The Global Business Environment of Primark Essay

Introduction

The organization selected for this case study is Primark which is a well-established bargain clothing retailer in the UK. It is the most successful discount clothing chain in the UK. Its value for money business concept provides tremendous growth of business in the industry with market leadership. Quality products are supplied by it at a cheap rate by applying effective cost control measures in production and marketing. An effective combination of low prices and high fashion to the products increases the sales turnover of the firm.

“ABF’s retail division, basically Penneys/Primark, recorded operating profits of stg£185m (€274m) on a turnover of stg£1.3bn (€1.92bn). The ABF interims revealed that Penneys/Primark had grown its half-year operating profits by 28pc to stg£91m (€135m)” (Ryan 2007).

Impact of Globalization on the Business of Primark

The current international business environment is characterized by globalization and international business operations. Primark has decided to adopt a new branding strategy for strengthening its international business operations. Single brand promotion the existing for this purpose and the existing subsidiary products are renamed. The existing 12 divisions of Primark are restructured by reducing to 3 divisional units for implementing the new branding strategy. The acquisition strategy is adopted by the company for expanding the business on a global basis.

Primark is used as the brand name of the product produced by the member companies in the group. Earlier the 12 subsidiary business units had their brand names and marketing awareness. As a globalization strategy, Primark carries out its operation in 61 countries. It occupies 80 offices in 21 countries. The group adopts unification of its operations under a single master brand of ‘Primark’ to strengthen the product line in global markets. It helps to promote the brand value of the products and components supplied by it through promoting the brand name (Barbara Quint, 1999).

Following are some of the factors which have enhanced the pace of internationalization:

Political Drivers

The political parties of most countries have started thinking of globalization and from an international perspective. They have accepted the fact that their countries can sustain in a globally competitive market only when their markets are opened up to the world economy. For example, the opening up of China and the countries of the former Soviet block has also been a significant driver of trade and investment between regions formerly closed to each other.

Technological Drivers

It is an accepted fact that technology has facilitated the growth of globalization and international trade relations between countries. The invention of computers and internet has compounded the pace of development and dependence of countries on one another. The establishment of a network such as the Internet involves high initial fixed costs, but additional users, both businesses and consumers, incur falling variable costs as the network size increases. These increasing returns to scale create huge benefits, known as network externalities, as the network expands.

Economic Liberalisation

Today all economies across the world have opened up for global economy and global integration. This is seriously practiced after periods of internationalization, especially in the late nineteenth century, is greater economic openness or free trade. Economic liberalization, in its modern form, usually describes internal economic reform such as deregulation and privatization and the removal of barriers to trade in services as well as the more conventional view of free trade as the removal of tariffs on physical imports.

Market Drivers

Many countries have realized that domestic markets are not enough to put all that they produce and started thinking of expanding their operations to overseas markets that led to a new approach in business strategy formulation.

Cost Drivers

The opening up of economies to the world economy has increased differences in resource costs in different countries, which made them think about lower costs, either by purchasing raw materials or components abroad, relocating a production process or service operation abroad, or outsourcing some of its activities abroad. Internationalization also enables a firm to take advantage of economies of scale, with the larger international market allowing the increased scale of operations, hence lower average production costs.

Impact or effect of market drivers on Primark

The major factors that affect the business operations of Primark in the globalization context are technological drivers and cost drivers.

The effect of technological drivers on the business operations of Primark:

Technological innovation in marketing of products such as online retailing greatly influenced the business operations of Primark. Primark created online retail strategy for their product. It is recorded that the online demand for Primark product highly increased over the years. Tremendous increase in the number of online customer that searches for Primark product reveals that their online retailing strategy is highly successful. The online strategy helped Primark to increase its customer base and profitability growth in the industry (Online Demand for Primark Increases. 2005).

Impact of cost drivers on the business operations of Primark

In the age of globalization cost reduction is an essential factor for sustaining the market position. Thus multinational firms are adopting the business policy of relocating their production operations to lower-cost countries to reduce the labor cost. In Asian countries, the cost of labor is much lower than in other parts of the world market. Primark came in contract with apparel producers in Asian countries such as India and Bangladesh, for supplying low-cost products to exploit the opportunity of lower labor costs in Asian countries. The suppliers of Primark in Asian countries are attaining the lower production cost by exploiting the refugees and child labor. The publicity of this fact among the international market community badly affected the image of Primark. Primark had breached the employment and immigration laws in the country by hiring illegal for their business operations without securing minimum wage for them. It affects their image as the supplier of low-rate garment products in the UK garment industry (Illegal Immigrants: Primark in Trouble. 2009).

Primark occupies 123 retail shops along the UK and it is a leading firm in the retail business. low-cost high fashion clothing is its major plus point. The extraordinary fashioned clothes of Primark are capable of attracting the targeted customer group. “More than a quarter of a million have been sold in 12 different styles. The latest company results, released in November, show annual profits up 30% and sales up 17% to more than £1b”. (Mallary, 2005).

The retail market was not attractive at the introduction stage of the Primark business. t. Several well-established firms existing at that time were in the stage of winding up. It resulted from the strong competition in the industry along with diminishing customer satisfaction and reduction of sales of clothing. Thus the economic climate provided the opportunity for Primark with their low-cost and high fashioned clothing products. Primark attained successful growth in the industry with this product strategy. The factor behind its success is the capability of changing the designs of products according to changes in the customer tastes and preferences. The time taken for implementing the new designs into products is approximately six weeks and this is a competitive advantage for the firm. It ensures the minimum cost of production for its products through the transplantation of production units in China and Eastern Europe, i. It takes only an economic profit margin per product and thus the selling price of products is the lowest in the market. The pricing of products at the lower level is not always preferable, because the cheap product is treated as cheap in quality also. Long-term customers’ individual needs must be fulfilled for existing in the industry. (Primark – king of no-frills fashion, 2005).

Depleting social resources, exploitation of employees, environmental pollution, and corruption are the major issues in the business aroused from globalization. Individuals and organizations are now concentrating on social responsibility. Ethical and socially responsible business operations are essential for the long-term existence of firms.

Authorities do not care about the social responsibility of foreign firms for attracting more foreign investment in the country. This soft attitude towards foreign investors causes more unethical and socially irresponsible actions from the investors. Thus globalization prevents ethics in business operations. The exploitation of resources of undeveloped countries is an irresponsible business practice. In the socially responsible business operation, keeping up the business value is insisted along with the well-being of stockholders. Customers are now watching closely the corporate responsibility of business firms towards society. They have the opinion that firms have social roles and they have to meet the social goals through their operations. The business entity is required to be met corporate social responsibility for creating sustainable value in the business, c. “Companies increasingly have to consider their reputation capital in the marketplace and protect their brand by ensuring their operations are beyond reproach”. (Globalization and the Business Case for Corporate Social Responsibility).

Extreme competition in the UK retailing industry forces firms to reduce the selling prices of their products because customers are more preferring low-cost products with better quality. Product differentiation is limited in the no-frill fashion segment. There are several competitors in the industry with the same type of products. Thus the cost of the product is the only way to make differentiation in the market. Primark is targeted at customers belonging to the age group of below 35 yrs. The slogan, “Look good, pay less” adopted by the firm for its products is very effective for attracting customers. Its main advantage is cost leadership in the industry.

According to the concept of Michael Porter, two ways of achieving potential profit in the business are providing the same products of rival firms at reduced rate or supplying differentiated products or services from that of rival firms. Cost strategy and differentiation strategy are the two strategies adoptable in the age of globalization. The clear customer segmentation adopted by the firm is helpful for getting market acceptance and growth. They concentrate on improving the efficiency of supply chain management. Primark adopted computerized customs clearance for improving the speed of business operations. (Black Well).

Ethical issues, social responsibility and the natural environment

A business firm has corporate responsibility towards the stockholders, customers, employees, suppliers, creditors, and the community. The market failure theory emphasized the positive and negative externalities of a business firm. Positive and negative externalities refer to “events which confer an appreciable benefit (inflict an appreciable damage) on some persons who were not fully consenting parties in reaching decisions which led directly or indirectly to the event in question.” (Tomer 1999, p.120).

Strategic corporate social responsibility of business firms involves the following factors

1. Alignment. It is the first function of ethically engaged business corporations. Firms have to align their formal business policies and procedures with the informal business culture. To sustain ethical responsibilities, firms have to align the corporate image with their business practice.
2. Dialogic communication. Ethically engaged firms have to value the perceptions of employees and customers. They required focusing on the difference as a valuable and useful resource for formulating the CSR related strategies.
3. Transparency. Corporate firms have to create and maintain clear and visible organizational structure, mission, policies and procedures. It will help to improve the trust and respect from the part of stakeholders and employees.
4. Participation. High levels of loyalty should keep up by ethically engaged corporations for confronting the ethical issues in the business operations. Firms have to accept the CSR as a core business policy rather than as a marketing strategy.
5. Courage. Ethically engaged firms required to possess the courage for taking risks. The employees should have courage for identify, assess and resolve ethical dilemmas.
6. Accountability. Ethically engaged firms are responsible for predicting and overcoming ethical challenges. They are accountable to the stakeholders for meeting the responsibilities. Specific corporate goals regarding CSR have to be framed by ethically engaged firms. (Zerfass et al. 2008, p.377).

Business firms are responsible for maximizing the shareholders’ wealth through maximizing the value of the firm. Being a corporate entity, it has a responsibility towards the society in which it exists and operates.

Business ethics and corporate social responsibility are an inevitable part of the business functions of companies in the present business world. Profit earning is a part of the corporate responsibility of the business firm towards its shareholders. The offering of standardized products and services at adequate cost is the responsibility of the firm towards the customers. The provision of better working conditions, better payment for service, and better development opportunities are part of the responsibility of the company towards the employees and other organizational personnel in the organization. A business organization is treated as an artificial entity. Thus it has a responsibility towards the local government to carry out the business functions in legal and regulatory ways. As an artificial member in the community it have responsibility towards the community in which it belongs and thus socially ethical business practises have to be followed by the business for fulfilling this responsibility.

Business organizations have to consider business ethics in its day to day affairs. Business ethics are different in different business fields. It is starting from the dealings with a single customer to the entire business world. Profit making is the part of capitalism in which the business firms are showing an exploitive mentality. It is not suitable in the present business world. Good business ethics is the positive factor that keeps the value of the business at a higher level. In the case of the soft drink industry giant firms are not following corporate socially responsible business functions. It greatly affects the smooth functioning of their business in any part of the world. In business ethics, exploitation of society is eliminated. (Crystal 2009).

Some business theorists argued that ethical duties of business firms are limited to the follow up of related law and earning profit for the stakeholders. Others argue that as an artificial member in the community it has ethical responsibility towards the society in which it belongs as like individual human beings. The Economist argues that follow up of business laws and honest behavior is enough for a business firm to meet its corporate responsibility. “Law and ethics are distinct spheres. Sometimes we are ethically obligated to do things that the law doesn’t require; sometimes we might even be required by law to do things we find ethically questionable.” (Cline 2005).

The business firm has social responsibility more than follow up of business laws and earning a profit which is to function properly without affecting the interests of the society badly.

Primark is a retail group that insists on being an ethical employer in the society it exists. It ensures abolition of child labor in the production process of its products. Products produced with child labor are not accepted by it from suppliers. It refuses to accept products manufactured by suppliers or sub-contractors by using home based child labor.

“According to Primark, the garments affected accounted for 0.04% of the retailers’ worldwide sourcing. It currently has more than 170 stores and made a £200m profit in 2007 on total sales of more than £1.6bn”. (White, 2008).

The Code of business conduct of Primark ensures its social responsibility. Safe and hygienic working conditions in the production centers are insisted in the code. “Child labor shall not be used, living wages are paid, working hours are not excessive, no discrimination is practiced, regular employment is provided, no harsh or inhumane treatment is allowed”. etc are other points in their Code of Business Conduct (Our code of conduct, 2008).

The customers are highly benefited from globalization with quality products at reduced rates due to intense competition among global firms. Firms are relying on contracting the manufacturing process to low-cost countries due to the increased globalization, f. Outsourcing of production to the low-cost manufacturers provides relief to the firms from reducing the cost of production and thus they can concentrate on other sectors of the business. Efficiency in entire operation can be maintained through this business strategy. Good quality products can be supplied to the customers at reduced rate. Primark has adopted the business model of outsourcing operations and contracting with low-cost suppliers. The remarkable growth of Primark is mainly contributed from this strategy. The disclosure of the outsourcing details of the firm reveals that the actual workers of Primark products in Bangladesh are paid only limited wages and it is not adequate for spending in daily life. Along with the inadequate wage problems, the working conditions in the manufacturing centres are extremely dangerous for their healthy life. Workers are forced to work overtime. It is a clear example of labor exploitation which is against the code of business conduct of Primark. The subcontractors engaged in the supply of clothes to Primark in south India are using child labor in the production process. This is also against corporate responsibility.

To attain competency in terms of cost reduction, labor exploitation and child labor are employed in the production. Thus the supply of low-cost products to the customers seems to be arising from the exploitation of the poor in society. Primark ensures that all of the unethical practices for its products are eliminated by emphasizing strict trading standards to the suppliers. Unauthorized subcontracting of suppliers is not allowed by Primark. The supply of quality products at low cost results in low mark-ups and economies of production. Other competing strengths of the company in the industry are reducing overhead costs and avoiding costly promotional activities (In the News, 2008).

Supplier Code of Conduct-Procurement of Merchandise

The company is sourcing high-quality products from many countries with diverse cultures and economies. The company is following a strict code of conduct towards its suppliers for the supply of goods and other services including contractors. All suppliers are supposed to act in accordance with these codes of conduct, failure of which will result in the cancellation of the business arrangement after giving a chance for appropriate changes in the practice. This code is made mandatory and is subject to audit. All suppliers are expected to follow an open attitude for the smooth conduct of the audit done by the company or any third party.

Employee Code of Conduct

1. Employment is freely chosen. The employment is not a forced, bonded or involuntary one. Workers need not deposit any amount of money with the company for getting a job nor do they keep their identity papers with the company. They can leave the organization as they desire after a reasonable notice.
2. In the organization, employee relationships are better respected by allowing freedom of association among them. Collective bargaining is also allowed for the employees in the organization.
3. All workers are at liberty to form and join any trade union of their choice and to actively engage in collective bargaining.

The company has been adopting an open attitude towards trade union activities and their approach toward the company.

Workers’ representatives are allowed to perform their functions at the workplace without any restriction. The representative functions such as workers committee with elected members where workers can confidently raise their grievances are allowed without any discrimination.

To restrict the law against the right to freedom of association and collective bargaining, the company would take steps for free association and bargaining in the organization.

A safe and hygienic working environment is arranged in the company in order to meet the standards of industrial laws and regulations.

In times of accidents and injuries arising out of, or in connection with work, adequate steps shall be taken and as a proactive approach, the same shall be prevented in the future.

Adequate health and safety training should be provided by the company for all of its workers to develop health and safety-conscious among them.

In order to assure the health and hygiene conditions in the working place, adequate facilities such as purified water, healthy food and beverages and sanitary toilet facilities are arranged.

Accommodation provided must be clean, safe and must conform to the need of the workers. The responsibility to observe these things is given to a senior management representative. The recent efforts put forward by the company in Bangladesh reveals its fairness in dealing with working conditions. A report in a piece of corporate news remarks “Primark is constantly reviewing and working on improvements to the working conditions of the people in its supply chain. We have an extensive auditing program, supplier training program and work with other third parties, including NGOs and governments, to ensure that our suppliers comply with their contractual commitments under our clear and strict Code of Conduct” (Primark defends charges of unethical working condition in Bangladesh. 2008). The company believes in the approach that good working condition is a prerequisite for high performance. The report further says that “In Bangladesh, we continually audit our suppliers. These audit reports are not often published as it is for the internal managerial purpose of Primark. By identifying the necessity of auditing together with its in- sufficiency in the organization, further, improvement is added in the audit process through various programs. We have also started a program of direct engagement with workers and junior management to ensure that they are aware of our commitment to them and continual improvement”. (Primark defends charges of unethical working conditions in Bangladesh. 2008).

Environmental requirements

The company has rather a strict approach in this regard, t. The company does not wish to work with suppliers who do not conform to the environmental standards.

Child labor shall not be used

The company has been following the policy of not recruiting child for work. It develops or participates in the programmes, which provide for the relocation of the child from workplace to education. The issue of child labor has been seriously taken by the company to keep itself in line with the ethical way of doing business. For example, the recent abolition of the contract with three Indian companies for purchasing goods indicates that the company is totally against child labor. (Primark Fallout: A Lesson to Learn. 2008). The Indian companies which have used children for their manufacturing operations were trying to reduce the cost of production to meet the demands of the low-cost fashion makers. But, the company was very rigorous in its approach which took a non-sympathetic approach for dealing with such suppliers.

Living wages are paid

The company always ensures that the wages and other benefits provided shall conform to the legal standards or industry benchmark, whichever is higher. The company takes utmost care in ensuring that the workers can meet the basic needs and save some as discretionary income.

All employees shall be given written information regarding the terms and conditions of employment and payment.

No deduction from the remuneration of employees shall be allowed without their permission.

Working conditions are not excessive

The company follows a working hour’s policy, which conforms to the national law and benchmark industry standards.

The per week working hours is restricted to 48 hours and one day off is given for every 7 days period.

Overtime is a voluntary matter and those who work overtime shall be remunerated at a premium rate.

Favoritism is not allowed in the organization

The company is always ensuring the elimination of favoritism in the organizational process such as employee hiring, compensation, access to training, promotion, and termination or retirement. These processes should be free from all types of discrimination based on race, caste, national origin, religion, age, union membership, political affiliation, etc.

Employment is on regular basis

Employment in the organization should be based on a long-term contract with the personnel. Terms and conditions of the employment are fixed through an employment contract prescribed under national law and regulations.

Obligations towards the workers shall not be avoided by the use of labor-only contracting, sub-contracting, or home-working arrangements, or through apprenticeship schemes.

No harsh or inhumane treatment is allowed

“Physical abuse or discipline, the threat of physical abuse, sexual or other harassment and verbal abuse or other forms of intimidation shall be prohibited”. (No Harsh or Inhumane Treatment is allowed).

Legal Requirement

The company is committed to full compliance with the laws and regulations concerning the procurement locations, and shall not deliberately violate any such law or regulation.

The company shall not enter into business with any suppliers who violate applicable laws and regulations. (Suppliers Code of Conduct).

Primark is still accused of unethical practices especially in the case of using cheap labor in its outsourced markets. The TV program titled Panorama broadcast by the BBC created news in the UK when it revealed that children with ridiculously low wages were working in inhuman conditions in the city of Tirupur in Southern India. They were engaged in stitching sequins to Primark garments in a ‘factory’ located within a refugee camp some seventy miles off the above-mentioned city. (After the Gold Rush).

This happened during the year 2008. In 2005, Primark was named the least ethical textile company in the UK by the organization called ‘Ethical Consumer’. (Hickman, 2005).

It is easy to deny that an organization is not aware of such practices mentioned above and wash hands over the whole affair. If a particular market is known to use unfair labor practices and child labor, there is every chance that outsourced work will also be done using them. There is no possible and effective way for Primark to check whether such practices are done on a long-term basis. But companies like Primark continue to outsource their products to markets in India and China. The only option is to stop outsourcing to markets which has a reputation of having used unfair labor practices and child labor. But it appears that in this respect, profit is a better motivator than ethics. Unless big companies take the initiative, such practices will continue even if Primark stops outsourcing. It will be only effective only if all the outsourcing companies jointly decide to stop outsourcing. Only then will the local authorities in the outsourced market will be serious in curbing such practices. For example, if all the textile companies that outsource labor from Tirupur stop it on the grounds of unfairness, the local authorities and the government will take serious notice of the loss in revenue. Then they may take steps to reign in the offending parties there. “Business ethics has moved beyond vulgar “business as poker” arguments to an arena where serious ethical theory is no longer out-of-place but seriously sought out and much in demand.” (Coady and Sampord 1993, p.25).

Effect of globalization on the operation of Primark

As a well-established garment manufacturing company in the UK, Primark has a wide variety of opportunities in the globalized business environment. It started business units all over Europe for expanding the business. By starting business units in Germany, Portugal and Netherlands successfully, it identified the opportunities of transnational strategy. Even though there exists strong competition in the retail market of Spain created by competent rivals such as Zara and Hennes & Mauritz, Primark gets market share and profitability through its accurate business strategies. It was the first stage of their expansion strategy. Started as Penneys in Dublin in 1969, Primark had gone through series of market operations and it now achieved the status of biggest value clothing retailer in the UK. It acquired the capability to supply quality products with high fashion at a reduced cost to the customers by utilizing the low-cost labor services in developed countries. Through customer satisfaction, it achieved market acceptance and profitability in its business. The main factor behind the success of Primark is its trans-national expansion strategy of production and marketing. It is realized from the concept of globalization. The production cost of garment products is comparatively lower in Asian countries than the European counties. It is due to the lower wages of workers and availability of cheap resources. By identifying this production opportunity, Primark has transferred its production process to countries like India and Bangladesh in which the wages of workers are lower. Thus globalization of production strategy helps Primark to get its products at reduced cost. (Hawkes 2008).

The expansion strategy of Primark is mainly based on acquisitions. Through globalization, the acquisition of firms by foreign investors becomes possible with limited restrictions. Thus foreign investors have the opportunity to expand their business by acquiring local firms in foreign countries. Through this localization strategy can be effectively employed in globalized business operations.

From a single store set up in Ireland, Primark group now owns a 40% market share of the UK retail garment business through an acquisition-based expansion strategy. The effectiveness of the domestic expansion strategy is limited due to the small population size in Ireland. Thus, globalized business expansion overcomes the limitation of population and demographic factors which restrict the growth of the business. Primark gets more customer groups and plenty of opportunity for product differentiation and more markets by starting business units in the UK and other parts of Europe. The limitations concerning the internal business environment of its native country, Ireland, are effectively overcome by Primark through its expansion strategy in other European countries.

Conclusion

Primark is known as a discount clothing supplier among its customer groups. Primark wanted to reduce its operating cost at the minimum lower level. Through transferring the production operation to lower-cost countries, it achieved cost-effectiveness in its production. Production becomes much larger by getting more market opportunity through market expansion, and thus economies of scale are achieved in its operations. (Expansion Through Acquisition. 2000).

From this, it reveals that globalization has played a major role in the successful market growth and profitability in the business operations of Primark. Primark is required to meet social responsibility and business ethics in its business functions. The adoption of child labor and low wages to employees are both illegal and unethical. Thus the company has to eliminate child labor for its products and have to ensure adequate wages for the employees engaged in the production of its products. Profit-making is not the only business function and responsibility of the business firm. Over than profitability, to sustain for along term in the industry the company has to meet the corporate social responsibility to the society. To keep the business value fulfillment of social responsibility is essential. The cost required to meet the social responsibility and business ethics would become part of the business assets through goodwill creation.

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