Modern organizations | Globalization and the environment

This essay is based on organization’s internal and external environment in today’s modern economy. It also discusses the drivers of globalization and effects of globalization on organization’s environment.

Firstly, it is important to understand the definition of globalization as there are many definitions. Secondly, the drivers of globalization are discussed in this essay including the history, aim and role of World Trade Organization. Further, the relationship between organization’s internal and external environment in global market is analyzed. It also highlights the changes that organizations have to face when going global. However, it is very challenging as an organization can control their internal environment but can not control the external environment.

An early description of globalization was penned by the American entrepreneur-turned-minister Charles Taze Russell who coined the term ‘Corporate Giants’ in 1897. However, it was not until the 1960s that the term began to be widely used by economists and other social scientists. It had achieved widespread use in the mainstream press by the later half of the 1980s. Since its inception, the concept of globalization has inspired numerous competing definitions and interpretations. Globalization refers to the shift towards a more integrated and interdependent world economy. Globalization has several different facets including the globalization of markets and globalization of products (Hill, 2004).Globalization has led to increasingly integrated markets across the world, changing the competitive environment in which firms operate. In the face of international competition in domestic and foreign markets, the least productive firms may be forced into bankruptcy while the most productive ones will take advantage of new business opportunities in foreign markets (IMF). Globalization attracts increasing interest and importance in contemporary world affairs. It also inspires passionate supporters and critic (BBC). Globalization is the process of increasing the connectivity and interdependence of the world’s markets and businesses. This process has speeded up dramatically in the last two decades as technological advances make it easier for people to travel, communicate, and do business internationally. In general, as economies become more connected to other economies, they have increased opportunity but also increased competition. Thus, as globalization becomes a more and more common feature of world economics, powerful pro-globalization and anti-globalization lobbies have arisen. The pro-globalization lobby argues that globalization brings about much increased opportunities for almost everyone, and increased competition is a good thing since it makes agents of production more efficient (investorwords, 2009).

The two most prominent pro-globalization organizations are the World Trade Organization and the World Economic Forum. The World Trade Organization is a pan-governmental entity (which currently has 144 members) that was set up to formulate a set of rules to govern global trade and capital flows through the process of member consensus, and to supervise their member countries to ensure that the rules are being followed. The World Economic Forum, a private foundation, does not have decision-making power but enjoys a great deal of importance since it has been effective as a powerful networking forum for many of the world’s business, government and not-profit leaders. The anti-globalization group argues that certain groups of people who are deprived in terms of resources are not currently capable of functioning within the increased competitive pressure that will be brought about by allowing their economies to be more connected to the rest of the world. Important anti-globalization organizations include environmental groups like Friends of the Earth and Greenpeace; international aid organizations like Oxfam; third world government organizations like the G77; business organizations and trade unions whose competitiveness is threatened by globalization like the U.S. textiles and European farm lobby, as well as the Australian and U.S. trade union movements.

There are four main elements and drivers of globalization: globalization of markets, globalization of production, technology innovation and falling of barriers to trade and investment which is analyzed in more depth including the role and aim of WTO.

Globalization of markets refers to the merging of national markets into one huge global marketplace. Now selling internationally is easier due to falling barriers to cross-border trade. A company doesn’t have to be the size of these multinational giants to facilitate and benefit from the globalization of markets. It is important to offer a standard product to the worldwide. But very significant differences still exist between national markets like consumer tastes, preferences, legal regulations, cultural systems. These differences require that marketing strategies in order to match the conditions in a country.

Globalization of production refers to the sourcing of goods and services from locations around the world to take advantage of national differences in the cost and quality of factors of production. The idea is to compete more effectively offering a product with good quality and low cost. For example, Nike is considerate one of the leading marketers of athletic shoes and apparel on the world. The company has some overseas factories where has achieved a super production with low cost. Unfortunately Nike has been a target of protest and persistent accusations that its products are made in sweatshops with poor working conditions. The company has signaled a commitment to improving working conditions, but in spite of the fact, the attacks continue.

Technological changes have achieved advances in communication, information processing, and transportation technology, including the Internet and the World Wide Web (www). The most important innovation has been development in the microprocessors after that global communications have been revolutionized by developments in satellite, optical fiber, and wireless technologies, and now the Internet and the www. The rapid growth of the internet and the associated www is the latest expression of this development. Besides, innovations have occurred in the field of the transportation technology. The development of commercial jet aircraft has reduced the time needed to get from one location to another. Now New York is closer to Tokyo than ever. Another example of technological change would be websites such as ebay.com where any individual can sell any item to anyone in the world; it is essentially the biggest garage sale ever. A third example of technological change would be production; in the 1900s people were making products largely by hand. Today, machines can whip out a dozen sweaters in an hour and make them higher quality. This way the global market can demand more products at a higher quality.

The falling of barriers to international trade enables firms to view the world as their market. The lowering of barrier to trade and investments also allows firms to base production at the optimal location for that activity. Thus, a firm might design a product in one country, produce a component parts in two other countries, assemble the product in another country and then export the finished product around the world. The lowering of trade barriers has facilitated the globalization of production. The evidence also suggests that foreign direct investment is playing an increasing role in the global economy. For example, Panama is now allowed to trade Pharmaceuticals, foods, and school supplies without suffering a tariff. Also, any other import is subject to only a 5% tariff as opposed to the previous 8%.

Decreasing and lowering of the trade and investment hurdles internationally is one of the important reasons of globalization. After the establishment of the world trade organization in which many countries participated due to the free trade agreements in the countries around the world. After the establishment of GATT (General Agreement of Tariff and Trade) it is the trade agreement between the countries that are willing to carry the free trade around the world.

The aim of these tariffs was to protect the local industries of those countries. But now the scholars of prosperity have though that the world would be become more peaceful and good place to live in when all the countries and their representatives coordinate with each other. The benefit of this is to the countries who do not have much source to utilizes their resources so that they can attract the large foreign investment in their countries.

The WTO provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development. The WTO also provides a legal and institutional framework for the implementation and monitoring of these agreements, as well as for settling disputes arising from their interpretation and application. The current body of trade agreements comprising the WTO consists of 16 different multilateral agreements (to which all WTO members are parties) and two different plurilateral agreements (to which only some WTO members are parties).

Over the past 60 years, the WTO, which was established in 1995, and its predecessor organization the GATT have helped to create a strong and prosperous international trading system, thereby contributing to unprecedented global economic growth. The WTO currently has 153 members, of which 117 are developing countries or separate customs territories. WTO activities are supported by a Secretariat of some 700 staff, led by the WTO Director-General. The Secretariat is located in Geneva, Switzerland, and has an annual budget of approximately CHF 200 million ($180 million, €130 million). The three official languages of the WTO are English, French and Spanish.

Decisions in the WTO are generally taken by consensus of the entire membership. The highest institutional body is the Ministerial Conference, which meets roughly every two years. A General Council conducts the organization’s business in the intervals between Ministerial Conferences. Both of these bodies comprise all members. Specialized subsidiary bodies (Councils, Committees, Sub-committees), also comprising all members, administer and monitor the implementation by members of the various WTO agreements.

More specifically, the WTO’s main activities are:

• negotiating the reduction or elimination of obstacles to trade (import tariffs, other barriers to trade) and agreeing on rules governing the conduct of international trade (e.g. antidumping, subsidies, product standards, etc.)
• administering and monitoring the application of the WTO’s agreed rules for trade in goods, trade in services, and trade-related intellectual property rights
• monitoring and reviewing the trade policies of our members, as well as ensuring transparency of regional and bilateral trade agreements
• settling disputes among our members regarding the interpretation and application of the agreements
• building capacity of developing country government officials in international trade matters
• assisting the process of accession of some 30 countries who are not yet members of the organization
• conducting economic research and collecting and disseminating trade data in support of the WTO’s other main activities
• explaining to and educating the public about the WTO, its mission and its activities.

The WTO’s founding and guiding principles remain the pursuit of open borders, the guarantee of most-favoured-nation principle and non-discriminatory treatment by and among members, and a commitment to transparency in the conduct of its activities. The opening of national markets to international trade, with justifiable exceptions or with adequate flexibilities, will encourage and contribute to sustainable development, raise people’s welfare, reduce poverty, and foster peace and stability. At the same time, such market opening must be accompanied by sound domestic and international policies that contribute to economic growth and development according to each member’s needs and aspirations. (WTO, 2009)

An organization’s internal environment is composed of the elements within the organization, including current employees, management, and especially corporate culture, which defines employee behavior. Also organization’s resources, its capabilities and competencies make up the internal environment of the organization. The internal environment plays a crucial role in the strategic management process of the organization. (Hill, 2004)

Although some elements affect the organization as a whole, others affect only the manager. A manager’s philosophical or leadership style directly impacts employees. Traditional managers give explicit instructions to employees, while progressive managers empower employees to make many of their own decisions. Changes in philosophy and/or leadership style are under the control of the manager. To analyze the internal and external environment of an organization SWOT analysis is carried out to identify strengths, weaknesses, opportunities and threats. The Internal Analysis of strengths and weaknesses focuses on internal factors that give an organization certain advantages and disadvantages in meeting the needs of its target market. Strengths refer to core competencies that give the firm an advantage in meeting the needs of its target markets. Any analysis of company strengths should be market oriented/customer focused because strengths are only meaningful when they assist the firm in meeting customer needs. Weaknesses refer to any limitations a company faces in developing or implementing a strategy. Weaknesses should also be examined from a customer perspective because customers often perceive weaknesses that a company cannot see.

The external environment in which an organization operates presents both threats and opportunities. Growth or decline in international trade, national protectionism and regional trading blocs are some examples of the political and economic environment, which have considerable impact on the marketing of the maritime industry. There are different ways of classifying the types of external environment that usually just reflect the preferences of different authors, but there are some core types which are always identified.

Your Kotler et al. (2004) text provides a comprehensive classification of the external environments, which it refers to as the macro-environment, as listed below: demographic environment, economic environment, natural environment, technological environment, political environment, cultural environment, technological environment, administrative/legal environment.

Administrative/Legal Environment

The administrative and legal environment in a country provides a framework within which an organization operates. In some countries this environment is very restrictive and has significant impact on all aspects of the organization; in other countries the administrative/legal context is more permissive. Understanding the administrative/legal environment is essential to determining if organizational change can take place. The administrative context within which the organization operates may be shaped by a unique combination of forces, including international, governmental, nongovernmental policy, legislative, regulatory, and legal frameworks. An organization is affected by the policy or regulatory context that gave rise to it. This includes specific laws and regulations that support or inhibit the institution’s development.

Technology Environment

Both the types and the level of technology in the society give insight into understanding an institution. Institutions dealing with Western paradigms are dependent on the state of national infrastructure, e.g. power, water, transport; those which concentrate on indigenous research paradigms may have totally different dependencies. Thus, it is important to understand the level of relevant technology in the institutional context and whether such technology is defined by computer literacy or by highly developed indigenous methods of verbal and nonverbal communication. It might also be helpful for an assessment to include a consideration of the process by which new technology comes into use, both to understand how difficult it is to acquire needed research technologies and to develop an appreciation for the society’s willingness to embrace both new knowledge and change.

Political Environment

The economy and legal system of a country are shaped by its political system. As such, it is important that organizations understand the nature of different political systems. Political system means system of government in a nation. Political system can be assessed according to two related dimensions. The first the degree to which they emphasize collectivism as apposed to individualism. The second dimension is the degree to which they are democratic or totalitarian. These dimensions are interrelated; system that emphasize collectivism tend toward totalitarian, while system that place a high value on individualism tend to be democratic.

Economic Environment

In the economic environment, the organizational analysis should centre on those aspects of the economic system that directly impact the type of project being considered. For example, inflation, labour laws, and opportunity costs for researchers in public institutions directly impact organizational activities in different countries. Countries with foreign currency restrictions represent different environments for institutions than countries without them, for such restrictions have ramifications for research, e.g. for equipment procurement and maintenance.

Social and Cultural Environments

Social and cultural forces at local, national, and often regional levels have profound influence on the way organizations conduct their work and on what they value in terms of outcomes and effects. For example, the mores of an indigenous culture have a bearing on the work ethic and on the way in which people relate to one another. Undoubtedly, the most profound cultural dimension is language. The extent to which organizational members can participate in the discourse of the major scientific language will determine the extent to which research efforts focus inwardly or contribute to regional and global research agendas. Understanding the national/regional/local values toward learning and research provides insight into the type and nature of research that is valued. For example, what is the relative priority placed on contract research in partnership with local clients, e.g. testing products and procedures with indigenous populations, as opposed to sharing information with academic peers internationally, or generating biostatistician data that will shape national or regional policy. Arriving at these priorities involves culture-based decisions.

Organizational architecture can be used by multinational enterprises to manage and direct their global operations. To succeed, a firm must match its architecture to its strategy in different ways. Firms whose architecture does not fit their strategic requirements will experience performance problems. It is also necessary for the different components of architecture to be consistent with each other (Hill, 2004). Organizational architecture refers to the totality of a firm’s organization, including formal organizational structure, control systems and incentives, processes, organizational culture, and people. An organization should be able to analyze their internal environment including their capabilities before they decide to go global. It requires different know-how of the new geographical market and an organization would need to make necessary changes in internal environment to enter the new geographical market successfully.

1. http://www.cliffsnotes.com/WileyCDA/CliffsReviewTopic
2. www.imf.org
3. www.wto.org
4. www.bbc.co.uk
5. www.Investorwords.com