Coca-Colas Operations in India - Case Study Example

[Type the document [Type the document sub Index Executive Summary 3 Socio- Cultural Forces 4 Influence of natural resources and environmentally sustainable resource 5 Influence of economic forces 6 Influence of economic forces 6 Influence of Legal forces 7 Influence of Political Forces 7 Influence of Labor forces 9 Case of Coca Cola 9 Reference 10 Executive summary In the era of globalization, more and more companies enter international markets in varying degrees. It is important that the environmental forces that impact international business are understood clearly for successful operations in different countries. These seven forces are socio-cultural forces, natural resource and environmental sustainability forces, economic and socioeconomic forces, political forces, legal forces, financial forces and the labor forces. The impact of Socio-cultural force can be better understood by using Hofstede's cultural dimension model. Through this model one can see how socio-cultural forces affect various management processes and decision making like organization design, product design, conducting negotiations etc. Religion and language are also important cultural factors that influence international business. Natural resources forces explain the significance of natural geography, topography, natural endowments, climate and sustainability of energy resources use on international business. The political system in the country reflects the will of the country in determining its course of economic growth. Political stability in the country is essential for long term prospects of business. Many countries now are more open to privatization of business. A country's economic health will determine demand for goods and services and availability of infrastructure and other resources for doing business. Maturity of legal system in a country will determine the risk of doing business in the country and is essential for fair transactions. The country's financial position in terms of balance of payments, exchange rate, inflation etc will help multinational companies to draw up strategies on investment, management of finances etc. Availability of labour and labor market trends will be important in determining setting up operations in a country. The Case of Coca Cola operations in India indicates how these seven forces influenced the company in its operations and how it reacted. The company had to face ethical dilemma of operating its plant in remote locations and face accusations of making profits at the cost of depriving locals of natural resource. Socio-Cultural forces Culture affects all business functions. Hofstede's cultural dimension model will be a useful starting parting to understand how culture influences business ((Hofstede, 2001).The power distance factor could indicate how bureaucracy operates in the country. If it is high it will mean a highly centralized decision making structure and very little delegation of powers to local authorities. This knowledge will help a company in doing negotiations. Very often this also defines the relationship between consumer and seller. This will also have an important bearing on organizational design. For example an organisation which tries to bring in its organizational value of empowered decentralized decision making to its employees from a cultural background of high power distance, will face difficulties in implementation (Meade 2005, p 95). Uncertainty avoidance may influence attitudes to entrepreneurship in society and inclination to take risks in financial institutions. Individualism vs. collectivism dimension will indicate the level of influence of unions and labors attitude to collective bargaining. This will also determine the predominance of task or relationship in interpersonal management. Religion has a strong influence on commerce. Religion is responsible for many beliefs and attitude affecting behaviour, which is brought into business and organizations by people (Ball et al 2008). Attitude to work, accumulation of material wealth and charity are all those arising out of cultural factors. Language is another important factor. Many countries have several languages, but have one single link language for commerce. Influence of natural resources and environmentally sustainable resource. The location of a country, its geographical and surface features and more importantly the level of environmental sustainability of use of energy sources are important force affecting international business. Many countries economy is shaped by these conditions. A country's topography determines locations of cities and human habitation. Deserts and Tropical Forests separate markets increase the cost of transportation and create concentrations of population. Much of Australia's population is concentrated in a few locations (Anon 2008). Country's topography will mean altering products to suit its need. Country's very often derive competitive advantage out of their location (e.g. of Singapore as the container hub). Waterway's like in India, Rhine in Europe, which provide cheap transportation alternative will attract investment from particular type of industries. The country's geographical position also determines its trade preferences. Regional trade groups are often formed for this between nations. Many times it also is a disadvantage when it has natural resources to export, but dependent on port outlet of another country. Entire Europe was denied of Russian gas last winter, because Russia was dependent on a route for export of this oil through another country's port, and had a dispute with it. Country's climate often determines the kind of industry that is possible in the region. Very often harsh climatic conditions spurs innovation, Israel's pioneering work in irrigation being an example. A country's sustainable use of its energy, availability of non energy resources will determine profitability of doing business in the country or with the country (Ball et al 2008, ch-7) Influence of economic forces When a firm enters overseas markets, an economic analysis of the target country becomes very important. A company can use a variety of reliable data bases for understanding a country's economic status. Important economic indicators will be Gross Domestic product (GDP), per capita income, income Distribution, Consumption vs. savings, unit labor costs, exchange rates, interest rate and inflation. A nation's direct taxation policy will determine disposable income, discretionary income and this will determine the demand for goods. Low discretionary income for instance will mean lower demand for luxury goods. Countries with slower-rising unit labor costs attract management's attention. Large international debts of middle- and low-income nations affect exchange rates and determine profitability of manufacturing in that country for multinationals. Population statistics like population growth, age distribution, birth/mortality rate will provide indicators that are useful for market analysis and labor availability. Another important economic indicator is the rural urban growth, useful for planning in marketing (Ball et al 2008, ch-8). Legal forces An analysis of legal system is important for analyzing business risk in the country. Multinationals very often must follow the legal system of their own parent country as well as the countries where they operate. A business legal risk is less when it operates in a country with rule of law. Apart from this there are various laws, international treaties, bilateral treaties which provide means for doing business between countries on a stable platform of rules and laws. International laws like CISG (Contracts for International Sale of Goods) enable smooth transaction of business and commerce. A company must still be sensitive to the special provisions of laws that are enacted to protect interests of some vulnerable population. Of late uniformity of IPR laws across nations has become very important. A business must be thoroughly knowledgeable on the IP protection laws of the country it operates as part of risk assessment (Ball et al 2008, ch-10) . Political forces The ideology based on which government is formed in a country is an important political factor. Ideology of a country could be capitalist (very little government ownership in business), socialist (public collective ownership of basic means of production and distribution), Communism (expropriation and confiscation of private owned business). In countries with capitalism we will have conservatives, liberals, democrats, republicans etc (Ball 2008 ch 9). Understanding these in context of the country is important for managers involved in international business. However, world-wide privatization has been the trend, even in countries which were traditionally socialistic and even in communist China. How this trend will be affected by the present global crisis is to be seen. Terrorism, the traditional political conflict between countries and unresolved ethnic problems between groups of communities in some countries are important factors in determining the impact of political force. Business do business risk assessment based on political factors when doing investment planning to make sure these are taken into account while assessing investment risk . Financial Forces Apart from the actual process of doing business in terms of exchange of goods, management of finance by business in different countries of operation can affect its profitability significantly. Monitoring of exchange rate across the globe and management of finance across borders based on this, is an important function in a multinational corporation. Exchange rate is influenced by supply and demand of the currency, interest rates, inflation and expectations. Balance of payment position will also alter countries exchange rate; a massive deficit will need to be corrected with devaluation. Many IT exporters in India hedged their foreign fund based by forward transaction based on strong rupee against dollar trend, but were exposed to losses when the trend changed suddenly, making spot transaction more profitable. Monetary policy and fiscal policy of the government influences exchange rate and inflation. Concepts like Fisher rate, Purchasing power parity are used by analysts for this purpose (Ball et al 2008, ch-11). . Certain countries have currency exchange rate fixed because of their own policy dictates and this can vary from actual market rates. This will create an illegal transaction market. Tariff on goods imported is another financial factor that will affect international business. Labor Forces Quality, quantity and composition of labor are important for an employer. The quality of the labour is dependent on the education and skill trainings institutions in the country. The predominance of sector (agricultural, industry, services) in which labour work and also the rural urban ratio will influence availability of labor. The bargaining power of labor in terms of how well unionism is developed and their power is a determining factor in labor wages and productivity. The growth of multinationals has brought the benefit of multinational unionism. Labor mobility within the country and between countries will influence availability of labor. Some countries have provisions for allowing guest labor to overcome shortage of labor in their country. Many industries use women in their work force preferentially, like garments, electronics assembly. There is a strong movement worldwide in the developed countries to resist, as customers, products from manufacturers using child labor or employing unfair labor practices, violation of human rights. Case of Coca Cola in India and influence of the seven factors on its behaviour: The following case of Coca Cola Company's operation in India illustrates, (Raviraman K, p176) the operation of all seven forces and how the company reacted to it. Coca cola had its operations in India since the sixties. After the significant political change in the country after the 1977 elections, the company was asked to dilute its foreign exchange by selling to local stake holders and also reveal the ingredient composition of the drink. This change that occurred due to political reasons was unacceptable to Coke and it withdrew its operations from the country. The company was right in doing so as disclosure of its trade secret would mean loss of its competitive advantage. Its rival Pepsi entered the Indian market in the early nineties. India was a huge market for Coke and it could not stay away from it for long. India had massive balance of payment problems in 1991 and after the formation of a stable political government, accepted relief from IMF and embarked upon structural reform and opening economy to foreign investment at favorable terms. Gradually the exchange rate controls were relaxed and the rupee was allowed to float freely on current account trade. Coca Cola took advantage of this change of financial conditions in India and took the right decision of reentering Indian market in 1993. Coca Cola and many multinationals realized the opportunity available for them through growth of a middle class population in the country, which was well educated and culturally more westernized in their attitudes for purchase and use of consumer goods. With decline in unionism and increase in productivity, labor market was very attractive. Many states within the country, eager to increase employment opportunities were attracting investment with offers at liberal terms of land and infrastructure for multinational firms. Infrastructure improvements meant logistics becoming easy. Coca cola took advantage of all this and in a short while set up a massive network of bottling and distribution to cover entire country with reach to remote villages. It invested Rs 4000 Crores (1 billion US dollars) progressively. It increased its market share to 61%. However Coca Cola and its rival ran into real problems because they did not consider the effect of their actions on environmental sustainability. They faced several problems at their bottling plants. One was a case at place called Plachemada in the district of Kerala, where it had set up a bottling plant after obtaining all licenses and local village level permission to operate the plant in 2001. After a couple of years there was a huge protest from the local farmers and the marginal tribals living in that area because of the alleged drinking water and agricultural water shortage caused through the plant's massive withdrawal of water through bore wells (1.2 million gallons a day), Causing land pollution through disposal of sludge was another accusation. Events proved that though Coke was in the legal right, the issues were genuine. The country had weak rules on regulation of use of groundwater and the company won the legal battle on this ground at the high court. The affected party have appealed to the Supreme Court, and with the newly introduced policy on ground water use, decision could go well against the company (Koonan S, 2007). The ethical dilemma faced by Coca cola here is that while it has been operating well within the legal and business framework, it failed to foresee the impact its actions will have on the local community. Does it have the right to use a local scarce and vital resource and make profit out of it, when the local community is deprived of it The event at Plachemeda is no isolated event, as a dozen similar protests are on in different locations. Its operations have indeed caused hardships to the locals and the company should have anticipated and proactively done something to counter this. Its rival Pepsi in Punjab for instance undertook a support programme of developing fruits and vegetables creating massive tangible benefits to the local community when it set up similar plant. Reference Anon, Environmental Forces and International Business, Focus Australia and Italy, http://searchwarp.com/swa16583.htm, accessed 1 Mar 09 Ball D.A., McCullough Jr. W, H, Geringer J.M. Minor M.S., McNett, J, International Business the challenge of global competition, McGraw Hill 2008. Hofstede G, Culture's consequences, Comparing values, behaviors, institutions and organizations across nations, Sage Publication, 2001 Koonan, Sujith, LEGAL IMPLICATIONS OF PLACHIMADA A CASE STUDY, International Environmental Law Research Centre, 2007-05, http://www.ielrc.org/content/w0705.pdf, accessed 3 March 09 Mead, Richard International Management Cross Cultural Dimension, Blackwell Publishing, 2005. Ravi Raman K, Plachimada resistance, a post developmental social movement metaphor Ed. Zias, Aram Post development Theory and practice, problems and perspectives, Routledge, 2006 Read More