TNCs in the Food Industry - Coursework Example

Explain the structure and operation of TNCs in the Food Industry Table of Contents Explain the structure and operation of TNCs in the Food Industry 1Table of Contents 2 Introduction 3 Overview of the Food Industry 4 Value Chain Analysis 5 Producers 6 Transformers 6 Distributors 6 Consumers 7 Recent Consumer Trends 7 Conclusion 10 References 11 Introduction Food constitutes the most basic necessity of human beings and in this aspect makes the food industry the largest industry segment of the world. The global food industry is valued at approximately $ 4 Trillion and employs approximately 62 percent of the total working population of the world (Kannan, Sivakumar & Gilani, 2010). Food industry in itself is a vast industry segment including firms engaged in the manufacture, distribution and retailing of food products. The twenty first century has seen the emergence of packaged and ready to eat food items whose units are found mushrooming around the world. The present study would analyse the structure and operations of the Transnational Corporations in the food industry. According to the United Nations Economic and Social Council a Transnational Corporation is defined as an “enterprises which control assets – factories, mines, sales offices and the like in two or more nations across the globe (Jenkins, p.1). Overview of the Food Industry The global food industry comprises farming, production, distribution and retail sectors. The industry is expected to grow at 3.5 percent growth on a compounded basis and is expected to be valued at approximately 7 Trillion US dollars by 2014. Traditionally, Europe has the largest share in this mammoth industry segment but presently Asian giants like India and China are also emerging as potential markets in the food industry (IMAP, 2010, p.4). The figure below represents the composition of the food industry and the percentage of individuals employed by each of the units. It is very clear from the figure that non-residential catering industry employs the highest number of individuals followed by retailing industry. Figure 1: Components of the Food Industry (Source: Kannan, Sivakumar & Gilani, 2010) Value Chain Analysis Value chain is s strategic framework that analyses the competitive advantage of a firm or industry and suggests recommendation on the ways to sustain competitive advantage (Porter, 1998, p.59). Figure 2: Value Chain of the Food Industry (Source: United Nations Industrial Development Organization, 2009, p.3) There are two types of value chains that are prevalent in the industry, namely the producer driven value chain and the buyer driven value chain. Producer driven value chains are employed by large multinationals including transnational companies and the product manufacturers who assume leadership and play a major role in coordinating with other market players. On the contrary, buyer driven chains are characterised by the presence of large market players who play the most influential role in managing different decentralised units (United Nations Industrial Development Organization, 2009, p.3). In case of food and beverage industry there are four main categories of market players namely, 1. Producers 2. Transformers 3. Distributors 4. Consumers (Kannan, Sivakumar & Gilani, 2010) Producers Producers in the food industry constitute of farmers, fishermen etc who use natural resources. The product in this stage is said to be in the input stage where raw materials are used to make the finished product (Kannan, Sivakumar & Gilani, 2010). Transformers Transformers constitute of manufacturers who make the final finished products. This stage is also referred as the transformation stage where raw food materials are converted to complete or partially finished products. The firms involved in this stage generally resort to large scale purchases from different vendors (Kannan, Sivakumar & Gilani, 2010). Distributors Distributors are entities who distribute or supply partially or completely finished food products to different retailers. Sometimes the products are further processed in this stage which is also referred to as the stage of distribution. Large scale exports and imports also occur in this stage (Kannan, Sivakumar & Gilani, 2010). Consumers Consumers constitute the final entities who consume the food products. The product in this stage is referred to be in the consumption stage. The purchase occurs through different modes ranging from semi finished foods to ready-to-eat foodstuffs. In this stage, only minor modifications in the product may be carried out which includes household activities like cooking and processing (Kannan, Sivakumar & Gilani, 2010). Recent Consumer Trends Busy work life of individuals owing to competition and stress at the workplace has led to the popularity of packaged food items and ready to cook meals. Demand has also risen for healthier foods as consumers are becoming more conscious about their health. This can be inferred from the fact that in 2008 meat consumption in UK dipped by about 24 percent. Consumers are giving importance to certification by different agencies. The fast food industry grew by about 29% in 2003 in UK alone (Kannan, Sivakumar & Gilani, 2010). Structure and Operation of TNCs in the Food Industry The twenty first century has been referred as the age of globalisation. Globalisation has resulted in organizations and firms breaching geographical boundaries to capture new markets. The growth of trans-national Corporation in the food industry has been often linked with the rise of globalisation. Large multinationals like Pepsi, McDonalds have emerged as the new face of the food industry. Globalisation has led to changes in food habits of individuals as they are exposed to cuisines of various nations. The fast paced life in the twenty first century has also compounded the growth of TNC’s in the food industry by offering ready to eat meals (Gereffi & Christian, 2008, p.2). The power and influence of transnational firms lie in their ability to integrate both vertically and horizontally into the value chains of the food industry, as well as in their strengths to influence political decisions and access to capital. Horizontal integration in the food industry has resulted in transnational firms becoming the leaders in the value chain. Transnational firms are presently engaged in all the stages of the value chain right from production to retail. This has significantly reduced the powers of the producers and the suppliers. Transnational firms also have the advantage of control over markets across geographic and political boundaries, which provide them with greater bargaining powers in the value chain. Vertical integration occurs when a firm controls and owns multiple stages in the value chain. Access to finance and expertise has compounded the vertical integration of transnational firms in the value chain. An example in this regard is the case of Dole which owns most of the plantations in Philippines apart from the supply chain and retailing facilities (Food and Agriculture Organization of the United Nations, 2003, p.120-122). The value chain analysis of the food industry also reveals that at every segment of the value chain large transnational firms have occupied key positions. For example in case of French fries the major market players like Mc Donald’s and Wal-Mart procure raw materials from transnational firms like Mc Cain foods and JR Simplot who in turn procure raw materials from large firms, these firms again procure goods like pesticides from firms like Bayer Crop Science which is again a transnational player. The success of the transnational firms in this regard has been attributed to their skills and expertise apart from other advantages like economies of scale, access to markets and capital. They are also known to have better marketing skills which impart a competitive advantage to the transnational firms (Gereffi & Christian, 2008, p.6). Another aspect of transnational firms lies in their ability to integrate the global and local value chain of the industry. Figure 3: Integration of Local and Global Value Chains (Source: Gereffi & Christian, 2008, p.7). The figure shows the integration of global and local value chains in the food industry. Central to this aspect is the presence of transnational firms like KFC and Mc Donalds who have successfully integrated every aspect of the value chain. An example in this regard is the case of KFC which is the largest procurer of chicken. Large scale operations and presence at critical points in the value chain has resulted in KFC dominating the suppliers of chicken across the world. Access to the mass popularity of global markets and large scale operations has further fuelled their influence in the value chains. The integration of value chains has also led to the amalgamation of food culture of different nations. Focus has now shifted towards combining nutritious food from Asia and adopting packaging and other related aspects from the Western nations (Gereffi & Christian, 2008, p.7, 8). Conclusion The analysis conducted for the present study reveals the huge scope of the food industry and the power and influence of trans-national corporations that operate in it. The major reasons for this could be attributed to their access to key markets apart from high expertise in the industry. Another major reason for success of TNC’s lies in its strategy of ‘thinking globally and acting locally’. Under this strategy, a firm resorts to international expansion (thinking globally) and takes care of the beliefs and sentiments of the local customers (Pleyers, 2010, p.202-203).A shining example in this case is that of Mc Donald’s in India, where the firms do not sell beef which is its most important product. The global market leader first introduced beef products in India which was met with widespread opposition from the masses making it unpopular, hence it had to close shop and re enter the market. Next time it took care of the local sentiments of the masses which made the company popular (Smith & Taylor, 2004, p.256). Food, a bare essential product, has an inelastic demand. This represents huge scope for the market players. The key for transnational firms lies in the abilities to leverage their expertise and use their marketing skills so as to generate sustainable competitive advantage in the industry as well as in the value chain. References Food and Agriculture Organization of the United Nations, 2003. Trade Reforms and Food Security. [Pdf]. Available at: ftp://ftp.fao.org/docrep/fao/005/y4671e/y4671e00.pdf [Accessed on November 27, 2010]. Gereffi, G & Christian, M. 2008. Food Production Systems, Trade, and Transnational Corporations: A Global Value Chains Approach to Consumption and Healthy Diets. [Pdf]. Available at: http://www.cggc.duke.edu/pdfs/GlobalHealth/Gereffi_Christian_WHOFINALApril19.pdf [Accessed on November 27, 2010]. IMAP. 2010. Food and Beverage Industry Global Report. [Pdf]. Available at: http://www.imap.com/imap/media/resources/IMAP_Food__Beverage_Report_WEB_AD6498A02CAF4.pdf [Accessed on November 27, 2010]. Jenkins, R. 1991. Transnational corporations and uneven development: the internationalization of capital and the Third World. Routledge. Kannan, M. Sivakumar, D & Gilani,T. 2010. Analysis about the food industry. [Ppt]. Pleyers, G. 2010. Alter-Globalization: Becoming Actors in a Global Age. Polity. Porter, M. 1998. Competitive advantage: creating and sustaining superior performance : with a new introduction. Simon and Schuster. Smith, P.R & Taylor, J. 2004. Marketing communications: an integrated approach. Kogan Page Publishers. United Nations Industrial Development Organization, 2009. AGRO-VALUE CHAIN ANALYSIS AND DEVELOPMENT The UNIDO Approach. [Pdf]. Available at: http://www.unido.org/fileadmin/user_media/Publications/Pub_free/Agro_value_chain_analysis_and_development.pdf [Accessed on November 27, 2010]. Read More