Managing Global Operations

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Table of Contents

Introduction
The Global Market
Global environmental scan and the financial consequences
Financial Supply Chain and Working Capital Management
Secured Short-Term Financing
Multinational Financial Management
Challenges of Operating in the Global Market
Benefits of Operating in the Global Market
Conclusion
Works Cited

Introduction

Managing the global operations has been one of the most important tasks that many organizations have had to deal with in the modern market. According to Loader (23), the world is increasingly turning into a global village where people can easily move from one part of the world to the other using some of the modern means of transport. Communication has also improved, making it easy for business units to monitor operations of their branches in various parts of the world.

This is advantageous for multinational corporations that have global market coverage. The research by Nersesian (66) argues that, in the current competitive market, it is no longer safe for a firm to confine itself within a given local market. Such local markets can easily be attacked by multinational firms at any time, the fact that may reduce their profitability. This means that, the best way of remaining competitive is to explore other global markets.

This helps the firm to increase the market base, limiting the impacts that may be caused by the entry of other international firms into the market. However, Hockley (43) says that, getting into the global market has its own challenges that the firm has to be able to deal with in order to achieve the desired success. Global operations need a high amount of capital to support the operations of the new overseas branches.

It means that such a firm must be able to access the capital market where it can get the needed capital to expand its operations. Accessing the global capital market may not be as easy as accessing the local capital market. In this research, the focus will be to determine how firms can manage global operations from a financial perspective.

The Global Market

The emerging technologies have had positive impacts on the global market as firms struggle to reach out various parts of the world. According to Loader (64), there is a massive shift in the way the global market is viewed by firms in the modern days. In the past, the global market was believed to be a preserve for the large multinational organizations with huge financial strengths such as Coca Cola and the General Motors.

During those periods, these large multinational corporations expanded rapidly as they enjoyed the benefit of operating in the local and international markets. The small and middle sized corporations continued to suffer as their local markets were constantly under attack of the new multinational firms. This reduced their competitiveness and their sources of income. These challenges have forced the medium sized firms, and even some small business units to spread the scope of their market beyond their original borders.

Today, global operations are no longer a preserve for the large multinational as small and medium sized firms are also embracing it. However, the global market has a number of new challenges that many of these firms have to face, especially if they are small or medium sized firms. Firms that make it successfully into the global market get to enjoy a number of benefits that may boost their level of income. There are some conventional issues that a firm should consider before plunging into the global market.

Many organizations have failed in the global market because of ignoring some of the pertinent issues in the global business operations.

According to Hockley (78), there is a marked difference between the environmental factors in the local market and that in the global market. The environmental factors for business units in the United States may not be the same as that in the United Kingdom, Russia, France, Saudi Arabia, or South Africa. Each country has its own unique characteristics that make it different from others. It is important to understand these factors in order to be able to operate successfully in the global market.

An environmental scan, using some of the market analysis tools, may be important at this stage in order to understand these factors and their relevance to business units that are operating in the global market. In a global market, firms are always under pressure to ensure that they manage their limited financial resources to facilitate their normal operations at the headquarters and the new plants. It is important to note that for a firm to manage its finances properly, the environmental scan would be very important.

Global environmental scan and the financial consequences

One of the most common tools that the business units need to use in order to conduct an environmental scan of the global market is the PESTEL Analysis. The political environment in the global market varies a great deal. The political environment in the United States cannot be compared to that of Southern Sudan or Syria. In the United States, the political environment has remained very stable since the end of the Second World War.

On the other hand, Southern Sudan has never known peace since the country gained independence. Syria is also at war with itself following the rebellious attacks on government facilities. Despite the turmoil, the market in Southern Sudan has remained very attractive for foreign investors because it is not fully exploited. An American firm that is planning to move to the market in Southern Sudan or Syria must take some caution in order to avoid the negative consequences that may be related to the instability of the political environment.

According to Loader (88), firms that operate in unstable political environments must always be ready to spend more on such issues as security, logistics, and insurance. This is so because the possibility of an attack is always high. In such environments, few insurance companies are always willing to offer coverage to business units because of the high risk factors.

The few that may be willing to offer the coverage would charge very high premiums. This means that in these politically unstable environments, business units must be ready to spend more on their operational activities. This confirms the argument that managing global operations need more financing than when a firm is operating locally.

The economic environment in the global market is also varied. The United States is the leading economy in the world in terms of its GDP and the purchasing power. According to the research by De (25), some firms have always avoided global markets with lower economic power. Countries with higher purchasing power are considered more attractive than those that are economically challenged. However, firms have currently learnt that even the less economically attractive markets may have niches that may support their operations.

Firms like Apple have been able to devise strategies that can help them thrive in both the developed and developing economies. In the developed economies, they take superior products with advanced features at very high prices. In the developing economies, they take low end products which attract low prices. The pricing strategy has worked for many corporations operating in the global market.

It is important for firms managing global operations to understand the different economic environments and come up with approaches that can be used to address the differences. Localizing management policies can be the best way of reducing the cost of operations. This will in turn, reduce the need for borrowings from the capital markets.

The social environment in the global market is highly diversified.

De (44) says that, business units must understand the social environment in different markets in order to achieve success. The process of establishing new branches overseas is very costly. A firm will be forced to incur the initial cost of putting up the structures, paying costs of registration, and cost of hiring new employees. It is, therefore, unfortunate that sometimes a business would fail because the concerned players ignored the social environment.

Culture and religious beliefs play a central role in defining the buyer behavior. McDonald’s is one of the most successful fast food companies in the United States. However, if this firm decides to open a branch in India, then a lot of care should be taken in terms of the products being offered. With a population of 1.2 billion people, India is the second most populous country in the world after China, making it one of the very attractive foreign markets for such a firm as McDonald’s.

Most of the Indians practice Hinduism and Buddhism as their main religion. Their religious practices prohibit them from eating animal products, especially meat and related products. Most of the popular products offered at McDonald’s are animal products.

Moving into India simply because of the large population, but ignoring the socio-cultural beliefs may be dangerous for this firm. The products offered by the firm will lack the market. The firm will be forced to wrap up its operations in such a market, the fact that may lead to serious losses to the firm.

Technology plays a vital role for firms managing global operations. It would be important to understand the role of technology in the global market, and how it may influence the need for financial resources in the global market. The emerging technologies have played a central role in turning the world into a global village. Technology can be used to reduce the cost of global operations in various ways.

With the modern technologies, the cost of labor can be reduced by replacing the human labor with machines, especially in areas where the cost of labor is high such as in the Western European countries. Video conferencing can be used by top managers whenever there is a need for a conference by the top management unit. The cost of moving these executives from various parts of the world will be reduced as they will attend the conferences right in their offices.

It also eliminates time wastage, making it possible for these top executives to dedicate more time into developing strategies that can be used in the foreign markets to increase the profitability of the organization. Technology also plays an important role in enhancing operational activities in the foreign markets.

Although the new markets may have different socio-cultural practices that may make employees in that region unique, the use of the modern machines may standardize some of the procedures and the outcome out of various processes. This helps in the further reduction of costs of operations.

Ecological issues may also affect the ability of a firm to operate adequately in the global market. According to De (67), the threats posed by the environmental pollution are becoming clear in the modern society. Some of the countries that are leading in the emission of greenhouse gases have experienced some of the worst natural disasters in the recent times. The Hurricane Katrina that hit the United States was one of the worst cyclones in the world’s history, and it was associated with the changing climatic condition.

The cities of Hong Kong and Beijing have been experiencing regular heavy smog and polluted air that poses massive health problems to people, especially the aged and young children. Japan was recently affected by a massive cyclone that destroyed properties worth billions of dollars and killed a score of people.

This alarming trend has affected the policies that different countries apply for firms that want to operate in their countries. Some countries have policies that restrict the amount of greenhouse gases that a company can emit within a given period. These policies may be viewed as punitive in nature because of the penalties attached to them when the set limits are surpassed. Some firms have refrained from some industries in the global markets because of the financial consequences of such policies.

The legal environment in the global market should also be analyzed and understood for a firm to be successful in the market. A business unit cannot survive in a business environment that lacks clear laws and regulations that define how it should relate with the government, other business entities, customers, and the public. However, different countries always develop laws and regulations that they consider most convenient to their local environment.

An American firm planning to invest in the United Arab Emirates must be ready to understand and embrace the legal environment in this new market. According to Cheverton (54), sometimes a firm may find the legal environment in other countries so unique that some of the policies may sound retrogressive. For instance, some of the Islamic banks in countries such as Saudi Arabia and Pakistan do not offer financial assistance to firms they consider operating out of the Islamic faith.

An American firm may find this policy strange because back in America, any formally registered firm is entitled to the capital market as long as its operations do not contravene the national law. In some of the developing countries, the process of registering a new firm takes a long time and is associated with extortions that may discourage the process of registering a firm. The best approach would be to understand the legal environment in these different countries.

It would be necessary for the management to make an effort to ensure that its operations do not go against the set laws and regulations in the host countries. This will help eliminate cases where the firm may be forced to pay heavy fines because of contravening the law. Such litigation processes do not only tarnish the image of the firm but also leads to serious financial consequences.

The environmental scan helps a firm be able to understand the global markets. This way, it becomes possible to develop the most appropriate approach that would be used by firms that are planning to explore the global market. The strategies will help the firm cut cost of operating in the new markets. It will also enable a firm understand ways through which it can access the capital market that can finance its operational activities. This makes it possible for such a firm to succeed in the market.

Financial Supply Chain and Working Capital Management

In the global market, business units face the challenge of having enough financial resources to finance their normal operations. According to Cheverton (89), financial supply chain in the global market is characterized by a number of challenges that hinder its flow to individual business units. Many business units find it challenging to acquire loans from financial institutions in various countries because of the rigid structures put in place by these business institutions.

Success in the market may not just be defined on the basis of the innovativeness in operations and excellent product delivery to the customers. There is a need to have enough working capital that would help in the daily operations of a business unit. A firm must be able to meet the cost of operation in order to achieve success in the market. It means that firms operating in the global market must have enough funding to support their operations.

It is important to note that sometimes the income generated from the normal business operations may not be able to provide enough financial resources to sustain the business. It means that it may be necessary to source for the working capital from external sources. It means that having a clearly defined financial supply chain is important to offer such business units some support when it is necessary. Working capital management is, therefore, an important process that should be given enough attention by the relevant stakeholders.

The financial supply in the global market may be negatively affected by a number of issues. One such factor is the collateral that some of the financial institutions demand before they can issue loans. Most of the financial institutions are always unwilling to extend loans to small and medium enterprises unless they produce collaterals. Given the fact that some of these small and medium sized enterprises may lack the required collaterals, they may be locked out of the financial market. This reduces their working capital base.

Secured Short-Term Financing

Sometimes a business unit may be under pressure to get some urgent financial support to boost its operations in the market. This is very common when a firm is expanding to other markets locally or internationally. Secured short-term financing is one of the best options that business units have, especially those that are operating in the global market. Nersesian (53) defines secured short-term financing as a loan where an individual or institution borrowing the money pledges a given asset as collateral for the loan taken.

It means that if the borrower fails to pay the money within the set period, then the lender will be at liberty to collect the collateral against which the loan was offered. Firms operating in the global market can easily access secured short-term financing from financial institutions. Most of these institutions are always concerned that some business units may fail to repay the loans. Having a surety will convince them that the loan will be paid. Some of the secured short-term loans attract very high interest rates.

According to Loader (96), it is recommended to take long-term loans than the short-term loans. Although short-term loans may appear attractive when there is an urgent need for working capital, they may have a negative impact on the operational activities of the firm, especially when the investment fails to yield the intended profits.

If the business unit fails to repay the loan in time and the collateral is collected by the lender, the business unit may be left in a worse financial position than it was before getting the loan. It is, therefore, important to take the necessary precautions when going for the secured short-term financing. It should be the last option that a business unit can take to address its financial problems.

Multinational Financial Management

It is assumed that multinationals have excess financial resources that can easily support their operations in the market. However, this is very far from the truth. Most of the multinationals always find themselves financially strained as they struggle to expand their operations to new regions. Financial management among these multinationals is one of the most important tasks that should be conducted with due diligence. Multinational financial management takes place at three main levels.

The first level is the central financial management that is done at the headquarters. It involves financial planning for various overseas branches of a multinational. The financial managers at the headquarters will need to determine the amount of money that should be allocated to branches of the firm in various countries, and the amount that should be retained at the headquarters.

Allocation of the financial resources should take into consideration some of the environmental factors that were identified in the environmental scan. Each of the overseas branches should be treated as uniquely as possible in order to ensure that the allocated resources can meet their local needs. The second level of financial management is at the national level.

The multinationals are always headed by general managers at the national levels who are answerable to the chief executive of the firm at the headquarters. The general manager and the finance department must be able to plan for the financial resources at the national level to meet all the needs in various plants within the country. The last stage would be at the operational level where the operational managers will need to plan for the resources so as to meet operational needs. Each level of financial management is very important.

If the operational manager fails to manage the financial resources assigned to him or her, the firm will experience strains at the national level, and the strain will be experienced at the headquarters of the firm. Similarly, if enough financial resources are not allocated from the headquarters to the overseas branches, the operational managers will not receive enough funding for operational activities.

Challenges of Operating in the Global Market

It is necessary to appreciate that, besides the financial constrained, there are other challenges that the firm may experience in the global market that may affect its financial base in one way or the other. One of the leading non-financial challenges in the global market is the difference in socio-cultural differences, in the global environment. According to De (56), cultural beliefs and practices closely define consumer behavior.

A firm which operates in the global market has the task of understanding these cultural beliefs and practices in order to determine the best approach of meeting the demand of customers. For instance, different colors are associated with different things in different societies. While white color may mean peace in one society, it is always a symbol of danger in some communities around the world.

Loader (76) says that, color plays a vital role when designing a product because some people would purchase a given product based on its color. It may require a firm to understand what each community associate each color with before developing a product. This is a complex process that would consume time and financial resources when conducting research. A firm must also be in a position to determine what the society believes about the products it offers.

As mentioned previously, going to the Indian market with animal products such as beef may be a suicidal venture because there will be no market. Similarly, opening a pork shop in the City of Riyadh, Saudi Arabia may be an uncalculated business venture because the majority does not eat pork. Such business units may also face threats of attack from the public because they believe that such a product is a mockery to their religion.

Some firms may face the problem of corruption and highhandedness from government officials. The report by Hockley (45) identifies such countries as Venezuela, Syria and Sudan as highly corrupt nations where foreign investors are forced to pay a lot of money to corrupt officials before they can be registered for operations. These governments would create numerous bureaucratic procedures that have to be followed by foreign investors to increase chances of stealing from the investors.

Language barrier may also be a problem, especially in cases where it is necessary to have the branches headed by officials from the headquarters. These challenges affect the ability of these firms to operate successfully in the market. In most of the cases, a firm may realize that it is forced to spend more than it had planned for, and this affects the working capital. The profitability of the firm is also reduced as the firm is forced to pay bribes or unclear services that the government may claim to offer.

Benefits of Operating in the Global Market

Globalization is gaining popularity among the large business corporations despite some of the challenges that are in the global market. Firms stand to benefit a lot from globalization, the fact that would affect their financial power positively. Going global offers firms an increased market for their products. A firm would not be restricted to the market within the national borders. It will be able to explore markets in other parts of the world increasing its production capacity.

Going global also creates an environment where a firm operates in a varied economic environment. During the 2009 economic recession that hit the United States and Europe, some countries in Asia and Africa were not affected. This means that, American firms that had their branches in such countries did not suffer as much as those that were exclusively operating locally. Going global also helps a firm diversity in the international market that makes it easy to deal with the local diversity in the country.

Loader (34) notes that, some local American firms have been able to deal with the diversified American markets. They are forced to target a section of the market and ignore others because of this diversity. When a firm goes global in its operations and manages to understand the diversity in different parts of the world, the local diversity in the country would easily be understood.

Such a firm will be able to meet the varying needs of different market segments within the United States, thereby increasing its local operation. These benefits would have a positive impact on the profitability firm. In turn, the firm will have a higher capacity to generate its working capital from its own operations without the need to borrow from financial institutions.

Conclusion

Managing global operations is one of the most challenging tasks that managements of multinationals have to contend with in order to achieve the desired success. It is clear from the above discussion that in order to operate successfully in the global market, there is a need for a strong financial base. A firm must have a working capital that can support its daily operations.

Sometimes these firms may be forced to source for this capital from the financial institutions. The global capital market has numerous regulations that may limit the capacity of a firm to access such loans. This means that, most of the medium sized corporation in the global market may be forced to go for such unattractive sources of finance as secured short-term loans. If a firm can withstand these challenges, then it may easily achieve success in the global market.

Works Cited

Cheverton, Peter. Global Account Management: A Complete Action Kit of Tools and Techniques for Managing Key Global Customers. London: Kogan Page, 2008. Print.

De, Toni A. F. International Operations Management: Lessons in Global Business. Farnham: Gower, 2011. Print.

Hockley, Lee R. Global Operations Management. New York: Nova Science Publishers, 2010. Print.

Loader, David. Advanced Operations Management. Chichester: John Wiley & Sons, 2007. Print.

Loader, David. Fundamentals of Global Operations Management. Chichester: John Wiley & Sons, 2007. Print.

Nersesian, Roy L. Trends and Tools for Operations Management: An Updated Guide for Executives and Managers. New York: Quorum Books, 2000. Print.

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