable Opportunities → Target markets

 

 

In practice, the segmentation and screening process will be based on economic factors, and might follow a number of stages.

Macro level research considers the overall PEST factors in the overseas market. Indicators of the total size of the market might include area, climate, demographic factors or gross domestic product.

 

The next level is the general market relating to the product. Such as chemical market existing in that country and how much chemical required in that particular market.

 

Micro level research identifies specific factors relating to the product. Such as:

  • Competition, existing and potential must be considered. For example how many companies are already manufacturing such chemical? Some markets might be very open and host to a large number of competitors.
  • The market might be similar to the domestic market in certain key respects. Measures of similarity include production and transportation, personal consumption, trade, health care and education.
  • Finally this leads to target markets or segments which are screened for their suitability.

 

 

Phase 1: Preliminary analysis and screening: matching company and country needs

The first step is an evaluation of available space in existing markets in the foreign countries. The purpose here is to identify which countries, on the basis of very rough screening criteria, are obviously not suitable for investment.

Screening criteria include:

  • Specified minimum acceptable levels of profits.
  • Market share and volume.
  • Acceptable legal conditions.
  • Political risk.

 

The results of Phase 1 yield the following information.

  • Obviously inappropriate countries are identified.
  • The potential of each overseas market is assessed.
  • Areas for further environmental research and analysis are identified.
  • The most appropriate markets are selected.
  • Changes to the marketing mix to meet local needs are determined.

 

Financial Issues are always of vital importance.

(a)   Will the company make profits? Which mode of entry will be profitable?

(b)  Will the profit be acceptable given the risk? Normally, the higher the risk, the higher the return required.

(c)   What is the size of investment and how much will it cost to finance the investment? Is money being taken away from other, potentially more profitable, investments?

(d)  How will the international trade be financed and how will the international cash flows be managed?

(e)   Will the firm be able to repatriate dividends and cash from the country? Restrictions on the export of cash make an investment less attractive.

(f)   What is the extent of exchange rate risk?

 

 

Phase 2: adapting the marketing mix to target markets

When target markets have been chosen it is necessary to examine the blend of mix elements in greater detail. Specifically the company should be seeking answers to two major questions.

(a)             What cultural or other environmental adaptations are needed to ensure customer satisfaction with the mix offered?

(b)            Will adaptation costs prevent profitable market entry?

 

Phase 3: developing the marketing plan

At this point a marketing plan is formulated for a specific country or target market. As in the earlier phases, the firm may decide to drop a particular country if it becomes evident that it cannot design a marketing plan that will result in the achievement of marketing objectives for the country.

 

Phase 4: implementation and control

Finally, specific marketing actions are implemented, coordinated and controlled. The last of these is very important, being much neglected despite the fact that effective monitoring and control enhances performance substantially. Control requires continuing monitoring of performance against targets to identify when remedial action is needed, in what form and by whom.

 

Conclusion: While considering all the matters discussed above the Company should make investment at the global level.

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