Advantages and Disadvantages of Global Company's Strategy - Term Paper Example

? Contemporary Issues in Business and Management Contents Contents 2 Introduction 3 Importance of Global Strategy 4 Advantages of Global Strategy 6 Disadvantages of Global Strategy 7 References 9 Introduction The last half of the decade has seen barriers to international trade and a host of firms adapting global strategies for achieving competitive advantage (Ethier, 1998). However, it has also been seen that benefits related to globalisation are more beneficial to a few organisations and less beneficial to others. To successfully create a global strategy and sustainable competitive advantage, it is very important to understand the nature of the industries working in a global environment as well as the dynamics of global competition (Head, Ries and Ruckman, 1998). A global industry can be described as an industry where all firms are competing within the global market in order to sustain and grow. A global strategy is driven by various factors. These can be cost drivers, competitive drivers, customer drivers and government drivers (Sakarya, Eckman and Hyllegard, 2006). We live in a global economy where the time required to cross continents has reduced to a bare minimum. With the help of advantage technologies, it is now possible to initiate conversations within no time. Because of these changes, there has been a shift in the business practices of organisations and more and more organisations are adopting a global strategy for growth and sustainable development (Aharoni and Ramamurti, 2011). A global strategy is the plan of an organisation to compete in these new realities of global markets. For example, in food manufacturing, organisations like Nestle, Cadbury and Kellogg’s have created marketing networks and global distribution based on marketing of their leading brands that are well recognised globally. Key aspects of a global strategy include: The global market should be treated as the domestic market. Establishment of a global marketing mix, differentiating between the national and regional differences such as language, culture and taste. Creating a global distribution and production system, for example establishing factories globally manufacturing goods for respective local regions (Vrontis, Thrassou, and Lamprianou, 2009). Concentrating on the most successful and most recognised products and brands. Since the global market is huge, a substantial amount of profit can be achieved by using economies of scale in terms of production, distribution and marketing. Rather than producing a large number of products, it will be more fruitful to manufacture those products and services which are well recognised and accepted by the customers round the world. Importance of Global Strategy The importance of global strategy can be understood from the flowing perspectives: Perspective of a Company With the international expansion, opportunity increases in terms of new sales and higher revenues. Sometimes, it might also happen that the profitability in the home country has reduced due to various unavoidable conditions. In such cases, revenues from the international market prove to be a saviour. At times which are turbulent, they might become the saviour in terms of profit. For example, poor growth and low profits in the domestic market in China were one of the main reasons that forced the Chinese company, TCL, to formulate a strategy with the aim of international growth and expansion. It has continued this global expansion strategy with new factories, new offices overseas and acquisitions with the aim of developing the positioning of its market particularly in the two markets for electronics goods, the European Union and the USA. Apart from opportunities such as new sales and profit expansion, global strategies can take place because of various other reasons. Oil companies, for example, look for expansion with the objective of securing their resources, a strategy which can also be termed as resource seeking (Bellin and Pham, 2007). Industries such as clothing look for global expansion with the objective of taking advantage of the low costs of labour and readily available cheap labour in particular countries. This global strategy is known as efficiency seeking. Some companies follow the global strategies of acquisition of foreign companies in order to enhance and grow their position in the market compared to the competitors, a global strategy known as strategic asset seeking. Perspective of a Customer With the establishment of international trade and global competition within industries, there has been a constant price war. The prices of services and goods are very volatile, and it gives positive opportunities for the buyers and customers of these goods and services. Global competition has increased the buyer power and with the help of growing economies, both the organisation and customers are gaining from the business (Nagel and Cilliers, 1990). For example, the multinational organisation Nike collects its footwear products from countries where the cost of labour is low, e.g. Vietnam and Philippines. Thus, as it helps in employment opportunities in third world countries and developing nations, it increases the profit margin of the global firm. In addition, many consumers prefer purchasing services and products that possess a global image. For example, branded shirts of Manchester United and Disney cartoon characters can be found anywhere around the world. Thus, utilising the well-known brands, the companies are able to make a global impression. International Organisations and Governmental Bodies The recent economies and political environments have shifted the global thinking towards an objective of bringing down barriers to the world trade and providing sufficient protection to some industries and countries around the world. Organisations such as the World Bank have been established with the objective of acting as facilitators of world trade. The World Bank is an international organisation that governs and monitors policies such as trade negotiations and transfers. It helps in the smooth functioning of multinational organisations and their various operations around the globe Life Cycle Global strategy also has its advantages in terms of product life cycle. An organisation can strategise its product life cycle by introducing older products into markets which are new, and saving the launching of a product's most advanced and recent version for markets which are well-developed. For example, a laptop manufacturing organisation will be able to sell its older-model laptops, particularly leftover and unsold stock, to a less-developed market after it launches a new laptop model. The older model may be outdated when compared to current European and American standards, but in case of a less developed market, these features are still functioning and used by them. This is an essential global strategy to get rid of the old but expensive stocks and is best applied in case of electronic and expensive products. Advantages of Global Strategy The benefits of global strategies can be clearly understood in terms of the following strategic management factors. Economies of Scale It is the extra cost savings that are achieved when a higher production volume results in lower unit costs. For example, steel costs per unit are low in case of Arcelor Mittal as the size of the mill is increased. Similarly, with the help of increased global production volume, the cost of unit products reduces and this helps the organisation in gaining cost advantage over their competitors (Hennart, 2005). Global Brand Recognition The benefit of a global strategy is that it helps in building brand recognition. Many multinational companies have established brands all over the world. In many cases, even though a particular brand loses some amount of brand value and recognition in the home country, it has been seen that they are still popular and valuable in the other countries (Clarke III, 2005). Global Customer Satisfaction Customers are going multinational and brand specific as they are demanding similar brands in different locations (P. Miles, G. Miles and Cannon, 2012). With the help of global strategies, an organisation can help its customers get similar brand experience wherever they go. Global production and distribution activities are followed by a majority of multinational companies in order to convert their products and services into global brands. Lowest Labour and Input Costs A global strategy helps in switching and choosing manufacturers and negotiating with them because of the availability of a large number of suppliers. For example, a computer manufacturer will manufacture the sophisticated parts in highly developed countries but it has the option of switching the assembling of the computer parts to those countries having lower wages, such as Thailand and Malaysia. This strategy has been adopted by many global organisations such as Nike (Elmuti and Kathawala, 2001). Recovery of Allied Costs Allied costs such as research and development and other development costs can be recovered by using a global strategy of marketing and distribution. New drugs, new models and various other forms of research costing billions of dollars are spent by various organisations. The larger distribution base these organisations will have, the more contribution will come in terms of distribution costs. For example, Airbus Jumbo A380 was launched in 2008 and it was estimated to cost US$ 10 billion, which was more than the developmental costs calculated. To combat this, the airplane was opened to many new routes, thus compensating the extra budget. Disadvantages of Global Strategy The costs of a global strategy can sometimes be more than the benefits and advantages. Below are a few risks and disadvantages of a global strategy: Macroeconomic Risk The major disadvantage of a global strategy is that the same products and services do not fit into all the markets. Different markets have different tastes and a few markets are sensitive to pricing and sometimes packaging. Apart from these, a few of the company’s products are more popular in particular countries than others. Strategising the product placement for each country is very daunting, and miscalculations or even a slight error can cost the organisation a fortune (Liow Ibrahim and Huang, 2006). Apart from this, there are extra costs of adapting the products and services to match the tastes and expectations of the respective country. Operational Risk There are operational risks associated with global strategies. There can be sudden and unavoidable changes in corporation laws or employment laws in the country where the organisation is marketing their products and services (Manuj and Mentzer, 2009). This could damage the operation of the organisation. Likewise, in case of wars and natural disasters, employees can go on a strike, and this can negatively affect the operations of an organisation in that particular country (Christopher et al., 2011). Transport and Logistics Costs In cases where manufacturing takes place in one country and needs to be transported to different countries for assembly and final packaging, the transportation costs can be high (Zeng and Rossetti, 2003). Particularly in case of heavy metals such as steel bars, the manufacturing costs are very high. In these cases, new manufacturing plants cannot be established because of certain reasons such as high expenditure, volatile conditions in the supplier country etc. Communications and Management Coordination Costs In practice, workers and managers from different countries need to be consulted often, and should be made aware of the situations and the issues of the countries they are working in (Holm, 2006). There are other extra costs such as tax variations and legal issues which need the attention of the organisation as well as the employees working there. This also means that the senior management team of the organisation needs to visit the countries for consultations, expert advice and handling of the important issues, which most of the time cannot be executed through video conferencing and other online techniques. This increases the overall cost of communication and puts pressure on the price budget. Apart from this, standardisation of services and products needs to be communicated to the different countries. In each case monitoring and controlling the results is also essential (Vrontis, Thrassou and Lamprianou, 2009). This takes a lot of time, money and important work hours from managers and employees who are already stressed about other important jobs. Issues in Emerging Economics Capital markets are insufficient in case of emerging and developing economies. Cost of capital is on the higher side, there is lack of proper information and venture capital is almost non-existent (Enderwick, 2009). Because of unavailability of goods and qualified educational institutions, most of the labour market is devoid of training and organisations have to bear extra costs in training these workers (Nilsson and Ellstrom, 2012). Lack of communication structure also results in creating difficulties in terms of brand building. Sometimes government obligations and strict rules and regulations in these emerging economies also restrict the smooth flow of the global strategies (Okpara, 2011). References Aharoni, Y. and Ramamurti, R., 2011. The evolution of multinationals. Research in Global Strategic Management, 15, pp. 113–135. Bellin, J. B. and Pham, C.T., 2007. Global expansion: balancing a uniform performance culture with local conditions. Strategy & Leadership, 35(6), pp. 44–50. Christopher, M., Mena, C., Khan, O. and Yurt, O., 2011. Approaches to managing global sourcing risk. Emerald Management Reviews, 16(2) pp. 67–81. Clarke III, I., 2005. 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