Write a note on Porter’s view of Globalization.
Porter’s View of Globalization.
Porter’s view of globalization is based on firm’s competitive advantage on worldwide basis. Whether a firm enjoys competitive advantage or not, is based on its value chain. Every firm, whether domestic or global, has to perform a number of discrete activities. These activities are known as “value activities”, which constitute its value chain. Porter has classified various activities of a firm into two groups:
- Primary activities.
- Support activities.
Primary activities are those that are directly involved in the creation of product or service. Following are five primary activities:
- Inbound Logistics: This consists of activities related to receiving, storing and disseminating various inputs to the products.
- Operations: This consists of activities that transform the inputs into the products and services of the firm.
- Outbound Logistics: This consists of activities that get the product from the firm to customer e.g. transportation, warehousing, order processing.
- Marketing and Sales: This consists of activities related to advertising, promotion, direct sales, pricing etc.
- Service: This consists of after-sales service such as repairs, supply of parts, installation, adjustment etc.
Support activities are the activities which facilitate the creation of the product or service and its transfer to the customer. Following are four support activities:
- Procurement: It consists of procuring usable and consumable assets like purchase of delivery trucks, purchase of machinery and spare parts.
- Technology Development: This is related to know how and the tools or equipment’s related to the exercise of that know how.
- Human Resource Management: This is related to requirements, selection, training, evaluating and compensating the human resources working with the company.
- Firm Infrastructure: This is related to planning, finance, accounting, legal relations etc.
All these activities have associated costs as well as buyer value. A firm is profitable if the collective value of performing these activities exceeds the costs of performing those activities. Firms gain their competitive advantage from constantly innovating and upgrading every aspect of the value chain and by figuring out new ways to conduct each of these activities. Value chain concept needs the notion of competitive scope which is breadth of activities performed by the firm in an industry.
Following are four basic dimensions of competitive scope:
- Segment Scope: Segment scope refers to the range of scope the firm serves. It includes product varieties, types of customers etc.
- Industry Scope: Industry scope means the range of related industries the firm competes in with a coordinated strategy.
- Vertical Scope: Vertical scope means the activities that are performed by the firm versus supplier and channels.
- Geographical Scope: Geographical scope means the geographic regions in which the firm operates with coordinated strategy.
Globalization is an issue of geographic scope. A firm that competes internationally has to decide how to spread the activities in the value chain among various countries. According to Porter, globalization has two dimensions:
- Configuration of firms.
Configuration: is related to the location in the world, where each activity in the value chain has to be performed including how many places. A firm has to decide should the value chain be dispersed across the countries or should it be concentrated in one location? In other words, where and in how many locations should each activity in the value chain be performed?
Coordination refers to how similar activities performed in different countries are coordinated with each-other. Coordination is rendered more complex because of the differences in languages and cultures, differences in the five competitive forces in the different parts of the world and distance involved in the delivery of goods and services.
Industries tend to globalize when the benefits of coordination and configuration globally exceed the costs of doing so. In general, industries that require a concentrated configuration of activities and have high coordination needs among the various elements of the value chain are global industries.
Such industries are characterized by largeness of scale, capital intensity, a high ratio of exports from a home base and careful coordination of advertising and research and development strategies worldwide. Examples of such industries are commercial air-frames, automobiles, semi-conductors, earth-moving equipment and electrical distribution equipment.
Industries that require a dispersed configuration of activities and have low coordination needs among the various elements of the value chain are “multi-domestic” industries. Examples of such industries are consumer packages goods and food processing.