Kai Liu
Word Count-1851/PIN-10443
The Principles of Crafting Successful Business Strategies in the Changing World: Four Combinations
Kai Liu
Introduction We are standing at a crossroad where great changes have been taking place: global economic situation is becoming worse and worse, and political structure of the world is stepping forward in a devious route. Ignited by subprime lending crisis in America, financial crisis has been continually developing and expanded to the whole globe, including western developed countries and poor developing ones. The impact is not confined in the field of finance and real estate. It has been eroding the real economy of the United States and also the globe. It is expected that all of the three biggest economic entities (USA, Europe and Japan) will fall into stagnancy or even regression in 2009 (Cong Mei, 2008), and the growth of BRICs (Brazil, Russia, India and China) will slow down (Huo Kan, 2008). It is also presumed that the contribution rate of China’s growth to the whole world is going to be 50% in the next year (Gao Jian, 2009), which does not seem good news for me although I am a Chinese. At the same time, local wars, conflicts and rivalries still exist and are likely to go deeper to some degree. Deteriorated economic and political conditions intertwine and even aggravate each other. This is the large picture with which all of the global companies are confronted. These changes in external environment mean risks to companies, especially to multinational corporations (MNCs). Although firms’ profit comes from risk and uncertainty according to Knight’s viewpoint (Knight, 2005), systematic risks are likely to harm everyone. What strategies should be adopted and which measures should be taken to hedge risks and keep rewards and profits? We can not provide exact strategies and methods for each company around the world. However, some principles, which global companies should abide by when they make decisions, are possible. Combine Globalization Strategy with Localization Strategy The aim of each company is to maximize her profit. In this process the size of the market is one of the most important determinants. To broaden the size of the market, a company should utilize both domestic and oversea markets well. To invest and set up subsidiary companies abroad can help her to achieve increasing return to scale and make the best of comparative advantages of different regions. While expanding abroad, a company is supposed to know the diversity of different countries and regions and then take localization strategy, which comprises the localization of human resources, products and management (Zeng, 2007). To achieve this goal, the company could 1
Kai Liu
buy some native companies (Wang Fengping, 2007). Localization is helpful to reduce costs, frictions with local cultures and risks and uncertainties of transaction and management. Globalization strategy is to expand the market and seek more profit, while localization strategy is to hedge various risks and make sure that potential profit can come true. For example, an American company establishes a sub-company in China. Then to employ a Chinese intellectual to be the CEO can do a favor to decrease the conflicts between this company’s American culture with local Chinese culture in many aspects, such as the management of human resources, marketing and understanding the policies of local government (Wang Yangcheng, 2007). As a result, it will abate risks and maximize the profit. This company could also annex a Chinese enterprise to acquire her patent rights, trademark, marketing network and other assets. This action would help the American company to steer clear of tariff and non-tariff walls of China, and then deduce risks and uncertainties. In the current international environment, to solve the problem that the domestic demand is not strong enough, a company could set up sub-companies to broaden the market in those countries that have friendly relationships with her own country, which means political risks (such as wars and diplomatic conflicts)are very small. By the same token, if the political risk is becoming larger and larger, or the economy of that country is falling into depression, this company should cut down or even shut off the business there. At the same time, this company needs to exploit other markets together with existing ones. In conclusion this company should balance globalization and localization (Wang and Mao, 2007). Combine the Consciousness of Competition with the Spirit of Cooperation and Mutual-benefit A successful enterprise must be the one that is brave and also skillful to compete. A company must have strong consciousness of competition, which means trying her best to reduce the costs of her products, investing much on R&D to facilitate technical innovations, cutting down prices at proper times to compete with her rivals, etc. Formidable competition power is the necessary condition for any firm to survive, gain profits and develop. Thus it is the preliminary target for any firm to fortify her competition power and attempt to defeat her rivals. However, a shortsighted company, which only cares about short-term competition power and profit, can not necessarily survive in the long run. She should learn how to cooperate with other firms and how to balance interests of different social stakeholders (such as government, competitors, consumers and employees). She should shape a nice image for herself by self-control, social commitment, cooperation and sharing benefits with others. Only in this way can she maximize her profit in the long run, because a firm’s social image and her efforts to fulfill her social responsibilities have become part of her most significant assets. The spirit of cooperation and mutual-benefit, in nature, is to minimize political risks, which here do not refer to wars or turmoil, but negative actions to companies from social 2
Global Initiatives Symposium in Taiwan 2009
stakeholders such as resistances from local governments, strikes from employees and rejections from consumers (Gao, 2009). By taking measures of cooperation and mutual-benefit, a firm can win the respect from the society. In the long-term viewpoint of eliminating different political risks these actions are the optimal choice, although they may bring some costs and harm the profit of the firm in the short run. At present, when the market of consumption is shrinking, an enterprise should boost up her competition power to gain a bigger share of the market on one hand; and on the other hand she should also bear some social burdens to keep her long-term reputation and image. For example, responding to the employment policy of the local government, she could promise not to fire her workers to win the supports of her staff and the government. She could also, by adopting a policy of discount, attain the trust from her consumers, whose incomes deflate a lot. Loss in the short run would be compensated by double or even treble profit in the long run. Combine the Control Power of Headquarters with the Independence of Subsidiary Companies and Departments For MNCs it is crucial to deal with the relationships between headquarters and sub-companies and departments well. On one hand, the headquarters of a company needs to coordinate and control the independent actions of different parts of the company to put holistic strategies into practice; on the other hand, the headquarters must make certain that each department has enough flexibility to behave freely in order to react efficiently to the changes of their own environments. The control power of headquarters is the guarantee of the implementation of the firm’s strategies and the realization of potential maximum profit; while the independence of sub-companies and departments aims to hedge concrete risks which headquarters cannot predict exactly and deal with timely. In the current atmosphere of financial crisis and economic depression, any MNC should distribute power better between headquarters and sub-companies. Nearly every country and region has been affected by the financial and economic crisis, but the degree to which they are affected is not the same, their economic performances are not the same, and the challenges they are facing and the urgent problems they need to solve are not the same. Therefore, I am inclined to provide a suggestion that MNCs give more power to their sub-companies in different countries or regions to help them adjust measures to local conditions to hedge risks and maximize their own profits. For instance, an automobile or financial corporation of USA is bogged down by severe challenges now. Nevertheless, the selling performance of her sub-company in China is still very satisfying. In this situation, it is inappropriate to impose the same requirement on this corporation’s sub-companies in USA and China. On the contrary it is wise to decentralize the headquarters’ power and give more independence to sub-companies. Combine Enhancing Adaptive Capacity to External Environment with Company’s Internal Construction
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Find the Next Wave to Ride On - New Business Strategies in the Changing World
Kai Liu
It is the time of economic and political turbulence now, and multifarious risks and uncertainties emerge. In face of these risks, every company should enhance her adaptive capability in this changing circumstance. What can a company do to eliminate the fluctuation risks of raw-materials’ prices and exchange rates, given the condition that both oil prices and exchange rates between major currencies fluctuate to a great extent? She should learn how to use several tools of risk management, say, financial derivatives. For another example, due to the influence of economic crisis and the deterioration of political relationships, commercial protectionism revives and risks caused by commercial frictions increase. Global companies which are engaged in international business ought to learn how to make use of international trade rules to vindicate their legal rights and interests and hedge these risks, especially for companies in those countries that joined WTO before long. In a word, every company should strengthen her capability to withstand risks in order to minimize the possible loss. But the most efficient weapon of a company to resist risks is her core competition power, which risk management can never supersede. A company without strong core competition power can hardly survive when huge risks come forth. Consequently, when enough effective measures are taken to hedge risks, a company should simultaneously improve her core competition power by innovations of technologies and products’ categories, upgrades of management and the control of strategic resources. Concluding Remarks In the contemporary economic and political environment, more risks and uncertainties grow out of economic recession, the revival of economic boundaries and frequent political frictions. Global companies, of course, should balance risks and rewards, and try to maximize their profits on the base of safety. To carry out this object, they need to frame proper strategies. It is undoubtedly that different companies ought to adopt different strategies because they are in different circumstances and in face of different challenges. This essay attempts to give some advices to global companies and provides several principles to craft successful strategies to hedge risks and keep profits. They are four combinations: every enterprise should combine globalization strategy with localization strategy, combine the consciousness of competition with the spirit of cooperation and mutual-benefit, combine the control power of headquarters with the independence of subsidiary companies and departments, and combine enhancing adaptive capacity to external environment with company’s internal construction. We believe that only by hewing to these principles could companies set good policies to get through the present economic crisis and survive in the long run.
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Global Initiatives Symposium in Taiwan 2009
References Cong Mei. The three biggest economic entities will simultaneously fall into regression. <www.sina.com.cn>. 31 Dec. 2008. Gao Jian. The economic growth rate of China perhaps will be 8.9% this year and its contribution to the world’s economy will be 50%. <http://finance.qq.com>. 19 Jan. 2009 Gao, Yongqiang. Managing political risk in cross-national investment: a stakeholder view. Singapore Management Review. 31(1):99-114, 2009. Huo Kan. The World Bank decreased the expectation of the global economic growth again. <www.caijing.com.cn>. 10 Dec. 2008. Knight, Frank H. (translated by Wang, Yu and Wang, Wenyu). Risk, Uncertainty and Profit. Renmin University Press. 2005. Wang, Fengping. Discussions and thoughts about annexations by MNCs. Market Modernization. Vol497. Mar. 2007. Wang, Jiancheng and Mao, Yunshi. The global strategy of MNCs. International Economic and Trade Research. Vol23. No.8. Aug. 2007. Wang, Yangcheng. Thoughts about the influence and countermeasure of MNCs’ localization of human resources. Market Modernization. Vol508. Jul. 2007 Zeng, Qingyun. MNCs’ localization strategy in China and the countermeasure of Chinese enterprises. Market Modernization. Vol503. May. 2007.
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Find the Next Wave to Ride On - New Business Strategies in the Changing World
Kai Liu
Global Initiatives Symposium in Taiwan 2009