Abstract
Multinational organizations understand how important financial management is when it comes to undertaking various strategic projects. These firms are always faced with the problem of numerous needs that must be met with the limited resources within the organization. A number of environmental factors, both internal and external factors, always define the approach that financial planning takes. In this paper, the researcher will look at how Tata Motors and Baidu Incorporation use financial management practices to achieve success in their operations.
From the analysis, it became apparent that Tata Motors is always concerned about the need to protect financial interest of its shareholders in most of its financial management practices. On the other hand, Baidu Incorporation has always employed financial management principles which are more focused on how the firm can achieve lasting growth within the existing legal structures. Each of the two approaches has worked differently to help these two firms achieve success. This may be attributed to the uniqueness of each firm and the different environments in which they operate. It comes out clearly that there are no conventional financial management practices which are universally acceptable. This analysis strongly recommends that a firm should always try to employ financial management practices which are most appropriate to its internal and external environmental forces.
Introduction
Multinational organizations use financial management practices in different ways based on a number of factors within the environment where they operate. Brigham and Daves (32) define financial management as “The efficient and effective management of funds in such a manner as to accomplish the objectives of the organization.” It is a specialized task that is often associated with top management unit within an organization. Successful organizations around the world owe their success partly due to the efficient management of the resources at their disposal. The management must know how to use its financial resources by prioritizing all financial obligations. The sources of finance must also be clearly defined. As Petrick says, the management must know when it is appropriate to get additional financial resources through borrowing or through sale of shares (55).
These are some of the critical management issues that would define the ability of a firm to overcome various environmental challenges. Multinational organizations face even greater challenge when it comes to financial management practices. In most cases, these firms always avoid the temptation to fund their already established branches using the resources available at the headquarters. They would treat each of the branches as an independent entity that should have the capacity to finance all its operations (Zdolsek and Iztok 74). However, sometimes this may not be easy, especially when the local environmental forces have negative impact on the ability of the branch to source for capital locally. In this essay, the researcher seeks to describe how multinational organizations (Tata Motors and Baidu) use financial management practices to achieve success in their operations.
Background Analysis of the Multinational Organizations
Tata Motors
Tata Motors is a publicly traded Indian automobile manufacturer that has global market coverage. The company is headquartered in the city of Mumbai. It is fully owned by Tata Group, a large conglomerate that also has its headquarters in Mumbai city. The firm specializes in the manufacture and sale of trucks, buses, vans, coaches, cars, and military equipments. It was founded in 1945 and has experienced a phenomenon growth over the years to become one of the leading automobile manufacturers in the world. Through mergers and acquisitions, Tata Motors has been able to enter various international markets with great success. However, the industry within which this firm operates is highly competitive. This means that the firm must find effective financial management strategies that can enable it to manage its projects without jeopardizing its profitability (Salwan 56).
Baidu
Baidu Incorporation is a leading Chinese web service provider that has its headquarters in the city of Beijing at Baidu Campus. Founded in January 2000, this firm grew very fast within the Chinese market due to lack of competition. According to Nuryanah and Islam, leading search engines such as Google Inc did not make serious attempts to enter the Chinese market till 2010, at which time Baidu had gained a loyal base of customers in the country (61). The search engine market is increasingly becoming very competitive and Baidu is now under pressure to manage the threat posed by its arch rival, Google. As it seeks to expand its operations to a global market that is dominated by Google Inc, this firm will need an effective financial management strategies that will give it a competitive edge over its market rivals. It would be interesting to see how this firm uses financial management practices to gain competitive edge over its market rivals.
Financial planning
Financial management starts with financial planning. According to Brigham and Daves, effective financial management starts with effective planning (19). Financial planning entails understanding the current financial position of a firm, identifying all the activities that need to be done, and prioritizing these activities based on the available financial resources in the best way possible. It involves getting the highest possible value from the current resources in order to achieve success either in the short or long run. An organization that fails to have an effective financial planning system cannot achieve success in financial management. Tata Motors and Baidu are large multinational organizations that have operations in the global market. A research by Petrick shows that Tata has one of the best financial management strategies (72).
It was one of the few firms in the automobile sector that were able to come out of the 2008 global economic recession stronger than they were before the recession started. This is largely attributed to its financial planning strategies. Most of the manufacturing activities of this firm are done in India where cost of labor is very cheap. This means that its cost of operation is always lower than that of the major competitors in the market. Its effective financial planning strategies enabled it understand the threat that was brought by the recession and prioritize its financial obligations. The best demonstration of successful financial planning by Tata Motors, especially during tough times was its acquisition of Jaguar Land Rover from Ford Motors. At a time when other companies were cutting down their expansion projects because of financial constraints, Tata Motors was expanding very fast because it had effective financial plans.
Baidu’s financial strategies have helped it expand its operations beyond the Chinese market. The biggest threat that Baidu faces in its global operation is the stiff competition that it faces in the market, especially from Google. To remain competitive, this firm is forced to be very innovative in its product delivery methods. However, to be innovative, this firm needs to plan for its financial resources. It needs to hire some of the best talented human resource who can understand the changing market needs. According to Zdolsek and Iztok, managing innovating sometimes may require a firm to have extra expenditure in building up the new concepts and retaining the needed talents within the firm (43). Baidu has tried to do this in the best way possible.
Use of debt
Debt financing is one of the most popular financial management practices that are very popular among various multinational organizations around the world. It offers a firm the needed money to fund its projects without opting for the equity funding. However, Petrick warns that this is a strategy that a firm should take with a lot of caution to avoid excessive debt burden (89). A critical analysis of Tata’s balance sheet from March 2011 to March 2015 shows that Tata has been very cautious when it comes to debt financing. The debt that the firm takes to fund its projects has remained relatively low. However, there has been a consistent rise in the amount of debts that this firm has been taking over the years. The firm has had a 37.2% increase in debt funding from 2011 to 2015. This clearly shows that as its operational activities increase, Tata Motors is finding it relevant to use debt funding as a strategy of increasing its resources (Salwan 67).
Baidu Inc on the other hand has been heavily relying on debt financing to fund its long-term projects, especially since 2012 when the find launched a strategic offensive against Google as it struggled to expand its operations in the global market. From the balance sheet, it is clear that long-term debt of the firm has more than doubled from December 2012 to December 2014. In 2012, the firm’s long-term debt was $ 1,562,967. This increased to $ 3,797,083 in December 2014 following a series of innovative ventures that this firm engaged into. It shows that this firm has found debt financing to be an effective way of funding its long-term projects (Boddy 88).
Dividend policy
According to Jain, Singh, and Yadav, dividend policy is another financial management practice that is unique in different firms (92). Different firms have different guidelines which it uses to determine how it pays its shareholders. The shareholders at Tata Motors have been receiving uninterrupted dividend distributions except in 2001 and 2002 financial years when the firm experienced financial problems. In its policy, the shareholders get dividends at the end of every fiscal period. Baidu Inc has never paid any dividend to its ordinary shares since it went public. In fact, it dividend policy clearly states that the firm does not intend to pay dividends to its ordinary share in a near future as it struggles to consolidate its finances to achieve a greater growth.
Managerial ownership
The concept of managerial ownership is increasingly becoming popular in running of the modern day businesses. The presence of shareholders in the management of multinational organizations is believed to be the best way of aligning shareholders’ interests with business decisions. At Tata Motors, the management is dominated by professionals, some of whom are not shareholders of the firm. However, the shareholders- through the board of directors- have the mandate of approving major investment decisions that the firm makes. This helps in ensuring that the interests of the shareholders are protected at all time. On the other hand, the level of managerial ownership at Baidu is very high. The chairman and chief executive officer of this firm is one of its original founders.
Corporate governance
According to Zdolsek and Iztok, corporate governance is one of the most challenging aspects of financial management (74). Balancing the needs of shareholders, managers, employees, customers, financiers, suppliers, community, and government al at the same time is not easy. At Tata Motors, corporate governance is achieved by defining the needs of all the stakeholders as clearly stating how they can be met without jeopardizing the ability of the firm to prosper. At Baidu Incorporation, emphasis has always been placed on how to enable the firm prosper within the existing laws that govern its industry. There are instances where Baidu Incorporation ignores the interests of clients to ensure that it operates within the law (Boddy 112).
Conclusion
Financial management practices are very important in defining ability of a firm to achieve success in the market. Different firms find different financial management practices important in their effect to achieve various needs using the limited resources they have at their disposal. In this paper, the researcher looked at two multinational organizations to determine how they employ different financial management practices in their operations. It comes out clearly that the strategies that Tata Motors find relevant are not necessarily useful to Baidu Incorporation. This may be so because the two firms operate under different socio-economic environments. It is, therefore, recommended that every firm should use financial management practices that suits it best based on the internal and external environmental factors.
Works Cited
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Brigham, Eugene, and Phillip Daves. Intermediate Financial Management. Mason: South-Western, 2013. Print.
Jain, Kennedy, Shveta Singh, and Surendra Yadav. Financial Management Practices: An Empirical Study of Indian Corporates. New Delhi: Springer, 2013. Print.
Nuryanah, Siti, and Sardar Islam. Corporate Governance and Financial Management: Computational Optimisation Modelling and Accounting Perspectives. New York: Cengage, 2015. Print.
Petrick, Joseph. “Sustainable Stakeholder Capitalism: A Moral Vision of Responsible Global Financial Risk Management.” Harvard Business Review 99.1 (2013): 93-109. Print.
Salwan, Prashant. “Growth & Internationalization: The Case of TATA Motors.” Strategic Finance 47.1 (2014): 1-19. Print.
Zdolsek, Daniel, and Kolar Iztok. “Management disclosure practices for disaggregated (financial) information in Slovenian unlisted companies.” The Journal of Business Finance and Accounting 18.2 (2013): 264-289. Print.