The two controversial events that took place in the recent past – the global credit crunch and the reports of low-paid labour in developing countries put a big question confronting the concept of globalisation. Is “Globalisation” a real means for emerging countries to grow, or is it just a tool for developed countries to advocate capitalism in those less developed ones?
The global credit crunch
Looking back at the history and causes of the credit crunch, de-regulation of financial markets first floats to the surface as the main cause of a big challenge of 21st century. De-regulation theory, first advocated by Milton Friedman, suggests that minimally controlled markets offer the most efficient distribution of products and services.
The theory was embraced by President R. Reagan and British Prime Minister M. Thatcher in 1980’s and lauded by many in the business world. As Ronald Reagan said: “In this era of crisis, Government is not the solution to our problem” later followed by the rest of the world.
De-regulation is good when it’s managed properly and it was initially practiced in business areas, however then followed by liberalising the whole system, including military and banking sector.
In 2004 Federal Reserve lowered interest rates to 1% to keep the economy strong. This in turn, enabled banks to borrow money for free, and then lend it out, earning nice profits. The main problem started with sub-prime mortgages, where banks instead of giving credit to responsible people, gave to those who were not able to pay. Eventually more and more home owners default their mortgages, and there was more supply of the houses for sale, than there was demand.
The house prices began to fall and no one wanted to buy a house. So, the banks were not able to pay back money to investors they borrowed from. They re-sold these loans to other banks, such as Investment Banks. Eventually, one after one, banks and other financial institutions began going bankrupt. The first to collapse was Lehman Bros. that paid ultimate price and pulled the rest of the world into global financial crisis.
So, the question here is whether the global crisis followed is more due to globalisation or due to liberalisation. It can be concluded that credit crunch started in the US due to the liberalisation of banking sector, where proper control was not attended to banking sector.
The growth in subprime mortgages was mainly concentrated in the US. What happened is that these subprime mortgage loans were bundled up and resold in CDOs to banks around the world. Therefore, because of the interconnection of the global financial system, many banks suffered from the bust in the US housing market. Therefore, we could say the globalisation of the financial sector meant that a problem in the US subprime mortgage sector spread to the whole world.
The reports of low-paid labour in developing countries
Many protesters around the world have claimed that globalisation is responsible for increasing inequality within and among countries and that it’s causing greater poverty. So one of the most controversial questions concerning this phenomenon is whether poverty and inequality in the developing world are a consequence of globalization. According to some observers economic globalization leads to a “race to the bottom” characterized “by the progressive movement of capital and technology from countries with relatively high levels of wages, taxation and regulation to countries with relatively lower levels” (Spar and Yoffe, 2000, p. 37)
The expansion of world trade has sustained economic growth around the globe and led to a rapid expansion of employment opportunities. The International Labour Organization has estimated that between 1995 and 2005, thanks to this global expansion, 40 million additional jobs have been created every year in its member countries. Despite this dynamism within the labour market, decent working conditions have not improved at the same rate.
On the one hand, organized labour argues that low-wage workers in developing countries will gain employment at the expense of American workers. On the other hand, self-appointed advocates of the developing world claim that trade with and investment from Western countries lead only to exploitation and continued poverty abroad.
According to some studies, sustained wage growth over several years is normally only possible when the economy is expanding and when labour productivity is growing. One example is China, where real wages grew on average about 11 per cent per year thanks to double digit economic growth. Conversely, when GDP per capita declined in Argentina during the financial crisis in 2001–03, wages fell by an average of 11 per cent per year.
Another way to look at the link between productivity and wages is to observe that the level of average wages is higher in countries in which labour productivity is higher. From a comparative perspective, it has been shown in various studies that international differences in wages across countries mainly reflect differences in economic development and labour productivity.
The relationship between globalization and development is quite complex. First of all, openness to foreign trade is far from being the only or most important factor in fostering development - actually, trade is a small factor in the economy -, nor is globalization solely responsible for creating disparities between rich and poor. As a matter of fact, human development, the reduction of poverty and increased output of goods and services depend on national policies much more than on openness.
Therefore, domestic policies and institutions, both in developing and developed countries, are in part responsible either for their poor economic performance or for the persisting gap between rich and poor. In any case, the State will have a significant role to play in a globalizing economy. For citizens to take advantage of the opportunities of globalization, they need access to high quality education, health care, information and communication technologies (ICT), social safety nets, and infrastructure.
TOPIC 2: INNOVATION
Q: Evaluate the importance of innovation in organisational processes of the 21st century and critically discuss whether process innovation contributes more to product innovation in a corporate framework.
Answer:
In the era of globalisation and rapidly changing environment, there is a vital need for companies to change the way the business is done and create new methods of productivity to enhance company’s performance and financial position. There is no longer place for old methods that used to be relevant in business environment few decades ago – 21st century, is a period of highly advanced and technologically driven business environment. The only way for companies to stay on the surface is through innovation of what is possible in the organisation to fulfil requirements of highly demanding customers.
Innovation – the ability to define and develop new products and services and deliver them to market – is the fundamental source of value creation in companies and an important enabler of competitive advantage. Innovation is inherently a highly cross-functional activity that, when it works well, creates a constructive tension between competing objectives of development cost, product value, performance, quality, and time to market. Product development touches every part of the company. Functions like strategic planning, sales, operations; customer support, purchasing, and finance are just as important to successful innovation as R&D and engineering.
Albert Einstein once said, “If I had 20 days to solve a problem, I would spend 19 days to define it.” Innovation is a particularly sticky problem because it so often remains undefined. The innovation process begins with the goal to create strategic advantage in the marketplace, so in this stage we think specifically about how innovation is going to add value to your strategic intents, and we target the areas where innovation has the greatest potential to provide strategic advantage.
Why innovation is important? Innovation is important on a number of levels. It’s important for nations and regions, for economic growth, and it’s important for firms for survival and growth. For companies there are a number of reasons as to why innovation is important and can be briefly summarised as follows:
- to survive adverse changes in operating circumstances;
- to gain competitive advantage;
- to protect market share;
- to make life easier for their customers;
- to open new horizons of doing business
- to comply with legislation;
- to reduce competition
- to stimulate staff with interesting and challenging work;
- to provide stability for the workforce;
- to attract alliance partners
- to attract extra funding;
- to raise margins and profitability;
- to drive total shareholder returns
Innovation, being a wide concept by itself, encompasses a broad spectrum of tools and tactics to imply in every sector of an organisation. There are various types of innovation, but they all lead to one goal – to enhance company’s position and performance. One of the important types of innovation is process innovation.
“A process innovation is the implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment or software.”
This involves the development of a new way to produce a product using a newly developed machine, a new method or the use of new software as part of the process or for developing new products. The delivery methods are associated with the physical movement of the product from the factory floor to the end user, i.e. the logistics of the company. This includes any system that is implemented in improving the delivery of the product to the customer such as computer systems, tracking systems and any associated equipment.
In definitional terms, a process is simply a structured, measured set of activities designed to produce a specified output for a particular customer or market. It implies a strong emphasis on how work is done within an organisation. A process is thus a specific ordering of work activities across time and place, with a beginning, an end, and clearly identified inputs and outputs; a structure for action. This structural element of processes is a key to achieving the benefits of process innovation.
Wal-Mart became the most successful retail company in history through their focus on process innovation and operational excellence. They had the same products as K-Mart, Target and many other discounters but their process innovations allowed them to lower costs and capture the market. The same story was true for Dell Computers. They had the same products but their mass customization gave the customer more choices at lower costs. Thus, it appears that success can be based on a single discipline.
However, the world doesn’t stay stagnant and innovation must be continuous. Otherwise, the competitors will take advantage and become leaders in the market. So the three main components of innovation: process innovation, product innovation and service innovation should go along to create the ultimate opportunity for company to prosper. The company cannot focus on process innovation alone, it should focus on product and service innovation all together.
No matter how important process innovation is to business success, however there are challenges and drawbacks of innovation too. First of all, as technology matures, gets cheaper and more standardised, it loses its ability to help one organisation distinguish itself from another. In other words, technology no longer delivers a competitive advantage; it becomes part of the business infrastructure, another cost of doing business.
As a result there is more risk for organisations that pursue innovation through technology, which is becoming more diffuse, more ubiquitous and less of a differentiator in the marketplace.
As the Blue Ocean strategy suggests it’s more effective for companies to create uncontested market space where the competition is irrelevant. One example of a company that succeeded in this field is an Australian wine company Yellow Tail. For two years it became the bestseller among imported wines in the US. The company decided not to compete head-on with major players, concentrate at non-customers, not customers and create new demand.
The company’s strategy was to eliminate and reduce factors the industry has long competed on; and to raise and create factors the industry has never offered, by simultaneously pursuing differentiation and low cost – at the heart of which is value innovation. This is how the company just in two years became market leader in the US.
There are lots of other such companies that made significant innovations, like: Apple’s iPad, Samsung Galaxy, Southwest airlines, Swatch and Google Search. However, the time passes and the world and needs change. And the time comes when these companies become mature enough to think of their strategy in more profound and comprehensive manner to sustain or further accelerate their growth in the future.
So the conclusion may be done, that process innovation is important, however not enough to gain ultimate advantage. So the company should engage in various processes at the same time to create value that will be far beyond its competitors’ potential.
by
boney (student)
