Globalisation and recent trends in Business | ISC Class 12 Business Studies Notes

This note covers the meaning, nature, opportunities and threats of globalisation and how it has changed the way business is conducted; the meaning, nature and importance of e-business to the buyer and the seller; the concept of outsourcing and the advantages and disadvantages of outsourcing to the outsourcer, the outsourced function and the service provider; the types of outsourcing (BPO, KPO and LPO); and the online means of conducting business (B2C, C2C, B2B, Intra-B, B2G and G2B) with examples.

What is globalisation and what is its nature?

Globalisation means treating the entire world as one single market, so that goods, services, capital, technology and people move across national borders with fewer restrictions than before.

Countries that earlier pursued self-reliance have become increasingly dependent on one another for procuring and supplying goods and services, because of increased cross-border trade and investment.

Manufacturing and trade beyond the boundaries of one's own country is called international business, and it is this cross-border activity, scaled up across the whole world, that produces globalisation.

The nature of globalisation is that it is broader than mere trade. It covers merchandise exports and imports, trade in services (tourism, transportation, banking, communication), licensing and franchising, and foreign investment (direct and portfolio).

The fundamental reason nations and firms engage in globalisation is that no country can produce everything equally well or cheaply: unequal distribution of natural resources and differing productivity levels mean each country specialises in what it produces efficiently and trades for the rest.

The World Trade Organisation and the reforms carried out by governments of different countries have been major contributory factors to this increased interaction.

Definition: Globalisation. Globalisation implies treating the entire world as one market, with free cross-border movement of goods, services, capital, technology, information and people.

What opportunities does globalisation offer business?

Globalisation offers benefits to both countries and firms. To countries, it brings earning of foreign exchange, which can later be used to pay for imports of capital goods, technology, petroleum products, fertilisers and pharmaceuticals; more efficient use of resources, because each country produces what it can produce more efficiently and trades the surplus; improved growth prospects and employment potential, since producing only for the domestic market severely restricts a country's scale of production; and an increased standard of living, because consumers gain access to goods and services produced anywhere in the world.

To firms, globalisation opens prospects for higher profits by selling in markets where prices are higher; increased capacity utilisation, since surplus production capacity built for the domestic market can be used to fulfil overseas orders, bringing economies of scale; prospects for growth once domestic demand saturates; a way out of intense domestic competition; and an improved business vision, as internationalisation forces a firm to diversify and gain strategic advantages.

Singapore, South Korea and China are given as countries that embarked on the strategy of "export and flourish" and became star performers on the world map.

What threats and challenges does globalisation pose for business?

Globalisation also exposes business to risks that do not arise in purely domestic trade. Because buyers and sellers in international transactions come from different countries, differences in language, social customs and business practices make it harder for them to interact and finalise deals.

Other stakeholders, such as employees, suppliers and shareholders, also belong to different nations, which makes decision-making more complex than when all stakeholders share one country's value system.

Mobility of factors of production such as labour and capital is generally less across countries than within one country, because of legal restrictions and differences in socio-cultural and economic conditions.

Customers across markets are heterogeneous in tastes, fashions, languages and preferences, which complicates product design. Business systems, laws, tariffs, taxation and import quotas differ widely from country to country and often discriminate against foreign products.

Political systems and risks differ across nations and can change without warning, and the use of different currencies, whose exchange rate keeps fluctuating, adds to pricing and foreign-exchange risk.

Together, these factors mean that managing international business is considerably more complex than managing domestic business.

How has globalisation changed the way business is conducted?

Globalisation has been closely linked to two other strong trends shaping business: digitisation and outsourcing. The development of faster communication, technology and infrastructure has brought nations closer, so that countries once cut off by geographical distance now interact routinely.

India, for instance, had to agree to liberalise its economic policies after approaching the International Monetary Fund in 1991 to tide over a balance of payment crisis, and since then has moved steadily towards integrating with the world economy; many multinational corporations have entered the Indian market while many Indian companies have taken their products abroad.

The internet has been central to this transformation. Because cyberspace has no geographical boundaries, globalisation would have been considerably restricted in scope and speed without it: a seller gains access to the global market, and a buyer gains the freedom to choose products from almost anywhere in the world.

Firms today enter international markets not just through exports but through contract manufacturing, licensing, franchising and foreign direct investment, all of which are forms of globalisation transforming how business is conducted.

What is e-business and how does it differ from e-commerce?

e-business may be defined as the conduct of industry, trade and commerce using computer networks. Firms use more private and secure networks, in addition to the public internet, for the efficient management of their internal functions.

Though the terms e-business and e-commerce are often used interchangeably, e-business is the broader term: it comprises all business transactions and functions conducted electronically, including the more popular set of transactions called e-commerce. e-commerce covers a firm's interactions with its customers and suppliers over the internet, whereas e-business also includes other electronically conducted functions such as production, inventory management, product development, accounting, finance and human resource management.

Definition: e-Business. e-business is the conduct of industry, trade and commerce using computer networks; it is a wider term than e-commerce because it also covers internal functions conducted electronically, not only buying and selling.

The scope of e-business can be seen in terms of the direction in which electronic transactions flow: a firm's interactions with other businesses (B2B commerce), its interactions with its customers (B2C commerce), and its own internal processes (Intra-B commerce).

What is the nature of e-business?

The nature of e-business shows in the features that set it apart from traditional business. It is conducted over computer networks, the public internet as well as private networks, so orders, invoices and payments move as electronic records and the business is largely paperless.

It is not bound by time or place: an online store can take orders round the clock and reach buyers anywhere, which gives even a small firm a global reach. It is also relatively easy and inexpensive to set up, since it needs no large physical premises.

At the same time, e-business is largely impersonal. Buyer and seller rarely meet, so the personal touch of a shop counter is missing, and the anonymity of the parties makes trust and security of transactions a central concern. It also depends on the technology capability of both the firm and its customers.

Why is e-business important to the buyer and the seller?

To the business organisation (seller), e-commerce expands the marketplace to national and international markets, gradually lowers the cost of operations, facilitates a "pull" supply chain in which production responds to actual demand, gives competitive advantage over rivals, allows proper time management, and lets small firms co-exist with big firms in a win-win manner.

Because e-business is relatively easy and inexpensive to start, even a firm with limited investment but good networking contacts can do substantial business, since "networked individuals and firms are more efficient than networthed individuals".

To consumers and society (the buyer), e-commerce brings flexibility of time and place, since shopping is possible 24 hours a day, 7 days a week; competitive prices, discounts and waive-offs; more options, choices and customised products; quick and timely delivery, especially for digitised products; wider employment potential; e-auctions and e-tenders; direct interaction with consumers; and wider outreach.

Dell's "build your own PC" and Levi's tailored-jeans service, offering nearly 1.5 million size and style combinations for about $55 with delivery in two to three weeks, are examples of mass customisation made possible for buyers by e-commerce.

Indian business has moved into this electronic mode too. Maruti Udyog, an Indian automobile manufacturer, carries out much of its sourcing of materials and components from suppliers in a paperless fashion over computer networks, a practical instance of the benefits that B2B commerce brings to the seller through lower operating costs and faster response. Likewise, sharekhan.com, described as India's largest online trading firm, lets Indian investors buy and sell shares and other financial instruments over the internet instead of through traditional, paper-based broking, bringing the buyer flexibility, speed and wider choice described above.

What is outsourcing and who are the parties involved?

Outsourcing is the practice of a firm contracting out a part of its manufacturing, research and development, or business processes, instead of doing everything itself.

Firms have been moving away from the "do it all by yourself" mindset and increasingly contracting out business processes, whether or not they are information-technology enabled.

Contract manufacturing, also known as outsourcing, is one well-established form of this: an international firm enters into a contract with one or a few local manufacturers in a foreign country to get components or goods produced to its specifications, and the goods so produced are delivered for use in the firm's final products or sold under its own brand name.

Three parties are generally involved in an outsourcing arrangement: the outsourcer, the firm that transfers a function or process out of its own organisation; the outsourced function, the specific work, process or activity that is handed over; and the service provider, the external firm (often in another country) that actually performs the outsourced work.

The Godrej group, an Indian company, manufacturing soap under contract for multinationals, including Dettol soap for Reckitt and Colman, illustrates a local Indian manufacturer acting as a service provider for an international outsourcer, making fuller use of its own idle soap-manufacturing capacity. This Indian example shows the local firm gaining a ready market for spare capacity, while the international outsourcer gets large-scale production without investing in its own factory abroad.

Definition: Outsourcing. Outsourcing is the contracting out of a business function, process or activity by one firm (the outsourcer) to another firm (the service provider), which then performs the outsourced work on the outsourcer's behalf.

Advantages of outsourcing

Outsourcing permits the firm that outsources (the outsourcer) to get goods or processes carried out on a large scale without investing in its own production facilities abroad, with little or no investment risk in the foreign country, and often at lower cost where the local producer has lower material and labour costs.

For the local firm or service provider, an outsourcing contract provides a ready market for idle production capacity, ensures fuller utilisation of its facilities, and gives it the opportunity to get involved in international business and gain any incentives available to export firms.

Limitations and disadvantages of outsourcing

For the outsourcer, local firms might not adhere to the required production design and quality standards, causing serious quality problems, and critical or confidential processes handed to an outside party carry a risk of loss of control and leakage of sensitive information.

For the service provider, the arrangement means losing control over the manufacturing or process design, since the work must be done strictly to the outsourcer's specifications, and the firm is not free to sell the contracted output as it wishes; it must sell to the outsourcer at predetermined prices, which can mean lower profit if open-market prices for similar goods are higher.

What are the advantages and disadvantages for the outsourced function?

The third party is the outsourced function itself, together with the people who used to perform it inside the outsourcer. For the function, the change can be an advantage: it passes to a specialist for whom this work is the core business, so it may receive better skills, technology and attention than it did as a side activity, and staff who move with the work may find wider career paths in that specialist firm.

The disadvantages fall mainly on the people and on coordination. Employees who did the work in-house may lose their jobs or face insecurity and changed terms of service, and once the function sits outside the firm it is harder to coordinate with other departments, to change at short notice and to keep its information confidential.

What are the types of outsourcing: BPO, KPO and LPO?

Business Process Outsourcing (BPO) is the contracting out of routine, rule-based back-office business processes, such as customer support, payroll processing, data entry and call-centre operations, to an external service provider so that the outsourcer can concentrate on its core activities.

A company's own call centre, handling toll-free customer queries and complaints round the clock, is an example of the kind of process commonly outsourced under BPO.

Knowledge Process Outsourcing (KPO) goes a step further and involves contracting out higher-end, knowledge-based work that needs specialised domain expertise and analytical judgement rather than routine processing, such as research, data analytics, engineering design and financial analysis, to a service provider with that expertise.

Business Legal Process Outsourcing (LPO) is a specific form of knowledge-based outsourcing in which legal support work, such as document review, legal research, contract drafting and patent filing support, is contracted out to a service provider with legal expertise, usually at a lower cost than retaining the same work in-house.

What are the online means of conducting business?

Viewed from the perspective of the parties involved, e-business can be classified by who transacts with whom.

In B2B commerce (business-to-business), both parties are business firms: an automobile factory, for example, uses a network of computers to place orders with component suppliers, monitor production and delivery, and make payments, while also cultivating more than one vendor for each component to reduce dependence on a single supplier.

In B2C commerce (business-to-consumer), a business firm transacts with its individual customers, as in online shopping where customers browse, select and pay for goods over the internet, for example on an online shopping mall such as indiatimes.com.

In C2C commerce (consumer-to-consumer), both the originating and the ultimate party are consumers; this suits goods for which there is no established market mechanism, such as selling used books or clothes, and eBay (where consumers sell to other consumers, with sellers and buyers able to rate one another) and PayPal (which holds the buyer's payment until goods are shipped and accepted) are given as examples that make such transactions more secure.

In Intra-B commerce, the parties are all from within one firm; computer networks (intranets) let a firm's marketing department interact constantly with its production department for customised production, and let employees work through recruitment, training and reporting electronically, sometimes without having to come to the office at all.

B2G (business-to-government) and G2B (government-to-business) transactions involve a business and a government department or agency: a business filing statutory returns and paying dues through an official government portal is an example of B2G, while a government department granting a licence, permit or approval to a business through an electronic form is an example of G2B.

The figure shows a central website box connected to two customer boxes.

One customer places an advertisement on the website because they want to sell products; the other customer wants to buy products. The arrows show the selling customer receiving money and the buying customer receiving products, both routed through the website.

The figure shows a manufacturing firm at the centre connected by two-way arrows to several supplier/vendor firms on one side (sending components, receiving orders and payments) and to dealers or distributors on the other side (sending products, receiving customer specifications), all links running through a computer network.

Going beyond the syllabus

The Information Technology Act, 2000 is the law behind much of India's shift to paperless, electronic business.

Its Section 4 gives legal recognition to electronic records, Section 5 to digital signatures, Section 6 allows filing of forms and receipt or payment of money with government agencies in electronic form, and Section 7 permits electronic retention of records that the law otherwise requires to be kept for a specified period.

These provisions underpin the online filing, e-tendering and electronic licensing that make B2G and G2B transactions possible in practice, and have encouraged government departments and regulatory authorities in India to move increasingly towards electronic filing of returns, reports and approvals instead of relying only on paper-based procedures.

In India, this move towards a paperless mode of doing business is also visible in private industry. Maruti Udyog, for example, carries out much of its sourcing of materials and components in a paperless fashion over computer networks with its suppliers, which is a practical instance of the B2B commerce discussed above. Likewise, sharekhan.com is described as India's largest online trading firm, allowing investors to buy and sell shares and other financial instruments over the internet rather than through traditional, paper-based broking.

Glossary

• Globalisation: treating the entire world as one market, with free cross-border movement of goods, services, capital, technology and people.
• International business: manufacturing and trade that takes place beyond the boundaries of one's own country.
• e-business: the conduct of industry, trade and commerce using computer networks, broader than e-commerce.
• e-commerce: a firm's interactions with its customers and suppliers for buying and selling conducted over the internet.
• Outsourcing: contracting out a business function or process by one firm (the outsourcer) to another firm (the service provider).
• Outsourcer: the firm that transfers a function or process out of its own organisation to another firm.
• Service provider: the external firm that performs the outsourced work on the outsourcer's behalf.
• BPO: Business Process Outsourcing; contracting out routine back-office processes such as customer support and payroll.
• KPO: Knowledge Process Outsourcing; contracting out knowledge-based work needing domain expertise and judgement.
• LPO: Business Legal Process Outsourcing; contracting out legal support work such as document review and legal research.
• B2B commerce: electronic transactions between one business firm and another, such as a factory and its component suppliers.
• B2C commerce: electronic transactions between a business firm and its individual customers, as in online shopping.
• C2C commerce: electronic transactions originating from one consumer and ending with another consumer, such as on eBay.
• Intra-B commerce: electronic transactions and communication among departments and persons within one firm, using an intranet.
• B2G and G2B: electronic transactions between a business and a government department, such as filing returns or receiving a licence online.
• Contract manufacturing: having a local manufacturer in a foreign country produce goods or components to a firm's specifications; also known as outsourcing.

Common errors and misconceptions

• Misconception: e-business and e-commerce mean exactly the same thing. Correct: e-business is the broader term, covering internal functions such as finance and human resources conducted electronically, while e-commerce is limited to transactions with customers and suppliers.
• Misconception: globalisation only means exporting goods. Correct: globalisation covers merchandise trade, trade in services, licensing and franchising, and foreign investment, not exports alone.
• Misconception: outsourcing has only two parties, the firm and the contractor. Correct: it is useful to separate the outsourcer (who hands work out), the outsourced function (the work itself) and the service provider (who performs it).
• Misconception: BPO and KPO are the same thing. Correct: BPO covers routine, rule-based processes, while KPO covers higher-end work requiring specialised domain expertise and judgement.
• Misconception: C2C commerce has no risk because no business is involved. Correct: anonymity between unknown buyers and sellers is itself a risk, which is why mechanisms such as seller ratings on eBay and payment intermediaries such as PayPal have developed.
• Misconception: e-business has no limitations because it is high-tech. Correct: it suffers from low personal touch, a digital divide among users, and higher risk from anonymity, impersonation and leakage of confidential data.

Exam-style questions with model answers

Q1. State the meaning of globalisation and give one example of a country whose growth benefited from it. [2 marks]

1. Globalisation means treating the entire world as one market, with goods, services, capital, technology and people moving across borders with fewer restrictions than before.
2. South Korea is an example of a country that adopted an export-oriented strategy and became a star performer on the world map as a result.

Q2. State the meaning of e-business and how it differs from e-commerce. [2 marks]

1. e-business is the conduct of industry, trade and commerce using computer networks, and is broader than e-commerce because it also covers internal functions such as production and finance.
2. e-commerce, by contrast, is limited to a firm's buying and selling transactions with its customers and suppliers over the internet.

Q3. Explain any three differences between traditional business and e-business. [4 marks]

1. Ease of formation: traditional business involves several procedural requirements and is difficult to set up, whereas e-business is comparatively simple to start because it needs no such formalities.
2. Physical presence: traditional business requires a physical location such as a shop or office, whereas e-business does not require any physical presence, since transactions take place over computer networks.
3. Cost of setting up: traditional business has a high cost of setting up because physical facilities must be created, whereas e-business has a low cost since no physical facilities are needed.
4. Response time: traditional business takes a long time to respond to customer or internal requirements, whereas e-business responds almost instantaneously because information flows at the click of a mouse.

Q4. Distinguish between B2B commerce and C2C commerce, with one example of each. [4 marks]

1. In B2B commerce, both parties are business firms, for example an automobile factory placing orders with its component suppliers over a computer network.
2. In C2C commerce, both parties are individual consumers, for example a person selling used books to another consumer through a website such as eBay.
3. B2B commerce usually involves repeated, ongoing transactions between known firms, whereas C2C commerce is often a one-off sale of goods for which there is no established market, such as second-hand items.
4. Because C2C buyers and sellers are largely unknown to one another, platforms add safeguards such as seller ratings or a payment intermediary like PayPal, which are not usually needed in B2B dealings.

Q5. Evaluate whether outsourcing is advantageous for the local firm acting as the service provider, or whether the disadvantages outweigh the benefits. [6 marks]

1. Outsourcing gives the local service-provider firm a ready market for any idle production capacity it holds, allowing fuller utilisation of its existing facilities without having to find its own customers for that output.
2. It provides a steady source of revenue through the contract, and, as the Godrej group's soap-manufacturing arrangement for multinationals shows, can make fuller use of a firm's own idle production capacity.
3. Working on contract for an international outsourcer can also give the local firm exposure to international standards, management guidance and, where goods are exported, access to any incentives available to export firms.
4. Against this, the local firm loses control over the manufacturing or process design, since the work must follow the outsourcer's exact specifications rather than the firm's own judgement.
5. The local firm is also not free to sell the contracted output on the open market; it must sell to the outsourcer at a predetermined price, which can mean lower profit if market prices for similar goods are higher.
6. On balance, outsourcing is advantageous for a local firm with spare capacity seeking steady work and experience, but the firm sacrifices independence and some bargaining power over price, so the benefit depends on how favourable the specific contract terms are.

Q6. State any two threats that globalisation poses to a firm entering international business. [2 marks]

1. Differences in currency and fluctuating exchange rates make it harder to fix stable prices and create a risk of foreign-exchange loss.
2. Differing business regulations, tariffs and import quotas across countries, and political risks that can change the rules of doing business, make international operations less predictable than domestic ones.

Q7. Identify the parties in an outsourcing arrangement in which a garment manufacturer hands its accounting and payroll processing to a service provider in another country, and explain one advantage to each party. [5 marks]

1. The Indian software company is the outsourcer, since it transfers a function out of its own organisation.
2. Customer-support operations are the outsourced function, the specific work that has been handed over.
3. The agency in the other country is the service provider, since it performs the outsourced work on the company's behalf.
4. The advantage to the outsourcer is that it can concentrate its own resources on its core activities, such as software development, while a specialist handles routine customer queries, often at a lower cost.
5. The advantage to the service provider is that the contract gives it a ready source of revenue and work, helping it build capacity, employ staff and gain experience that can be used to win further contracts.

Q8. Explain the concept of KPO and distinguish it from BPO. [4 marks]

1. Knowledge Process Outsourcing (KPO) involves contracting out high-end, knowledge-based work, such as research, analytics or specialised design, to a service provider with domain expertise and the judgement to analyse and interpret information, not merely process it.
2. Business Process Outsourcing (BPO) involves contracting out routine, rule-based back-office processes, such as data entry, payroll or customer-care calls, where tasks follow set procedures.
3. BPO therefore mainly needs trained staff following defined scripts or procedures, while KPO needs qualified specialists capable of independent analysis and decision-making.
4. Because KPO work demands higher expertise, it is generally regarded as a more value-adding and higher-paying form of outsourcing than routine BPO work.

Key takeaways

• Globalisation means treating the world as one market, with goods, services, capital, technology and people moving across borders more freely.
• Globalisation brings opportunities such as foreign exchange earnings, efficient use of resources, growth, employment and higher profits, but also threats from currency, political and regulatory differences across countries.
• e-business is broader than e-commerce: it covers production, finance, inventory and human resource functions conducted electronically, not just buying and selling.
• e-business benefits sellers through lower costs, wider markets and competitive advantage, and benefits buyers through flexibility, choice, customisation and competitive prices.
• Outsourcing has three parties: the outsourcer who hands work out, the outsourced function or process, and the service provider who performs it.
• Outsourcing benefits the outsourcer through lower investment and cost, and the service provider through fuller use of its own capacity and steady revenue, but each party also carries its own risks.
• BPO covers routine back-office processes, KPO covers knowledge-based work needing expertise and judgement, and LPO covers outsourced legal support work.
• Online means of doing business include B2B, B2C, C2C, Intra-B, B2G and G2B, each named for the two parties transacting electronically.

Test yourself

What is the key difference between e-business and e-commerce?

e-business is the wider term, covering all electronically conducted business functions, including finance, production and human resources, while e-commerce is limited to buying and selling transactions with customers and suppliers.

Name the three parties usually identified in an outsourcing arrangement.

The outsourcer, who hands a function out; the outsourced function, the specific work transferred; and the service provider, who performs that work for the outsourcer.

Give one example each of a B2B and a C2C transaction.

An automobile factory ordering components electronically from its suppliers is B2B; a person selling used books to another individual over the internet, as on eBay, is C2C.

What kind of work is typically contracted out under LPO?

Legal support work, such as document review, legal research and contract drafting, contracted out to a service provider with legal expertise.

Why does the internet make globalisation easier?

Cyberspace has no geographical boundaries, so it gives sellers access to the global market and gives buyers the freedom to choose products from almost anywhere, speeding up globalisation.

State one benefit of e-business to the business organisation (seller).

It expands the marketplace to national and international customers while gradually lowering the cost of operations.

What distinguishes BPO from KPO?

BPO involves routine, rule-based back-office processes, while KPO involves knowledge-based work requiring domain expertise and analytical judgement.