Business Strategy in Global Environment - Term Paper Example

Business Strategy In Global Environment Although, international trade was said to have shifted to a more dynamic and global landscape since the turn of the twentieth century, it was only during the 1980s when radical movements was truly felt in the world of business. This period was touted as the foundation of contemporary business management as it saw the emergence of an integrated global market driven by the concepts such as globalization, technology and the advent of the financial and capital markets. These variables threaten the traditional approaches to business management and in formulating strategies to meet the needs of an increasingly integrated market and the opportunities that came with it. Van Gelder (2003, p. 1) reminded us that the primary aim of formulating a business strategy is to achieve a particular consumer behavior. And traditional business strategies are usually product-driven or company-centric, which is why there is a need for a new strategy amid the revolutionized business landscape - one that requires a more consumer-centric approach. The current landscape, which will be discussed later in the Environment Evaluation, will justify this. The traditional American business strategy, for instance, featured short-term solutions and mass productions. We see this in the business principles advocated by Fordism, where mass-production and economic stability is achieved by paying high-wages to its workers. But the Japanese approach, which relied on high-technology to come up with high quality products, quickly caught up with the Americans and eventually beat them in the automobile industry, thereby setting up new standards. David Morris (1996) referred to this as the Cycle Time Model wherein the Japanese can bring new products to the marketplace in a matter of months – an output the Americans could take years to produce. Toyota boasted that the speed of their production process enables them to collate consumer feedback and act on the improvements immediately, hence, avoiding future losses and gaining points in consumer response. Let us first lay the foundation of formulating a global business strategy that is responsive to the elements of globalization, technology and the capital markets. The Process Essentially, strategy in business is employed so that a business can fit into an environment, then survive and prosper. Campbell et al. (2002) described this business strategy formulation as a process since the movement goes on and on due to a constantly changing environment. The generally accepted principles that guide the business strategy formulation come in several approaches. But the gist of the process involves three stages: Doing a situation analysis: both internal and external; both micro-environmental and macro-environmental. Concurrent with this assessment, objectives are set. This involves crafting vision statements (long term view of a possible future), mission statements (the role that the organization gives itself in society), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives. These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan provides the details of how to achieve these objectives. (Strategic Management) Success or failure of a business depends on whether all efforts were thoroughly exhausted in order to satisfy the elements required. There are other variations for these stages in marketing and one of the most popular was the SWOT - Strengths, Weaknesses, Opportunities, and Threats – evaluation introduced by Albert Humphrey. “SWOT analysis involves understanding and analyzing your strengths and weaknesses and identifying threats to your business as well as opportunities in the marketplace.” (Westwood, p. 78) Traditional approaches have followed these stages to the book, but the difference lies on the environment. So, finally, we will try to explore the impact of globalization, technological progress and the emergence of the financial/capital markets in the context of the situation analysis. Environment Evaluation We should remember that when we say that a company initiates a situation analysis, it means that first step in a corporate strategy where the situation and trends in a specific market is evaluated. This is very important because in this stage, a thorough study on three major variables is undertaken - the consumer, cost and the competition. The outcome will be the basis of the next step, which is setting the business objectives. So what are the situation and the trends today? Global Village A very important variable in the evaluation of the current business landscape is the globalization. On a broader perspective, “it is a term referring to the fact that trade, investment and technology links are increasing worldwide as is the number of countries which are open to the world markets.” (Welfens, p. 3) This concept has reduced the world into one community defying borders and even political differences, hence, the term “global village”. Schumpeter has advocated this idea since the early1900s. “In Schumpeter’s theory, the ability and initiative of entrepreneurs, drawing upon the discoveries and ideas of scientists and inventors, create entirely new opportunities for investment, growth and employment. The exceptional profits made from these innovations are then the decisive signal to swarms of imitators, generating bandwagon and multiplier effects throughout the system.” (Globalization, Economic Development and Inequality, p. 244) The recessions and global depressions experienced during the early part of the twentieth century were, according to Schumpeter, the combined results of the erosion of profits and the slow-down of growth in the previous wave of technology and the disruptive effect of emergent technologies. Globalization is seen to have brought people closer together with increasing possibilities of personal exchange due to technology and the Internet. It is so widely enshrined in the every fiber of modern societies that culture, economy, politics and technology offer their own respective perspectives. For instance, culturally, globalization is the label for the attempt to erode national cultures like those experienced by the European Union, while in technology, it is seen as a development process of internationalization and localization. In a sense, globalization disrupted international business through the following characteristics: First, it spurred growth of international commerce in a very fast rate. The growth of international trade accelerated to an average of one and a half times the rate of growth of world gross domestic product (GDP) between 1965 and 1990.1 “The World Bank predicts that world trade will continue to grow at this rapid rate, with a forecast of over 6 percent annual growth for the 1995-2005 period. It predicts especially fast growth in the developing countries, with East Asia leading the way with growth of over 10 percent a year.” (Van de Walle, p. 159) The trend of the integration of the national economies is the engine behind this growth and there is no sign of it slowing down. At present, the mainstream economy puts emphasis on speed of trade – speed in getting to market, speed in production and speed in acquisition. 2 Together with technology it had driven market changes in periods unimaginable decades past. People can now talk and close a deal real time without any consideration of distance and the period of time. Secondly, globalization increased the flow of capital. Due to trade agreements and issues of international competitiveness, high-income countries have relaxed policies on capital outflows while developing countries have introduced attractive economic packages and policies to attract investors. As a result, private investments and capital were poured to developing countries in a series of waves. Total private capital flows reached about $306 billion in 1997 in real terms when they peaked. 3 According to David Dollar et al. (2001), these mostly financed mergers and acquisitions due to the wave of privatizations of public companies in emerging economies. In the middle of this, investment banking also flourished. Globalization and technology helped this sector get rid of the market inefficiencies that hindered its growth. Indeed, in the past two decades, the market has improved enormously in size, liquidity, and diversity. 4 Grosse, writing in his book, Future of Global Financial Services, stressed that the investment banks work heavily through electronic means, with far fewer physical offices than their commercial banking counterparts. Hence, they are more capable to rapidly handle assets and liabilities and financial information and transactions. (p. 27) Technology enabled investment bankers to have less direct exposure to client. For instance, the advent of multi-purpose accounts in the US, such as Financial Management Account, empower clients to transact “via telephone or Internet to buy and sell securities as well as pay bills and hold funds in interest bearing accounts.” (Grosse, p. 27) All in all, banking professionalism, client relationship and security were greatly improved to the advantage of all the participants. Third, international trade agreements, such as the WTO and the GATT were established. These organizations have become powerful bodies in the quest to a free world trade and deregulation. Perhaps one incident that highlighted the role of WTO is the globalization of China, a country of 1.26 billion people. The success of the country’s opening up to the world, upon its accession to the world trade body, represented the ideals of the international free trade. “Over the past two decades, the size of the Chinese economy has sextupled by riding on a hyper growth rate of around nine percent per annum… The share of export of goods and services in China’s Gross Domestic Product has risen from six percent to over 20 percent in 2000… The rising economic power and market potential also have made China a gigantic magnet for international capital.” (Auch, p. 1) Fourth, globalization revolutionized the global financial systems. Financial systems reforms were undertaken around the world primarily due to issues of international competitiveness required in a free market as well as the changing landscape of a particular economy. The development of a country’s financial system in relation with the rest of the world has become imperative. We are reminded that “financial markets and intermediaries today are globally linked through a vast international telecommunications network, so that trading of securities and the transfer of payments go on virtually around the clock.” (Merton et al. p. 3) The trend is for financial systems to be integrated with world markets, including the opening of national financial markets to non-residents. For instance, in Japan foreign exchange regulations were abolished and interest rate control was lifted so that capital could flow in and out of the country more easily and swiftly.5 “Indeed, one can think of today’s financial system as a global network that can be freely accessed by any government or firm that has standardized hardware, software, and trained personnel necessary to ‘hook up’ to it.” (Bodie et al. p. 12) The end result is, governments with less developed financial systems can learn from examples of, say, the US or Germany’s financial infrastructure as well as their historical paths in order to establish their own according to their needs and resources. Finally, globalization shattered the distance and borders in the exchange of goods and services and, in the process, introduced outsourcing. Daniel Gardner (2004, p. 45) points out to the fact that companies realize that as markets become increasingly global, the tactics associated with the discipline are even more relevant, hence the advent of outsourcing. One of these tactics is the lean manufacturing principle where companies improved on their tools by taking advantage of cheap labor or cheap materials from emerging economies. To illustrate: Historically, a significant portion of manufacturing by US companies has been performed outside of the United States… In recent years, providers of information technology services (ITO) and business process functions (BPO) have followed suit and invested in service delivery centers in ‘offshore’ locations such as India and the Philippines. (Delaney, p. 421) Foreign governments like Brazil, China, Philippines and those in Eastern Europe have encouraged investors by offering incentives, less hostile economic policies and other perks. Technology It is no longer a novel situation when people talk about “internet time”. Today, exchange is done in a matter of minutes even if the participants happen to be at the different corners of the globe. And the market change happen in the span of months instead of years, which was the trend back then. Business logistics were also severely streamlined while competition became more fierce putting startup businesses and big players on a level playing field. All this happened because of technology. It is not, therefore, surprising to find a good number of business strategists incorporating technology in their organization’s strategy. Frederick Betz ( p. 441) explained that the fundamental point is that “a formal set of planning procedures for technology can improve the integration of technology with business strategy. The purpose of the technology planning process is to integrate technical change with business development.” The importance of technology in the world business can be illustrated on how it became a primary asset in most profitable commercial enterprise. “Technology and other forms of intangible assets or intellectual property serve as the keystone of many large and small businesses all over the world” (Watkins, p. 1), achieving the same importance held by the traditional business assets such as bricks and mortar, manufacturing facilities, rolling stock and physical inventories. 6 Technology also created opportunities, specifically for small entrepreneurs as individuals or small organizations can now start technology-driven companies with a relatively smaller amount of capital. “The rapid evolution of technology fosters a growth rate that will often generate cash flow sufficient to cover capital expansion and growth requirements internally.” (Watkins, p. 2) The Internet and all the start-up businesses therein, which have mushroomed just this past few years, have contributed to the dynamism of competition in international trade. In the whole business equation or in the capitalist process, the stage of production and where distribution and consumption have to meet are crucial. Here, technology plays a vital part. It reduced the roles of the middlemen, maximizing profit for companies and also reducing costs and hence, prices for the consumers. In a nutshell, this is the current international trade landscape that a business strategist must contend with in order to formulate a strategy that is both responsive and effective. As a result of the globalization and all the other elements that come with it, businesses are now faced with new challenges in order to survive. In our analysis of the current business landscape, we have explored the environment of the consumers, factors that could influence cost as well as the competition. All the relevant information leads us back to one concept and that is to go global. Global Consumer Culture The desire for consumer goods and lifestyles specifically Western is one manifestation of the global market. “Transnational consumer goods and services corporations including McDonald’s, Disney, and Coca-Cola are becoming increasingly prominent throughout the world. With faster and more affordable transportation, international tourists populate ever more remote regions of the world. Stars of music, world cuisine, and world fashions are becoming increasingly prevalent.” (Global Perspectives in Cross-Cultural and Cross-National Consumer Research, p. 2) This phenomenon has been popularly dubbed as the global consumer culture. If we look closely, we see an ironic blend of homogenization and diversity. This is the reason why the global consumer required a brand new strategy in marketing. Let us look at one example: There is a dilemma in implementing standardized marketing policy in the manufacture of branded goods. Ideally, in this system, same products with the same brand names and the same price, advertising and distribution policies are offered in different countries. The problems come in the income levels, preferences and marketing infrastructure, which unfortunately vary from country to country. The abovementioned situation underscores the need for business strategies to be more market-centric in all aspect of global business strategy formulation. Alison Auch even mentioned that China’s remarkable growth is a result of a market-oriented reform that has progressed in tandem with the opening of the economy to foreign trade and investment. (p. 1) Whatever is the nature of an organization, if it plans to be successful it must adopt this approach in order not be swallowed in the din of international trade. Market-oriented or consumer-centric approach is flexible, responsive as well as realistic in the midst of the chaotic and cutthroat global trade. The forever shifting movements in the global trade, which feature innovations with every blink of an eye, requires strategy that is innovative as well. Johnston et al. expounded for us what this signifies: Strategy innovation proposes that customers and the dynamics of the marketplace are the center of the business universe, and that wise companies will consider setting their orbits around them. If customers need call centers to receive the service they need, companies should consider changing their business model to create them. If Third World markets need household products at lower prices, should explore innovative ways of providing them. (p. 32) Conclusion What this paper seeks to explain is simple. There is no need to completely abolish traditionalist approaches in doing business amid the global environment. Indeed, most companies are anchored on its principles for stability. But to ignore any changes is as good setting a mousetrap to ones business. Innovation, as explained beforehand, is a very important factor in the whole equation. If the development of a business strategy is a process, then let us consider the innovation of a business strategy a stage in the scheme of its evolution. Our point is that, business strategy should be a convergence of time proven business principles, new innovative approaches and technology. We can no longer make a good product and hang a sign on the door, asking people to come and buy. In this age, there are hundreds or so in your neighborhood who have done the same, as we speak. Globalization, offers businesses unlimited opportunities, but it also opened up an entire Pandora’s box of challenges. The tools are available, so innovation and creativity might just as well let a business stand out. Bibliography Auch, Alison. Chinas Economic Globalization Through the WTO. Ashgate Publishing, Ltd., 2003 Betz, Frederick. Managing Technological Innovation: Competitive Advantage from Change. 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