The Use Of Globalization In Markets Business Essay
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Published: Mon, 5 Dec 2016
Globalization has long captured the attention of academics, consultants and entrepreneurs. In its broadest sense, globalization refers to the broadening set of interdependent relationships among people from different parts of the world (Daniels, Radebaugh and Sullivan 2009). Despite the enduring interest to the phenomenon, our understanding of it is far from complete. Rugman and Verberke (2004), opine that globalization is a poorly understood phenomenon. Nevertheless, global activities are touching the lives of the consumer and the business practitioner, regardless of their lifestyle, size or location (Daniels, Radebaugh and Sullivan 2009). Hence, it is essential for managers to have a deeper understanding of the global industry and of a firm’s full globalization potential, in order to reduce costs and generate revenues in international markets (Farrell 2004).
1.2 AIMS AND OBJECTIVES:
The broad aim of the report is to evaluate the dynamic processes in the global economy and its impact on key stakeholders. To enrich the evaluation, the “globalized” soft-drink industry (Samiee and Roth 1992) is selected and the extent, to which it is globalized, is theoretically measured. Further, a juxtaposition of the remote macro-environment faced by the industry in the UK and in India is attempted. This would help acquire data on the broad macro-environmental forces of strikingly different countries, relevant to international business.
1.3 TOOLS AND METHODS:
The “Drivers of Globalization” framework developed by George Yip, for analyzing globalization potential, is utilized as a general yardstick to test the soft-drink industry’s global reach. A PESTEL analysis is carried out for examining the macro-environment of the UK and India for the soft-drink industry.
2. INTRODUCTION TO SECTION I
2.1 Globalization and its manifestations:
“The world is a chain, one link in another- Maltese proverb” (Daniels, Radebaugh and Sullivan 2009 p. 44).
Globalization refers to the broadening set of interdependent relationships among people from different parts of a world that seems to be divided into nations (Daniels, Radebaugh and Sullivan 2009 p. 44).
An industry refers to people or companies engaged in making goods and services for sale (Princeton 2007).
Basically, an industry is said to be globalized when it pursues international sales or acquires resources from abroad, or both.
At the core of the beverage business, is the soft-drink industry. The key players are Pepsi, Coca Cola and Cadbury Schweppes. These companies have expanded internationally and have been flooding the soft-drinks market with their ever- evolving products. In order to strengthen their foothold, each firm in the industry attempts to experiment with new beverages. Moreover, they invest heavily in reaching out to new consumers and sourcing from new suppliers.
In the following pages, the soft-drink industry is selected and then, using Yip’s framework, the industry is analysed in order to find the extent to which it is globalized.
3. DRIVERS OF GLOBALIZATION
3.1 Introduction to Yip’s framework:
DRIVERS OF GLOBALISATION
(Source: Johnson, G., Scholes. K. and Whittington, R., 2008. 8th ed., Exploring Corporate Strategy: Text and Cases Harlow: FT Prentice Hall based on Yip, G., 2003. Total Global Strategy ll, Harlow: FT Prentice Hall)
The above framework is a representation of the factors that drive an industry to explore the operational, market and investment opportunities around the globe, thus enhancing the formation of global value chains. These are broadly classified into: Market, Cost, Competitive and Government drivers.
3.2 Application of Drivers to the Soft-drink Industry:
In order to diagnose the extent of globalisation in the industry, each ingredient of the suggested ‘drivers’ is applied to the industry and the findings are presented as follows:
3.2.1 MARKET DRIVERS:
Globalization has reduced, if not exacerbated inequalities between rich and poor countries. Convergence of average incomes of developing countries has resulted in the emergence of a large middle-class group. This trend is mainly driven by leaping growth rates of India and China. “The group under consideration is labelled “global middle class” (GMC) and consists of people whose income levels are between the average incomes of Brazil and Italy, in purchasing power parity terms” (World Bank 2008).
The soft-drink industry has been maintaining a stronghold in the American and European beverage market ever since its inception.
Consumption of Carbonated Soft-drinks:
(Litres per person, per year: 2002)
(Source: Euromonitor, 2009. Soft drinks in the United Kingdom. [online]. Available from: http://www.euromonitor.com [Accessed 27 February 2009].
Besides Western economies, the industry is also sporting smiles in emerging markets of Asia, defying the general trend of downturns. Owing to the hotter climates of South and South East Asia, and increasing disposable incomes, the soft drink industry is witnessing global expansion in the true sense of the term. Also, owing to highly populous and rapidly emerging markets such as China and India, consumption in Asia is well at par that of North America. The trend is expected to continue, with economies of Pakistan, India, Indonesia, China and Vietnam predicted to achieve the highest growth rates. The list includes three of the most highly populated countries in the world, and also reinforces the mass market advantages, both in marketing channels and manufacturing, for the soft-drink industry in Asia (Roethenbaugh 2002).
With such signs of convergence of per capita income, standards of living and tastes, the soft-drink industry has a global consumer to cater to. This implies greater standardization of products, global advertising campaigns and establishment of world brands. It also brings down the mammoth investments made in researching separate, local markets and targeting consumers according to nationality or culture.
The world is more accessible. Technological innovations and advancements in communication have eliminated cultural, geographical and logistical obstacles. Radio, press, television, cell phones and the internet are brand building trump cards, each, a milestone, in the means of communication.
Companies also used popular websites such as Bebo, Facebook, YouTube and Clubdtv to reach children (Telegraph 2008).
The virtual world has boosted the soft-drink industry’s global strategies. Consumers are more accessible, companies more mobile:
Pepsi unveiled a global mobile strategy to be launched in multiple territories. The strategy will see the mobile Internet taking a key role, with a web-based portal informing consumers of latest promotional campaigns.
Sites are currently being launched around the world, featuring content relevant to local campaigns, such as a football portal in Brazil, cricket portals in Asian nations, baseball campaigns in America and likewise (Pease 2005).
Besides customers, the Internet also links companies with their partners, suppliers and distributors.
3.2.2 COST DRIVERS:
Technological innovations, development in information and communication are cost-effective benefits that are used to reach consumers and suppliers.
Both Pepsi and Coca Cola have successfully operated web portals across the world to connect with the digital generation (Pepsi 2009) and (Coca Cola 2009).
Tapping the unique benefits of emerging economies like reduced labour costs, efficient operational capabilities and greater markets, the industry manages to keep investors and shareholders happy.
Sourcing efficiencies, implementing service and logistical standardization has proved to be lucrative.
The inputs for Coke and Pepsi’s products are primarily sugar and packaging. Sugar can be purchased from many sources in the open market. And if sugar becomes expensive, the firms switch to corn syrup, as they did in the early 1980s. So, the suppliers of nutritive sweeteners do not have much bargaining power against Coke, Pepsi, or their bottlers.
E.g. NutraSweet, an American supplier of sweeteners, had unsuccessful negotiations with Coke and Pepsi, and the soft drink industry gained another supplier, Holland Sweetener, which lowered the price of aspartame [artificial sweetener], as Coke and Pepsi exerted combined pressure to strike a favourable deal.
Hence, Coke and Pepsi have real power over a fragmented market and are spoilt for choice. They could take or leave any particular supplier; but the suppliers do not want to miss out on some of the biggest worldwide users (Interscience 2005).
The benefits of cost globalization are immediately accrued to investors, manufacturers and suppliers of the industry.
Some problems arising out of friction in the supply chain:
In the soft-drink markets of Europe and the US, beverage companies use bottlers to package and distribute products. This supply chain structure has been the cause of conflicts of interest between manufacturers and bottlers:
Beverage companies have mostly had higher returns and lower capital requirements.
Bottlers have had lower returns and higher capital requirements for building and maintaining production and distribution (Interscience 2005).
3.2.3 COMPETITIVE DRIVERS:
The firms in the soft drink industry have been subject to fierce competitive pressures from rivals within the industry and substitutes outside the industry.
Coca-Cola, Pepsi Co. And Cadbury Schweppes are the key players in the industry. They are all globally established, thus compelling each other to take up challenges pertaining to marketing or product development, in the global arena
In 2004, PepsiCo dominated North America with sales of $22 billion, whereas Coca-Cola only had about $6.6 billion, with more of their sales coming from overseas (Murray 2006).
Global strategic alliances and acquisitions make headlines on a daily basis. These factors further push a firm to explore beyond their comfort zones.
Coca-Cola acquired New York based mineral water brand Glaceau in 2007, in a $ 4.1 billion as a move to meet consumers’ needs across the spectrum of beverages.
The transaction accelerated Coca-Cola’s earnings per share and extended its consumer appeal to a previously untapped market segment of the health-conscious group (Atlanta 2007).
Moreover, there are entry barriers in the industry, since it is nearly saturated with existing players. In addition, there are other hurdles such as high fixed costs for logistics and transport, and other capital requirements that keep new entrants at bay. At the same time, it perpetuates the domination of existing players.
Building and maintaining brand loyalty is a herculean task for any firm in today’s scenario, exhibiting cutthroat competition.
The Brand Keys’ Customer Loyalty Leaders Survey (2004) showed that Diet Pepsi ranked 17th and Diet Coke ranked 36th in terms of brand loyalty, for global brands.
3.2.4 GOVERNMENT DRIVERS:
Since the liberalization of the political and economic systems in Central and Eastern Europe, a huge new market for foreign firms has opened up. In particular, the enormous growth potential of the region prompted a rush into the emerging markets here (Schuh 2007).
Economic integration through political agreements enabled greater mobility of capital, technology and people, across national boundaries.
Following are the chief agreements and trade blocs that have resulted in tariff reductions and mutual co-operation between nations:
1] WTO: The World Trade Organisation was formed in 1995. 125 nations were its members. It was the successor of the General Agreement on Tariffs and Trade (GATT), which was born in 1947. The fundamental principle of GATT was- ‘trade without discrimination.’
2] Regional economic integration: RTAs- Regional trade agreements, FTAs- Free Trade agreements and PTAs- Preferential Trade Agreements have all aimed at abolishing tariffs between member countries.
As of July 2007, 205 countries are registered under RTAs.
Neighbouring countries ally due to proximity and cultural similarities.
NAFTA, (North American Free Trade Agreement), 1994, which includes U.S., Canada and Mexico. This agreement exploits the advantages of geography and economic viability to the fullest. U.S.-Canada trade is the largest bilateral trade in the world.
Both, Pepsi and Coca Cola, the behemoths of the soft-drink industry, have the same parent: the U.S. The FTA between U.S. and Canada has implied that the soft-drink industry accounts for 0.1 per cent of all Canadian GDP. Moreover, Canada is the largest export market for U.S. soft-drinks (CANSIM 1999).
The soft-drink industry benefits from these agreements as it gets the advantage of low tariffs and gets protected by the high external tariffs imposed on non-members, thus discouraging threats.
3] Trade groups:
The European Union (EU) is the largest and most successful regional trade group. The large size and richness of this market lures investor countries and thus provides an impetus for industrial establishments (Daniels, Radebaugh and Sullivan 2009).
Pepsi and Coke have been successful in: launching common advertising campaigns, sourcing raw materials and setting up production units, all over Europe.
East Europe represents a clear strategic priority for international soft-drinks’ leaders. This has included the privatisation of state owned enterprises, increased direct foreign investment and the formation of new businesses and joint ventures.
E.g. As many as eleven national Coca-Cola operators are listed in East Europe’s top 50 soft drinks companies ranking. In addition to these better known brands, Coca-Cola operators have continued the production of strong local brands inherited through takeovers.
The importance given to local operators is also significant. Romanian company European Drinks has built scale, despite low international demands. Private label brands such as Hoop and Kvass are widespread in markets such as Poland, the Czech Republic and Hungary (Zenith 2004).
Asian trade groups like Association of South East Asian Nations (ASEAN) and Asia Pacific Economic Cooperation (APEC) encourage multilateral economic cooperation and tariff reduction. They also offer great investment opportunities due to their large market size.
However, statutory regulation is rising.
Governments around the world are concerned about safety and quality. While food safety is the major focus in Europe, emphasis in the US is more on bio-terrorism and food security. The U.S. Food and Drug Administration (FDA) is proposing the registration and tracking of almost all domestic and imported food articles, but some are concerned that the complexity of the rules will overwhelm both the food industry and the FDA (Zenith 2004).
4. INTRODUCTION TO SECTION II
In this section, the PESTEL analysis for the soft-drink industry would be transposed onto 2 countries, the United Kingdom and India, to encapsulate national variations and how they may influence the conduct of business.
5. PESTEL ANALYSIS
The PESTEL Analysis is a tool used to obtain a bird’s-eye view of the environment in which an industry operates. It is an acronym for Political, Economic, Social, Technological Environmental and Legal. The earliest reference to such a technique can be traced to Francis Aguilar’s ETPS (Economic, Technical, Political and Social) in his book: Scanning the business environment (CIPD 2009).
PESTEL ANALYSIS FOR THE UK:
United Kingdom’s Political system
The United Kingdom (UK) consists of England, Wales, Scotland (who together make up Great Britain) and Northern Ireland. It is a constitutional monarchy and a parliamentary democracy. The Queen is the nominal head of the state, thus power mainly being exercised through elected representatives.
Political environment faced by the industry
UK government seeks to replace colas with milk
Dairy group Arla UK launched ‘One Shot Milk’ campaign in January, 2006, to compete directly with soft drinks. The scheme formed part of UK government’s plans to make sure that the only drinks available in secondary school vending machines will be milk, water and fruit juice (Dairy Reporter 2006).
UK government set out to combat childhood obesity by lashing out at soft drinks-
With fears growing regarding overweight and obesity in young people, particular focus in the UK is now moving towards restrictions to limit children’s and young people’s exposure to advertisements for products that are high in fat, salt, or sugar (HFSS food and drink). Ofcom (UK Office of Communication, independent regulator and competition authority for the UK communications industries) invites companies to restrict advertising of HFSS food and drink to children. Currently, the UK Government is looking at strategies to encourage healthier vending in schools (Emerald Insight 2008).
Impact on stakeholders
As is evident from above, in the past few years, the political climate in the UK has hindered the operational efficiencies and caused investment value of the soft-drink industry to deteriorate. Moreover, it has compelled the manufacturers to divert their capital to healthier options.
To deal with any further threats of political risks, the companies in the industry strive to take active approaches.
In 2007, soft drinks witnessed a continuation of the shift from carbonates to still products such as fruit/vegetable juice, smoothies and bottled water.
E.g. Coca-Cola bought Fuze Beverage, a UK-based maker of juice, tea and energy drinks, Brazil-based Leao Junior SA iced tea maker and launched Vitamin-infused mineral water by acquiring New York based Glaceau energy brand (Coca Cola 2007).
United Kingdom’s Economy
The UK is currently reeling under the impact of the economic recession necessitating government bailouts for what were alleged to be the most robust and stable institutions. Although every sector has felt the pinch of the crisis, FMCG [fast moving consumer goods] industries have coped better than others (Financial Times 2009).
Economic environment faced by the industry
Contrary to predictions, key players of the soft-drinks sector have occasionally had reasons to celebrate, even in the midst of a global downturn
Soft drink industry immune to recession
Continuing with the trend of companies that have rocketed past competition, The Coca-Cola Company announced its ninth-straight quarter of double-digit earnings per share (EPS) growth and a third straight year of meeting or exceeding its long-term-growth targets, in February 2009, for the UK market (Market Oracle 2009).
Impact on stakeholders
The direct consequence for such a well performing industry is that the confidence of investors and shareholders is consistent, coupled with little changes in promotional campaigns and advertising revenue.
The maintenance of a steady influx of capital is the cause as well as effect of stable consumer support. The overall standard of living of the average middle-class is not as disastrous so as to prompt a person to think twice about buying a cola.
United Kingdom’s Society
Food items such as chocolate, sweets, savoury snacks, crisps, fast food, sugary drinks and breakfast cereals, or what is labelled as “junk”, is the popular choice of diet, in general.
Social Environment faced by the industry
The manufacturers of snacks and soft-srinks frequently face the heat from educational institutions or other socially prominent representative bodies. The accusations range from misleading children in advertisements to potentially ‘harmful’ ingredients in the products (Guardian 2008).
Impact on stakeholders
A] Negative impact-
Against the backdrop of a proposed ban of soft-drink vending machines in schools, announced by Ms Ruth Kelly [a British Labour Party politician, currently Member of Parliament] at the Labour conference, Coca-Cola warned the education secretary it might withdraw its vending machines network from schools.
The company’s business model would have been unviable. This idea prompted Coca Cola to suggest withdrawal of vending machines. The argument is left unresolved with Coke facing minimal losses due to the withdrawal from a small section of schools.
It said schools would lose money and pupils would suffer from the removal of a highly efficient country-wide beverage distribution system (BBC 2006).
B] Positive impact-
Despite marginally losing out in the kids’ segment ageing population has boosted soft-drink market growth.
1] The UK market for soft drinks is likely to continue to grow over the medium term as consumers in an ageing population, are more likely to reach for a soft drink. Certainly the smoking ban could make soft drinks less of the exception and more of a rule.
2] Health orientated concoctions are expected to continue to drive consumer demand through heightened expectation although the industry will have to guard against threats from the environmental lobby which has already targeted bottled water as a wasteful industry in terms of packaging and resources (Euromonitor 2009).
United kingdom’s technological capabilities
The United Kingdom is industrially sound enough to support the supply chain procedure from sourcing to putting the product on the shelf.
Technological Environment faced by the industry
Manufacturing: The making of a soft drink begins with clarifying the water, to eliminate any trace of impurities. Next comes filtering, followed by sterilizing and dechlorinating the water. These steps are followed by mixing the ingredients and finally carbonating the beverage.
The simplicity of the manufacturing procedure leaves little room for technological impediments.
Franchise model: Since the U.S. introduced the franchise model to the world with businesses like Coca Cola and motel industries, it has taken off in numerous nations due to its cost-effectiveness. It does not call for invention of a new device or process.
Internet forums, advertisements, discount coupons are some of the branding tactics used by soft drinks manufacturers.
Internet Usage Statistics:
As of Sept/06, 63.8% of the British population were avid net-surfers (NIELSEN 2006).
Both the above mentioned factors have led to better promotional capability and thus, rise in sales.
Overall environmental scenario in the UK
Volume growth slowed down due to unfavourable weather
The UK suffered one of the wettest summers on record in 2007 which significantly impacted soft drinks volume sale. Sales remained average.
Environmentalist lobbies exerting pressure on soft-drinks to think greener
The key issue in this is the non-biodegradable plastic bottles that have been popularized by the industry.
Pepsi shares its environmental sustainability commitments which include reducing water consumption by 20%, electricity usage by 20% and fuels consumption by 25%, all by 2015.
Pepsirecycling.com is a website that encourages visitors to recycle. It involves games, collection of points and environmentally-sound prizes.
Legal environment faced by the industry
A smoking ban in England, making it illegal to smoke in all enclosed public places and enclosed work places in England, came into force on 1 July 2007. Similar bans were introduced by the rest of the United Kingdom – Scotland on 26 March 2006, Wales on 2 April 2007 and Northern Ireland on 30 April 2007.
Impact on stakeholders
But the soft drinks industry showed itself to be adept and adaptable as it brought new products and brands to the market that really met the consumers’ needs.
There was good growth shown by soft-drinks, juice drinks and bottled water. All three categories are often consumed with food, and that combined with the introduction of the smoking ban, does suggest that the growth in food linked with additional consumption of soft drinks is something that will be seen both now and in the future.
PESTEL ANALYSIS FOR INDIA:
High growth prospects:
A good 90% of global growth this year is going to come from emerging markets like India and China. India, for example, is resorting to lowering interest rates and expanding fiscal stimulus plans in order to grow. This has facilitated infrastructure development and lending and tax breaks.
Burgeoning Retail Outlets:
Soft-drink companies have benefited from the recent opening up of various convenience stores and hypermarkets in India (Reardon and Gulati 2008).
Impact on stakeholders
The 2 major soft-drinks giants- Coca Cola and Pepsi have been able to reach the urban Indian like never before. New players have been added in the value chain. The retailers and department store owners have seen positive growth of soft-drinks, although they are not in a position to bargain for proportionate retail margins.
The high birth rate of India has resulted in a population that consists of a huge chunk of the youth.
The people are also known to have a keen interest in cricket, which is a popular sport attracting sponsors worldwide.
Impact on stakeholders
Soft-drinks are expected to perform well within the segment of the younger population. Brands are being considered as status symbols, especially by the youth. This factor is effectively tapped by the soft-drink industry, as it extends its merchandise to branded apparel, bags and accessories. The youth have helped the industry garner a huge support and establish brand loyalty (Pepsi 2003).
Given the simple manufacturing procedure explained earlier and the level of India’s industrialization, there aren’t any obstacles in this area.
Internet advertising is fast catching up all over the globe and India isn’t far behind. Social networking sites and blogs are especially popular with the adolescent and youth segments.
These factors provide ample scope for the manufacturing and marketing departments to expand in the country.
The general climatic conditions in India make it favourable for soft-drink manufacturers to sell their good almost round the year. India experiences hot weather conditions throughout the first five months of the year. These conditions return in September and October, tempting people to grab a soft-drink frequently (Britannica 2007).
Following concerns from environmental bodies, Coca-Cola Co. and Pepsi each have committed to use 10 percent recycled resin in PET bottles this year.
Around 60 percent of PET bottles in India are recycled, because they are collected by very poor people who pick through waste and salvage items of some value, and because most of the PET market in India is concentrated in the larger cities (Atlanta 2007).
Growing pressure on soft-drink companies after India’s Supreme Court ordered them to reveal every ingredient in their drinks, following tests that found they were contaminated with pesticides.
The results, published by the campaigns group Centre for Science and Environment (CSE), could hit Coke and Pepsi’s sales in a soft drinks market growing at between seven and eight per cent per year.
Both companies have panicked due to a direct hit to sales and have sought to reassure consumers their products were safe (PTI 2006).
Similarities and Contrast between U.K. and India
SIMILARITIES U.K. India
Stringent government backed measures to discourage soft-drink consumption
No potentially destructive government policy
The Franchise model
Hit by recession
Popularity of sports
Wave of health-consciousness sweeping through the public
Soft-drink popularity consistent
Internet savvy population
Long stretches of
favourable [hot] climatic conditions
(Generated by student)
From the findings presented in both sections of the report, it is concluded that the soft-drinks industry is a globalized industry.
From the brand names being recognized worldwide, to investments in plants in various countries; from successfully leveraging core competencies, to expanding into new markets, the industry continues to exhibit evidences of being globalized.
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