The global context of business

Accounting Ahead | Original study resource | accountingahead.com.au

The global context of business

MODULE 1 | 1.5 | STUDENT COMPANION

Globalisation describes organisations that operate in many countries, with their activities in those

countries connected through money, manufacturing, marketing or selling. Ways in range from importing

and exporting, licensing and franchising, through joint ventures and strategic alliances, to a wholly owned

subsidiary. Generally, more control brings more investment and more risk (entry modes are covered in

Module 4).

Four forces that drove globalisation

Globalisation

Operations in many countries, linked

together

Competitive

As trade barriers fell, new rivals from Japan,

then Korea and China, competed everywhere

Technological

Containers, air freight, the internet and cheap

calls made global operations possible

Social

Converging tastes created mass global

markets for the same products

Political

GATT, then the WTO, plus regional and

bilateral agreements cut trade barriers

Five families of global risk

Market

More rivals with local know-how; different

distribution; localise or standardise?

Economic and financial

Different growth, labour costs and

spending power; interest, inflation, tax;

exchange rates

Legal and political

Different laws and regulations; harder debt

collection; new governments and agencies

People and culture

Customs, values, languages and

leadership styles; employment law and

industrial relations

Physical and technological

Time zones, infrastructure, electrical

standards; IP leakage; cyber attacks

These risks come on top of the normal risks of competing, and multiply across countries

GLOBAL STRATEGY AND LEADERSHIP | M1 | 1.5 | STUDENT COMPANION

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Worked example: exchange rate risk (imagined)

Nothing about the product or the customer changed; only the exchange rate moved.

Wildmoss Botanicals sells one jar of face cream in the US for US$30 A$ received

When A$1 buys US$0.65: 30 / 0.65 A$46.15

When A$1 buys US$0.75: 30 / 0.75 A$40.00

Fall in A$ received per jar (about 13%) A$6.15

Four benefits of globalisation

Cost

Scale economies, more

purchasing power, lower

production costs

Timing

Launch in many markets at

once; less time for imitators

Learning

Share knowledge across

countries instead of in

national silos

Arbitrage

Place activities where

currencies, wages and

input prices give the best

return

Benefits depend on conditions such as market growth, technology and customer responsiveness

Case note: Starbucks in Australia

Starbucks opened its first Australian store in Sydney in 2000 and grew to 87 stores by late 2007. In July 2008,

after years of losses, it announced it would close 61 of its 84 stores, keeping 23 and cutting 685 jobs. Analysts

pointed to Australia's thriving espresso and independent café culture, a price premium customers did not see as

justified, high rents and an expansion that ran too fast. In 2014 Starbucks sold its remaining 24 stores to a local

operator.

Sources: ABC News, 29 July 2008; Starbucks annual report (Form 10-K), 2007; UNSW commentary (P. Patterson), 2008.

GLOBAL STRATEGY AND LEADERSHIP | M1 | 1.5 | STUDENT COMPANION

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Practice questions

MODULE 1 | 1.5 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 case. Imagine a South Australian winery called Redgum Ridge planning to sell its wines in India. It

has learned that imported wine faces significant import duties; alcohol rules and taxes differ from state to state;

wine must be sold through licensed importers and distributors, several of whom already represent well-known

European brands; many local wine drinkers prefer lighter, slightly sweeter styles; the rupee can move sharply

against the Australian dollar; summer temperatures can exceed 40 degrees Celsius and cool storage along the

supply chain is patchy; and a rival has been caught copying another Australian winery's label design.

Question 1 - Identify the main risks in each family

Risk family Risks facing Redgum Ridge

Market

Economic and financial

Legal and political

People and culture

Physical and technological

GLOBAL STRATEGY AND LEADERSHIP | M1 | 1.5 | STUDENT COMPANION

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Question 2 - Which benefits apply?

Imagine a payroll software company called Ledgerly with development teams in Brisbane, Manila and Krakow. It

sells one product, translated into several languages, to customers in fifteen countries. It releases every update to

all customers on the same day, keeps a shared library of fixes so a problem solved in one office is solved for

everyone, and decides where to grow each team by comparing salaries and exchange rates in the three cities.

Which of the four benefits of globalisation does Ledgerly enjoy? Explain each one.

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Question 3 - Standardise or localise?

Imagine an Australian flat-pack furniture retailer called Woodfold, known for a simple Scandinavian-style range

made from plantation timber, planning to open in Japan. Its research shows that city apartments there are often

smaller than Australian homes, many households use futon-style bedding and low tables, customers expect a

very high finish and clear instructions in Japanese, and Woodfold's cost advantage depends on long production

runs of a standard range. Should Woodfold standardise or localise its range? Justify your recommendation.

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Worked answers

MODULE 1 | 1.5 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Redgum Ridge's main risks

Risk family Risks

Market Entrenched European brands with established importer relationships; distribution

only through licensed importers; a choice between adapting wine styles and

labels or keeping the standard range

Economic and financial Import duties raise shelf prices, so affordability depends on disposable income;

rupee movements can erode margins; state taxes add cost

Legal and political Different alcohol rules, licences and taxes in each state; import regulations that

can change

People and culture Preference for lighter, sweeter styles; different drinking customs between regions;

the need to build relationships with distributors

Physical and technological Heat and a patchy cold chain can spoil wine; label copying threatens the brand,

so trademarks should be registered locally

Question 2 - Ledgerly's benefits

Cost: one product sold in fifteen countries spreads development costs over a far larger customer base. Timing:

simultaneous releases are efficient and give imitators less time to copy new features. Learning: the shared fix

library stops each office solving problems another office has already solved. Arbitrage: growing teams where

salaries and exchange rates give the best return lowers the cost of development.

Question 3 - Woodfold: standardise or localise?

Recommendation: a hybrid. Standardise what drives the cost advantage and the brand: core designs,

materials, production runs, supply chain and brand identity. Localise what Japanese customers clearly need:

compact sizes for smaller apartments, a few new lines such as low tables and futon-friendly bases, a higher

finish standard, and instructions and service in Japanese.

Justification: full standardisation risks a range that does not fit Japanese homes, the same trap that hurts

brands entering a market with a strong local culture. Full localisation would destroy the long production runs that

make Woodfold competitive. Starting with a limited adapted range and testing it lets Woodfold learn before

committing.

GLOBAL STRATEGY AND LEADERSHIP | M1 | 1.5 | WORKED ANSWERS

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