International Trade and Competition - Coca-Cola - Case Study Example

Running Head: INTERNATIONAL TRADE AND COMPETITION International Trade and Competition [A-Young Jun] [Name of the Institution] International Trade and Competition Introduction There is much talk today about the global crisis. It has become a popular topic in the media, in political circles, among the global gamblers and among economic ‘experts’. The financial crisis we are experiencing now, which was initially referred to as the credit crunch begun in July 2007. The credit crunch is the sudden reduction in the general availability of loans. Critics believe that the credit crunch might have been caused by the increasing number of defaults which were taking place in America as lenders were unable to pay off their debt.Evidence for global crisis, we are told, can be seen in the slowdown of the once buoyant Japanese economy, in the sudden transformation of the East Asian ‘miracle’ into a ‘meltdown’, in the failure of Russia's transition to an instant market economy, and the re-emergence of financial problems in Brazil. Even the sources of buoyancy in the United States are being questioned. Such talk sends the global gamblers into selling frenzies that further weaken the economies of these beleaguered countries. But are these observed difficulties unique? Are they really the signs of a forthcoming global crisis? Those with any understanding of the past will realise that regional problems of this nature are always with us. Similar difficulties emerged during the 1970s and 1980s in Latin America, China and even the Western world during the OPEC oil ‘crisis’. And yet there was no global recession/depression. Such problems emerge regularly in various parts of the world owing to the natural process of strategic exhaustion and, less predictably, to the actions of political extremists (as in Russia and China). Once a new dynamic strategy has been adopted, or once the attack by extremists has settled down, the ‘crisis’ is resolved and forgotten. Paradoxically, however, a real crisis of global proportions does exist today. But it is not the crisis claimed by other observers. Rather it is a hidden crisis that is the outcome not of the contradictions of capitalism but of those who arrogantly think they can control it. These are the global crisis makers who, surprisingly, are either faceless or bland people: people in private who peddle seductively dangerous ideas, and people in public who use these ideas to shape policy. These ideas and policies threaten to undercut the long-term viability of rich and poor societies alike. Unlike the more visible economic difficulties, it is a problem that refuses to go away, and will remain even after the more superficial difficulties have been resolved. Its persistence arises from its anonymity. It is a malignancy that is widely regarded as benign. Essentially it is a false vision of what constitutes a healthy society and of the means required to achieve it. This is the real crisis we will face in the new millennium. MNEs and Effects of Global Financial Crisis It is an admitted fact that crisis situations, whatsoever, demand crisis management responses and MNEs must anticipate and face, compensate and avert a financial crisis as it occurs (Bartels and Freeman 2000; Goodman 2002; Singh and Yip 2000; Thompson and Poon 2000) and altering the sum of dedicated resources in an up-and-coming market under crisis is possibly the most significant strategic resolution for a firm. The decision reassesses the level of the foreign operation and chiefly moulds the MNEs manage in the local operations and its point of risk spotlight (Anderson and Gatignon 1986). Multinational companies have always taken infrastructure as a key determinant in their foreign entry mode decisions for developing countries (Agodo 1978). Physical infrastructure (e.g., roads, harbors, railways, and buildings and facilities) and technological infrastructure (e.g., telecommunications, computers, and logistics) are vital for efficient performance of the market functions of a firm (Dunning 1980). The availability of supporting structures and industries (e.g., postal service, power and water supplies, and banking facilities) is also vital (Porter 1990). The length of time an MNE has experienced in the particular market enables them to adapt to the existing infrastructure on a technological and physical level (Sharma 2002). While a financial crisis may disrupt the above infrastructural conditions and support structures, a country's efforts to enhance the conditions during the crisis may attract multinational companies to increase their investment even in the event of a financial crisis. Furthermore, the financial crisis, while adversely affecting the local economy by causing unemployment and currency devaluations, does increase the appeal of the emerging market as a production base by decreasing the costs for raw materials, site development, and a quality labor force. Reduction of cost and the availability of these production factors could be the key factors that attract companies to expand operations in spite of crisis. While causing much uncertainty, economic crises usually result in major economic reforms that make a market more approachable for foreign investors and increase the tendency for MNEs to expand their investments to reap additional benefits (Chotigeat and Lin 2001). Constructive corporate tax policies and slighter limitations on foreign possession are strappingly interrelated with the choice of high resource commitment mode (Sharma 2002). Emerging markets pursuing trade liberalizations have targeted foreign firms in the restructuring of such policies (Chotigeat and Lin 2001). The relief of barriers such as tariffs, local contents restriction policies, and privatization of state-owned institutions are invitations to foreign companies to invest in the host country (Zhang 2000). After the initial entry, the continual changes in barriers provide a great opportunity to reinvest in the country. Coca Cola and Global Financial Crisis Coca-Cola is widely known famous product, which called King of soft drink. From America to start with, next Europe, in addition Asia, finally extended whole world. On the marketing hand, Coca-Cola Company is careful, wonderful, and successful. Even it builds a sort of America culture, extended the whole world. It simply is a miracle. Coca-Cola Company depended on oversea market, 80% profit from there. In the near future, the sales of Asia were increase very fast despite Asian financial crisis of 1997, that achievement is heartening. But, under this situation, the extendable plan, marketing strategy, investment and so on must be more careful; company is paying attention to different culture and custom background. (Hannagan, 2002) The reason behind is to lessen the global financial effects on sale in a parabolic fashion. Coca cola averted and minimized the multi-pronged effects of global financial in most of world countries. As a successful multinational must depend on management, develop new market, and use tools of media, better marketing, and better market strategy and image orientation. Coca-Cola wanted to secure market share in India, where the lucrative Indian market is estimated to be over 1 billion people and Coke wanted to have at least a fair share of it, but failed miserably initially. Over 70% of Coca-Cola's revenue comes from global sales, so securing a foothold in India was very important for them. (Dibbs, 2002) When they went into India trying to market Coke like they did everywhere else, they nearly got wiped out of India and risked losing valuable market share to competitors. Coke tried reentering India after they realized that there were some distinct cultural differences in marketing Coca-Cola in India. Probably most notable is that the Indian wages are much lower than the familiar American, European or other Asian markets. To address the issue of trying to develop an addressing strategy in India, Coke broke their previous mold and tried something new; they hired India movie stars to promote their product, lowered prices, and introduced a newer size product. Introducing a new product would be difficult because people just don't have the expendable cash to purchase on a whim. In India, Coca-Cola also realized that it would have to change its advertising approach because of cultural differences.( Kotler, 2006) In India, movie stars are larger than life, much bigger than in Western cultures, so when a movie star endorses a product, the people respond. Coca-Cola had a policy of not having celebrity advertising, which was an unexpected cultural obstacle for the company. Despite global recession, it is vital to keep integrating marketing communication effectively for Coke to continue its growth and domination in the soft drinks industry. For Coke, it is an advantage to have millions of loyal customers. By using competitive advantage and a combined digital strategy, Coke can not only stabilize its territory, but also can create more profit. Nevertheless, Coke should use their advertising to enhance the message of new products, such as "Coke Zero" which is a no- calorie alternative to Coke Classic. Otherwise, ambiguous products may confuse the consumers. The structure of Coca-Cola's sales organization is critical to keeping the company on top. Each member of the 1,400-person sales force belongs to a cross-functional account team that combines representatives with experts in finance, marketing, operations, and administration. Levels of Debt and Incentive Structures The amount of debt taken by commercial and investment banks increased tremendously leading up to the financial crisis. A change in the legislation in the US allowed investment banks to take increased levels of debt so that they could invest in the lucrative mortgage backed securities (Labaton, 2008). These firms basically made use of financial leverage by borrowing at lower interest rates and investment in higher interest bearing mortgage based assets. Top five US investment banks, which are now either bankrupt or taken over, had almost US$ 1.4 trillion debt in 2007 which is nearly 30 percent of the size of the US economy (Labaton, 2008). The result of this additional source of fund led Bear Sterns to increase debt in such a manner that its borrowing to equity ratio was 33 times. Other firms were not too behind. How did it all go wrong? Until early 2006 all the parties to the transaction were happy: the borrowers were able to get loans, the banks were making money and the economy was booming both in US as well as in other parts of the world. Things started to get sour as the boom is the housing prices started to recede and the interest rate started to increase. With the decreasing housing prices it became difficult for home owners to carry on with their mortgages as they were neither able to refinance nor able to sell without suffering significant losses. With interest rates rising from 1 percent to 5.35 percent the number of foreclosures and default on sub prime loans increased significantly from 2006 onwards (BBC, 2008). In UK Northern Rock was the first casualty with a bank run in almost one hundred years. The bank, which had lent aggressively, was having severe liquidity problems and had to be nationalised in order to maintain the financial stability. Bear sterns faced a similar fate in the US and was bought over by JP Morgan in a record low amount. Lehman Brothers, one of the largest US investment banks, went into bankruptcy causing great panic. A number of other financial institutions in both US and Europe also went into administration or taken over by other firms. In order to cope with the crisis leading central banks around the world pumped huge amount of money in the money market to provide liquidity but without much impact. (Torbat, 2008) The US and UK government announced huge bank bail-out package in September 2008 to restore confidence both among financial institutions and investors. The global meltdown has also affected Australia. Housing industry has also fallen throughout Australia after modest growth in 07. Interest rates have been steadily increasing since 2002 and the housing affordability for Australians are dropping to record lows. The rising interest rates have forced many struggling Australian homeowners to reluctantly sell off their homes and compete with 5 million other Australians for a diminishing supply of rental properties. Average rental vacancies have also dropped to 1.9% after being at around 3.5% for the past 20 years. The higher demand for rental properties has pushed up rents making it tougher for struggling families. Impact of the Financial Crisis on MNE,s One of the biggest financial crises in the history of human civilization has created huge impact in all sector of the economy especially on MNE,s. UK being one of the prominent financial centres of the world has taken a huge beating. Hundreds and thousands of jobs have been lost and investors have lost millions of pounds in stock market. Experts and commentators have indicated that the worst of the financial crisis is yet to come with the effect of a number of instruments such as credit default swaps have yet to hit the financial markets (BBC, 2008). Lack of funds coupled with the unwillingness on the part of the banks to advance much needed credit facility to business have resulted in a number of companies from the real economy to either cut down its workforce or close its business. The impact of this has already been felt in the British economy as the country is in the brink of deep economic recession. Millions of jobs are at risk with demand slowing down business cutting down on their investment and expansion (BBC, 2008). Leading experts warn that due to the recession unemployment could rise to almost three million. The stocks markets have plunged as a result of the credit crisis with the banking stocks taking a battering. About 60 percent of the UK pension funds have been invested in the stock market (Peachey, 2008). The fall in the stock markets have reduced the value of these pensions significantly affecting a great number of people who are in the brink of their retirement. Similarly companies and funds which had invested in the stocks have lost millions of pounds and their balance sheet appears to be much more vulnerable. Due to the global nature of the crisis a large number of intuitional and individual investors are also poised to lose huge amounts of money which they had invested in foreign banks. Multinationals can actually have an advantage over local competitors e.g. China's consumers have traditionally been quite parochial in their buying habits. Its people have historically bought local products from local companies so it was difficult for many Chinese companies to expand nationally in the face of global recession. Multinationals, however, can have a 'national brand' image, which makes it easier for them to gain acceptance across the nation just like coca cola. One of the biggest mistakes 'new-to-the-market' multinational firms make in Asia is assuming that their products have brand recognition like they do back in their home market. They don't. To be successful, multinationals must be in for the long haul, are good corporate citizens and invest much, much more in public relations and marketing than they generally plan to. The impact of the credit crisis is being felt in every sector from humanitarian aid to climate change packages. The paucity of funds will be felt all throughout the economy. (Torbat, 2008) The pound which had been one of the strongest currencies in the recent times has fallen significantly against the US dollar. Although this might be good news for the exporters, imports will be much more expensive potentially stoking inflation. With the inflation at a 10 year high the depreciation in the value of pound can only spell more problems in the future. The most significant step taken by the British government to shore up the financial crisis has been to injected additional capital in banks and money markets. These measures on one hand have been somewhat effective in calming the financial markets. On the other hand, however, they have increased government debt to unprecedented levels. With the increase in unemployment, contraction of business and slump in the housing market, revenue collection of the government is poised to go down (Preston, 2008). All these conditions may lead investors to dump pound holdings further precipitating the value of the pound and raising the cost of borrowing government debt (Preston, 2008). Some of the economists strongly believe that the financial sector does not have any role in economic growth and on the other hand others say, financial sectors are the “pioneers on development of economics”. Joan Robinson (1952 p.86) states, “Where enterprise leads finance follows”, therefore he has totally removed the financial sectors from the list of factors that control the economic growth. On the other hand, a group of economists argue that financial market helps the growth of economy. Conclusion The above discussion revealed the causes of the global financial crisis and its impact on the British economy. This has been one of the most painful periods of history to modern financial markets. Although a number of significant steps have been taken by government of various countries, the crisis is yet to abate. It will take a significant amount of time before the financial markets again start operating in normal manner. More importantly, however, there is a great need of some fundamental changes in the structure and operation of financial markets coupled with appropriate regulatory mechanism to make sure that crisis of such proportions do not occur in the future again. The Recovery will take long. Just as the two previous recoveries, this one could create lots of unemployment. Therefore, the employers need to be convinced the economic recovery is here to stay. If the stimulus from the government programs starts diminishing, the weakness in the private sector has caused a double-dip recession in 2010; however, exports can stop this to happen. Only a third of experts believe that we have entered a sustainable recovery, with the balance either doubting its sustainability or denying that a recovery is even underway. 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