Economics of the Business Environment

Business analysts postulate that changes in the global business environment have significant effects on various national economies as well as the businesses or companies operating within these economies (Maddison 2002). For instance, during the times of slowdown growth of the global economy, also known as recession, a lot of macroeconomic indicators fluctuate. Some of the factors used in defining the economic trends include, household income, business profits, investment spending growth of the Gross Domestic Product, and the employment rates (World Bank 2003a). For instance, for the companies or businesses, recession, a period of slowed economic growth can affect their operations by either boosting up or lowering their profits. However, this depends on the business tactics adopted by the respective companies. To illustrate this further, one company, Huawei Technologies will be used as a case analysis for this paper. The company’s performance data for 2005 to 2011 will be used to assess the impacts of the macroeconomic exposure on its performance. Specifically, the paper will consider the vulnerability of this company, and its market exposure, especially during the periods of slow growth of the global economy.  The paper will also identify the factors that explain its level of protection. In addition, economic aspects of the company’s corporate strategy that appear significant will also be identified.

Slowdown in the Growth of the Global Economy

A slowdown in the growth of the global economy is a period when there is a general decline in the global economy (Maddison 2002). During such periods, the purchasing power of the consumers generally declines due to lack of adequate income or low salaries. This in turn leads to a slump in the market with products and services not being purchased in the market. Consequently, production decelerates and the commodities’ prices rise.  Many companies are thus forced to trade their goods at throw-away prices, and in turn, end up incurring great losses (Koo 2009). The country’s economy thus suffers greatly during such times. Some of the impacts of recession on the economy include;

• Decrease in the stock prices, since most of the investors keep away from investing for fear of losses. This may cause smaller companies to close down.
• Slump within the market because of a decline in the purchasing power of the consumers
• An increase in the unemployment rates, since most people are made vulnerable to job lose.
• An increased national debt, as less money is spent in developing the country.  Most of the government funds are channeled baling out public companies. For instance, the current recession saw most of the government funds in the United States being channeled to reviving its banks.  Most of the taxpayers’ funds were being spent in boosting the banks.

Recession is without doubt bad for the country’s economic growth and development (Maddison 2002). It contains significant impacts to the individual consumers, the companies and institutions operating within the country as well as the general economy. However, there are noted cases of some global companies who have managed to thrive during these harsh economic times. Most of them have employed efficient business strategies that have enabled them to cope with their macro business environment (Koo 2009).  A case of one global company, Hauwei Technologies will be analyzed to identify the impacts of recession to its growth.

Huawei Technologies Company

Huawei Technologies Company is one of the fledging multinational companies in China. It basically deals in the networking and telecommunications products and services, with its headquarters in the Shenzhen, China.  Huawei is rated as the largest Networking and Telecommunications Company in China, the second global company in switches and fixed line, and the third in wireless networks in the world (Shukla 2011). The company was established in 1987, as a private company by Ren Zhengfei, and is owned by its employees.  However, it is important to note that Huawei is the first Chinese non-state owned company to successfully spread out its operations globally (Shukla 2011). Huawei has penetrated nearly all markets globally with its primary operations revolving around the construction of telecommunication networks, manufacturing communication devices, mobile networks, optical networks and the provision of consulting and operational equipment and services to the enterprises. An Industry Insider highlighted that Huawei subdivides the telecommunication equipment into three main divisions; fixed line networks, internet switches and the wireless networks. According to its founder, Ren Zhenfei, the company has a major goal of becoming the leader in all the three divisions (Shukla 2011). The company is currently serving about 270 operations in about 130 countries, together with 45 of the top 50 telecommunications companies around the globe.

The Company’s Vulnerability

Huawei is a global company with its operations spread across different countries around the world. Just like any other global company, Huawei is likely to encounter significant impacts from the slowdown of the global economy. First, economic recession comes with significant foreign exchange loses and thus, affecting the company’s net income. For instance, increase of the Chinese Currency against the Dollar, together with other currencies resulted in a foreign exchange loss of about $776 million (Loretta, 2009). Furthermore, Huawei receives approximately three quarters of its revenue from its branches located outside China. Basically, the fact that Huawei is a global company with operation within different countries means that its net income is highly dependent on the global business environment. Changes within this environment therefore carry significant impacts on this global company.  It therefore follows that the fact that this company is a global company, makes it vulnerable to its changes.

The Company’s Market Exposure

Today, Huawei manufactures some of the most stylish telecommunications products in the world, and the company’s management claims that it is not just making it cheaper, but enhancing its products. The company has established a standing as the most preferred cost effective, yet high-quality builder of mobile networks. Furthermore, Huawei heavily invests in innovation.  For instance, according to the 2010 Fast Company Rankings, Huawei was ranked as the world’s fifth most innovative company (Shukla 2011).  An analysis of the company’s performance illustrates that it has been making remarkable progress.  For instance, the company’s global contract sales reached USD$ 11 billion in 2006, which is about 34 percent increase from the previous year’s sales.  However, about 65 percent of these gains are generated from the overseas markets (Loretta 2009). At the end of the 2008 financial year, Huawei Technologies’ global contract sales reached USD$ 23.3 billion, a 46 percent increase from the previous sales. The company’s sales jumped to USD$ 30 billion in 2009, and increased by 24 percent to 185.2 billion Yuan in 2010. In April 2011, the company announced a significant increase in its earnings, that is, 30 percent increase from its previous earnings. It had so far attained a net profit of US$ 3.64 billion (Loretta 2009). Huawei Technologies’ revenues for the 2010 financial year accounted for about 15.7 percent of the $78.56 billion international carrier-infrastructure-network market, which placed the company to a second position (Shukla 2011). The company’s recent performance is well illustrated in the chart below;

 It is therefore evident from the company’s performance that its net gains have been growing in an upward trend (Shukla 2011). The company is well exposed to the global economy as it has its operations well spread across different countries.  From its recent performance, it is evident that the company has been making supernormal profits and is therefore not in a strategic hell.

Level of Its Protection from the Market Exposures

Huawei Technologies 2008-2010 performance clearly indicates that the company has been attaining a tremendous increase in its net earnings. For instance, the company was able to attain a net increase of 20 percent in its earnings, compared to the previous earnings.  According the company’s founder, the remarkable performance during this difficult year illustrated the company’s growing strength. Basically, there has been a significant increase in its earnings, which illustrates that the company is well protected from its vulnerability and market exposures. For instance, there was a significant foreign-exchange loss that impacted most of the global companies in 2008 (Loretta 2009).  However, Huawei Technologies was able to attain a net profit increase of about 20 percent when almost all of its rival telecommunication equipment manufactures reported shrinking losses. The company reported that it had attained a net profit of about $1.15 billion, while its revenue rose by about 43 percent to about $18.33 billion (Loretta 2009). On the other hand, its major competitor, Ericsson reported a 47 percent drop in its net profit in the same year, 2008, a time when the global economies were facing slow growth. However, considering the fact that the company was able to thrive during a time when other international companies were reporting significant losses, as reported from its performance, it can be therefore concluded that the Huawei is protected from the market exposures. The 2008 global slump is a good example to illustrate how Huawei is well protected from the global market exposure, as it is reported that the company was able to attain a boost in its net earnings, unexpectedly, since most international companies reported losses (Sheridan 2011)..

Factors Explaining Its Level of Protection

As highlighted by its founder, Ren Zhenfei, Huawei Technologies success is basically attributed to its humble origins, together with its distinctive corporate culture (Sheridan 2011). Huawei was able to attain its initial breakthrough when it incorporated innovative ideas into its manufacturing process. The company went forward to innovate the first digital telephone switch with the largest switching capacity in the whole of China and therefore, gained popularity (Srinivasan 2002). This enabled the company to gain a market share and it later made its way through to the mainstream market. Like any other global company, Huawei is vulnerable to the changing market trends. One of the recent slumps that affected most of the global companies is the 2008 economic downturn (Loretta 2009). However, Huawei was able to thrive during this difficult period, and analysts highlight that one of the main reasons for Huawei’s success is because it has more flexibility to conduct its operations under lower profit margins without experiencing the shareholder pressure (Sheridan 2011). Therefore, as other companies become price conscious, Huawei got an opportunity to thrive, as it generally offers lower prices for its products in the market. In addition, it has established a global reputation as the most preferred low-cost manufacture, yet concentrating on the production of high quality products. For instance, the company is capable of attaining remarkable margins, while still setting its prices only 5 to 15 percent lower compared to its major global competitors such as Ericsson. Huawei Technologies was noted to have recorded a tremendous increase in its profits in 2008, a time when other global companies were receiving losses.  Business analysts highlight that Huawei was able to attain a rapid market share by offering competitive technologies for lower prices, compared to what its competitors offer. However, the company is often cautious not to offer too low prices for its products. It employs a pricing methodology that ensures it attracts as many customers as possible, while ensuring the company does not incur significant losses from the prices it offers for its products (Sheridan 2011). Furthermore, Huawei lays greater emphasis on the hierarchical management more willingly than on its individual employees, as the company considers them as being easily replaceable. Its corporate culture heavily depends on propaganda and rhetoric. For instance, according to the company’s basic law, its culture is based on the love for the homeland, the public, work and life is the company’s source of cohesion; creativity, solidarity, responsibility and respect represent exemplary culture of the company.  Other features of Huawei’s culture are considered to be typically Chinese.  Hard work and resilience are some of the qualities that are valued within the traditional culture of the Chinese, and are employed by Huawei as an approach to attaining a competitive advantage (Gopalan 2001).  Huawei has implemented a business strategy that is composed of superior pricing, brand awareness and customer service. Another factor behind the company’s success is that it gives more attention to the provision of superior customer service (Sheridan 2011). This has become a distinguishing feature of the company’s business model. The company is basically committed to ensure it produces superior products and services to its customer, a fact that has enabled it attain a competitive advantage over its competitors.

Economic Aspects of Huawei’s Corporate Strategy

From the analysis of Huawei’s performance, it is well evident that the company has been making a tremendous increase in its net incomes over the recent past, not considering the changes in the macro environment the company is exposed to.  This is well evident from the 2008, when most companies reported declines, while Huawei was able to record a remarkable rise in its net profits. Business analysts postulate that Huawei employs a pricing methodology that ensures its products have a lower price compared to what its competitors offer in the market (Sheridan 2011). Basically, recession is characterized by deceleration in the production and thus, companies are forced to trade their products at throwaway prices, hence incurring losses.  However, considering the fat that Huawei has more flexibility to conduct its operations within lower profit margins, it becomes had for the company to be affected by such market pressures. It follows therefore that Huawei’s pricing methodology is particularly significant as it makes the company more resilient and is therefore not greatly affected by the changing global market environments.

Conclusion

The business environment is susceptible to changes, which contain significant impacts on the individual consumers, companies and the general economy of the country. For instance, a slowdown in the growth of the global economy provides significant macro economic effects.  These effects are often measured in terms of the employment rates, household incomes, a country’s productivity levels, in terms of the Gross Domestic Product, as well as the business profits. This paper has analyzed a case of one company, Huawei Technologies. The company basically deals in the production, construction and sell of the telecommunication products, fixed lines and wireless devices among other products. An analysis of the company’s previous performance illustrates that the company has been making tremendous increases in its profits. Due to its remarkable performance, the company has not been impacted by the changing global business environment in any way.  For instance, during the 2008, foreign exchange loss that negatively affected most of the global companies, but it was reported that Huawei Technologies attained a net increase of 20 percent.  Thus, its recent performance suggests that it is well protected from its vulnerability and market exposures. One of the factors explaining its level of protection is its pricing methodology, as it offers lower prices for its products compared to what its competitors offer. This economic aspect has enabled the company to thrive and thus, attain a competitive advantage over its competitors in the market.