Era of Liberalization and Globalization - Term Paper Example

 International business 1 International business – Strategy & Organizational Structure Introduction All businesses are organizations for the production and trading of goods / services in the market place in an environment of competition. Their basic objectives are to generate surplus value, sustain and grow. Irrespective of a one-man, one-location business like a newspaper kiosk or mammoth organizations employing thousands in scores of countries like the soft drink giants, the basic objectives of all businesses remain as stated. Operating a global business requires a clear understanding of the socio-political and economical factors in each of the locations, to evolve an appropriate strategy, keeping in mind the competing forces and the corporation’s vision. Strategy is implemented through relevant organizational structure. This essay discusses the historical development of international business briefly, outlines the terms ‘strategy’, ‘organization structure’ and ‘competitive advantage’, and examines the relationship between strategy and organizational structure for sustaining international competitive advantage in this era of liberalization and globalization. International trade and globalization of business In the beginning, international business was largely confined to trading - in raw materials, agricultural products and manufactured goods. Such activity was substantially expanded during the colonial era, with the active participation of the governments. In the twentieth century, it has metamorphosed into strategic global business activity of expansion for exploiting newer opportunities and sustaining competitive advantage. In the developed countries, it has become increasingly necessary for firms to expand their businesses internationally instead of confining themselves to the local market. The main reasons International business 2 for such development were economic in nature like the relative profitability of expanded operations (overseas markets may be more profitable), exploiting new opportunities (local market may be saturated), availability of raw materials and man-power at more economical costs, etc. With the active promotion of free trade by the economically developed countries, multinational companies have started adopting global business strategies, instead of just being multi-location ‘national businesses’. As stated by Schell, “Globalization should mean adoption of a global strategy” (Schell, 2006, p.4). Thus, globalization is much more than doing business in different countries; it is recognition of the need for strategically different approach to doing business, be it in localizing the product or organizing the process or managing the environment or reorganizing the structure of a company. Acquisitions, cross-border mergers, strategic alliances are all different aspects of globalization. Each of these approaches or a combination thereof is followed as a deliberate winning strategy. Strategy Porter describes strategy as ‘an internally consistent configuration of activities that distinguishes a firm from its rivals’ and goes on to add that strategy is ‘the particular combination of activities a firm adopts compared to its rivals’ (Porter, 2004, pp. xvi - xviii). Strategy is implied in three generic forms viz., cost leadership, product differentiation and focus. It is the analysis of the activities that determine the competitive advantages and leads to decisions for business expansion / diversification and therefore, in expansion into national or international operations. Igor Ansoff’s ‘growth-vector or the product-market matrix’ is a well-known analytical tool for planning business expansion (Ch. 9, Diversification and synergy, Virginia.edu). The International business 3 four cells of Ansoff’s product / market matrix identify the business expansion route as: growth through market penetration (cell 1), growth through new customers / markets (cell 2), growth through product development (cell 3), and through new products to new markets i.e., through unrelated diversification (cell 4). Product Market According to Ansoff, most companies progress through all the four stages of strategies in sequence and hence this kind of analysis is important to formulate strategy for diversification and to know the current status of development of a firm. This is also a part and parcel of the process of seeking avenues for business expansion either organically (i.e. through expansion of own activities) or inorganically (i.e. through mergers and acquisitions route). In the two concepts discussed above it is seen how the urge for business expansion finds rationale based on strategic considerations. Competitive advantage Michael Porter dwells up on the concept of analysis of ‘value chain’ i.e., the chain of activities in any business along with their relative costs and role in product differentiation, the two most important components of competitive advantage of a firm. In the ultimate analysis, International business 4 value chain is what a firm offers to a buyer and is therefore strategic to competitive positioning. He argues that a firm must undertake a deep analysis of activities (value chain) in search of synergy either within the existing lines of business or in any potential acquisition. This analysis is for the purpose of satisfying a customer need. Its focus is the customer and therefore ‘external’ rather than complementarities and conveniences within a firm which are ‘internal’. Internal factors are certainly important if only to serve the ultimate goal of sustaining competitive advantage over a long period of time (Porter, 2004, pp.33 – 61). Having briefly seen the concepts of strategic considerations on the one hand and ‘value chain’ of activities of a firm on the other, it is now appropriate to discuss the relevance of organizational structure of a firm, with particular reference to international firms. Organizational structure Activities determine strategy options, activity analysis determines options for gaining competitive advantage, and organization structure determines the way the activities of a business are carried out. It breaks down the activities into compatible functional areas like engineering, production, purchase, finance, administration etc. and formalizes reporting relationships and performance responsibilities. Most importantly, it identifies the decision making levels. Organizational structures evolved from one-firm one-location stage onwards. Such basic structure was designed for the purpose of delineating responsibilities and ensuring control, while the overall business policy and corporate goals were being handled by centralized managements. A look at the organizational structure was enough to know the division of responsibilities, lines of control, staff and line functions, etc. Even when firms expanded their business nationally, the International business 5 organizational structure remained largely unchanged since the market to which the firm was serving was homogeneous and the competition being a well understood factor. Organizational structure for international business An organizational structure that is appropriate for a nationally oriented business is not so in most cases of international business operations, because of the varying socio-political, cultural and economic conditions, which a firm operating in several countries faces. International companies face challenges and opportunities in many locations and they are heterogeneous in nature. It is also not easy for a centralized management or executive committee, situated in the parent country to fully appreciate these factors, and to decide the course of action. The very act of expanding into a global business with identified strategies, demands a more appropriate organizational structure, because the strategies are fine-tuned to sustain competitive advantage and the design of the organizational structure is an integral part of the selected strategies. A line of approach which is appropriate for a German unit may be inadequate for a unit in China, given the market and other conditions. What is appropriate for South Asia may be completely in appropriate for West Asia, given the cultural differences and the stages of economic prosperity in the two regions. In such situations, the question arises as to who is best positioned to decide on the strategy for each market? Many international firms are following the dictum that the people closest to the market are best placed to decide. This approach needs an organization structure that allows flexibility and decision making at the local level. Different approaches Different firms have been adopting different approaches while designing their International business 6 organizational structure for international operations. This is an evolution process that has been going on since about mid-90s. To consider a few examples: Xerox, the well-known document processing company, reorganized itself into five business groups – production systems, office products, document services, channels and supplies. While in the earlier period, the international operations group handled all overseas business, in the new dispensation, all local or overseas the business in a particular product or service, was organized as an independent profit center operation. This division is based on product or service offerings, the idea being intensive management of the different lines of business, with in-house competition between the different business units. Within each business unit, the organization structure largely remained traditional and the overall centralized management control remained intact. Unilever believed that while the corporate responsibility is towards building brand value and formulating policy for developing business, the people closest to each market are best suited to take decisions on developing the business. These decisions may relate to any number of important issues such as local alliances, products and pricing, promotion etc. Essentially, this approach is ‘tailoring the product or service’ to suit local market conditions, and the organizational structure is empowered local management to take decisions. (Unilever, 1996, p.2) Toyota follows geographical region wise integration of operations and localization as part of its globalization strategy. They call it as ‘globalizing management’ (Toyota, 1996, p.10). Global strategy, “…is a process of continuous revitalization of a firm’s activities that aims at solidifying its present and future competitive position” (Ali, 2006, p.172). The several International business 7 steps that are usually identified with the global strategy include, “Organizational restructuring and programs designed to push responsibility closer to customers and consumers” (Artzt, 1990). Relevance of local conditions Irrespective of the market conditions, firms continue to invest in potential and emerging markets like India, China & Brazil. While doing so, the over-riding consideration is the hugeness of the particular market and therefore its importance in the overall corporate vision. At the same time, a market like India is at once amenable to political persuasion and subject to political pressures. While foreign investments in power plants at exorbitant costs are easily pushed through with government counter guarantees, there is opposition to investments in consumer goods like soft drinks or fast food restaurants. Such market nuances can only be gauged and properly addressed by local managements. To this extent, the organizational structure should permit this freedom of action. (Hall, 2007, p.82-83) China, which is another huge market for international companies, has been following export promotion as the main plank of its economic activity. It aggressively promotes foreign direct investment in partnership with local business houses, to produce goods for export market (mainly) and for domestic consumers as well. It has been impossible for any international firm to ignore China in their strategic considerations for global competition and market share. In effect, the strategic considerations for expanding business internationally demand appropriate organizational structures; these may be different in different markets. The challenge for the top managements is to manage such diversity even while keeping focus on the corporate vision and mission. International business 8 Conclusion Business activity has traveled a long way from being small local firms to nationwide units, from being traders in primary/secondary goods to international businesses, and today to the stages of being truly global firms, operating in several countries either independently or in association with local firms. Strategic considerations have not lagged behind in this changing scenario of business activity. Contrary to national perspective, firms are focusing on region wise or country wise strategies to remain competitive on the one hand, and to acquire and maintain market share on the other. These strategies are giving rise to mergers and acquisitions or cross border alliances as a means to spread business to newer markets. Organizational structures also evolved along with the changing character of businesses. Centralized management control of all the policy and product lines is no longer the norm; international firms are reorganizing their product / service offerings in line with the socio-political and economic environments prevailing in the different locations from which they operate. Decision making has moved from the corporate headquarters to local managements, so that the policies and products of the firm are in line with the local aspirations. References Ali A J. (2006), “Globalization of business”, Haworth Press, New York. Artzt E L. (1990), “Strategies for global growth”, (Speech delivered at P&G meeting 21st May, 1990, as quoted by Abbas Ali in Globalization of business, p.174). Hall C W L. (2007), “International business: Competing in the global marketplace”, McGraw-Hill, New York. Porter ME (2004), “Competitive advantage”, Free Press, New York. Schell C. (2006), Study guide unit 1, “International business strategy: The international business environment”, Manchester Business School Worldwide, UK. Toyota Motor Corporation, (1996) “Annual report 1996”, p.10. Unilever’s organization, (1996) “London: Unilever corporate relations department”, p.2. Unknown, ‘Ch. 9 - Diversification and synergy’, Available: http://faculty.darden.virginia.edu/bourgeoisj/files/Chapter%209.html [18 October 2007] Xerox, Annual report, 1997, (as quoted by Abbas Ali in Globalization of business, p.157.) Read More