Transnational Operations

by Jaime Marulanda 1. May 2010 18:05

Introduction

                The advances in communication technology, i.e. the Internet, coupled with the power and affordability of information technology, has transformed the way companies conduct business both in a national stage and internationally. The affordability of these technologies has allowed smaller companies to compete in markets traditionally dominated by large enterprises as well as compete in progressing and new markets.  As the technology has evolved, businesses have also gradually engaged in international business as the tools and opportunities have been presented. The popularity of globalization is directly related to the popularity of communication technology given that it provides businesses that at one point were unable to run business operations globally with the opportunity to complete internationally. Transnational operations can provide organizations with many advantages in several different levels, and if managed correctly, the organizations can offset the possible problematic aspects that exist, providing these organizations with an optimized structure that can transform the business into a successful company operating in a global stage.  

Disadvantages

                If not properly accounted for and controlled, transnational operations can present several aspects that can negatively affect an organization. Among these aspects are technological infrastructure of the host nation, political and economic stability, cultural difference, and technical knowledge and know-how. Understanding the intricacies and differences of the host nation is fundamental to the success of business conducted in an international environment.

                Not every country has access to the technological infrastructure enjoyed by most first and second world countries. Additionally, not all social classes and business segments may have access to highly efficient communication networks or infrastructure. The price of such services may be disproportionate and out of the reach of most small businesses. Traditionally, technological innovations in developing nations are significantly higher in price and, in terms of communication infrastructure, also less reliable. Even when readily available, the local service levels may be below the standards that the organization requires. Given that optimal communication and efficient communication channels are essential to the success of international business, the infrastructure available needs to be clearly understood and/or alternatives to account for communication lapses must be in place prior to the commencement of business operations in the host nation. Problems in infrastructure can lead to difficulty in the transfer of work or meeting project deadlines and can lead to quality issues.

                The political stability of the host nation may also present disadvantages that can cripple operations overseas. When dealing with countries where policies suffer frequent change and present negative business environments, such as increased trade restrictions, restrictions on foreign investment, nationalization or repatriation of private businesses and/or profits, or increase in tariffs, the risk of conducting business may prove to be too high. Examples of these types of action can be seen when earlier this year Venezuela’s president Hugo Chavez nationalized and began the expropriation of US-based Cargill (CNN Money, 2009).

                The fluctuation of currency and other economic issues can also negatively impact operations. The changes in monetary policy and other economic issues, as well as the instability of local currency, is, at best, difficult to predict and thus increases the risk of failure (C M Sashi, Devi Prasad Karuppur, 2002). This can lead to increased costs within a matter of minutes, and can affect the cash flow and profit margins of an organization.

                Differences in culture can present several issues and need to be understood. If ignored and not managed properly, these issues can turn the differences into disadvantages. An environment where there is a respect towards local customs needs to be established and simple actions such as having an understanding of local holidays, cultural customs, religious traditions, and language variances can make the difference between organizations that have a corporate culture that transcends borders to one that establishes an “us versus them” mentality.  Culture can also play a role in the way moral and ethical issues are viewed, and as such, need to be carefully analyzed to avoid issues that can present themselves as legal problems. Corporate policies that may be considered unethical or even illegal in the host nation must be quickly identified and modified. Simple aspects, such as the way employees deal with having to work overtime in order to complete a project on time, have to be considered given that it can affect employee morale, violate local laws, or present quality issues.

                The capabilities of the local employment pool in terms of technical knowledge, experience, and expertise, as well as the limitations of such, must be inventoried in order to avoid the pitfall of being unable to fill positions that require a certain level of technical know-how at the local level. The lack of such type of personnel can lead to a serious shortage of qualified employees to fulfill the needs of the organization.  This not only includes technical knowledge but language limitations and barriers that can exist. Also, additional resources in training may need to be allocated in order to reduce the language and technology barriers. These obstacles can present serious weaknesses which can negatively impact the organization’s transnational strategy. If not considered, these barriers can drive down the quality of work presented and impact service levels.

Advantages

                Transnational organizations have the inherent advantages of flexibility, diversity, global market reach, and efficient cost structures, among several others. Even though several disadvantages have been presented, the commodization of bandwidth technology and the globalization trends of economies and politics are driving companies to meet an ever-expanding global market. As these tendencies continue, fueled by the expansion in use and popularity of global communications, the disadvantages will be reduced at a similar pace. While issues such as quality of work and service levels have traditionally plagued international corporations, the evolution of technologies and the experience gained from transnational operations are also vastly improving these areas and diminishing the negative view traditionally held.

                Transnational operations provide flexibility in many different areas, such as business operating hours, service language, and market reach among others. Because different parts of the world operate in different time zones, businesses that operate in other parts of the world can offer around the clock service by strategically operating in certain time zones.  This provides a flexible work schedule that can greatly increase customer service levels. Also, the different language spoken in other countries can add flexibility by providing customers with language options. Additionally, businesses that operate in other countries develop a communications and technological infrastructure in order to operate successfully. This added infrastructure can be used and leveraged to take advantage of the local market under which the organization operates in. Given that there is a presence in that host country where local personnel are employed, know the language, and are part of the host culture, the organization is presented with the possibility of extending its current market by also marketing its products and services locally. Traditionally, the size and complexity of the international operations grows as organizations develop experience, which provides the ability to gradually introduce products and services to the new market (Henry Wai-Chung Zhao, 2002).

                Diversity in the workforce also provides organizations with the experience and tools required to market products globally. This diversity not only provides an expansion in customer reach by increasing the languages that the company can service, but also with an experience in how to manage cultural diversity among its customer and employee base.  Having insight into how to manage this type of diversity provides businesses with a competitive advantage over businesses that traditionally have only competed in local markets that may lack cultural diversity. Given that the tendency of business is towards globalization and such a tendency will only increase as communication technology is further commoditized, such experience is an asset that can greatly increase the ability to compete in internationally.

                Another advantage of operating in a transnational environment is that the cost structure of the organization has the potential of being considerably lower. Organizations can therefore take advantage of the lower cost structure offered by host nations, which include lower property prices and lower employment wages additionally from the possible positive results of currency exchange rates. Although this may not be the case in all countries, when strategically analyzed, organization can seek countries that offer these types of advantages. In order for this aspect to be considered an advantage, the negative factors of employee turnover rates, technical knowledge, and labor laws need to be clearly identified. Also, aspects that the local culture considers important are vital to successful employment. While some cultures consider pay rates important, others consider training and knowledge equally important, if not more important.  With employee laws understood and well developed training programs that can continually improve personnel and communication and maintain employee morale at a high level, positive aspects are clearly illustrated. The advantageous factors of diverse languages coupled with lower wages can provide organizations with an optimized structure.

Conclusion

                The evolution of communication technology and information systems has provided organizations world-wide with the possibility of working in a global stage. As these technologies continue to improve and are driven further mainstream internationally to reach more people and organizations at difference levels and lower social classes and sectors, the global marketplace will continue to grow and prosper both in terms of service providers as well as customer base. Although the potential for many disadvantages in transnational operations exist, this continual evolution will provide so that the advantages presented far outweigh the possible disadvantages. Additionally, risk assessment and risk management performed on such disadvantages can produce the ability to develop strategies to manage and eliminate potential vulnerabilities and convert the possible disadvantages into opportunities and advantages.

References

CNN Money (2009). Venezuela Nationalizes Cargill Operations. Retrieved from CNN Money Website: http://money.cnn.com/2009/03/04/news/international/venezuela_cargill/index.htm

C M Sashi, Devi Prasad Karuppur (2002). Franchising in Global Markets: Towards a conceptual framework. International Marketing Review, 19(4/5), 499-524. Retrieved May 8, 2009 from ABI/INFORM Global Database.

Henry Wai-Chung Zhao. (2002). Entreprenuership in International Business: An institutional perspective. Asia Pacific Journal of Management, 19(1), 29-61. Retrieved May 5, 2009, from ABI/INFORM Global Database.

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