Globalisation of Logistics and Supply Chains - Example

Globalisation of Logistics and Supply Chains Name Tutor Course Date Abstract Multinational enterprises are the main drivers of globalisation which has its merits and demerits. Most of the MNEs are currently expanding to several global points while headquartered in their first operational countries. The expansion of the operations of the MNEs requires integrated administration, supply chain and logistics processes for an effective analysis of progress and economic output. It also requires the use of global strategy. This research paper is an analysis of the effectiveness of the use of an integrated global strategy that MNEs are applying in several countries. Several models and author opinions are used to analyse the operation of the MNEs in the countries. Keywords: Multinational enterprises, Global strategy Triad Pestle Yip Porter Globalisation. Introduction The issue of globalisation has taken over in many sectors and its integration in the supply chain and logistics of multinational enterprises is growing with fears from its supporters and non-supporters on the effectiveness of the integration. The objective of this paper is to critically analyse the possibility of multinational enterprises working using an integrated global strategy in several countries globally in these present times. Multinational Enterprises are the highest contributors of world investment and trade though this is contributed by a small percentage. The largest 500 MNEs are reported to be the contributors of more than 90% of the world’s foreign direct investment (FDI). The research question requires the analysis of application of global strategy on the operations of MNEs in many countries. Therefore, in handling the research question there is focus on the definition and operations of MNEs’ supply chain and logistics processes. Secondly, a review of the globalisation as fostered by the MNEs. There will also be an evaluation of the global strategies that are used in the diverse countries using the PESTEL analysis model. Additionally, the context of porter’s Diamond and Yip’s Total global strategies in the changes implemented by the MNEs will be done. This will highlight the benefits that the integration of the strategies in several countries has. Multinational enterprises (MNEs) MNEs are defined by Rugman et al (2006) as companies that are controlled from a headquartered in one country but have operations in other countries. The rise of MNEs has been the largest contributor of the globalisation process presenting several advantages. They allow companies to be involved in the production and distribution of standardized products that are used in many of the countries. The presence of a single company spread out across many countries requires the integration of several systems including the supply chain, marketing, logistics, administration, industrial process, strategy and human resource management. These integrated subsections vary depending on the field of operation of the company. This integration is aimed at reducing competition and increasing company sales. According to Harrison et al (2005) the integration of the process of logistics and supply chain are helpful as MNEs are expanding their operations to rising markets such as China, Brazil and Africa that are not part of the Triad. The integration is driving market advantage. This denotes that the use of the total global strategy is not a myth but an achievable fact that is happening in the MNEs operations currently. There are several factors that are part of the global strategy; global market, global competition and global operations. Details on the globalisation of the use of a total global strategy by MNEs are discussed in detail after an understanding of the globalisation. Globalisation Globalisation is the production and distribution of standardised services and products on a global scale. One of the greatest enforcers of the globalisation process is MNEs that are expanding their markets and operation centres to other countries in the world extending beyond the TRIAD nations. Conflicting opinions have been presented by supporters and non-supporters of the globalisation process. Rugman et al (2008) support the globalisation of MNEs beyond the Triad countries because it leads to the economic interdependence of the involved economies. Apart from that the globalisation of MNEs has led to increase in trade and Foreign Direct Investments. The globalisation of MNEs has several advantages, as expressed by Manolica et al (2013), which include reduction of production costs, stronger market positioning, increased operational flexibility and increased revenue generation. Some of the drawbacks that that have been brought by the globalisation of multinational companies is the fact that the progress of the multinational company depends on specific factors if the host country that include political stability, taxation laws and other legal obligations set for multinational corporations, bureaucracy, corruption, tariff and non-tariff barriers and custom duties. In addition to that, the MNE must have comprehension of the market to ensure that its products have a market to avoid effects on the financial plan. MNEs require a highly efficient management and communication models. There are five drivers of globalisation that are pointed out by Yip (1989) and include the market drivers, government drivers, competitive, changes drivers and changes overtime. Market drivers depend on the customer expectations and the supply chain that involves distribution and include the global channels, global customers, transferable marketing and homogeneous customer need. The cost drivers are dependent on the economies of the countries that a MNE operates in and the global economy. Government drivers vary from government to government and are standardised by the leaderships of the countries. They include trade policies, technical standards and market regulations. Competitive drivers are the determinants of the competition between MNEs and might lack influence on the other drivers of globalisation. Change over time defines the changes in the industry which have an effect on the growth of globalisation. Despite the presence of these drivers, each MNE must have a global strategy. Evaluation of PESTLE /Key Dynamics Globalisation has led to the expansion of MNEs to different nations. Initially, there was a stronger presence of MNEs in the TRIAD nations but there is a continuous expansion beyond the BRIC (Brazil, India, Russia and China) countries to other global states. However, about 80% of the revenues generated by these MNEs are attained from their original countries which are mostly in the triad regions. According to Rugman et al (2002), in 2004, out of the said 20 MNEs only 6 were true global MNEs because some of them had extended markets in triad nations. Examples of the MNEs that were allegedly global but only functioning in their home triad market are Pernod Ricard and Vivendi which were achieving 81.7% and 68% of intra-regional sales respectively from their regions. MNEs and proponents of global strategies should understand their region of operation and ensure that they are using the correct strategy. Figure 1: Framework for Analysing Globalisation (Rugman et al, 2002) Global MNEs have a global strategy while the rest have regional strategies and national strategies. The global strategy that an MNE decides on depends on two main facts: the number of countries they operate in and the firm specific advantages (FSA) of the non-location and location bound advantages. This enables MNEs to standardise their products and to benefit from the integration. The global strategies are only effective if implemented by MNEs that are global instead of those that are focussed in the triad countries. The first aspect is the understanding of the the integrated global strategy before carrying out the PESTLE analysis. A global strategy is the strategy that MNEs apply in order to ensure maximum performance of its global network through integration and sharing. The global strategy has five dimensions: market participation, product offering, location of value added activities, competitive moves and marketing approach. The global strategy according to Yip (2003) dictates that the operation of a business in a global setting requires a clear global strategy that incorporates the core business strategy, the competitive objectives of the business and the geographical extent of operation of the business. He states that the strategy must have a sequence and defined hierarchy of implementation. The PESTLE analysis covers four main sections which are Political, Economic, Social, Legal, Economical and Technological factors that determine the environment of the MNEs. According to Mwenya (2001), the PESTLE analysis is used in understanding the environmental factors that affect an MNE. They are varied depending on the country that a MNE is based and are the determinants of the global strategy that can be used. Technological factors affect the use of global strategies in diverse countries. The development of technology that improves communication and management enhances the implementation of the global strategy in several diverse countries. The technological advancements have led to increased telecommunication in MNEs that are spread far apart in global regions. As expressed by Narula et al (2003), technological advancements is one of the factors that have led to increased globalisation and the enhancements in this field are supportive of the implementation of global strategies by MNEs. According to Griffin et al (2006), the technological environment of a country is be changed by the MNE by the willingness to transfer technology of the original country to the host country or by the country when it invests in the required technological infrastructure. An example of a technology transfer is the requisition by the Kingdom of Saudi Arabia to the companies that were involved in oil exploration to hire and train Saudi engineers before venturing into oil exploration in the country. Similarly, China required General Motors to operate in the country after it set up five training centres on fuel systems and power trains to enhance the technological awareness of the Chinese people. As expressed by Yip et al (1989), the political environment of the region of operation of a MNE also determines the effectiveness of the application of a global strategy. The political environment is the most dominant influencer of the MNE and includes the government stability, country leadership strategies, government trade regulations and tariffs and the presence of economic and political unions. These include economic and regional institutions such as the European Union, BRIC, TRAID, International Monetary Fund, World Trade Organisation and Organisation for Economic Corporation and Development. These organisations and trade bodies have a political role in the host country of the MNC and have regulations that may limit or enhance the performance of the MNE in the member countries. Some countries are unstable and characterised by civil or tribal wars that are sudden and have associated risks to the MNEs. Additionally, factors such as currency deviations, repatriation, taxation, inflation and terrorism are characteristics in a country that have negative impacts on the effectiveness of the global strategy. Political risks are divided into micro political and macro political risks. Micro political risks affect MNEs in a specific industry in the host country and the examples are the requirement by the Venezuelan government to have all oil companies to renegotiate their contracts with the government. A macro political risk affects all the MNEs in the hoist country and an example is the rise of terrorism and civil wars in some countries. In regions of the Niger Delta there have been cases when Shell Global and Total had to close down their operations due to increased protests from the locals (Harrison et al, 2005). With regard to the effectiveness of operation of global strategy MNEs legally, there are changes in the laws that affect the operations of companies that vary with countries. Some of the key dynamics in the legal system include laws, right to judicial reviews, sanctions and embargos, employment laws. An example is the embargoing of trade with South Africa in the 1980s to protest the hardship apartheid rules. Some countries may introduce legal reforms such as naturalization while others may enforce privatization which creates opportunities for MNEs. Some nations are involved in repatriation which is the imposing of restrictions on the MNE to return profits attained to their countries. Therefore, legal frameworks of the hoist country must be considered by the proposers of global strategies. Social cultural factors that affect the operations of global strategies of MNEs are the development of the host country in terms of educational training, lifestyle, income distribution, population growth and social mobility. Aging populations denote a reduction in the workforce while a population that is packed with the middle age groups will provide the workforce that MNEs require. The connectivity of a country to changing world themes such as social media is part of the social issues. These factors will affect the performance of the global strategy that an MNE will use and consequently the result attained (Barker, 2012). The economic trends that affect the operation of a global strategy include economic factors such as unemployment rates, market size, nature of business and competition, inflation rates, investment levels, energy costs, GNP trends, trading blocks and business cycles. Some of the key changes in n the economic sector are the economic power shift from the major world economies to other countries such as China, high debt levels of the third world countries, fluctuations in prices of commodities and goods, differing patterns of consumer expenditure and rising debt levels in the developed countries. These changes affect the local market of the MNEs and their operations. Countries that provide the right competitive advantage to MNEs provide an economic environment that allows the success of an integrated global strategy. The market size depends on the distribution and size of the population. An environment that is economically viable is easy to penetrate and allows a simpler implementation of global strategies. The environmental factors that affect the implementation of integrated global strategies are the regional environmental agreements that are agreed on by members of certain institutions or bodies and environmental laws of the host country. It is not entirely impossible for the integrated global strategy to deliver in all countries that have diverse features but some factors may introduce changes to the strategy. This highlights the importance of the PESTEL analysis in order to add changes to the global strategy according to the characteristics of the host country (Porter, 1990). Linking MNE's with Porter and Yip Porter’s diamond of national competitiveness is also used to assess the environment in which an MNE operates in. after an analysis of 10 industrialized markets, Porter (1990) concludes that competitive success is created by differences in national values, culture, institutions, history and economic structures and the dynamic and challenging environment of the host country contribute to the success of nations in a particular industry. He later devised the diamond of national environment which is comprised of factor conditions, firm’s strategies, demand conditions and the related and supporting industries. Factor conditions are the factors involved in the production of a good or a product and may include scientific or specialised knowledge applied in production. The demand conditions are the extent to which companies are driven by their host country to produce superior services and products. This requires innovation and enforcement of strict standards. The presences of local related and supporting industries that are competitive on the global scale are contributors of greater national competitiveness. The structure, rivalry and strategy define the organisation, formation of the MNEs in the host countries. These four facets are interactive and work with each other as shown in the figure below: ( Mwenya et al, 2001). Figure 2: Potter’s Diamonds of national advantage Source: Porter M (1990) Figure 3: Diamonds five process model Porter’s five forces are determinants of the competition that MNEs experience. The factor conditions that affect the effective of the global strategy are the presence of markets. The mobile phone industry has an oligopoly market situation with highly differentiated products. An MNE that is in a market that is strongly characterised by all of the five forces is one that is unattractive as it supports perfect competition. Yip (1989) offers three steps that are involved in the development of a total global strategy: develop core business strategy, internationalise the strategy and globalise the strategy. The international body develops the core strategy which is then implemented in the other countries. These two factors are linked to the successful implementation of global strategies. Therefore, the integrated global strategy is only successful after it is decided upon by core of the MNE before being internationalised and implemented in other countries. The global strategy is composed of the global industry and has the market, cost, government and competition drivers. Market drivers are the customer needs, lead countries, transferable marketing and global customers and channels. These depend on the behaviour and preferences of the consumer. In the BRICs and other nations that Multinational enterprises are expanding into there has been a continuous economic growth that has led to an increase in the population and consequently of the market share. This increase in the population and technological advancements denotes increments in the opportunities that are presented to multinational enterprises. A different market driver is the current overuse of the oil resources for energy use which is predicted to diminish by 2030. MNEs should therefore be involved in the generation of renewable energy (Lasserre, 2012). Figure 4: regional GDP growth (1970-2025) Source: Conference board total economy database (2014) Figure 5: Projected growth of GDP Source: Conference board total economy database (2014) Competitive drivers are defined by the porter’s diamond and dictate the fact that the competition in each country will differ. MNEs are encouraged to focus on creation of appropriate alliances that will ensure the success of their global strategies. An example by Dumitrescu et al (2012) was the alliance between Puma AG and Swire Pacific in Hong Kong because Puma had greater knowledge on the products. Sony Ericson is also a joint venture of Ericson which is based in Sweden and Sony based in Japan and the alliance is now part of the global handset competition. The BRIC countries are said to have massive resources such as oil and natural resources which can be exploited by interested MNEs. Yip et al (2011) identifies cost drivers that include the global developments that are due to globalisation. They include improved infrastructure, technological advancements, economic growth and reduction in costs of labour. China and India are some of the countries that provide cheap labour. Among the BRICS, China is the best provider of cheap labour. All MNEs should also incorporate innovation methods in their total global strategy because it is a driver of globalisation and competition. In terms of government drivers, the laws and trade barriers that influence international trade are the main components. In the European Union it takes a shorter while to import a product than in Brazil. Therefore, governments should enforce regulations that allow MNEs to operate in their countries. Additionally, multinational enterprises should identify countries that are venues for increased Foreign Direct Investment and start investing in the regions. Some of these countries are India and China which was ranked second globally in attracting of foreign direct investment and foreign investments. As seen in Table 4 and 5 above, China and India are predicted to be the biggest gainers in GDP between 2015 -2015. Figure 6: increased FDI inflows globally Source: OECD (2013) Conclusion The paper above discusses the incorporation of an integrated global strategy and whether it is effective. From the research conducted, it is concluded that the use of a total global strategy can be applied effectively by MNEs that operate in diverse countries of the world. The application of the strategy requires all MNEs to understand their level and thus not incorporate a global strategy where a regional strategy is sufficient. The market that an MNE is venturing into must be thoroughly assessed using the PESTLE model to avoid operational and financial loses that are avoidable. It points out the effects that key dynamics in the analysis may have in the implementation of the total global strategy. Lastly, the link between Yip and Porters and the total global strategy is discussed in the BRIC nations. The factors presented by the Yip model and Porter diamond model should be used by MNEs to introduce appropriate changes to their chosen global strategy. List of references Barker, J. 2012, Consumer tech demand defies the economic headwinds, Technology, Media and Telecommunications Predictions 2012. Dumitrescu, C & Scalera, F. 2012, Strategies of Multinational Enterprises, International Journal of Business and Commerce, Vol 1, pp. 12-26. Conference board total economy website, (2014), Global Economic Outlook 2015, Charts and tables”, conference total board. [Online]. Retrieved 14th Feb 2015 from < https://www.conference-board.org/data/globaloutlook/index.cfm?id=27451> Harrison, A., and Van Hoek, R., 2005, Logistics Management and Strategy – Chapter 1, Person Education. Johnson, G., Scholes, K., and Whittington, R., 2005, Exploring Corporate Strategy: Text and Cases, 7th edn, FT: Prentice Hall. Lasserre,P., 2012, Global Strategic Management. 3rd ed. New York: Palgrave MacMillan. 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