BUSINESS ORGANIZATIONS IN A GLOBAL CONTEXT
Business Organizations in a Global Context
Increasing Competition in business has induced industries to expand their operations globally. Liberalization of laws related to foreign direct investments in developing countries has further facilitated transferring of business operations across boundaries. However, shifting of business operations to other countries needs an in depth knowledge about their cultural, social, economic, political and legal dimensions for conducting business functions smoothly. Firms contemplating globalization of their activities often hire business consultants to advice them about the business environment of other countries for easy transitions.
The case discussed in this paper concerns the operations of a similar consultancy firm that is designing a brochure to demonstrate its knowledge and expertise in globalization of business operations. The author who is a member of a research team in the consultancy firm has been assigned certain tasks for the brochure which are described below
Organizations operating on a global scale are confronted with business conditions typical of the country as well as the type of industry and the sector to which it belongs. Every country has a different set of regulations for industries operating in different sectors such as consumer items, Power and Energy Sectors, Health Care, IT, construction, Tourism etc. Companies that set up their operations in these sectors are required to comply with these regulations failing which they may be penalized or their licenses may be annulled. The following section discusses key differences between multinationals’ operations depending on the sectors they belong to
Cultural differences – Cultural differences are more applicable to industries producing consumer items as preferences differ according to cultural affiliations. Tastes of individuals differ in different countries and industries manufacturing consumer items have to be aware of these differences and accommodate them in their products for successful acceptance.( Kogut, B. & Singh, H., 1988, 2.) has addressed the importance of considering the cultural orientation of a country in deciding the entry mode of a multinational. In the power, energy or healthcare sector cultural differences are not significant, as the products or services are quality driven rather than individual preferences. Industries in construction and tourism must include the cultural orientations of different countries in their operations to gain an access to into their culture. The promotional strategies in these sectors must also take into account the cultural differences in their advertisements.
Technological differences – Industries like healthcare products, power and energy sector and IT may be more technology intensive compared to construction and industries manufacturing consumer items. Service sector organizations like tourism and hospitality are not technology intensive but use internet enabled platforms facilitated by Information technology for efficient operations. Mostly Multinationals introduce new technologies
Difference in human resource competencies – Industries in different sectors need different competencies, industries in power and healthcare and IT sector may need technically skilled human resources whereas organizations in tourism and hospitality sectors may need human capital with management competencies like communication skills and diversity management skills.
Differences in legal regulations – Food, beverages and pharmaceutical items have to meet FDA standards stipulated in all countries. Other industries also have sector specific requirements regarding employment of local labor, equity of wages, anti discrimination laws and engaging child labor. Some countries like China endorse formation of unions within organizations. There are different acts related to subcontracting applicable to different sectors.
Differences in Economic Conditions – Usually consumer items and service sectors face a stiff competition from both local firms and other multinationals. Unless there is a product differentiation strategy employed, industries must resort to aggressive promotional policies to win a market for its product. However in power sector and healthcare equipments markets are still not saturated and companies can play the market forces on their terms and conditions to the extent of an oligopolistic position.
Firms operating on a Global scale have to execute responsibility in four main areas namely, diversity, ethics, sustainability and citizenship (Mendenhall, M.E, et al, 2012, 244).
Diversity – Firms that set up their operations in destinations other than the parent country have to manage with a diverse work force. Therefore they have the responsibility of promoting equality between races, minorities and genders. A research conducted on diversity management in different sectors using diagnostic tools to assess diversity needs revealed that global managers must incorporate diversity management responsibilities in their existing policies when operating globally (Ozbilgin, M. & Tatli, A., 2008, 184).
Ethical Responsibility – The Global expansion of firms across borders has also increased the responsibility of presenting an ethical commitment by them. This entails promoting an honest dealing with all stakeholders by protecting their interests and not exploiting or misusing the resources placed at their disposal. A global firm is expected to promote a culture of ethical disposition at its workplace and taking care to discourage all transgression of moral behavior such as bullying, bribery, exploitation etc. The case of Primark child labor exposed by BBC panorama shows the ethical apathy of multinationals towards the working conditions of suppliers based in developing countries (Hwa Lee, M.M., 2011).
Sustainability – Organizations establishing business set ups in other countries must exhibit a conscientious approach towards using the resources carefully so as not to deplete them. They should consider using recycled options and should not use such methods that compromise the ecology and biodiversity of a country through pollution, deforestation and over use.
Corporate Citizenship – Industries should initiate steps towards improving conditions of living of poorer and less privileged sections of society in which they operate by taking up welfare activities under CSR. Multinationals using the resources of other countries must demonstrate their responsibility towards the people and the government by adopting policies that contribute towards improving the status of the inhabitants.
A discretion displayed in fulfilling responsibilities of global corporate impacts their images and reputations favorably, contributing to the profitability of the organization.
Evaluation of Strategies employed by Global firms
In order to survive the competition in the global market, multinationals employ different strategies to gain entry into a country, build a niche for itself and stay ahead of the competition. The effectiveness of the various strategies practiced to accomplish the above mentioned objectives depends upon the economic, political, legal and cultural environment of a country. An attempt at evaluating the strategies of the firms is made in the following section:
Product Differentiation – In the consumer goods sector where there is stiff competition between the firms, the companies apply the strategy for product differentiation. Product differentiation is the process of focusing on the exceptional features of a product that differentiates it from similar products and provides it with uniqueness. This strategy is effective when there is a variety of similar product satisfying same demands and the producer wants to grab a market share for its product by attracting a section of customers interested in the unique feature.
Diversification- The process of adding more related products to its existing range is known as diversification. A firm specializing in manufacturing televisions may add music systems and cell phones to its range. This strategy is effective when the management utilizes its existing facilities to spread its manufacturing costs over a range of related products that do not necessitate extra investment. This strategy is also effective when a product has reached its saturation or peak sales or many competitors have come into the market and the company foresees a decline in its revenue unless it introduces something new in the market where competition is comparatively lower.
Low Cost Leadership – The strategy of selling economic range of products to cater to the demands of low income group is quite effective in winning a market share. This strategy is profitable only if the company has introduced innovations in product or process technology for cost effectiveness. Chinese products are cheaper because they have introduced cost effectiveness in labor costs. Similarly using cheaper substitutes in raw material can be used for implementing the low cost leadership strategy.
Strategic alliances – Joint Ventures established with the aim of using the core competencies of the partner to its advantage is effective when the partner already has developed a market for its brand or quality products or has an expertise in technology. Collaboration with the firm may mean operating in an already established market or using its technological knowhow to upgrade its system.
Innovation – The Strategy of introduction of new products and processes using technological innovations is used by producers to create a market for its product. This strategy is very effective if the product is accepted by the customers as it has the advantage of enjoying a monopolistic market until a new substitute is introduced.
The decision to expand its operations to new countries and the choice of the destination depends on the functioning of its National Economy. The national economy of India which registers a growth of about 8% and shows an impressive GDP is a promising destination for many organizations planning to expand their operations globally. One of such organizations is the GE Healthcare, USA, which is planning to take is drug and healthcare equipments manufacturing operations to India. European markets have reached the saturation point for pharmaceutical items and therefore GE’s plan appears to be a wise one taking into consideration India’s growing economy. India with its large population and a fast growing market for healthcare is not likely to reach saturation soon. GE had engaged Indian Healthcare experts in exploring the viability of expanding its operations in India ( Prokesch, S., 2009, 105). This fact has been a crucial factor in inducing GE to take the decision to transfer its healthcare operations to India. Also the Indian technocrats’ proficiency in IT and software Engineering has influenced GE’s decision to set up its operations in India and take advantage of the domestic human capital’s skills which proves to be more cost effective than moving the expatriates to the new destination and train them to understand local factors.
India has introduced liberalization of its economic policies to invite foreign direct investments. But in order to provide employment to the local people as well as to upgrade technology, India has raised the slogan of ‘Make in India’. According to a report published in Business Standard (2015), GE has indigenously manufactured a CT scanner in its Bengaluru plant with the help of local R&D experts. This is an example of how countries formulate policies to influence the operations of the organizations and protect local resources. However the economic environment of India and its economic policies have induced global organizations to take advantage of these policies for increasing their sales.
Presentation on the Impact of Global factors and Current Issues on International Business
Global Integration is a term used to explain the process of using the combined performance of its diverse functions spread across the world to deliver products and value worldwide (Palmisano, S.J., 2006.127). The age of liberalization has forced firms to consider themselves as a combination of specialized functions such as purchase, production, R&D, sales, marketing etc. For each of these elements, the global integration of activities is forcing companies to decide the site for a function, the work to be done and whether they want it performed indigenously or by an outside partner.
Implications of Global integration on business
Global integration of business creates both opportunities and challenges for Organizations which are presented below
Benefits
Using the opportunities available in different countries for its own advantage
Countries have their own strength and weaknesses in their resources such competent HR in certain areas, availability of raw material and innovative technologies. Organizations can base their functions in a country depending on their needs
It frees existing capital for other investments
Out sourcing resources which are cost effective makes more funds available for investing elsewhere. Palmisano (2006, 133) illustrates the example of Bharti Enterprises in India which emerged as the country’s largest private-sector telecom provider by leveraging the expertise of external partners.
Enhanced Standards of Living
Global integration has resulted in employment for more people across the world and provided better income which has contributed in improving the standard of living.
Better Global participation of SMEs
Smaller enterprises who have become partners of Multinationals through subcontracting and supply chain components have won an increased participation in the global economy improving competitiveness and technological upgradation.
Challenges
Increased Competition
Emergence of so many players each aiming for cost effectiveness will increase competition and threaten existence of weaker organizations
Loss of Jobs
Outsourcing can mean loss of jobs in countries from which business operations are shifted
Securing a competent work force
The new business methods will need a supply of trained work force with specialized managerial skills who can deal with the new management challenges.
Worldwide regulation of intellectual properties
Global integration will lead to piracy of ideas and innovations which is going to be increasingly difficult to be curtailed.
Effect of Global Economy on Business
Business performance of multinationals across the world has been affected greatly by the economic conditions of the global market. While liberalization of international trade policies have provided an impetus to international business and productivity, Global recession has resulted in the elimination of many business operations as well. The effect of Global economy on international business is outlined below
Increased Competition- Liberalization of market regulations have resulted in many companies across the world to enter market for same product thereby increasing competition
More innovations – In an attempt to stay ahead of competition, companies have introduced more innovations in products and processes to build a market share for its value added products.
Increased employment – Liberalization of entry policies have resulted in inviting many foreign enterprises in developing countries and resulted in increased employment of the local people.
Better performance – In an effort to win a competitive edge companies have started giving attention towards improving business as well as social performance.
Improved Standards of living – More employment, access to global brands and display of a greater social conscience has improved the living conditions of people in developing countries.
Just as a booming global economy can boost the above elements an economic depression can cause an inverse effect. The impact of recession on US based SMEs have been investigated by Ghosh, J., et al (2012, 9).
Impact of information and communication Technologies on Globalization
Innovations in IT and communications have facilitated the Globalization of business transactions to a large extent. Operations that needed actual presences of people can be done over the internet presently and simplified business transactions like banking, shopping, supplying and collecting information over the world in a matter of minutes. This has facilitated the internationalization of business as now both customers and suppliers of products and services can connect virtually and close a deal without meeting personally. Using internet enabled interfaces, global organizations can reach a range of customers, suppliers and other stakeholders easily and in lesser time. India’s recent development in IT and software competencies has attracted many multinationals to transfer their operations here (Harrison, A. 2013, 64)
Impact of International Trade on domestic products and Services
Globalization has affected domestic products and services both positively and negatively. While immigration of technologies has also upgraded the technological expertise of domestic industries in the wake of the competition generated by multinationals, sub contracting with the latter has enhanced the use of their resources. Also internet enabled commerce has induced the domestic manufacturers and service providers to gain access to a global market, thus increasing their turnover. It has also employed the domestic service industries in a variety of operations introduced because of Globalization. Borrowing-financing activity has become global too and domestic businesses can utilize this factor for financing their growth and expansion through global capital (Cavusgil, S.T., 1993.85)
However there are some detrimental effects of globalization on local businesses as handicrafts based businesses are losing market against cheaper machine produced alternatives. Also the domestic industries may have to suffer increased pricing pressure and may have to lower their margins which hamper their plans for expansion. This can be avoided only if domestic industries are ready for the changing trends and incorporate them in their businesses.
Handouts for Audience
A print out of the factors describing the implications of Globalization represented in activity 3 may be distributed as handouts for the audience to support the presentation.
A report on the Global business environment and business strategies
The current Global Environment
Organizations operate in a global environment now where there is an increased competition, availability of resources and more awareness across the world regarding business activities and responsibilities that necessitates large as well as small organizations to formulate strategies for growth and retention of market shares. The introduction of IT enabled platforms for business has expanded the reach of business. The global market is subject to economic fluctuations and requires a strategy to withstand them.
The Strategies for expansion
Business strategies to gain access to the global network include joint ventures, acquisitions and establishment of new units in the developing countries.
Another strategy that is being promoted by business experts is the global integration of operations and outsourcing of facilities.
More and more multinationals are using internet enabled platforms to gain access to more customers as well as to perform business transactions as a strategy to expand their operations worldwide.
Business Strategies differ according to the changing global atmosphere and depending on the goals and core competencies of the organizations. Firms may use strategic alliances like mergers and collaborations to realize their visions.
The business environment of India and issues faced by multinationals
Liberalization of trade policies for FDI in India has made it a favorable destination for products and service organizations considering expansion. India has also shown considerable skills in software and IT field and is being preferred for companies like UPS and GE interested in getting logistics support for their operations. Moreover the Indian market has witnessed a growth in the last decades and registered an improvement in its GDP which has also made it favorable for multinationals. The political climate, being democratic in nature is also supportive of inviting firms for growth of trade and capital as compared to China.
However, India’s local manufacturers have raised a campaign promoting local products in a bid to save the domestic companies from being wiped out due to a stiff competition. Local companies are trying to use the cultural affiliations of the country to advertise their products. In this situation multinationals have to use a strategy of promotion that can compete with the local issues.
References
Cavusgil, S.T., 1993. Globalization of markets and its impact on domestic institutions, Indiana Journal of Global Legal Studies, pp.83-99
Ghosh, J., Lucy, D., and Lepage, F., (2012) Understanding the Impact of the Global Economic Crisis on U.S. SMEs' Trade Exports to BRIC; Collected Faculty Scholarship; Paper 90; Retrieved from http://scholar.dominican.edu/all-faculty/90
Harrison, A., 2013. Business environment in a global context, Oxford University Press
Hwa Lee, M.M., 2011. Reacting to bad publicity over Sweat shop issue: The case of Primark, Journal of International Management https://journalofinternationalmanagement, wordpress.com/
Kogut, B. and Singh, H., 1988. The effect of national culture on the choice of entry mode, Journal of international business studies, pp.411-432.
Mendenhall, M.E. and Osland, J., 2012 Global leadership: Research, practice, and development. Routledge
Morrison, J., 2006. The international business environment: global and local marketplaces in a changing world. Palgrave Macmillan.
Ozbilgin, M. and Tatli, A., 2008; Global diversity management: An evidence based approach. Palgrave Macmillan.
Palmisano, S.J., 2006. The globally integrated enterprise; FOREIGN AFFAIRS-NEW YORK-, 85(3), p.127
Prokesch, S., 2009, How GE teaches teams to lead change. Harvard business review, 87(1), pp.99-106.
