A critical analysis of the globalization strategy of a multinational company (Coca-Cola) - Essay Example

Table of Contents Table of Contents 2 Introduction 3 2 A Review of IB Theory 5 3 Case Study: Coca Cola 8 3 Company Overview 8 3.2 Environmental Analysis 10 3.2.1 External Analysis 11 3.2.2 Internal Environment 15 4 Concluding Recommendations 16 5 Bibliography 18 Abstract Multinational corporations are, arguably, the purveyors of globalisation, its initiators and primary beneficiaries. Insofar as it has facilitated the movement of goods and services across national borders and removed much of the barriers to foreign direct investment, globalisation has allowed corporations the opportunity to internationalise. While conceding to the fact that internationalisation is a risky endeavour, international business theory has proposed a number of risk-minimising strategies and a set of recommendations for the constructive exploitation of globalisation for the purposes of profit maximisation. Needless to say, while some corporations have successfully implemented these recommendations and have substantially expanded their markets and financial returns as a result, others have not. This research looks at one of the corporations which has successfully reaped the rewards of globalisation: Coca-Cola. Drawing on international business theory, the study engages in a critical analysis of Coca-Cola's external and internal environments for the purposes of shedding light on its corporate strategy and the uncovering the determinants of its success. The analyses, which utilise Porter's Five Forces, SWOT and PEST, indicates that Coca Cola's success is a direct outcome of an internationalisation strategy which is deeply considerate of the particularities and peculiarities of the various national markets within which it operates. 1 Introduction Multinational corporations are popularly regarded as the primary beneficiaries of globalisation. In his defence and justification of this claim, Wartick and Wood (2006) highlight the immediate correlation between the removal of barriers to international trade and foreign direct investment and the growth and expansion of the global activities of multinational companies. While not disputing this claim, the fact is that multinational companies are not simply the primary beneficiaries of globalisation but the purveyors of globalisation. In other words, globalisation was spearheaded by globally-minded, expansionist corporations such as Coca-Cola. Indeed, as Wartick and Wood (2006) argue, corporations such as Coca-Cola, McDonald's, Phillip Morris, Nestle and several others globalised business through international expansion via mergers, acquisitions and franchises, prior to the inception of globalisation. The implication here is that Coca-Cola, among others played a seminal role in the globalisation of the international economy and, indeed, designed and pursued global business strategies prior to the passage and subsequent enforcement of WTO rules. This perspective on the role of multinational companies in the globalisation process can be validated through a brief, albeit critical, review of the implications of multinationals. Understanding the role of multinationals in globalisation and the degree to which, if at all, globalisation impacted the strategies of MNC, is contingent upon knowing the meaning of MNC. Gershon (1997, p. 3) offers a very precise and concise definition of the concept, writing that a multinational corporation is "a nationally based company with overseas operations in two or more countries" (Gershon, 1997, p. 3). As may have been inferred from the introductory paragraph and as most are well aware of, multinational corporations are a significant part of the contemporary global economy and, without any doubt, its primary players. The power which multinationals command and the extent of their influence on the economy, whether at the national, regional or global level, is explicitly explained in Jacoby's (1984, p. 5) description of the multinational corporate entity: The multinational corporation is, among other things, a private government, often richer in assets and more populous in stockholders and employees than are some of the nation states in which it carries on its business. It is simultaneously a citizen of several nation states. owing obedience to their laws and paying them taxes, yet having its own objectives and being responsive to a management located in a foreign nation. (p. 5) On the basis of the foregoing definition, multinational corporations emerge as transnational business entities; that is, business firms which operate in more than one national economy, not as a foreign entrant, but as a native (Jacoby, 1984). Even though they possess numerous national identities and are perceived of as citizens of more than one nation, the fact is that the loyalties of these corporations transcend national boundaries, just as their powers often exceed those of national governments. These companies are transnational both because of their multiple identities and their transcendence of national affiliation and loyalty. Concurring with this description of the transnational corporate entity, Gershon (1997, p. 4) maintains that transcendence of national boundaries and loyalties is further evidenced by the fact that "strategic decision-making and the allocation of resources are determined on economic goals and efficiencies regardless of national boundaries." The implication here is that the international business strategies of multinational or transnational corporations are inherently global in nature. While conceding to the fact that multinational corporate entities do consider the particularities and peculiarities of the national economies within which they operate, their corporate strategies are attuned to transnational internationalisation, as will be illustrated through a review of the relevant theoretical literature and a review of Coca-Cola's global strategy. 2 A Review of IB Theory International business theory, as is business theory per se, is grounded in a single, unquestionably important, economic precept. This precept is that forms must pursue profit-maximizing strategies. The key to profit maximization, as Toivanen and Waterson (2005) point out is market expansion. If firms are to experience growth and if they are to increase their profit margins, they must both exhaust the limits of their existent market and venture out into new ones; that is, engage in market creation. As Toivanen and Waterson (2005) demonstrate through reference to McDonald's and Burger King, market expansion and the creation of new markets entails geographic growth and entry into new territories. In other words, and as Johanson and Wiedersheim-Paul (1975) point out, profit maximization translates into the internationalisation of business operations. Internationalisation is, needless to say, a risky endeavour as it entails, not just the entry into geographic territories and markets which are foreign to the firm in question but in creating a market for the firm's services/goods within that foreign market Johanson and Wiedersheim-Paul, 1975). As such, and in order to minimize the risks and maximize the opportunities for success, firms usually adopt one, if not both, of two specific strategies. The first is to enter into markets in which a demand for the product/service in question has already been articulated and wherein, according to market research, there exists a strong potential for growth (Toivanen and Waterson, 2005). The second is to limit entry to markets which are similar to the home market in terms of culture, consumer behaviour and consumer taste, among others (Toivanen and Waterson, 2005). These two strategies, or approaches to market expansion, if pursued can significantly minimize the risks associate with entry into foreign markets and, indeed, ensure a successful and profitable venture. Concurring with the importance of pursuing one, or both, of the strategies briefly outlined in the preceding, Stultz and Williamson (2003) add that they allow business firms to capitalise on their most important asset - organisational knowledge and experience. In other words, if firms enter into markets which are similar to their home market, the knowledge and experience that they acquired over the years will be relevant and, indeed, an important contributory factor in eventual market success. Even though international business theory argues the importance of the cited expansion strategies, Casson (2005) and Dicken (2006) quite rightly point out that were firms to adhere to the market similarity constraint, the expansion of multinational corporations would be limited to specific regions. For example, Coca-Cola's expansion would have been limited to North America and Western Europe and markets in the Middle East, Asia and Africa would not have been considered at all. The implication here is, as Casson (2005) quite rightly points out, that while the market similarity constraint has its evident strengths, it is also beset by the disadvantage of limited expansion. In consideration of the global success attained by transnational's such as Coca-Cola or McDonald's, to name but two, the market similarity constraint translates into the loss of markets which, over the years, have proven themselves worth countless of millions in annual profits (Casson, 2005). Therefore, even while acknowledging the validity of this strategy in relation to risk minimization, and possibly risk aversion, it functions against globalisation and transnationalization. As the rationale of internationalization is profit maximization, transnational corporations aim towards the creation of new markets and not just the movement of their goods/services to markets where there is a pre-existing demand or which bear strong resemblances to their home market. Accordingly, businesses pursue a market development and creation strategy which entails their adopting new markets and adjusting their business strategies corporate image and products towards greater consistency and harmonization with the new market (Wiles and Wiles, 2005; Carbaugh, 2005; Marx, 2006; Sundaram and Black, 2007). As per the aforementioned strategy, the internationalization of businesses is inextricably tied to the market creation and market adaptation process, culminating in a situation wherein the new, and supposedly foreign, entrant operates within the market as a citizen (Kumar, Markeset and Kumar, 2005). This strategy, despite its involving a tremendous amount of market research, branding, promotion and investment, is the key to transnationalization. Indeed, it is because they pursued this strategy that companies such as Coca-Cola, McDonald's and numerous others, successfully transnationalised and emerged as global, rather than national, market actors. 3 Case Study: Coca Cola Bearing the above review of IB theory in mind, the Coca-Cola Company will now be critically analysed as an example of a successful transnational conglomerate. Following the presentation of a company overview, Coca Cola's expansionist and global strategies will be critically analysed. 3.1 Company Overview According to the information published on its corporate website, Coca Cola was established in 1886 and, despite operation in a highly competitive industry has, over the course of 122 years, successfully emerged as the global leader in the non-alcoholic beverages market. The company owns four of the five leading international non-alcoholic sparkling beverages companies, operates in over 200 countries and has 90,500 employees. Producing more than 2,800 non-alcoholic beverage varieties, the company sells 1.5 billion consumer servings per day (Behind the brand, 2008). According to a Hoover Online (2001) report, operating in Europe, Middle East, Africa, North America, South America, Asia and Eurasia, Coca-Cola commands 50% of the global non-alcoholic beverages market. Foreign expansion, as may be deduced from the foregoing, has significantly contributed to the company's financial well-being, as more than 60% of its sales and profits are generated from outside the North America, the home, region (Hoover Online, 2001). This last is very important in light of the preceding theoretical review as it confirms the argument against adhering to the market similarity constraint. Had the company limited its expansion to markets which were similar to the United States, it would be approximately half its current size and its profits would have also been halved. The below financial table provides a clear indication of the success of the company's globalisation strategy: Figure 1: Company Performance Source: Company Information Snapshots, Coca-Cola, http://www.corporateinformation.com/Company-Snapshot.aspxcusip=191216100 As Figure 1 quite clearly illustrates, Coca-Cola's sales have experienced a steady increase from 2002 to 2008, reaching its highest point in 2008. As a direct result, dividends have experienced a similar increase. If anything, the above graph evidences the success of Coca-Cola's globalisation strategy. 3.2 Environmental Analysis While the preceding figure, in conjunction with the company overview presented in the above, emphasise Coca-Cola's global success, this question needs to be critically investigated through an environmental analysis. This analysis, which will combine between SWOT, PEST and Porter's Five Forces, will explore the company's internal and external environments for the purposes of determining whether Coca-Cola has realised its existent market potentials and, ultimately, for the evaluation of the company's global strategy. 3.2.1 External Analysis As stated in the preceding section, the Coca Cola Company operates in 200 countries across five continents. Undertaking an external environmental analysis, therefore, is problematic as the markets in question are hardly homogenous and cannot be discussed as a single unit. Indeed, as Hill (2007) quite rightly point out, one of the primary challenges confronting transnational corporation is not just the disparity between markets but the striking variances in market culture, economic laws and regulatory policies and work/business ethics. Practices which are considered an integral component of the business culture in some countries, are considered illegal in others, with one example being cash gifts/bribes. Added to that, and possibly more importantly, consumer markets differ, as do needs and expectations (Hill, 2007). Further expounding upon this through reference to the retail consumer market, Wartwick and Wood (2006) note that some McDonald's menu items, while highly popular in some cultures and markets, have no place at all in others. An example here would be meals with bacon which, as popular as they are in the United States, are not included in menus in Israel and Muslim countries. The implication here is, as may be inferred from both Hill (2007) and Wartwick and Wood (2006), is that transnationalism gives rise to numerous challenges. The application of the relevant aspects of Porter's Five Forces to Coca-Cola's external environment, confirms that the company faces several challenges due to its transnational nature. The beverages market is a highly competitive one and this means that the company faces intense competition in almost all of the markets within which it operates (Allen, 2005). The threat of substitutes is very high, indeed, and Pepsi Cola comes to mind as the most immediate such threat. Added to that, within the various national markets within which it operates, there are domestic/national alternatives such as Sport Cola in the Middle East and Whatever in Singapore and SE Asia, to name but two examples (Hays, 2006). Hence, the external environment is characterised by a high level of substitute threat and this contributes to buyers', as opposed to suppliers', power. In other words, consumer bargaining power is higher than supplier bargaining power. In addition to the above stated, it need also be noted that as a direct result of globalisation, the threat of new entrants is, theoretically speaking, high. While the beverages market is an intensely competitive one, it is also an extremely lucrative market. Given that globalisation has, to a large degree, removed the barriers to foreign trade and direct investment, this means that the financial attractions of the beverages' industry and the size of the global beverages' consumer market can motivate investments in this industry and the launching of novel non-alcoholic sparkling beverages. Indeed, over the past five years, dozens of new beverages' companies formed and penetrated into Coca Cola's global market. While they have not been able to dent the company's sales and grab a part of its market share, the fact still remains that the threat of new entrants is high (Allen, 2005; Hays, 2006). Indeed, even Coca-Cola's leading competitor, Pepsi Cola, has been unable to shake its dominance over the global market. As Hays (2006) explains, while Pepsi Cola dominates, with over 50% of the market, in Canada, Saudi Arabia, Egypt, India, Pakistan, Malaysia and Indonesia, Coca Cola is not just a very strong second but it supersedes Pepsi in all other countries with 50-75% of the market share. Added to that, while Coca Cola operates in over 200 countries, Pepsi has operations in only 150 (Hays, 2006). The implication here is that not only have new entrants been unable to dent Coca Cola's market share but its primary competitor, Pepsi, has been similarly unsuccessful. A PEST analysis confirms that Coca Cola confronts numerous challenges but, because of its first mover advantage and continued innovation, has been able to retain its dominance over the global non-alcoholic sparkling beverages' market. Stating with the political environment, it is important to highlight the fact that the company operates within a vast number of diverse political systems. While some of these, as its North American, Australasian and West European markets are politically stable, others are not. This means that some of its markets, especially its African, Middle Eastern and Latin American ones are a source of potential problems (Hays, 2006). As regards its economic environment, it need be noted that even though globalisation supposedly imposed a free market economic agenda upon the global economy and its numerous national ones, there remains marked disparities in the company's economic environments. Some are wealthy and stable, while others are comparatively impoverished and unstable (Hays, 2006). This does not simply mean that the company faces economic challenges in some of its environments but that it has to adjust its corporate and marketing strategies to the prevalent conditions in each of its environments. Just as its political and economic environments are disparate and sources of several challenges, so are its social and technological ones. In direct relation to its social environment, it should be noted that Coca-Cola operates in over 200 countries. This means that it operates in several, often very different, socio-cultural environments. The importance of the cultural factor to the business environment and the ways in which it influences a company's strategy, has been explicated by Hofstede (1991; 2002), variances in national cultures makes it impossible (or at least a loosing strategy) for transnational companies to adhere to corporate policies, strategies and management paradigms which they have in place in another culture/country. This is because cultural factors impose restrictions on the strategies which can be utilised and those which cannot, in addition to which, they function to influence the outcomes of strategies. Granted that Levitt (1983) makes a case for companies formulating global strategies which address the global market as opposed to national markets, the fact is that cultural differences cannot be ignored. National and cultural differences, contrary to Levitt's (1983) argument, are not necessarily minor differences which transnational companies can afford to ignore. The implication here is, therefore, that corporate strategy must be culture-specific even while it adheres to the corporation's larger, transnational corporate policy. In relation to technology, it is important to point out that strategic management literature has devoted considerable space to emphasising its importance (Capron and Glazer, 1987; Johnson and Scholes, 1993). Technology is a source of competitive advantage. It need be noted, however, that as important as technology may be to corporate performance and even though Coca-Cola operates in both technologically advanced and technologically challenges companies, the former does not pose any particular advantage and the second, no specific threat. Quite simply stated, and as Allen (2005) and Hays (2006) explain, Coca-Cola takes its technology with it wherever it goes. In other words, whether Coca Cola operates in a technologically advanced or backward country, its operations remain unaffected as it transfers its technological knowledge and skills along with it. 3.2.2 Internal Environment Internal environmental analyse are conducted for the purpose of shedding light on a company's internal functioning and its organisational strengths and weaknesses. According to Grant (2005), these types of analyses are generally conducted by using the first two of the SWOT tools and Porter's Value Chain. In direct relation to SWOT, one finds that the company's strength lies in its first-mover advantages and the associate organisational knowledge and experience. As Hays (2006) very rightly points out, in over a century of operation in this particular industry, Coca Cola has accumulated a wealth of experience and knowledge, both of which function as its most important assets and strengths. An additional strength lies in the company's pursuit of an internationalisation strategy which focuses on domestic markets. It does not penetrate into foreign markets as a transnational foreign corporation but builds itself in that market as part of the market in question. The advantage of the aforementioned strategy is that it tailors its corporate strategy to its external environment. This strategy, insofar as it can be defined as the pursuit of internationalisation through nationalisation, brings to mind Douglas and Wind's (1987) contention that globalisation is a myth. As regards value chain, Porter (1985) defined it the collectivity of a firm's generic value adding activities. The primary activities of a value chain are inbound logistics, operations, marketing and sales and services (Porter, 1985; Grant, 2005). When using this tool to analyse Coca Cola, one finds that it is, indeed, strong in all of the mentioned areas, and most especially as pertains to sales and marketing. Further, as Hays (2006) argues, the strength of its value adding activities primarily emanates from the fact that the company approaches each of the markets within which it is located on the market's specific terms. In other words, pursuing a transnational/global strategy which acknowledges both the similarities and differences between the markets within which it functions, has contributed to the strength of the company itself. 4 Concluding Recommendations On the basis of the information presented in the foregoing critical analysis of Coca-Cola's international business strategy and performance, an important recommendation can be made. Before presenting it, it worthwhile emphasising that the company in question, as evidenced in the foregoing, represents a successful internationalisation strategy. As one considers the source of its success, one finds that, even though experience and knowledge play a fundamental role in it, Coca-Cola's approach to internationalisation is at the core of its global success. The company has expanded into virtually every national market and, according to Hays (2006) is the world's most recognisable brand name, and has attained success in virtually every one of these markets. The reason, as indicated in the report is that even while Coca Cola pursues a global strategy, it treats every market as an independent entity. In other words, its internationalisation strategy embraces flexible responsiveness to the unique peculiarities of each of the markets within which it operates. This is the key to Coca-Cola's success: its approach to internationalisation focuses on the uniqueness of national markets. While this strategy has proven successful, it is a highly resource-consumptive one (Allen, 2005). Given that Coca Cola operates in a highly competitive market and in consideration of the challenges posed by Pepsi Cola and other non-alcoholic beverages companies, resource exhaustive strategies are hardly sustainable. It is, thus, recommended that Coca Cola pursue internationalisation through a regional strategy, as opposed to a national one. Regional strategies will fulfil the same objectives as do national ones given the striking similarities between countries which occupy a single region, as North America or the Middle East, for example, and are, certainly, not as resource consumptive. This recommendation is well worth implementing as it will cut down on costs and, accordingly, contribute to a more price-competitive product. In highly competitive markets, the preservation of resources is imperative and the said recommendation will enable precisely this. 5 Bibliography Allen, F.L. (2005). Secret Formula: How brilliant Marketing and Relentless Salesmanship made Coca Cola the best Known Product in the World. New York: HarperBusiness. Coca Cola Company (2008) Behind the brand. Retrieved on 15 March, 2008 http://www.thecoca-colacompany.com/ourcompany Capron, N. and Glazer, R. 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