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EFFECTS OF TREND TO BUSINESS IN GLOBAL ECONOMY AND 3-STEP STRATEGY TO RESPONSE TO THE FLOW OF CHANGE Nguyen Thai The main topic of GIS Taiwan 2009 is: “Challenges and Opportunities, the Global Economy in the Transition Phase”. Being totally globalised is not an easy and straightforward step. Although there was an idea of flat world to introduce the globalisation (Friedman, 2005), our world is still not globalised yet. The business world is changing very fast but it is too early to confirm that it is “flat”. This first part of the essay will give a brief discussion about global economy with its challenges and opportunities. More importantly, the second part focuses on effects of trends to business entities and suggestive strategies to survive and succeed. The reason why the Global Economy is seen as still in the transition phase is because it has not reached to the age of globalisation yet. Globalisation can be understood as “the shift towards a more integrated and interdependent world economy” (Hill, Cronk & Wickramasekera, 2008, p.8). In particular, it means that separate national markets are merged. Also, flows of trade and investment and corporations between firms and regions are also increased. It is implied that in the time of transition there are not only more opportunities but challenges as well. There are reasons why it is said that globalisation is the opportunity for all individuals, companies and countries. The theory of David Ricardo about Comparative Advantage in his book Principles of Political Economy (1817) describe that “countries should specialise in the production of goods and services they can produce relatively more efficiently” (Hill et al., 2008, p.54). Hence, countries can just import goods that it produce relatively less efficiently from others. The argument of the theory is that free trade (i.e. in the global economy) is a positive-sum game for all nations that participate in. In addition, New Trade Theory of Krugman et.al in the 1970s identify the source of comparative advantage which are using the benefit of economies of scales (i.e. cost of production will reduce with large number output) and first-mover advantage (i.e. creating barriers for later entrants) (Hill et al., 2008). Business in global economy is very beneficial. In the last few decades, there are decreases in tariffs that encourage freer trading. World trade now has increase faster than world output. Foreign Direct Investment (FDI) has also surged. When companies want to expand their operations outside their country, they find it fewer pressures than before. The new integrated markets (Singapore, Hong Kong, etc.) now themselves also find strategies to attract multinational companies. Overall, the picture of global business is quite bright. However, challenges for ones who want to participate in global economy are also significant. On the one hand, opportunities are not for unintegrated countries and regions such as ones in Africa or South Pacific. On the other hand, local companies in integrated countries have to face more competition with rivals from outside. These competitions cause the unemployment or decreases in wage. At the broader level, global economy in the transition phase also has to deal with the gap between the riches and the poor. The substitute of national governments to supranational organizations such as World Trade Organization (WTO) or International Monetary Fund (IMF) one way or another fades away the sovereignty of each independent nation. 1
The second part, more importantly, will discuss on business strategies in this changing world. The definition and effects of “trend” to business will be described first. Solutions or strategies to be successful then are suggested with arguments. Trend is defined as a general development or change in a situation that people are behaving. The world business in 21st century has been witnessing a lot of changes from national economies, especially the trend in Asia. China is becoming the 2nd largest country in terms of its Gross Domestic Product Per Capita (GDP PC). If the 19th century was the time of Europe and the 20th century for US, now people keep discussing on the rising of Asian economies in this century such as 4 “tiger” economies (South Korean, Singapore, Taiwan, and Hong Kong). China became a member of WTO in 2001 and Vietnam in 2007 also prove for the truth that Asian economies themselves actively participate in world’s business. Thailand and Malaysia also raise their ranks in the level of competitiveness, 29th and 16th respectively (World Competitiveness Yearbook, 2004). There are advantages of trends for business. Chatterjee and Nankervis (2007) mentioned that in some Asian countries’ management system, they have used the “flying geese” model of competitiveness. The speciality of this model is that once Asian countries have followed this trend, “one country moved on to the next level of value added another developing country would take its place as at the lower-value ends” (Williamson, 2005, p.38). Hence, Asia countries can help each other to develop their economies in terms of reviewing their mutual strengths and weakness (Chatterjee & Nankervis, 2007). Regarding trends of consumers, there are many newspapers which wrote about the success of global brands such as McDonald’s, IPod or Levi’s. In my view, the more successful company is, the more loyal customer it has. In the case that customers love to possess a specific product, the producers will benefit the most. Products’ qualities are standardised and customers around the world use the same things. It helps suppliers reduce cost of production. Thus firms nowadays have incentives to adopt the “global standardisation strategy”. That strategy is defined as “pursuing a low-cost strategy on a global scale and increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects and location economies” (Hill et al., 2008, p.393). However, the risks of doing business followed by trends are very potential. Thailand, Malaysia and Indonesia are countries who follow 4 “tiger” economies with the vague of economic optimism (Chatterjee & Nankervis, 2007). It is explained that “Their success was mainly based on the development of export-oriented industry sectors, government participation in corporate strategic development, entrepreneurial risk-taking and diligence of the human capital…The catastrophic effect of Thailand’s financial crisis generated a domino effect on the region leading to massive economic shock. Countries that were affected severely included Thailand, Indonesia, South Korea, Malaysia and Singapore.” (Chatterjee & Nankervis, 2007, p.6) The trend is beneficial for producers because they can sell the same products for many people in many countries, but this world of business is not that simple. Only in industrial goods industries customer’s needs are quite universal. Hence companies like Intel, Texas Instruments and Motorola follow global standardisation strategy (Hill et al., 2008). However, in terms of consumer good markets, the local responsiveness is extremely high. Namely, 2
Global Initiatives Symposium in Taiwan 2009
there are specific needs that each company has to supply for all kinds of their customers. In my opinion, the successful company is the one that satisfy all customer requirements, not the one which just offers only a few choices. In short, trend is easy to change so it can blur companies to make suitable decisions that they forgot to pursue loyal customers. Business entities can response the flow of changes in global economy with the suggestion of 3-step strategy. Firstly, they need to do research carefully to evaluate the extent of trend. This is because countries are extremely different in terms of culture, political and legal environment, economic environment, etc. Even each categorise has many components. For instance, when researching the culture of a country, it has to be investigated in religion, education, language, etc. With over 200 countries and regions all over the world, this work is exceedingly high pressure and need to be done carefully. Misunderstanding a country can lead to the mistake in evaluating the trend. If a company make mistakes in this very first step, it is unsurprising to explain for its failure. Secondly, there are decisions that a firm has to make after they value the trend. This second step is about choosing a suitable strategy. Figure 10.9 show 4 basic strategies for an international firm with the scale of “pressures for local responsiveness” and “pressure for cost reductions”. Hill et al. (2008) describe these strategies in which the best strategy to follow really depends on the deliberation of the pressure for cost reductions or for local responsiveness. Although global standardisation is quite ideal, this non-stop changing world of business continues to put more pressure on firms. Customers have a tendency in using similar products but they also need special requirements that firms have to adapt. For example, McDonald’s has offerred Salads Plus range in their menu because Australians tend to have more health conscious, more choices and variety of nutritious foods (Pride et al.,2007). Today’s business is so competitive hence firms should adopt a transnational strategy. A formal definition of this strategy is “attempting to simultaneously low costs through location economies, economies of scales and learning effects while also differentiating product offering across geographic markets to account for local differences, and fostering multidirectional flows of skills between different subsidiaries in the firm’s global network of operations.” (Hill et al., 2008, p.395)
Figure 10.9: Four basic strategies (Hill et al, 2008, p.394) 3
Find the Next Wave to Ride On - New Business Strategies in the Changing World
Thirdly, always chasing the trend is not what businesses desire. They themselves want to create and control it. There is a very good example from the birth of iPhone since 2006. After the creation of this smart phone with “touch screen”, other mobile companies feel threatened and they must quickly adapt the usefulness that new technology brings to customers. LG introduced the LG-Prada phone not long after the Iphone and then LG UC990 one with also support touch screen. Other companies like Nokia, Samsung also arrange to release their new touch-screen phones. More interestingly, even Google already announced their new G-phone with all supports for programs and services they offered online. The trend of this kind of new smart phone is very competitive. At the end of this competition, however, it is unknown that which company will benefit the most. Another interesting example might be the appearance of Eec-Pc, the net book laptop, which ASUS is the pioneer. Other laptop companies like HP, Dell, and Acer also follow the practicality of this small net book which are portable, light, and cheaper a normal laptop. It is said that the ASUS Company is quite successful with this project. The perspective here is that innovation is very important in today’s business. This third step was argued that “today’s successful organisations must foster innovation and master the art of change or they will become candidates for extinction” (Robbins & Water-Marsh, 2007, p.21). It is the reason why in a company Research and Development (R&D) department gets a large proportion of funding because businesses found it crucial. Also, the benefit of first-move advantage in business is significant because it can bring more benefits to company. In conclusion, this world of business keeps changing very fast and it brings opportunities as well as challenges for business entities. The process of globalisation give more choices for countries to expand further because free trade is argue as a positive-sum game but countries and regions in Africa are missing out of this because they are not integrated enough. Trend of consumption also contains benefits and risks. Asia countries can help each other develop the business by apply the “flying geese” model but focusing on export-oriented industry sectors is not secure enough to build up the strong economy. The Asian Financial Crisis in 1997 effected most countries in Asia but only Japan, China and India can stand because they have huge domestic markets (Chatterjee & Nankervis, 2007). And also, businesses can response to the flow of changes by referring the 3-step strategy. Firstly, doing research country differences (i.e. culture, political and legal environment, economic environment, etc.) is important to help businesses evaluate the value of trend. On the next stage, each company choose a suitable strategy whether is has pressures for cost reduction or local responsiveness. Lastly, to be active in trends of business, companies must invest on R&D department to manage innovations, create new trends for consumers and receive benefits from first-mover advantages.
Global Initiatives Symposium in Taiwan 2009
References Chatterjee, S.R. and Nankervis, A. (2007). Asian management in a changing world. In Chatterjee, S.R. and Nankervis, A. (Ed.), Asian management in Transition Emerging Themes (pp. 3-15), New York: Palgrave-Macmillan. Friedman, T.L. (2005). 'It’s a flat world, after all', The New York Times Magazine, April, pp. 33-37. Hill, C. W. L., Cronk, T. and Wickramasekera, R. (2008). Global Business Today, an AsiaPacific Perspective, Sydney: McGraw-Hill. Pride, W. M., Rundle-Thiele, S., Elliot, G., Waller, S., Paladino, A.and O.C. Ferell. (2007). Marketing. First Asia-Pacific Edition, Brisbane: John Wiley and Sons. Robbins, S.M. and B.Water-Marsh, T. (2007). Organisational Behaviour 5th edn, Australia: Pearson Education, French Forest. Williamson, P. (2005). Strategies for Asia’s new competitive game, Journal of Business Strategy, 26(2), 37-43. World Competitiveness Yearbook (2004). From http://www.imd.ch.
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Global Initiatives Symposium in Taiwan 2009