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Globalisation of Logistics and Supply Chains Analytical Essay

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Updated: Jan 15th, 2020

Introduction

This paper is based on the topic of globalisation of logistics and supply chains. It seeks to establish whether Multinational Enterprises (MNEs) can operate an integrated global business strategy in more than one country.

It is argued that operating such a strategy is a reality for MNEs which are able to match their globalisation potentials with their globalisation strategies. To organisations which are not able to do so, operating such a strategy is more of a myth than a reality.

Examples which are discussed include Tesco and Toyota. The paper is based on the backdrop of the increasing number of organisations which are going global. Such an increase is fueled by the need to increase competitiveness, reliance on advanced technology, and the desire to venture into particular markets.

Globalisation Explained

Globalisation is the attempt to eliminate the differences between people of the world through interaction and communication. The period before the two World Wars was characterised by minimal interaction, communication, and cross-border movements.

That situation however changed after the World Wars due to the realisation by nations that there was need of working together in various spheres of development such as education, economy, employment, environment, and governance (Beck 2000).

Globalisation is mainly driven by advancement in information and communication technology, improvement of transport infrastructure, and liberalisation of trade and immigration policies. Through globalisation, people are able to work anywhere in the world irrespective of their cultural orientation.

Globalisation has also enabled people to study, marry, and stay in any part of the world (Cole 2005). In terms of culture, globalisation has enabled different cultures to coexist peacefully without cultural prejudice.

The interaction of people in different spheres of life has made them to appreciate their cultural differences, a situation which has greatly reduced instances of racism and ethnicity (Chrysanthopoulos 2010).

The history of globalisation has been a subject of heated debate between different scholars. Some have argued that globalisation started during the time of Greek civilisation while others have stated that globalisation is a concept which belongs to the modern era.

Despite these differences about the history of globalisation, many scholars tend to agree that globalisation was triggered by the conquest of America by the Europeans (Fiske 2007).

According to Clark, globalisation started early before the industrial revolution of 1600 (Clark 2008). On his part, Spielvogel traces the earliest form of globalisation to the Hellenistic Age, during which many urban centres came up in Europe.

Through the early form of globalisation, there emerged popular cities such as Athens, Antioch, and Alexandria (Spielvogel 2010).

According to Kendall and Cole, the integration of trade between the famous Roman Empire and other empires such as the Han dynasty and the Parthian Empire was still another pointer of early form of globalisation (Kendall & Cole 2006).

Kendall and Cole attribute the integration of trade between the Roman Empire and other empires to the establishment of the Silk Road.

The road was very famous because it stretched from China all the way to Rome and as a result, it was seen as a major achievement as far as cross-border movement and trade were concerned (Baily, Farmer, Crocker, Jessop & Jones 2008).

Other scholars further argue that apart from trade, agriculture was also associated with the early form of globalisation, where crops like cotton and sugar started being grown by non-Muslim countries across the globe.

When the two World Wars came to an end, there emerged a new form of globalisation which was characterised by the desire to integrate the world through cooperation is social, political, and economic development.

The leaders of many countries attributed the World Wars to the poor integration of the world’s social, economic, and political spheres, where countries considered harming and exploiting others as strategies of gaining popularity and influence across the globe (Harrison & Van-Hoek 2005).

From 1960s onwards, the new form of globalisation evolved to contemporary globalisation. Some major characteristics of contemporary globalisation include increased rates of immigration, liberalisation of education, technology transfer, and liberalisation of trade.

The Nature of Multinational Business

Multinational business involves MNEs, which establish businesses in different countries of the world. As a result of globalisation, corporations of different types and sizes have become multinational.

The corporations have relied heavily on the advancement in information and communication technology and improvement of transport infrastructure to coordinate their businesses in different countries (Rugman & Collinson 2006).

Many MNEs prefer investing in developing countries because such countries have unexploited markets as well as low or no competition.

But before doing any investment, it is important for MNEs to do an environmental analysis and come up with strategies of ensuring that they are cushioned from incurring losses which may result either from man-made or natural causes (Daniels, Radebaugh & Sullivan 2011).

One risk which MNEs face is that of foreign exchange exposure. This risk is explained as the possibility that a corporation may suffer losses or make huge profits due to the fluctuation of exchange rates for foreign currencies (Wild, Wild & Han 2008).

Due to the risks which come with fluctuation of exchange rates, MNEs come up with strategies of managing foreign exchange exposure. One such strategy is the foreign exposure management.

This strategy entails five steps namely doing a forecast of the stability of the currency of the home country, putting in place a reporting system for monitoring the exchange rates, putting in place an hedging exposure, centralising or decentralising the management of the exposure, and having the right tools for exposure management (Daniels, Radebaugh & Sullivan 2011).

For example, Dell’s exposure management strategy involves the forecasting of the rates of foreign exchange. It has a team which is responsible for monitoring the exchange rates and let the company know the best time to import or export its products in the Mercosur region.

Dell also relies on hedging as a strategy of managing its foreign exposure. Through hedging, the company is able to enter into contracts with financial institutions to cushion itself from the fluctuating exchange rates.

Dell’s exposure management strategy has been successful to a great extent. The success is attributed to a team which is responsible for managing the exposure. This team, led by Mr. Pickett has been able to manage the exposure effectively for a long time.

However, the team has been unable to harmonise its strategy by putting into consideration the views of other corporate players, who are usually of the view that it should use hedges instead of entering into contracts with financial institutions.

Some of the strategies which Dell should implement so as to enhance its exposure management include the decentralisation of its exposure management, exposure netting, and the use of balance sheet hedging (Daniels, Radebaugh & Sullivan 2011).

MNEs usually operate in diverse environments in terms of culture. In many cases, it is difficult to separate the culture of countries with organisational culture. The reason is that many MNEs employ many locals so that their businesses may appeal to customers in those counties.

As a result, the culture of many MNEs is a true reflection of the culture of specific countries. However, since MNEs cannot give all jobs to local employees, they face the challenge of conflict of cultures at the workplace (Steers, Sánchez-Runde & Nardon 2010).

Consequently, the success of MNEs in internationalising their operations largely depends on their ability to be proactive. They should have a good understanding of the cultures of different countries to avoid culturally based conflicts at the workplace (Lysons & Farrington 2012).

MNEs should also prepare the ground for their businesses by establishing relationships and networks with local business stakeholders and governments.

They should also insure their businesses against different types of risks. MNEs which do not take these precautionary measures are usually faced with many challenges, some of which culminate in the closure of businesses.

MNEs should also consider political risks which may come after the establishment of the businesses. Political risks may be firm specific or country specific. Firm specific risks are those which are directed to a specific firm as a discriminatory treatment by governments or other competitors.

Country specific risks are those which affect the country as a whole and may include things like political violence, national strikes, high taxes, or policies which may be unfair to all MNEs operating in a particular country (Hill 2006).

If the risks are more than the anticipated profits, then the MNEs should consider exporting their products instead of doing foreign direct investments. However, if there are minimal or manageable risks in the host countries, the MNEs should consider doing foreign direct investments.

The reason is that foreign direct investments are efficient and effective in maximising profits and exploiting the new markets (Hill 2006).

Benefits of an Integrated Business Strategy

An integrated global business strategy has the advantage of reducing costs with huge margins using what economists refer to as economies of scale. If for example a MNE has operations in four countries which are close to each other, that MNE may reduce the cost of production by pooling the production of the four countries in one country.

By so doing, the MNE is able to cut huge costs of setting up production plants in all the four countries. If the cost of production goes up in one country, the MNE may easily shift the production activities in the neighboring country where the cost of production is low.

By so doing, the MNE is able to achieve flexibility in its production, which in tun increases its efficiency and effectiveness (Scholte 2005).

Having an integrated global business strategy also has the benefit of enabling MNEs to exploit cheap factors of production such as raw materials, capital, land, and labour. It happens because the supply and demand of the factors of production mentioned above vary from one country to another.

As a result, MNEs prefer doing their production in countries where the cost of the factors of production is low (Johnson, Scholes & Whittington 2010). A good example to demonstrate this argument is Japan, which is renowned for its vibrant manufacturing sector.

The sector has been a major force behind Japan’s economic growth for many years and as a result, Japan has retained its manufacturing culture.

Consequently, it leads in the manufacture of various goods such as machine tools, electrical appliances, chemicals, ships, electronics, optical equipment, steal, and automobiles (Australian government, department of foreign affairs and trade: Japan country brief overview 2014).

However, there has been increased competition from China and South Korea, which are manufacturing some of the goods mentioned above. The competition has been occasioned by an increase in manufacturing cost in Japan due to increased cost of labour, especially due to its highly educated workforce.

In an effort to counter the increased cost of labour, Japan has transferred some of its manufacturing activities to low-cost countries in Asia and Africa (Yamaha: local offices 2015).

An integrated global business strategy also has the potential of improving the quality of products and services offered by a particular MNE. The reason is that through integrated global business strategy, the MNE is able to focus on particular products or services and invest its innovation on those products or services.

As a result, the MNE becomes a global leader in those products or services. This strategy is able to give the MNE a competitive advantage because it invests immensely in making those products or services as unique as possible, and by so doing, the MNE is able to create a market niche for itself (Van-Weele 2009).

For example, Toyota is known for its lean strategy, where it manufactures few but high-quality automobiles compared to general motors, which deals with a wide range of automobiles. Through its lean strategy, Toyota has been able to increase its competitiveness in the automobile industry.

The reason is that there are customers who prefer expensive high-quality cars to cheap low-quality cars (Mangan, Lalwani & Butcher 2008).

According to Porter’s competitive strategy, Toyota’s scenario is referred to as differentiation. In the field of strategic management, the concept of differentiation refers to the process of making a product or a service popular among customers.

It is achieved through description of the unique characteristics of the product or service being differentiated. The whole idea behind differentiation is to create a market niche for that particular product or service.

When customers are made to understand the unique characteristics of different products and services, they are able to make informed decisions regarding different products and services.

If done well, differentiation enables customers to purchase specific products or services in a market flooded with many varieties of products and services (Thompson & Martin 2010).

Tesco is another example of a MNE which has embraced the concept of differentiation. It is a multinational organisation dealing with grocery and general retail merchandise. Its headquarters are at Cheshunt, United Kingdom (Tesco 2014).

According to information posted on its website, it is the third largest retail merchandise in the world after Wal-Mart and Carrefour. Its main market is in the United Kingdom but it has grocery stores in more than 13 countries across the globe (Tesco 2014).

Through differentiation and positioning of its products, goods, services, and operations, Tesco has managed to place itself in a strategic position as far as competitiveness in concerned. It has also penetrated several markets across the globe through mergers and acquisitions.

However, the organisation has some gaps, which if properly addressed can enhance its competitiveness in the retail industry.

I would advise the organisation to invest more resources in differentiation and positioning so as to improve its future strategic position. Instead of differentiating a single product at a time, it should differentiate several products at the same time. Doing so would enable it to have a pool of loyal and dedicated customers for its goods and services.

I would also advise Tesco to change its market entry strategy. The reason is that its current strategy for entering new markets focuses on opening new stores in different countries. Even though it is a good strategy, it has not helped the organisation a lot. The reason is that opening new stores is more expensive than working with agents.

The organisation should therefore consider entering into partnership with organisations which are not in the retail industry and start selling its products through those organisations. This strategy would enable the organisation to save the costs associated with setting up new stores in other countries.

In order to realise a substantive growth, I would advise the organisation to consider establishing more stores in the United Kingdom than in other countries.

Drawbacks of Globalisation

The current global supply chains are faced with various challenges, which bring about various risks to MNEs. These challenges and risks are based on the changing nature of customers’ preferences.

As opposed to a few decades ago, it is becoming increasingly difficult for MNEs to meet the needs and preferences of their customers, especially due to increased transparency in the free market economy.

There are also increased levels of awareness among the customers on the current global market trends, and as such, customers are constantly looking for the ‘next big thing’ from different MNEs (Lan & Bhuvan 2006).

Globalisation has enabled many companies to expand into new markets in foreign countries so as to increase competitiveness and profitability. Even though globalisation is viewed as a strategy for increasing companies’ profit margins, it comes with increased costs due to complexity of the supply chains.

Different countries have different taxation and business regulation policies. In many countries, it is expensive to manufacture goods due to prohibitive taxation policies. As a result, many MNEs opt to manufacture their goods in low-cost countries and transport them to the countries where they have businesses.

The end result is increased cost of production, reduced efficiency, and a decline of customers’ loyalty. If not managed properly, these issues pose the risk of reduced profitability and ultimate closure of businesses (Flynn, Morita & Jose 2011).

The other significant challenge in the current global supply chains is volatility of markets. For a supply chain to function effectively, there is need to have a relatively stable market in terms of customer preferences, cost of production, supply of goods and inputs, and business regulation policies.

There has also been fluctuation of the major currencies like the United States dollar. The fluctuation not only affects supply chains but it also makes it hard for investors to make crucial investment decisions.

The instability of the major currencies also exposes the supply chains to poor market forecasting, which leads to poor harmonisation of manufacturing, processing, and pricing strategies.

Conclusion

Globalisation has made it possible for organisations of different sizes and complexities to become global and operate integrated global business strategies.

However, operating integrated global business strategies is not an easy task, especially for organisations which are not able to match their globalisation potentials with their globalisation strategies. Examples of MNEs which operate integrated global business strategies include Toyota and Tesco.

Reference List

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Rugman, A.M &Collinson, S 2006, International business, Prentice Hall, FT.

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Spielvogel, J.J 2010, Western civilisation: a brief history, volume 1, Cengage Learning, New York, NY.

Steers, R, Sánchez-Runde, C & Nardon, L 2010, Management across cultures: challenges and strategies, Cambridge University Press, Cambridge.

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Thompson, J & Martin, F 2010, Strategic management: awareness and change, Cengage Learning, South Western.

Van-Weele, A 2009, Purchasing and supply chain management: analysis, strategy, planning and practice, Cengage Learning, Farmington, MI.

Wild, J.J, Wild, K.L & Han, C.Y 2008, International business: the challenges of globalisation, Pearson, Prentice Hall.

2015. Web.

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