Phase Model of Globalization

The intention of this paper is to give an outline of the stages in the phase model of globalisation. It will talk about each of the four stages and some associated advantages and disadvantages with each. Also this paper will be looking at companies within Australia that represent each of the stages in the phase model.

Introduction

Globalisation is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology. (StateUniversityofNewYork)Globalisation is a defining word of our age and the way in which we live; globalisation affects people, companies, their workforce and consumers. It affects all aspects, not just of the corporate world, but transactional and cultural relationships generally and so affects how we live and how we interact, no matter where we live (Stanley J. Paliwoda 2009). Globalisation has been accelerated by falling trade barriers, the spread of free trade and trade harmonisation in an electronic age, bringing a reduction in the bureaucracy surrounding international trade and increased speed to the way in which communications relay changes anywhere in the world (Stanley J. Paliwoda 2009). There are four stages in the phase model of globalisation they are Exporting, Cooperative contracts, Strategic alliances and Wholly owned affiliates (McWilliams 2010). In the following paper all four stages will be analysed and using Australian companies who operate at each stage the risks and major disadvantages will be identified and outlined.

Body

With today’s more and more globalised world the yearly value of global trade in the form of exports and imports is expected to exceed $12 trillion. In most recent years world trade has consistently grown at a more rapid rate than world productivity (BusinessVictoria 2008). The term “export” is derived from the conceptual meaning as to ship the goods and services out of the port of a country, in summary it means selling domestically produced products to customers in foreign countries (McWilliams 2010) the main risks with exporting are high financial costs, ever increasing trade barriers, and greater political, legal and cultural complexity. An example of an Australian company that uses exporting is the iconic Australian swimwear brand Speedo who export their items to countries such as UK, Japan, France, Italy and Germany (Speedo 2010), also many other well known Australian fashion designers such as Lisa Ho, sass & bide and Ksubi (AustralianGovernment 2010) have increased the exportation of their designs and lines internationally over the past decade.

The next phase in the model is known as cooperative contracts and it comprises of two commonly used types; Licensing and Franchising. Licensing is an agreement in which a domestic company, the licensor, receives royalty payments for allowing another company, the licensee, to produce the licensor’s product, sell its service or use its brand name in a specified foreign market (McWilliams 2010). The use of licensing in industry can open up gaps for risks to occur, such as the licensor giving up control over the quality of the product or the service sold by the foreign licensee also licensees can eventually become competitors, especially when a licensing agreement includes access to important technology or proprietary knowledge. In Australia Telstra is a main company which is using licensee stores, the Telstra Licensed shops (Telstra 2010) can be located in all major cities and shopping centres. A business or company also has the option of franchising; this is a collection of networked firms in which the manufacturer or marketer of a product or service, the franchisor, licences the entire business to another person or organisation, the franchisee (McWilliams 2010). Compared to licensing its risks are more numerous; at the end of the franchise term, the franchisor is not obliged to renew the franchise, in which case the business and its goodwill revert to the franchisor. Some franchises have restrictions in place which means you are limited where you may operate and/or promote your business; franchisees generally have to operate the business according to the franchisor’s operations manual. In Australia we have many well known franchised companies one being The Coffee Club which has 270 stores across Australia, New Zealand and Thailand (Reed 2010)and the popular chain of Healthy Habits which now has 32 stores nationally (Reed 2010)

The Strategic alliance phase is an agreement in which companies combine key resources, costs, risk, technology and people (McWilliams 2010). Strategic alliances are becoming more and more prominent in the global economy, more than 20,000 corporate alliances have been formed worldwide over the past two years, and the number of alliances in the USA has grown by 25 percent each year since 1987 (Elmuti and Kathawala 2001). There are four types of strategic alliances; joint ventures, equity strategic alliance, non-equity strategic alliance, and global strategic alliances. The most common form of strategic alliance is joint ventures which involve two or more companies or individuals in a partnership for a particular purpose (Bambi Faivre Walters 2008-2010). The more valuable the complementary assets held by a local firm, the more likely a foreign firm will choose a joint venture as a means by which to enter a host market (Chiao, Lo et al. 2006). Some major disadvantages with this stage are; the overcoming of language and cultural barriers, clash of egos and company cultures, dealing with conflicting objectives, strategies, corporate values, and ethical standards and the time consuming for managers in terms of communication, trust-building, and coordination costs (Ellay 2009). A recent joint venture was the merger of Vodaphone and 3 mobile who now fall under the joint company of VHA. VHA markets its products and services under the Vodafone brand, but retains exclusive rights to use the 3 brand in Australia (Gedda 2009)

Wholly owned affiliates is the final phase in the model, these companies are foreign offices, facilities and manufacturing plants that are 100% owned by the parent company (McWilliams 2010). There is a distinct primary advantage to this which is that the parent company receives all of the profits and has complete control over the foreign facilities, but the biggest disadvantage to the use of this phase in business is the expense of building new operations or buying existing businesses, this is phase is also commonly referred to as build or buy. In situations of non-firm-specific assets, joint ventures are superior to wholly-owned subsidiaries, which are highly exposed to environmental uncertainty. In situations involving firm-specific assets, wholly-owned subsidiaries may reduce the risks of delay and opportunistic behaviour by partners in uncertain environment (Chiao, Lo et al. 2006). Mitsui E&P Australia Pty Ltd (“MEPAU”) is an example of Australian company that is wholly owned affiliates. It is a 100% affiliated company of Mitsui & Co., Ltd and Mitsui’s main investments are largely in the Australian and New Zealand energy sector (Mitsui 2010). While the payoff can be enormous if wholly owned affiliates succeed, the losses can be immense if they fail, because the parent company assumes all of the risk (McWilliams 2010)

Conclusion

In summary, all of the four stages in the phase model of globalisation have immense impact on how businesses and companies evolve through time. Some businesses may choose not to follow the phase model step by step, they can opt to skip stages on the way; there are also a majority of businesses choosing not to follow this phase model at all (McWilliams 2010). At first, globalisation was about taking advantage of minor expenses in offshore destinations, but now thriving globalisers recognise the additional major advantages to this and are taking on these advantages, where unsuccessful organisations are not. Each stage or phase of the model inherent its own levels of risks; but to make sure there is successful implementation of these phases requires conscientious planning, and also requires continuing management, and strong dedication from the business and organisation leaders.