What do you consider to be the principal micro- and macro-economic forces driving change in the global economy in recent years and, using specific examples, explain why and how these forces have made global corporate management more complex?
This essay will isolate two key factors that influence micro and macro economic policies and how they make corporate management more complex. Technology is a micro-driver and I will illustrate how this affects the competitiveness of a firm. Globalisation is a macro-driver and I will highlight how this makes global management more complex as it has both expansionary and diminutive affects on trade and economic growth.
Writing, printing, and electricity are historical examples of technological development, and recent additions include the internet, lasers, mass production and flexible manufacturing (Malecki, 2002). Labour and capital have been the conventional inputs behind output expansion, but recent theoretical developments place innovation at the heart of microeconomic development (Helpman, 1998 & Grossman and Helpman, 1990). Porter goes on to argue that the competitive advantage of a firm arises from technology and the efficiency with which conventional inputs are utilised (Snowdon & Stonehouse, 2006). Porter explains that competitive advantage – developed within the framework of Porter’s Five Forces model (Porter, 2008) – is the fundamental factor attributing to microeconomic development, arising from strategies of innovation and development. For an overview see Appendix 1. Business strategy should focus on technological advances, and how this can further business efficiencies. Kodak was a victim of technological substitution, with the advent of digital technology and the rise of its competitor, Fujifilm (The Economist, 2012). Constant, exponential increases in technology require constant investment and management to maintain competitive advantage, thus making management more complex.
The Internet is arguably the most significant leading technology of recent era (Malecki, 2002), and creates complementary products that increase productivity (Helpman, 1998) but also competition by drastically reducing the marginal costs for production (Bakos & Brynjolfsson, 2000), thus market entry. The increase in e-commerce firms is an example, where barriers to entry are virtually zero. Managers must be sure to identify potential entrants and substitutive products early so as to plan effectively.
The need to use technology and innovate quickly is required to deal with the shifting paradigm of global competitiveness. Firms should gauge the affects technology has on the boundaries of both vertical and horizontal integration perhaps necessitating boundary redefinition to establish efficiency (Afuah, 2003). Understanding performance related affects of technology and in particular the Internet within organisations (Conner & Prahalad, 1996) is necessary. To assess the affect that technology has on the whole innovation chain, firms must note the effect technological change has on its suppliers (Brandenburger & Stuart, 1996). Firms should communicate with suppliers as businesses have become more inter-dependant, and collaboration via the value-chain should be considered. A strategist can gain a competitive edge for profits through the industry structure manifested through the elements of Porters’ Five Forces model (Porter, 2008), and utilise technology to achieve this.
Globalization enabling technologies include the Railroad, Steamship and the Telegraph. Open, free trade was characterised by Dennis Robertson (1940) as an “engine of growth” and globalizers have demonstrated higher growth rates (Bhagwati & Srinivasan, 2002). Since countries have shifted from inward to outward looking policies, we have seen an explosion in world trade. Bhagwati & Srinivasan (2002), argue that comparative advantage is key in explaining trade patterns and that freer trade should help in the reduction of poverty. Porter counters this argument suggesting the traditional trade theory based around land, labour and capital has limitations, because of the liquid capital market (Snowdon & Stonehouse, 2006). The international movement of large sums of money at the click of a ‘mouse’ has obvious implications for multi-nationals, as currency speculation can quickly alter trading environments and currency values, thus quickly changing costs of production and sale. Keniche Ohmae further alludes to the ‘Invisible Continent’ with visible, borderless and invisible worlds in our new economy, and that these new online businesses can acquire others to perpetuate growth without regulation by nation states. (Ohmae, 2000).
Porter stipulates that no longer the quantity of labour affects your competitiveness but rather the specialisation and quality of labour. Porter argues for the competitive advantage of nations by saying “National prosperity is strongly affected by competitiveness, which is the productivity with which a nation uses its human, capital, and natural resources” (Snowdon & Stonehouse, 2006). Krugman talks of a new economic geography, in which specialised clusters emerge within nation states (Krugman, 1994). Examples include financial sectors in London, technology clusters in Silicon Valley, and low-end apparel manufacture in China. Firms must understand location is a key component to their operations, and that varying the location of parts of the value chain may be more profitable. The iPod is assembled in many countries, before eventually being ‘made in china’. To ensure continual price competitiveness this complexity must be understood. Globalization has dramatically altered the volume of goods traded, due to such innovations as the ‘cargo container’, which has in turn led to vastly complex value chains.
There has been a tendency toward decentralisation around the world, and increased heterogeneity of preferences (Alesina, 2003). He implies that ethnic heterogeneity and even racial prejudice can interfere with the implementation of good growth enhancing policies. Therefore businesses must empathise with cultural norms in all countries in which the firm is to operate. Alesina goes onto articulate that bigger is not always better, and insinuates economic integration results in political disintegration. It is interesting to note current political debates in the Eurozone, aimed at increasing fiscal cohesion. Furthermore, Grossman & Helpman (1991) argue a link between trade intervention and long-run growth, thus suggesting globalization does not present the optimum. Krugman suggests that we require more global policy coordination to ensure long-term growth, such as with the Financial Transaction Tax (FTT). Firms must understand individual national policies and how these will affect trade and operations. If a firm’s objective is to maximize profit, then being ready to move operations based on national policies is vital.
It has been argued that globalisation has increased negative externalities, in particular environmental issues. However Porters’ competitive advantage model suggests that better resource productivity would offer an advantage of efficiency over competing firms, and that therefore increased globalisation might decrease pollution (Porter & Van der Linde, 1995). Companies should look at increased resource productivity as a method to make itself more competitive in the global market and thus decrease pollution, which adds complexity of externality management. Firms can measure their environmental impact, and use this as a ‘litmus test’ for production efficiency. Managers should promote an innovative working environment to further production efficiency. Utilising technological developments is one method of micro-economic change that affects macro-economies.
In conclusion, it can be seen that technology and globalization affect micro and macro-economies, and that both add to the complexity of corporate business management in a global world.
Porters Five Forces Model
Diagram 1: This diagram illustrates the key components of Porter’s Five Forces Model (Maxi-Pedia, 2012).
Porter’s Five Forces Model is a framework for industry analysis and the development of competitive strategy created by Michael Porter in 1979. It is used to assess the potential profitability of a market, and thus the attractiveness for investment. The process is used by business strategists when looking at new potential markets and businesses and is used to gauge the expected returns on investment. It should be used to shape strategy to increase company competiveness.
An unattractive market place is one where these factors combine to decrease potential profitability, where it approaches pure competition. In these instances one can only expect normal profits.
This model is more concerned with microeconomics where the focus is more local to business, rather than macroeconomic factors.
Afuah, A. (2003) Redefining Firm Boundaries in the face of the Internet: Are firms really shrinking?. Academy of Management Review [online]. 28 (1), pp. 34-53.
Alesina, A. (2003) The size of Countries: Does it matter?. Journal of the European Economic Association [online]. 1 (2-3), pp. 301-316.
Bakos, Y. and Brynjolfsson, E. (2000) Bundling and Competition on the Internet. Marketing Science [online]. 19 (1)
Barney, J. (1991) Firm Resources and Sustained Competitive Advantage. Journal of Management [online]. 17 (1), pp. 99-120.
Bhagwati, J. and Srinivasan, T.N. (2002) Trade and Poverty in the Poor Countries. The American Economic Review [online]. 92 (2), pp. 180-183.
Brandenburger, A.M. and Stuart, H.W. (1996) Value-based business strategy.Journal of Economics and Management Strategy [online]. 5, pp. 5-24.
Conor, K. and Prahalad, C.K. (1996) A resource-based theory of the firm: Knowledge versus opportunism. Organisation Science [online]. 7, pp. 477-492.
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Maxi-Pedia (2012) Five Forces Model by Michael Porter. [online] Available from http://www.maxi-pedia.com/Five+Forces+model+by+Michael+Porter [Accessed 25 February 2012]
Ohmae, K. (2001) The Invisible Continent: Four Strategic Imperatives of the New Economy. : .
Porter, M.E. (1980) Competitive Strategy: Techniques for analysing industries and competitors. New York: Free Press [online].
Porter, M.E. (1995) Green and competitive: ending the stalemate. Harvard Business Review [online]. 73 (5)
Snowdon, B. and Stonehouse, G. (2006) Competitiveness in a globalised world: Michael Porter on the microeconomic foundations of the competiveness of nations, regions, and firms. Journal of International Business Studies [online]. 37 (2), pp. 163-175.
Porter, M.E. (2008) The Five Competitive Forces That Shape Strategy. Harvard Business Review [online]. 86 (1), p. 78.
The Economist (2012) The last Kodak moment. [online] January pp. ?-? Available from : http://www.economist.com/node/21542796 [Accessed 14 February 2012]
As i begin to write my fist assignments on Economic factors, both micro and macro, that are changing in this complex world i have stumbled across this great lecture from Professor Paul Krugman in October 2009, regarding the history and future of globalization. This was part of the Citigroup Foundation lecture at the Ford School of Public Policy and International Policy Centre.
In this video Krugman highlights that this is not a new phenomena, and walks us through the standard theory of comparative advantage and how this is perhaps not entirely relevant in todays world. He talks about a new Economic geography, including clustering and specialisation, and the demands that the complex value chain has on firms. He goes onto mention by products of globalization to include an integration of thought (ie all people thinking the same when faced with a crisis), and how perhaps globalisation needs policy coordination.
Have a listen to this, as i think it is well worth the hour and half.