The impact of globalisation on business Essay Example for Free

The impact of globalisation on business Essay 1. INTRODUCTION. Advancement in transportation and information technologies has opened up the world to lucrative business opportunities. Many companies no longer confine their business domestically but reach out globally in search of better profits. When a company conducts business across national boundaries, it is participating in international business. International business paves the way for globalisation. Ball et al. (2004) found that globalisation can be defined in many ways but broadly globalisation occurs when an entity (government, company, NGOs, etc.) carries out an activity (economic, political, technological, etc. ) in a host country. Globalisation has impacted the way many companies performed their business. New strategies are required to identify the opportunities presented by globalisation. Companies need to understand the forces that drive them towards globalisation. Most importantly, the companies must be prepared to meet the challenges of globalisation. This report presents globalisation in the context of a global strategy. It assesses the impact of the global strategy on the Texchem Group of Companies (Texchem), a company based in Penang. Texchem is founded in 1973 by its current Chairman and Chief Executive Officer, Dato Seri Fumihiko Konishi. Today, Texchem is well diversified into the business of trading, manufacturing and services with divisions in the packaging, industrial, food, family care and venture industries ( 2003). Currently, Texchems globalisation efforts are concentrated around the Association of South East Asia Nations (ASEAN) countries and China (Chiew 2004). The organizational structure of Texchem is shown below. The groups investment holding company is Texchem Resources Berhad.  (source: Texchem Resources Bhd, www.trbgroup.com/business_act_corporate_structure.htm) FIGURE 1: Texchem organizational structure 2. FORCES DRIVING TEXCHEM TO GLOBALISE. Normally, a companys decision to globalise is influenced by a combination of several factors. These factors are the forces that drive a company to expand abroad. Each company has its own unique reasons to carry out oversea business activities since declining trade barrier and technological changes seem to underlie the trend towards greater globalisation (Hill 2003, p. 8) today. Texchem has mainly operated domestically apart from venturing into Singapore a year after its inception. It was not until 18 years later that Texchem started its globalisation exercise aggressively after building up its strength and reputation. Starting with Thailand in 1992, Texchem continued with Vietnam (1994), Myanmar (1997, Indonesia (2002) and China (2002). Now, Texchem is well represented in the ASEAN region (Texchem Annual Report 2002). Like any other companies, there were also unique forces that drove Texchem to globalise. Chief among them were: * Be a US$1 billion company. It cannot be denied that all companies are profit driven. After all the very existence of a company rest on the profits it makes. Texchem is no different in this aspect. However, Texchem is not only trying to make a profit but striving to be a US$1 billion company by 2010. This is Texchem Vision 2010 which is to be achieved with annual sales revenue of US$1 billion (Konishi 2002). Texchem 5 year performance chart below shows that there is still much to do and globalisation is the answer to bigger market opportunities. (source: Texchem Resources Bhd., www.texchemgroup.com) FIGURE 2: Texchem financial performance In order to realise this Vision 2010: Texchem has identified and capitalised on global market opportunities and allowed its growth to be determined by market trends and customers demands. Then it responded to such opportunities with top quality products and services that deliver real value www.texchemgroup.com/aboutus/history.html 2003, p. 1). Furthermore, Texchem has to survive through economic crisis in order to sustain a steady and resilient performance. One way is to prudently invest in growth industries with different market cycles like the food industry (  history.html 2003). * Loss Of Trade Preference. Konishi said Malaysia is treated by Europe under the general system of preferences which imposed an import duty of 14% on Malaysian products entering Europe. Texchem will not enjoy this status when import duty goes up to 20% in 2005 (Tan 2004). In 2003, Konishi said Texchem has estimated a US$25 million export market to Europe, Japan and Australia for its surimi and fishmeal products by 2006 (The Star 2003). The loss of this preference will affect Texchems profit. It may not be feasible to market seafood products in Europe due to price disadvantage. Therefore, to continue capturing the European market, Emmanuel (2004) wrote that Texchem is setting up a RM50 million seafood processing plant in Europe in 2005. Tan (2004) reported that Konishi said, Raw material will be imported from Myanmar as import duty on raw material going into Europe is only 3.5%. Production cost will then be lower giving Texchem the  competitive edge again. * Be close to clients / customers. Interdependency among companies is a norm. When a client is satisfied with the companys products and services, loyalty is attained. Therefore, when a client sets up shop overseas or penetrates a foreign market, it is not surprising that the company normally tags along. Many international companies wanting to market and distribute products in ASEAN have appointed Texchem for the task due to its reputation and international networking. Taking customer support a step further, Texchem even located its operation to be close to its local and multinational clients ( 2003 ; www.texchemgroup.com/stakeholders/customers.html 2004). For instance, Texchem-Pack (Thailand) was established to serve its major Texchem customers like Seagate, Mektec, IBM, etc. in Thailand (Konishi 2003). Its production facilities are located near customers operations to give immediate respond to their needs and to any changes in the local market. This also shorten delivery timings and to provide just-in-time delivery. Reduction in logistics and transportation charges is a cost savings to customers ( 2003). Another example is Texchem-Pack (Wuxi) which was established to serve the hard disc drive industry, the semiconductor industry, the electronics industry and the telecommunications industry in Jiangsu Province and Shanghai, China ( 2003). The establishment in China enables Texchem to be close to and provide more effective and efficient services to its customers in China. * Acquire Technology. Many companies brought along their technologies when setting up shop abroad. As the world become more and more accessible, it becomes possible to team up with these companies in the host country to acquire their technologies. Although Texchem has invested heavily in research and development and use leading edge, in-house facilities both for product enhancement and for new products (www.texchemgroup/business/packaging.html 2003, p. 1), it is continuously seeking out new technologies to gain competitive edge. As such Texchem joint ventures with international leader and creates new subsidiaries often through technology transfer arrangements that enable both parties to net a bigger catch ( www.texchemgroup.com/business/texchem-eng.html 2003a ;  group.com/stakeholders/associates.html 2003). To illustrate, Eye Graphic (Vietnam), a Texchem joint venture with Eye Corporate Planning Co Ltd of Japan, is equipped with advance digital propress system and flexo photopolymer printing plate making equipment ( * Demand. In any business activities, there must be demand. Without demand, a companys product will eventually be rendered obsolete. One of the reasons Texchem chose to expanded into ASEAN and China was because there was a huge demand for its products. And, Texchem is prepared to set up more manufacturing plants to meet the increasing demands of the ASEAN market ( 2003, p. 1). With greater demands from the Chinese market, Texchem now intends to expand its Wuxi plant into thermoforming for the high-tech industry and injection moulding for the computer and semi-conductor industry (Konishi 2003a, p. 2). Also, in line with increasing global demand for surimi, Texchem has set up a manufacturing plant in Myeik, Myanmar (Konishi 2003a, p. 3). Texchem expansion into Indonesia, with its largest manufacturing plant in Kerawang (near Jakarta), is to cater for the need of 206 million people. The  brand name of Fumakillas mosquito coil in Indonesia is distributed under the name Domestos Nomos, a successful household name ( 2003a). Yap (2003) reported Konishi as saying, so far, we have shipped over 400,000 cartons in the first 6 months of operation, equivalent to the total volume that Texchem sold in Malaysia, Thailand, Myanmar and the Philippines in the same period. A comparison of the population in ASEAN countries in presented below in order to appreciate the magnitude of the demands in ASEAN. FIGURE 3: ASEAN population breakdown. From the table it is understandable why Texchem has been aggressive in penetrating the ASEAN market to capture the demand. ASEAN has a combined population of 500 million. 3. GLOBALISATION EFFECTS ON TEXCHEM INTERNATIONAL BUSINESS STRATEGY. Before a company expands abroad, it must have a strategy. According to Ball et al. (2004) there are several strategies that could be adopted such as the global strategy, multidomestic strategy, transnational strategy and international strategy. Globalisation has an influence on which strategy to adopt. Careful assessment of the various internal and external business environments is a prerequisite before any decision can be made. In crossing national boundaries, globalisation affects Texchem international business strategies in terms of the following: * Standardisation. Texchem operations are standardised in all the host countries. All packaging plants provide: One stop total packaging solutions equip with state-of- the-art facilities. Furthermore, all Texchem plants support customers through excellent logistics, warehousing and inventory management. This is done via a nationwide network of branches and sales offices ( www.texchemgroup.com/business/texchem-pack.html 2003c, p. 2; www. texchemgroup.com/business/texchem-mat.html 2003a, p. 1; www.texchemgroup. com/business/familycare.html 2003, p. 3). With globalised operations, Texchem would be able to take advantage of business opportunities occurring anywhere in the world and would not be constrained to specific sectors (Khambata and Ajami 1992, p. 43). As product preference and requirements are becoming increasingly alike globally, product standardisation across all cultures would enable companies to manufacture and sell low-cost reliable products around the world without being adapted to individual country preferences (Khambata and Ajami 1992, p. 43). To capitalise on this, Texchem products are also standardised globally. It manufactures and distributes household insecticide such as the Fumakilla mosquito coils under different brand names in Indonesia (Domestos Nomos), Thailand (Chang) and Myanmar (Jumbo) ( 2003b). * Global Decision Making. With globalisation, Texchem decision making covers a wider scope now compared to when it did domestically. Texchem has centralised its decision making in its Penang corporate office. This is where Texchem makes decision on strategies issues such as policy, capital, technology and products. Decisions are global minded taking into consideration the local factors of the host countries. Texchem Design Centre is centralised to tailor-make packaging solutions in the fastest possible time for all its plants across ASEAN countries and China to meet customers demand around the world ( 2003). * Market scope. Globalisation opens up the world as a very big market. Domestic markets, however large, are limited in size and growth and are targeted by domestic competitors (Khambata and Ajami 1992). To continue growing, Texchem sees the world as one market to sell its products. Khambata and Ajami (1992, p. 283) said that: Apart from the fact that the existence of a new, larger customer base would help boost sales, overseas markets often confer additional advantages such as competition from overseas markets may not be strong. When the local market is large and the demand is consistent enough to justify investment in the plant and equipment needed to set up a manufacturing operation, production economies can occur (Khambata and Ajami 1992, p. 284). Also, Texchem can tap the Chinese market to derive economies of scale and scope (Konishi, Texchem annual report 2002). Operational economies of scale allow Texchem to keep prices competitive and deliver exceptional value ( 2003). * Develop skills. Part of the globalisation process concerns developing skills especially multicultural and bilingual ones. Texchem encourages such skills development to communicate and establish rapport with its global clients, staff and customers. Not surprising, Texhem only recruits staff of outstanding caliber and provides training for them ( 2003). In order to develop skills, Texchem formed strategic alliances with agents around ASEAN region with strong domestic knowledge in sales and distribution ( 2003b, p. 1). Texchem has approached globalisation with a global strategy because the above effects have the essence of a global strategy. Ball et al. (2004, p. 6) defined the global strategy as a strategy that attempts to standardise and integrate operations worldwide in all functional areas. Texchem has adopted precisely this strategy. 4. MAJOR OPPORTUNITIES CREATED FOR TEXCHEM. As the world shrinks into a global village because of accessibility, abundant opportunities are available to business organisations. Companies are quick to take advantage of these golden opportunities to further their interests. In other words, globalisation provided avenues for companies to spread their wings into foreign markets. Globalisation presented many major opportunities for Texchem too as it did for others. Texchem management was quick to see these opportunities and swiftly took advantage of them. The major opportunities created for Texchem were: * Tariff Reduction. Tariffs are taxes levied on foreign goods entering the country. Sometimes it can be levied on goods leaving the country as well. According to Hill (2003), tariffs protect domestic products against foreign ones. It is a form of government intervention to shield local companies from international  competitors who have superior technologies to make higher quality products at lower cost. By levying taxes on such goods, it brings up their prices to be on par with local goods. With the exception of Singapore, all ASEAN countries have imposed tariffs on imports. However, ASEAN initiated the ASEAN Free Trade Area (AFTA) in 1992, detailing a regional progressive tariff reduction plan. To be implemented in stages, tariffs on goods with 40% ASEAN content shall be progressively reduced to between 0 5% by 2003. There were some exemptions to the implementation year for Vietnam (2006), Laos and Myanmar (2008) and Cambodia (2010) ( 2003). With the reduction in tariffs coupled with the huge population in ASEAN countries, the trading opportunities are very attractive. Texchem acknowledged this fact. It noted that with AFTA in place, the regional exchange in business is expected to further boost various industries ( 2003a, p. 1). Texchem has been anticipating AFTA since 1990s. Knowing the opportunities AFTA presented, it has ventured into ASEAN countries to position itself first while waiting in full anticipation for the implementation of AFTA. This strategy gave Texchem a head start to study the market opportunities of the host country better, build up its reputation, find solutions to lower production costs and sell competitively. This foresight has paid off handsomely as Texchem registered improved sales in all its division for the year 2003 (Konishi 2003b). As quoted in the Texchem investor newsletter (2003, p. 4), the increase in revenue for the Packaging Division was mainly contributed by the successful penetration into new market AFTA region, namely Thailand. This is because: Thailand experienced a substantial increase in revenue from the trade of plastic resins, a direct benefit of reduces impact duties effective Jan 2003, in line with the implementation of AFTA (Texchem investor newsletter 2003b, p. 2). As Konishi (2003b, p. 5) mentioned: Texchem Resources Bhd Group will continue to make the 100% AFTA proof objective its priority. Texchem is indeed in a position to take full  advantage of AFTA as it expands further into the global market. * Strategic Location. Geographical location is another opportunity that can be taken advantage of. According to Ball et al. (2004, p. 263), geographical proximity is often the major reason for trade between nations. Apart from close proximity, the location of a nation also offers other suitable operational advantages for foreign companies. For instance, if the country has sea frontage, companies can make use of ports in the country to export their products. This was what Texchem was looking for when it ventured into Myanmar. Texchem was searching for an advantage in Myanmars location and found it in a town called Myeik (please see map for location). (source: design printing services, www.dpsmap.com) FIGURE 4: Map of Myanmar. The Myeik Archipelago, which includes over 800 pleasant and enchanting islands, lies in the Andaman Sea along the south Tanintharyi coast. Myeik is the port city of this archipelago. It has the potential for industrialisation of marine base products because the Andaman Sea has abundant fish. Texchem joint ventured with Mascot Industries Co Ltd of Myanmar to set up ASK Andaman (Lee 2003). The strategic location of ASK Andaman at a fishing port complement the abundant fresh fish from the Andaman sea has set it as the most idealistic plant for surimi and fishmeal processing ( www.texchemgroup.com/  business/andaman.html 2003, p. 1). The fishing port facilitated the export of Texchems products from Myeik to Japan, Australia and Europe. It also provided an infrastructure for Texchem geographical reach so that it is the ideal partner for multinationals that have operations spread across the region ( 2003, p. 2). * Abundant Raw Materials. Sourcing for cheap raw materials is an important task in any operation. This is where competitive advantage can be sustained. Therefore, many foreign companies flock into ASEAN in search of raw material because they are in abundance. Konishi said Texchem globalisation into Myanmar enables it to tap the countrys natural resources and obtain a reliable supply of good quality and more cost effective raw material (The Star, 2003). ASK Andaman manufactures and market surimi and fishmeal products and provides Seapack Food with a reliable supply of reasonably priced, good quality surimi raw material ( 2003a, p. 1). It requires fresh fish to manufacture and process surimi and fishmeal products. The Andaman Sea has abundant supply of fresh fish to provide ASK Andaman. * Low Labour Cost. Labour cost in ASEAN countries is generally low with the exception of Singapore and Malaysia. Many foreign investors take this opportunity to relocate their operations here so that their production cost can be reduced. The table below provides a comparison of labour cost among ASEAN countries. Texchem has set up manufacturing plants in Thailand, Indonesia, Vietnam and Myanmar because the labour cost is lower than Malaysia. It practices stringent cost controls ( 2003, p. 2) and taking advantage of this opportunity is a prudent strategy. The setting up of manufacturing operations in competitive labour cost countries (Texchem investor newsletter 2003a, p. 2) provided Texchem with a competitive advantage over other domestic competitors. Konishi (2003b, p. 4) was please to note that: The year 2003 was spent building a solid base for Texchem operations in Myanmar and with its competitive labour and abundant natural resources, great returns beckons as Texchem begins exporting its marine products globally. Myanmar Sometimes a company is attracted by just one or two opportunities offered by the host country. However since Myanmar offers all the above opportunities for Texchem, it is only appropriate to provide an opinion of the country in this report. Myanmar has rich natural and human resources. The government is encouraging direct foreign investments to take advantage of these resources. With a market oriented economic system aimed to liberalise its economy, foreign investors would be given the right to enjoy appropriate economic benefits. They would also be safe guarded by the Government against nationalisation of their business. There are tremendous investment opportunities in natural resources such as teak forests, minerals and gems. Historical and cultural attractions offer vast potential for tourism. The labour force is highly literate and trainable. Myanmar has a long coastline rich in fish and other marine life. An estimated one million metric tons of sustainable fishery resources could be exploited annually. Investment opportunities in the fishery industry include setting up of cold storage facilities, fishmeal plants, canning plants and shrimp farms and / or hatcheries ( n.d.). 5. CHALLENGES FOR TEXCHEM AND MEETING THEM. Converting business opportunities into profits is usually never plain sailing. There are challenges to overcome first. These challenges come in many forms i.e. trade barriers, high taxes, corruption, unskilled workers, poor infrastructure etc. Although globalisation created many opportunities, Texchem must overcome the many challenges that came with these opportunities before reaping in the profits. Among the many challenges Texchem has or shall encounter in globalisation are: * Building Brand. Branding is a very important exercise for companies going global. Foreign markets must be made aware of the existence of their products. Irrespective of the large population, if the product is not known then there shall be no demand. When Texchem ventured into Indonesia to market its mosquito coils through Fumakilla, it realised the difficulty in building its mosquito coil brand. Fumakilla is relatively unknown to millions of Indonesian and without awareness the product will be just another product on the shelves. As a solution, Fumakilla has embarked on a RM12 million branding exercise to expose its mosquito coils to the Indonesian market under the brand name Domestos Nomos. Advertising and promotions activities were carried out via PT Technopia Lever (Texchem investor newsletter 2003b). Since the expansion of the Family Care business to Indonesia in September 2002, Domestos Nomos has: Achieved a market share of 6.5% as of Sept 2003. Sales in the 2nd half of 2003 improve due to seasonal trend of the household insecticides market in ASEAN. It has also become the top brand with an average market share of 40% in modern retail outlets located within Jakarta and Medan (Texchem investor newsletter 2003, p.4 2003a, p.3). With such a large market, Fumakillas top priority for 2003 was to build the Domestos Nomos brand so as to achieve further significant market penetration into Indonesia. With a population 206 million, industry  potential in massive (Tan, GH 2002, pp. 30-31). * Sustaining Market. Market penetration is just the first step to a successful globalisation. After penetrating a foreign market another challenge shall present itself. This challenge is sustaining the market. Sustaining a market is difficult because there is no such thing as a perpetual sustainable market. Products come and go frequently because of competition. Texchem success depends on: Keeping its fingers on the pulse of an ever-changing market and on its resourcefulness in responding to customer needs. By constantly updating knowledge of market trends and sharing knowledge with suppliers, Texchem is able to rapidly develop and introduce new products that exceed its customers expectations (  industrial.html 2003, p. 1). Texchem is focused on maintaining its market leadership and is confident of attracting potential partners for help because of more competitive products from China (Texchem investor newsletter 2003b, p. 2). Therefore, Texchem is very selective in its choice of partners, choosing only those whose needs can genuinely be met and who are committed to long term brand building ( 2003, p. 3). * Financial Limitation. Insufficient financial capability is a hindrance to globalisation. Funds are required to invest in foreign soil. Additional plants and equipment have to be procure and employees paid. Normally, capital expenditure can only be recouped after a few years of operation. Sourcing for funds to globalise is a major task for Texchem. One of the ways to overcome the shortage of funds is to list the company in Securities Exchanges. In September 2003, Texchem announced: The listing of its Packaging business on the Main Board of the Singapore Exchange Securities Trading Limited (SGX-ST). Texchem is currently awaiting approvals from SGX-ST and the Monetary Authority of Singapore (MAS) to list Texpack Holdings on the SGX-ST (Texchem investor newsletter 2003b, p. 3). The access to funds shall pave the way for Texchem to take advantage of viable investment opportunities in the international capital market. It also broadens its fund raising capabilities to expand and grow its Packaging Division within the region and on the global arena (Texchem investor newsletter 2003a). * Risk. There are no risk free investments. The same goes for globalisation. In fact, risk assessment for globalisation is considered a delicate task. Unexpected global events such as epidemic, natural disaster and war are some of the risks that are difficult to account for. These unexpected events affect company performance. Texchem Food Division performance could have been better if not for the SARS epidemic and war in the Middle East (Nishida 2003, p. 28). To demonstrate the impact, Kim (2003, p. 18) said that Texchem-Pack (Wuxi) in China suffered losses due to the indirect effect of the SARS epidemic during the first half of 2003 because Texchem sales and marketing team was prevented from servicing the clients due to the outbreak. However, Texchem was able to overcome this challenge with the support from its clients, new business partners, the dedication of the team and the support form the Penang head office'(Kim 2003, p. 18). Apart from that, the risk of lack of basic infrastructure and communications  is another prevailing issue when entering third world countries. Texchem can attest to that because the initial stage of establishing in Myanmar was difficult because of the lack of infrastructure and communication problems (Nishida 2003, p. 28). Nevertheless, Texchem was able to grow and expand its operation in Myanmar due to strategic acquisitions, meticulous planning and the synergizing of all Texchem plants (Nishida 2003, p. 28). 6. CONCLUSION AND RECOMMENDATION. Globalisation has changed the way business is being conducted. From being a domestic company in the 1970s and 1980s, Texchem is now a successful global company. Ever since Texchem started globalising its performance has been growing steadily. Apart from a slight drop in revenue in 2001, Texchem has registered an increase in sales and operating profit for the past five years. (source: Texchem Resources Bhd, www.texchemgroup.com) FIGURE 5: Texchem financial performance For the year 2003, Texchems gross dividend payout was a remarkable 8%, much to the delight of its shareholders. Globalisation has also generated sufficient profit for Texchem to be transferred to the Main Board of the Bursa Malaysia (formerly known as the Kuala Lumpur Stock Exchange) in 2001 after being listed in the Second Board in 1993. This milestone signified the growth of Texchem into a major listed conglomerate in Malaysia. Texchem is now a household name in family care products and its packaging division is well represented in ASEAN. Its food division is also making inroads into Europe, starting with Italy. Overall, globalisation has indeed changed the corporate profile of Texchem. It has provided Texchem a vast market for its products and Texchem has seized the opportunities created well. With six more years to go, Vision 2010 may sound a little ambitious. It is not that Vision 2010 cannot be achieved but it should be scaled down to allow for any unforeseeable economic crisis such as workers strike, war, epidemic or even natural disaster. 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