Globalization

What happens when economies integrate into a single larger market through the forces of globalization? Understanding some of the repercussions of market integration can help firms to compete more successfully in a global marketplace.

When markets integrate, the number of customers for a product or service increases. However, a larger market can also support more competitors. Firms that have competed only domestically and which are competing in integrated global markets can expect the intensity of competition to increase.

In a larger market, the demand curve which a firm faces changes. The demand curve shifts, but most importantly, the slope of the demand curve decreases from the direct effect of the increase in market size. The flatter demand curve means that producers can gain more market share from cutting price.

The flatter demand curve, also has implications for operating profit. Smaller firms which operate in the upper part of the demand curve will experience a decrease in demand and new, lower-cost cutoff for profitability. If a firm has too high a cost level, it will not be able to be profitable with the lower-cost cutoff and will be forced to exit the industry. However, firms which have lower cost structures will be able to adapt to the increased competition by lowering their price and markup and gain market share. In short, there are both winners and losers from market integration.

Before competing in global markets, firms should assess their cost structure and how it will be impacted by the shift in the demand curve. Where possible, a firm’s cost structure should be improved by seeking greater efficiencies in operations. Lean production can help drive such efficiencies and enable cost structure reductions which can help a firm to compete more profitably in global markets. This is a good strategic use of Lean thinking and can help a firm to weather the forces of market integration.

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