Monday, April 9, 2012

Internet Effects on Globalization Drivers

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Internet Effects on Globalization Drivers

Industries differ in their globalization potential and in their degree of Internet use. But, as demonstrated below, increasing Internet use accelerates the pace of globalization, but in differing ways for different industries (Table 1).

[Table 1. Summary of Internet Effects on Industry Globalisation Drivers]

Market Globalization Drivers

The Internet affects industry specific market globalization drivers in several ways. In addition, use of the Internet still varies greatly by country from now nearly 50% of the adult population in the United States to under 5% in Russia, China and India (Figure ). So the location of an industry’s key markets also matters.

[Figure . Use of Internet in Key Economies]

The Internet increases global commonality in customer needs and tastes. When customers in an industry have needs and tastes that are mostly common across countries, companies can make more use of global strategies, especially in offering globally standardised products and services. The Internet and the Web further expose customers to global offerings and other lifestyles. Individuals can now travel on the Web rather than physically but can have similar global exposure and global learning effects. So they are more likely to migrate to the highest or most popular global standard. This effect held even before the arrival of the Internet.

The Internet has two effects. First, it reinforces the appeal of those brands that are already globally recognised. Potential customers can get more information about these product offerings and have their desires further reinforced. At the same time, the Web creates more opportunities and churn in the next tier of contender brands. Relatively unknown brands will be able to rapidly build up word of mouth via the Internet and global presence via the Web. Superior design in Web sites can make up for currently low recognition. Both Schwab and Dell Computer completely shifted their marketing and ordering systems to the Web. The dramatic effects on their businesses are well recorded. Less obvious is that this shift helped propel both companies from the “possible” category of suppliers to the “must consider” category. Even if someone does not end up choosing Schwab or Dell, most potential customers now have to consider these two companies.

The Internet enables global customers. Multinational companies increasingly act as global customers by globally co-ordinating or centralising their purchases. But there are many obstacles, both external (finding and co-ordinating with vendors around the world) and internal (agreeing and co-ordinating requirements across international subsidiaries). The Internet and the Web make it even easier to become global customers. Customers can search the Web for suppliers from anywhere in the world. Or they can go even further and place requests for proposals on their own websites and wait for vendors to bid. General Electric created The Trading Partner Network as an on-line auction site for customers and suppliers of non-production goods, such as office and computer supplies and other non-production products and services that help to run day-to-day business operations.

The Internet facilitates global channels. Analogous to global customers, there may be channels of distribution that buy on a global or at least a regional basis. Their presence makes it more necessary for a business to rationalise its worldwide pricing, other terms of trade, and even its product offerings. The Web has accelerated the growth of regional and global channels of distribution, allowing traditional bricks-and-mortar channel firms to more easily complete their networks. And, of course, “clicks-and-limited-mortar” firms like jump straight into existence as global channels, although the real Amazon distribution system was Amazon + Ingram (the United States’ largest book wholesaler, based in Seattle, since displaced by Amazon’s own warehouse operations) + United Parcel Service in the United States and various other package deliverers elsewhere.

Thirdly, the rise of net intermediaries (pure “click-and-mouse” firms with no physical assets) such as and creates a new dimension to long-time vendor-distributor relationships. In the automobile sector, carmakers have traditionally focussed on mostly sub-national, and occasionally national, area agreements. The new Internet channels bypass these relationships to seek out the best deals either on a national basis (as Autobytel does in the United States) or on a pan-European basis as does the partnership with Which? (Britain’s consumer association). The immediate effect is that carmakers are rethinking their European pricing, having a degree of price convergence forced upon them.

The Internet makes global marketing more possible. Multinational companies now try to use as much as possible global rather than national marketing. The Internet has two effects on global marketing, enabling and demanding.

In terms of enabling global marketing, Internet/Web based marketing has inherent global reach. Second, users share a common style of interaction, they have been conditioned to interact with electronic communications in a certain way, browsing, searching, and impatient. Third, most users, by self-selection, have a working knowledge of English, itself the far dominant language of the Internet, even though more than half of the 80 million Internet users speak languages other than English (Kushner 2000).

In terms of demanding global marketing, the Internet and the Web mandate that vendors use globally standard brand names. A simple example suffices to illustrate this new commandment. In an earlier era, would probably have been in Brazil only, but in the United States, in the United Kingdom, in Germany, and in China. In the Internet era, the founder of chose the world’s largest river as his company’s global brand name. Similarly, other elements of the marketing mix, particularly price, need to be more uniform than in the pre-Net era.

The Internet highlights lead countries. Global competitors need to participate in countries that are industry leaders of innovation, fashion or prestige. The Internet has two effects. First, it makes it easier for customers to identify lead countries and to monitor their offerings. The Web lets everyone visit Paris or Tokyo or Los Angeles. Consumers can rapidly identify the trends and fashions in lead countries and will become increasingly dissatisfied with inferior domestic offerings. The fall of the Berlin Wall cut demand for East German cars, such as the Trabant, from a ten-year backlog to zero. The Web brings down Berlin Walls all over the world.

Cost Globalization Drivers

Several cost drivers have spurred globalization over the last two decades. The Internet is reinforcing each of these drivers by transforming the economics of almost every business.

The Internet drives down global economies of scale and scope. Global scale economies or scope economies apply when single-country markets are not large enough to allow competitors to achieve optimum scale in a value-adding activity, whether production, research, marketing and so on. The Web-induced transformation of businesses generally reduces minimum efficient scales. First, many physical activities are being replaced by web-based virtual activities. Therefore, many scale and investment barriers to global spread are bypassed. For example, many already globalized companies are running down their international distribution systems, while newly internationalising companies need spend much less on international distribution. Second, value chains and business systems are being broken up or “deconstructed” (Evans and Würster). Inevitably, this means a consolidation of players and market share at the deconstructed stages and therefore a larger scale. On the one hand this means that there is less pressure on the new entities to globalise. But on the other hand, these new entities have a clearly focussed business model and competitive advantage that is easily transferable and leverageable internationally.

This reduction in economies of scale and transaction costs will particularly help smaller firms from emerging markets. For example, small firms in Asia will be able to combine to achieve global reach, reducing the customer proximity advantage of firms in developed economies.

The Internet enhances global sourcing efficiencies. The market for supplies may allow centralised purchasing to achieve savings in the cost of produc-tion inputs. A primary Web phenomenon has been the creation of Web-based purchasing systems that are global. Before the Net, globally centralised purchasing required complex, paper- and phone-based co-ordination of the needs of geographically dispersed subsidiaries and suppliers. With the Net, subsidiary requirements can be managed in a more efficient and democratic process through Intranets. And relationships with vendors can be managed on a global basis on Extranets. For example, the Big Three U.S. automakers created the Automotive Exchange Network (ANX) to support automated interactions with their parts suppliers. ANX defines a set of technology and service-quality standards for exchanging critical transaction and planning documents over the Web (Frook). European and Japanese automobile companies are developing similar systems. In electronics, Matsushita is building Internet links among its 100 factories in Japan, and 5,000 of its 7,000 suppliers.

The Internet speeds up global logistics. A favourable ratio of sales value to transporta-tion cost enhances the ability to concentrate production into global-scale units. The Web facilitates the operation of global production and supply networks. Boeing Company created the Boeing partners network to connect with its 40,000 trading partners around the world. For example, 45 separate regulatory agencies in the United States, Canada, Japan, Russia, and several European nations, use the Boeing Intranet to collaborate on its space station project. These networks can also be supported by third party services, such as Information Resources Associates’ Extranet Support Centre.

The Internet exploits differences in country costs. Differences in country costs and skills can provide a strong spur to globalization. The Internet does not change relative country costs and skills but it enables many activities to be shifted to lower cost countries. First, the Internet can used as a means of efficient communication and co-ordination to make possible the “off-shoring” of activities that would otherwise be too complex to manage. For example, some consulting firms have shifted their document production work to India, communicating via the Net and taking advantage of time zone differences as well as lower costs. While U.S. and Europe-based consultants sleep, when they do sleep, their documents and presentations are being produced for them. Second, the deconstruction of activities creates specialised Web-based functions such as customer service (particularly for information-rich services) that can easily be shifted to lower cost locales. The information database can remain in the home or other key country while being accessed by Internet from lower cost and perhaps less secure countries.

The Internet reduces product development costs. High product development costs relative to the size of national markets act as a driver to globalization, companies need a global sales base to amortise the development costs. The Internet has several effects. First, it can reduce development costs in a number of ways. Some aspects of the product, particularly supplementary ones such as service, can be shifted out of the physical product onto the Web. This allows the development of a simpler, global, core product with lower development (and production) costs. In some cases, the customer can do the final customisation online. Both Nike and IDwatch from Idtown (a Hong Kong firm) allow customers to design and order their own customised products. Another cost reduction arises when companies use Intranets to manage globally dispersed product development teams, thereby also enhancing effectiveness.

Government Globalization Drivers (Barriers)

Government globalization drivers mostly constrain the ability of multinational companies to globalise and operate globally integrated strategies. The Internet weakens many of these government barriers to globalization.

The Internet side-steps trade policies. Host governments affect globalization potential in a number of major ways import tariffs and quotas, non-tariff barriers, export sub-sidies, local content requirements, currency and capital flow restrictions, ownership restrictions and require-ments on technology transfer. E-commerce hits these barriers in several ways, particularly in the bypassing of import duties and taxes. For services delivered over the Internet, most governments find it impossible to monitor or tax these, unless the government is actively engaged in monitoring and censoring Internet traffic, as is the case with a few authoritarian regimes. For services ordered over the Internet but delivered physically across borders, governments should, in theory, be able to catch these at the frontier. But in practice, most governments miss significant proportions of the increasing numbers of relatively low value items.

The Internet spurs global technical standards. Differences in technical standards among countries affect the extent to which products can be globally or regionally standardised. The move to put standards on government websites and to allow public access is gradually increasing the transparency of the standard setting process, and should encourage the spread of globally compatible standards. For example, Japan is lobbying other G8 nations for unified global rules on e-commerce financial trading.

The Internet confronts diverse marketing regulations. Differing marketing regulations affect the extent to which uniform global marketing approaches can be used. Governments lag in their efforts to regulate marketing on the Internet. Differences in rules on Internet marketing can themselves pose a barrier to globalization. For example, the European Union is applying increasingly strict rules to prevent marketing e-mail from originating outside the EU. So many e-marketers are finding that, just like old economy producers, they need to set up operations inside the EU. Germany forbids all unsolicited marketing contact of consumers, including via e-mail. France forbids e-Bay and similar Internet auction services from allowing French users to access websites outside France itself.

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