International Business Environment - Dell - Case Study Example

Globalization and the Business Environment 2007 Introduction Inter-linkages between economies across different geographies have existed for centuries but it is only recently that the world has become truly integrated into a ‘global village’ rather than in a state of one group of countries exploiting the other. Capitalism and the Industrial Revolution had its roots in technological innovations like the power looms and railroads in Britain in the middle 19th century but it soon spread across Europe and North America, allowing for growth in commerce (Chirot, 2000). The modernization of the European and North American economies was aided to a large extent on the availability of raw materials (cotton from India in the case of Britain) and labor (African slaves for North America) from the colonies. By the advent of the 20th century, however, the limits of the capitalist development had been reached, leading to the Great Depression of the 1920s in North America and Europe (Giddens, 1986). The two World Wars changed the global economic power balance, with most of the colonies gaining independence over the period and Soviet Russia becoming more powerful and dissociated from the western powers. Post war reconstruction, growing urbanization and technology improvements revived the North American and European economies while Soviet Russia too developed technological capabilities. However, the world got bifurcated between the capitalist (mainly North America and Europe) and the socialist (mainly the USSR) camps while the Third World countries (the developing or underdeveloped nations, most typically erstwhile colonies of European powers) aligned themselves to either of the two camps. The global economic order has significantly changed since the end of the Cold War in the late 1980s. As the divergence of the world between the two superpowers and their respective beneficiaries in the so-called Third World disappeared, the world has now become a ‘global village’ that is increasingly inter-linked for mutual benefits. The processes of production and consumption have undergone significant globalization, aided be the nearly free flow of capital and technology across political barriers. In this paper, I will describe the different aspects of globalization that has created the ‘global village’ – the roles of the multinational companies, technology, outsourcing and global capital flows. Thereafter, I will describe the changed business environment with the help of a case study (that of Dell Inc.) that has been able to exploit the situation to its benefit. The role of multinational companies The main agents in the globalization process have been the multinational companies that have endeavored to reap the benefits of low costs and large markets cutting through geographical and political roadblocks. The growth of multinational companies may be traced back to the 1950s and 1960s when post-war reconstruction in developed countries led to their growth but in the more recent times, these companies have expanded beyond their geographies to exploit the markets in the emerging economies that have by now come out of the shadows of post-colonial days. There is increasing collaboration between these two sets of economies – their labor and markets – through the free flow of capital and technology. The process of globalization has only been enhanced by the phenomenal growth of telecommunication and the internet across almost all countries of the world. In the 1950s and 1960s, the North-South divide was critical, with developing countries characterized by low income and resource bases while developed countries, where only 15 percent of the population lived, grew the per capita income through industrialization (Lipetsk, 2003). The poorer countries concentrated on primary goods production while manufacturing processes developed only in the rich countries. The ‘unequal exchange’ theory, or the Singer (1949) – Prebisch (1950) thesis, maintained that gains of trade were generally towards the rich countries. The Singer-Prebisch thesis has lost much of its relevance since then, with globalization taking the manufacturing processes beyond the developed world. By the 1970s, developing countries became more assertive in demanding for their rights and demanded an economic order that would shift power from rich countries to a more equitable system (Looney, 1999). The New International Economic Order (NIEO), framed by member governments of the developing world was approved by the United Nations in 1974. This, however, did not mitigate the growth of a parallel economic order – the multinational companies (MNCs) that have now grown to be independent of local politics and governments. Despite the political movement towards an international order through the 1970s and 1980s, MNCs have continued to remain on their growth trajectory and since the 1990s, the global economic order has moved from being international to transnational. Over the years, MNCs have ruled world business and governments have had limited roles to play. A survey by Institute for Policy Studies in 2000 found that the world’s top 200 companies’ sales were greater than a quarter of the world’s economic activity and that their combined sales were more than the combined income of all countries except the top nine (Anderson and Cavanagh, 2000). MNCs have become increasingly independent of governments and have grown through mobility of capital, technology and finance. Moreover, the growth of modern telecommunication and the internet has meant that location of units are increasingly irrelevant and possibilities of growth unlimited. Most governments of developing nations have now reduced tariff and investment barriers for MNCs (UNCTAD, 1997). Asia has become particularly friendly towards an MNC-based growth regime. China, for instance, has actively framed policies to attract foreign direct investments (FDI) by MNCs and the country is the second-highest recipient of FDI (UNCTAD, 1997). Similarly, MNCs from the developed world have manufacturing and service locations in developing countries. The system, largely independent of any active role by the respective governments, provide MNCs with low-cost opportunities, while at the same time adding to the host countries’ national income. The role of technology The Asian countries of India and China have been growing faster than Europe and North America on the strength of technology and globalization. Development in modern telecommunication and free flow of capital has resulted in a global economy, of which India has been a major beneficiary. Thus, technological innovations have to a large extent determined the extent and direction of modernization and development (Castells, 1996, Kuznets, 1989). The development and modernization path has not been identical for all countries of the world. The economies that led in technological innovation had a first mover advantage and have influenced the pattern of development in other regions (Guillen, 2001). Hence, the global balance of power continue to be tilted towards North America and Europe, which led in almost all the early technology innovations, despite growing globalization and financial integration of the world. South Asia, being one of the most densely populated parts of the world (Shackman, Wang and Liu, 2002), has entered the development and modernization trajectory but has followed the dictums laid out by the western world even in a post-colonial world. While, the sub-Saharan countries continue to remain backward and dependent on aid from the west. The role of outsourcing Since the stagnation in the 1980s, manufacturing industries in the United States have been looking for ways to cut costs. The growing capabilities in the emerging countries provided the opportunity of saving huge costs through outsourcing – that is by transferring manufacturing facilities to low cost centers in Mexico (which had the first round of outsourcing of automobile components), China (the second round of outsourcing of auto components, textiles and a horde of other industries), India (which has emerged as the back office of most service related activities) and many other countries like Brazil, Ireland and Malaysia. Hence, the manufacturing world is now a ‘global village’. Typically, multinational companies today set up production facilities in different countries not simply to take advantage of natural endowments but of a variety of factors like cheap labor, low taxes, lax environmental regulations, subsidies and lower labor standards. As a result, free trade translates to intra-firm trade between countries, which is the case for 50-70% of trade between Mexico and the United States (McGaughey, 1993). Since the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico came into force in 1994, there has been an increasing trend of outsourcing of component sub-assembly manufacturing to Mexico. Hence, the erstwhile “multi-domestic” production structure by multinational automakers has given way to a tierization of the value chain in which the lower tiers supply to the upper tiers parts manufacturers (Martin, 2006). Although outsourcing began as a corporate strategy in the manufacturing sector, particularly in automobile manufacturing, it spread to other sectors in the 1990s – especially those related to the Business Process Outsourcing (BPO) of information technology (IT). Although BPO had already begun in 1963 when Electronic Data System (EDS) handed over its data processing services to Blue Cross Pennsylvania (Logicaster), followed by many such agreements, outsourcing continued to remain within the borders of the United States. Only in the 1990s, companies began to outsource to other low cost countries. This phenomenon came to be known as offshoring. The dotcom boom of the 1990s, the advent of the Internet and advancement of telecommunication in countries like India, China and Russia, the discovery of the large English-speaking labor pool (engineers and other professions) in Asia, particularly India where wage rates are significantly lower than in the United States, outsourcing soon grew to be a rage among leading companies. Particular areas for outsourcing grew to be non-core business operations like call centers, transaction processing, payrolls and other HR activities, etc. In 2003, Gartner Inc. research showed that outsourcing generated $298.5bn in global revenues. Further, 3.3mn jobs will be outsourced to India, China and Russia, Ukraine, Pakistan and Vietnam by 2015, according to Forrester Research (Logicaster). The role of global capital flows In an increasingly inter-linked global economy, it is no longer possible for policy makers to manage their individual economies exclusive of what is happening elsewhere. The macroeconomic indicators of individual countries are greatly influenced by the global economic scenario. In the present system of international flow of capital, dollar is the principal medium of exchange, with 68% (up from 51% a decade ago) of reserves of central banks of countries being held in dollars although only about 12% of global exports and 18% of global imports is contributed by the US. Dollar has thus emerged as the major monetary instrument since 1971 when President Nixon took it out of the Gold Standard specified by the Bretton Woods conference. Thereafter, the practice has been that the rest of the world trades in dollars while the United States produces it (Liu, 2002). Of course, some trade also happens against the other major currencies like the British pound, Euro, Yen and others but the bulk of it is in dollar. The countries compete with each other in trade and build up dollar reserves in their respective central banks, using it for their imports, most of it being for oil imports. Hence, higher the exports from a particular country, higher are the built-in support for more dollar reserves in its central bank. However, the countries may also invest the surplus dollars over its import requirements in assets. Since 2005, many countries, particularly China and other south east Asian economies are increasingly investing in US Treasury Bonds in search for higher yields. International trade has seen a major shift over the last few years by which exports from Asia are growing at a fast rate. Hence, the US is facing trade deficit with China, with which it has 11% of its total trade (CIA). Globalization and outsourcing of manufacturing and services, in search for low costs, have meant that the United States has become the consumer of the last resort. The US economy recovered from the 2000 dotcom bust and has grown at about 4% per annum on the basis of high consumption by the people and the government. On the other hand, Asia recovered from the 1997-98 financial crisis and more recently on the basis of foreign investments in these countries and high savings, resulting in what some economists call, a “global savings glut”. The high growth rate in many countries, particularly the 9% per annum in China, has been maintained by a relatively low-valued currency, yuan, mainly on the basis of outsourced manufacturing and high exports to the US. As a result, foreign central banks are flushed with dollars and are on the lookout of avenues for investment. These dollars have found their way to be invested in the US Treasury Bonds, which have been made attractive by the Fed by high interest rates. Thus, instead of the US supplying capital to other countries, as it did in the past, it has turned into the major consumer and is supported by the capital flows from the rest of the world into it. However, this trend of current account surplus in the rest of the world while the US running into current account deficit is unsustainable over the long run. Sooner or later, foreign governments will stop investing in US Treasury Bonds, fearing the US debt become unsustainable. This results in falling dollar value as less dollars are flowing in, thereby making investments in US assets unattractive. The world is increasingly becoming dependent on high consumption spending in the US, which is increasingly being burdened with the debt that it is incurring in the process. A slight capital flow out of the economy might lead to huge recession worldwide. There is an urgent requirement for the global imbalances to be rectified through greater cooperation between central banks. According to the IMF, the US needs to increase savings (through reducing budget deficit) while consumption in other countries like China should be increased (Beams, 2006). However, these policy prescriptions are easier said than done. US savings though reduced budget deficit may impact the employment levels badly, hurting the living standards of the working population. Savings can be induced also by raising deposit interest rate. In that case, however, lending rates will also have to be raised, again adversely affecting the investment climate in the country. Raising mortgage rates also impacts negatively on social welfare. At the same time, the IMF measure of devaluing the Chinese yuan, aimed at more consumption at home, affects the Chinese exporters, particularly the small business earning profits from exports. Since the 1997-98 Asian financial crisis and the dotcom bust in 2000, the economies have not gone back to the investment mode despite the high growth in the recent years. Instead, the savings in these export-led economies have been held in financial assets, aided by the high yields from US Treasury Bonds and stock markets in emerging countries rather than being invested in physical capital. At the same time, firms in the developed markets that have seen growing corporate profits have been maintaining huge undistributed profits and not necessarily increasing physical investments. This has been noted in the latest World Economic Outlook (cited in Beam, 2006). Thus, with the lack of new investments, that could lead to higher jobs and output and hence a self-sustaining growth, international flows of capital has meant that there has been a high churning of financial assets without any productive physical investments. Thus, the high global growth rates that have been witnessed in the recent past has the risks of being derailed because of the capital imbalances, signs of which are being seen through the falling dollar. In order to check a major disaster that might get out of hand, the respective central banks need to act in a coordinated manner such that the exchange and interest rate mechanisms are synchronized. At the same time, since exchange rates essentially reflect the trade flows, the world should move to a more equitable trade structure that is not excessively dependent on dollar. More regional trade denominated against regional currencies will ease the strain on the dollar. Lastly, domestic consumption demand in Europe and Asia needs to be increased while the US needs to take steps to increase its savings rate such that the capital imbalances are corrected and the pressure on the dollar is reduced. The new business environment The creation of the ‘global village’ has altered the business environment and companies have changed their business policies accordingly. Dell Inc. is an example of a successful outsourcing process in the manufacturing sector. The company was incorporated in 1984 and over the two decades, has emerged the second largest computer seller. Much of its success is on account of outsourcing its intermediate production activities to low cost centers around the world. Dell created its production capabilities in the early-1980s by supplying PC parts and components to IBM when the latter began outsourcing to cut costs (Dedrick & Kraemer, 1998). Thereafter, Dell expanded its network by also supplying to HP and DEC and newer computer manufacturers like Compaq, Gateway and Acer. The company set up its first production center in Austin, Texas in 1985. Subsequently, other production centers were created in Ireland (1990), Malaysia (1996), China (1998) and Tennesse and Brazil (1999). By 2001, the Americas contributed 72 percent of Dell’s revenues and 68 percent of its employment; Europe, Middle East and Africa (EMEA) 20 percent of sales and 20 of employment and Asia Pacific 8 percent of sales and 10 percent of employment (Kraemer & Dedrick, 2001). In general, Dell has avoided outsourcing the final assembly like the competition does. It outsources sub-assemblies like motherboards. For notebook PCs, it outsources nearly the entire production chain except the final configuration but it keeps control over the production and supply chains. The main reason of this rigid control is the fear of losing out by creating competition from the assemblers that might slowly build capabilities for final assembly, like Dell itself has done. As Corkery (2000, cited in Kraemer & Dedrick, 2001). Dell’s entire supply chain is geared to fit into its build-to-sell business model. The suppliers can either maintain warehouses near Dell’s assembly locations or ship as required. Asian suppliers do both, some even storing components in trucks parked at the shipping docks. Typically, components like disk drives, CD-ROM drives, power systems, cables and connectors are shipped from Asia while motherboards are largely procured locally. Selectron and SCI supply motherboards to the US plants from their Mexico and US plants alike. While the plants in Europe procure components largely from Asian suppliers. The inventory remains in the suppliers’s books till Dell puts the order. Intel is the only exception since its market strength is large enough to force Dell take over its inventory before acquiring the final customer. Since its inception, Dell has selected its suppliers carefully, with only about 50 to 100 suppliers contributing 80 percent of the components and parts. The company chooses suppliers on the basis of various factors, only 30 percent of which is contributed by the cost structure and the remaninig factors are quality, service, delivery scheduling and flexibility (Byrnes, 2003). However, Dell’s sourcing pattern is changing. While it began by primarily sourcing parts and components from Asia, regional components manufacturers are increasingly supplying to Dell. The regional networks, too, however, are a combination of Asian, European and American suppliers. Conclusion Thus, globalization has emerged every aspect of economic life in almost all countries of the world that have become inter-linked with each other. Hence, the international business environment that companies now operate under is grossly different from what it was a few decades back. The main participants of the ‘global village’ have been the multinational companies, the markets in the developed as well as the emerging economies, labor (skilled, high wage workers in the developed world as well a the semi or unskilled labor in the emerging economy) and the respective governments. The situation has been a win-win one in all, globalization enabling high growth and employment in post-colonial economies and multinational companies saving on costs of production. Companies like Dell have capitalized on this ‘global village’. However, global capital flows from the western economies to the emerging ones, high consumption and job losses in the former are the potential dangers in the process of globalization. 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