IBM assignment 2
IBM Assignment 2
Q1
(i) Briefly explain what is meant by the term “globalization”.
(3 marks)
(ii) What do you understand by the concept of a global commodity chain?
(8 marks)
(iii) Discuss what problems may result from a strategy of outsourcing.
(14 marks)
(Home 2004)
(i)
Globalisation, according to Kenichi Ohmae, refers to the shift towards a more integrated and independent world economy. As a result of the reach of the worldwide connectivity, globalisation can be seen as divided into two components; the globalisation of markets as well as the globalisation of production.
As a result of the vast reach of technology, it has enabled citizens of the world to experience a never-before connectivity to one another. As such, these citizens are exposed to a wider myriad of consumer goods and services, and thus, the term global consumers, where citizens of any one country are now made blurred. Global consumers thus demand goods and services of a certain quality, and of particular taste, and so comes another term of global products and brands. This, in turn, spurs firms to go global to extend their business to a bigger audience and consumer market.
The globalisation of production is one that mainly hinges on a now famous word: outsourcing. As a result of minimizing costs to seek greater profits, firms are now using an approach of diversifying their production to different regions where expertise is readily available, infrastructure is adequate, and cost of factors of production is low. As such, firms might have operations in many countries; each specializing in certain parts, or even extend their reach by having branches operating as a lone entity to cater to the distinctive market.
As Theodore Levitt once said, “The world has become a big global market”, this so exemplifies the globalisation of markets and the globalisation of production.
(ii)
The concept of a global commodity chain is one that can be used to understand how the stages of producing one product can be carried out in several different parts of the world, which is indirectly related to the globalisation of businesses. This, simply, is also known as outsourcing.
With increasing pressure to reach out to the world to attain a greater market share as well as reaching untapped potential consumers, firms are now encouraged to diversify their operations and market their products globally.
One result of this globalisation of business is of the international division of labour, where different type of work is conducted in different regions of the world or companies establishing bases all over the world to market their products.
Firstly, companies that attempt to reach a wider audience and to minimize cost (to maximize profits) would shift parts of their production the different regions of the world. Often, in making a decision to move comes into play a variety of factors, such as finding an adequate pool of people with the expertise, the support provided by the government, the technological edge along with the infrastructure to support the transfer and freight issues, and lastly, the cost of production.
In general, work that requires technicality, research-based, and services-related activities are located in the developed countries, where a ready pool of qualified workforce is in place, as well as other contributing factors. Singapore is able to attract foreign investments because of its largely educated workforce that possesses the expertise to produce high-end quality goods and services. The government has also in place various policies that exempts new industries from taxation for the first few years, and the corporate tax rate is consistently being revised (from the current 22% in YA2004 to the expected 20% in YA2005) to entice greater investments. The world class infrastructure supporting business, ranging from technology and freight services, is well developed and poised to handle the assigned tasks.
Work that is more of a manufacturing base requires mostly lower-skilled labour which is readily available in developing, third-world countries where the need of such expertise is low and the vast labour market is wide, thus lowering the costs of production in all. China, or even India, has a massive population that is able to take up such work, as their educational level and skills possessed is still lacking to handle work that requires greater skills and expertise. Even though infrastructure and education is now being put in priority to support and nurture the growing economy, there is still a lag, which they would eventually catch up. Political instability, in the case of India, may even deter investors from chipping in.
The global commodity chain market mainly shows the production process as well as the backward and forward linkages, where companies aim to integrate their companies towards their source, end, or even laterally, in operating and expanding their business.
One example would be of a paper-making factory. A paper-making factory may choose to expand and secure their operation by buying plantations to establish their source of production, in countries where land is cheap and suitable for the particular species of trees to flourish. This is known as a backward linkage. It can also choose to buy up competitors to increase their market share and presence or even to attain higher economies of scales, known as a lateral integration. And finally, it can also choose to further develop their business by buying up printing firms and offer publishing of books to customers. This is known as then, forward linkage integration.
This globalisation of business has made the global commodity chain possible, as goods and materials can be transported across continents cheaply to take advantage of cheaper sources of labour as well as the varying factors mentioned earlier, and to capitalize on market potential. Through this method of expansion via the ‘global commodity chain’, it has allowed companies the flexibility and geographical mobility to move production to wherever the most lucrative contract can be made and so, react quicker to changes in the wider business and international environment.
(iii)
A strategy of outsourcing may bring benefits that aimed at mainly, attaining a greater market share and higher profits through cost minimization. However, problems may crop up in the midst, where it may be just a trend to jump onto the bandwagon of outsourcing.
Firstly, one major factor to consider would be for the companies to decide on which country to outsource. As mentioned earlier, companies have to decide on the criterions to base their decision on, such as the availability of people with the expertise, the level of support provided by the government, the technological advancement and spread of IT in the country, ease of infrastructure to support the transfer and freight issues, and most importantly, the cost of production.
Often, many factors may come conflicting with the main interest of lowering cost of production, yet being a necessity, becomes an unnecessary rise in cost of production. In the case of American textile, outsourcing may become more expensive than the production in home country, where trade tariffs and quotas imposed in fact increases costs in production in relation to production in the home country.
Selection of the overseas trading partner is also a problem. There is the problem of whether the partner is trustworthy, especially in production of innovative goods and services that has been patented, is a major concern. Also, in countries where it is almost customary for the managers to line their own pockets with money from the company, siphoning the funds, along with the secret formula.
Along the same line, it would also pose as a shock to the foreign firm to the local culture. In such cases, there is a need to reconfigure the structure to incorporate the outsourcing activities. In China, it is said that one has to ‘provide favours’ to the higher officials to get things done, yet in other places, such practices are not tolerated. In the USA, laws can convict employees of unethical behaviour even though the act is committed outside USA. In Asia, the preferred structure of management would be a top-down one, whereas it is opposite to the Western culture of a democratic style of management.
Another concern is of quality and control of products, where in the midst of meeting targets and by quoting lower prices to win foreign investment contracts, quality and control of products are compromised. This may dent the company’s reputation, and deter consumers from getting their products. Thus, global benchmarking and best working practices must be instilled in the partners.
One other factor coming into play is where problems in fluctuating exchange rates may make outsourcing expensive. In a production, such as Boeing, where productions of different parts are made in different area, the core competencies of producing specific parts are left in the home country. With varying exchange rate, the whole process of assembling and flying the parts to a location for assembling may end up being more expensive.
Finally, the globalisation of markets has lead to a deregulation of financial market, where it is easier to obtain finance. This means also that one country’s performance index may be pegged to another, and the global financial market is subjected to shock waves, an example being that of Black Monday, 19th October 1987. On that particular day, the Dow Jones Industrial Average fell by 22.6%, the largest one-day decline in recorded stock market history. This one day decline was not confined to America, but mirrored all over the world.
In essence, there are benefits as well problems in regards to outsourcing. As such, the respective companies must try and anticipate and and prevent the problems from occuring that may incur greater costs rather than achieving the aim of lower costs.
Q1
(i) Briefly explain what is meant by the term “globalization”.
(3 marks)
(ii) What do you understand by the concept of a global commodity chain?
(8 marks)
(iii) Discuss what problems may result from a strategy of outsourcing.
(14 marks)
(Home 2004)
(i)
Globalisation, according to Kenichi Ohmae, refers to the shift towards a more integrated and independent world economy. As a result of the reach of the worldwide connectivity, globalisation can be seen as divided into two components; the globalisation of markets as well as the globalisation of production.
As a result of the vast reach of technology, it has enabled citizens of the world to experience a never-before connectivity to one another. As such, these citizens are exposed to a wider myriad of consumer goods and services, and thus, the term global consumers, where citizens of any one country are now made blurred. Global consumers thus demand goods and services of a certain quality, and of particular taste, and so comes another term of global products and brands. This, in turn, spurs firms to go global to extend their business to a bigger audience and consumer market.
The globalisation of production is one that mainly hinges on a now famous word: outsourcing. As a result of minimizing costs to seek greater profits, firms are now using an approach of diversifying their production to different regions where expertise is readily available, infrastructure is adequate, and cost of factors of production is low. As such, firms might have operations in many countries; each specializing in certain parts, or even extend their reach by having branches operating as a lone entity to cater to the distinctive market.
As Theodore Levitt once said, “The world has become a big global market”, this so exemplifies the globalisation of markets and the globalisation of production.
(ii)
The concept of a global commodity chain is one that can be used to understand how the stages of producing one product can be carried out in several different parts of the world, which is indirectly related to the globalisation of businesses. This, simply, is also known as outsourcing.
With increasing pressure to reach out to the world to attain a greater market share as well as reaching untapped potential consumers, firms are now encouraged to diversify their operations and market their products globally.
One result of this globalisation of business is of the international division of labour, where different type of work is conducted in different regions of the world or companies establishing bases all over the world to market their products.
Firstly, companies that attempt to reach a wider audience and to minimize cost (to maximize profits) would shift parts of their production the different regions of the world. Often, in making a decision to move comes into play a variety of factors, such as finding an adequate pool of people with the expertise, the support provided by the government, the technological edge along with the infrastructure to support the transfer and freight issues, and lastly, the cost of production.
In general, work that requires technicality, research-based, and services-related activities are located in the developed countries, where a ready pool of qualified workforce is in place, as well as other contributing factors. Singapore is able to attract foreign investments because of its largely educated workforce that possesses the expertise to produce high-end quality goods and services. The government has also in place various policies that exempts new industries from taxation for the first few years, and the corporate tax rate is consistently being revised (from the current 22% in YA2004 to the expected 20% in YA2005) to entice greater investments. The world class infrastructure supporting business, ranging from technology and freight services, is well developed and poised to handle the assigned tasks.
Work that is more of a manufacturing base requires mostly lower-skilled labour which is readily available in developing, third-world countries where the need of such expertise is low and the vast labour market is wide, thus lowering the costs of production in all. China, or even India, has a massive population that is able to take up such work, as their educational level and skills possessed is still lacking to handle work that requires greater skills and expertise. Even though infrastructure and education is now being put in priority to support and nurture the growing economy, there is still a lag, which they would eventually catch up. Political instability, in the case of India, may even deter investors from chipping in.
The global commodity chain market mainly shows the production process as well as the backward and forward linkages, where companies aim to integrate their companies towards their source, end, or even laterally, in operating and expanding their business.
One example would be of a paper-making factory. A paper-making factory may choose to expand and secure their operation by buying plantations to establish their source of production, in countries where land is cheap and suitable for the particular species of trees to flourish. This is known as a backward linkage. It can also choose to buy up competitors to increase their market share and presence or even to attain higher economies of scales, known as a lateral integration. And finally, it can also choose to further develop their business by buying up printing firms and offer publishing of books to customers. This is known as then, forward linkage integration.
This globalisation of business has made the global commodity chain possible, as goods and materials can be transported across continents cheaply to take advantage of cheaper sources of labour as well as the varying factors mentioned earlier, and to capitalize on market potential. Through this method of expansion via the ‘global commodity chain’, it has allowed companies the flexibility and geographical mobility to move production to wherever the most lucrative contract can be made and so, react quicker to changes in the wider business and international environment.
(iii)
A strategy of outsourcing may bring benefits that aimed at mainly, attaining a greater market share and higher profits through cost minimization. However, problems may crop up in the midst, where it may be just a trend to jump onto the bandwagon of outsourcing.
Firstly, one major factor to consider would be for the companies to decide on which country to outsource. As mentioned earlier, companies have to decide on the criterions to base their decision on, such as the availability of people with the expertise, the level of support provided by the government, the technological advancement and spread of IT in the country, ease of infrastructure to support the transfer and freight issues, and most importantly, the cost of production.
Often, many factors may come conflicting with the main interest of lowering cost of production, yet being a necessity, becomes an unnecessary rise in cost of production. In the case of American textile, outsourcing may become more expensive than the production in home country, where trade tariffs and quotas imposed in fact increases costs in production in relation to production in the home country.
Selection of the overseas trading partner is also a problem. There is the problem of whether the partner is trustworthy, especially in production of innovative goods and services that has been patented, is a major concern. Also, in countries where it is almost customary for the managers to line their own pockets with money from the company, siphoning the funds, along with the secret formula.
Along the same line, it would also pose as a shock to the foreign firm to the local culture. In such cases, there is a need to reconfigure the structure to incorporate the outsourcing activities. In China, it is said that one has to ‘provide favours’ to the higher officials to get things done, yet in other places, such practices are not tolerated. In the USA, laws can convict employees of unethical behaviour even though the act is committed outside USA. In Asia, the preferred structure of management would be a top-down one, whereas it is opposite to the Western culture of a democratic style of management.
Another concern is of quality and control of products, where in the midst of meeting targets and by quoting lower prices to win foreign investment contracts, quality and control of products are compromised. This may dent the company’s reputation, and deter consumers from getting their products. Thus, global benchmarking and best working practices must be instilled in the partners.
One other factor coming into play is where problems in fluctuating exchange rates may make outsourcing expensive. In a production, such as Boeing, where productions of different parts are made in different area, the core competencies of producing specific parts are left in the home country. With varying exchange rate, the whole process of assembling and flying the parts to a location for assembling may end up being more expensive.
Finally, the globalisation of markets has lead to a deregulation of financial market, where it is easier to obtain finance. This means also that one country’s performance index may be pegged to another, and the global financial market is subjected to shock waves, an example being that of Black Monday, 19th October 1987. On that particular day, the Dow Jones Industrial Average fell by 22.6%, the largest one-day decline in recorded stock market history. This one day decline was not confined to America, but mirrored all over the world.
In essence, there are benefits as well problems in regards to outsourcing. As such, the respective companies must try and anticipate and and prevent the problems from occuring that may incur greater costs rather than achieving the aim of lower costs.
posted by 유산 @ 1:09 AM
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