Strategies for Multinational Enterprises in Emerging Markets - Case Study Example

? Strategies for MNEs in Emerging Markets Table of Contents Introduction 3 0 Emerging Market Strategies 4 2.0 Lessons from Top MNEs 6 2.1 Comparison of Strategies Adopted by MNEs: LG Electronics and Unilever Group 6 Conclusion 9 References 12 Introduction The rapid rate of globalization has led to an increase in business competition compelling organizations to formulate strategies that help in maintaining their existence in the global arena. The rate of success of globalized business organizations is dependent on their ability to utilize opportunities available to them. For multinational enterprises (MNEs) operating in emerging markets, their rate of success is tied to how well they can utilize the opportunities emerging from these markets. In the past, MNEs were contented with the surplus they earned from doing business in the developed world markets and other selected countries. However, with the saturation of these economies, global business organizations have come to the realization that there is a need to venture into emerging markets which provide new opportunities. The emerging markets have a huge demand base for products that were hitherto unavailable to them coupled with large populations with significant purchasing power. In consideration of these unique features, the emerging markets have come to be regarded as fitting and dependable suppliers of an array of goods and services. Despite the existence of a huge economic potential, the MNEs are continuously faced with various risks and challenges unique to these emerging markets. MNEs and other global business organizations therefore, have to formulate alternative strategies in order to remain successful in emerging markets and maintain their existence in the global arena. This paper examines the unique set of strategies that have been adopted by successful MNEs in their quest to remain global, and further looks at two case studies of Unilever Group and LG Electronics by comparing the strategies they adopted in order to remain economically viable in their host countries and maintain their global presence. 1.0 Emerging Market Strategies The business strategy adopted by a firm plays a central role in the pursuit of globalization and ensuring that they fully take advantage of the available opportunities in emerging markets. These unique approaches that may differ from the ones these MNEs employ in the developed world markets enhance the techniques of global strategic management. The success of champions in emerging market economies has shown that these multinationals clearly understand the emerging market environment in which they operate, paying them huge dividends on the innovative strategies they are able to formulate. The existing successful multinationals have also indicated that they understand the chemistry and the psyche of consumers in the host country, enabling them to target a broader market instead of focusing on a fortunate few (Upadhyay, 2007). Moreover, the highly successful MNEs have built considerable distribution channels that utilize a highly advanced distribution strategy with the aim of reaching a bigger percentage of the population. In the process, these firms have been able to build their brands, establish reputations, and create an image that neatly merges their overall global strategy with local consumer preference and ensured satisfaction. Owing to their discretion and highly developed strategic approaches, MNEs such as Unilever Group, Coca Cola, LG Electronics, GE and IKEA have shown remarkable success in emerging markets such as India, China, Brazil and Argentina (Upadhyay, 2007). The examples above provide evidence showing that in order for MNEs to be successful in their pursuit of globalization and the quest to remain globally competitive in emerging markets, they need to come up with unique strategies that take into account an understanding of the host country’s psychological trends and choice patterns. In addition, it is imperative to note that emerging markets consumers experience rapid changes in their preferences and the technological situation in these economies also undergo constant change. Concerning this, MNEs in emerging markets need to appreciate new initiatives and exploit the available opportunities in order to remain global (Khanna, Palepu& Bullock, 2010). Research by management specialist on firm strategies in emerging economies is biased as it focuses on a preoccupation with strategies that seek to overcome the lack of western style business environment (Peng, 2001). The lack of proper law enforcement mechanism in emerging economies is a hindrance in the provision of services to top customers (Hoskisson et al, 2000). Multinational companies are often mostly concerned with the creation of competitive advantage through patents. Brands and contracts and are wary of entering markets where the ability of local institutions charged with the responsibility of protecting propriety technology and knowledge are weak (Delios and Henisz, 2000). In order to mitigate on these challenges, MNEs venturing into these markets develop boundaries that protect internal resources from unplanned pilferage and look for partner organizations with substantive power to fill the void in the business environment (Khanna and Rivkin, 2001). A number of management academics thus continue to look up to the “westernization” hypothesis in the process of conducting empirical studies while waiting for the development of an economy modelled on Western concepts. These academics constantly explore how MNEs can implement strategies that help mitigate on the lack of legal boundaries and difficulties attributed to the protection of property rights. Researchers have for instance examined how firms can address gaps in the business scene through forming of alliances joining networks, using interpersonal ties or managing firm boundaries (Delios and Henisz, 2000). More specifically, Hoskisson et al (2000) concur on placing emphasis on the need for the adoption of western practices by the emerging economies in the quest for attracting investments by MNEs from the developed world. The research also suggests that in pursuing the top most markets in the emerging economies, MNEs can employ those strategies that have been shown to competently work in global markets and use prevailing models and comparable subsidiary approaches based on effective control of resources, extraction of know-how and leveraging economies of scale and scope. Boundary protection strategies previously developed by MNC are seen to be less effective in low- income markets where social benefits influence economic decisions and especially where shared use of property is common and blurs ownership boundaries. It is highly unlikely that the technical knowledge, intellectual property and resources of MNEs in these emerging markets can be protected through patents and brands (McDonald, Londonand Hart, 2002). Two approaches to global segmentation have been proposed, the first one entailing the clustering of countries along similar dimensions with firms encouraged to concentrate on one cluster, or subset of countries, at a time (Oyewole, 1998). The second strategy looks at global segments that transcend national and cultural boundaries (Hassan and Katsanis, 1994), and most importantly, this approach recognizes within-country differences, the emphasis being on segmenting top of the pyramid customers more finely (Hassan and Katsanis, 1994). 2.0 Lessons from Top MNEs 2.1 Comparison of Strategies Adopted by MNEs: LG Electronics and Unilever Group Given the rapid saturation of the developed world markets, multinational enterprises are turning to emerging-market economies such as India, Brazil, China and Mexico as their core markets for sustained growth. As they endeavour to enter these markets, most of the MNEs have put a lot of emphasis on the wealthy elite at the top of the chain, producing goods and offering services that are more or less similar to those available in the developed world markets (Arnold and Quelch, 1998). This has resulted in these MNEs employing an imperialist mind-set to sell their products to the wealthy societies of emerging markets. However, most other firms have started to realize the existing opportunities and potential market available at the base of the economic pyramid of these markets. Companies such as Unilever continue their dedication to the generation of a considerable amount of their revenue from these markets (Ellison,Mollerand Rodriguez, 2002). The Unilever Group employed this strategy in Brazil and Argentina with the introduction of low cost products while at the same time altering their package images. During the economic crisis that hit Argentina, the company realized the benefits of this unique strategy when it received rich dividends resulting from the alterations done to the packaging of beauty products including shampoos and soaps. Unlike the economic crisis in developed world economies where companies are sometimes forced to close production due to uneconomic returns, Unilever, through the employment of this strategy, was able to stay afloat in Argentina (Kapferer, 2012). While Unilever adopted a supply chain strategy where its local suppliers are required to agree to a set of standards desired by Unilever in Argentina, LG Electronics on the other hand put a lot of emphasis on the critical role localization of their products played in the business strategies of remaining competitive in India. India, being an emerging economy has a large middle class with the potential market with their own established preferences. By appreciating the national cultures, LG localized most of its products such as having regional menus in most of their electronic products, and producing low-priced products targeting the rural market. In the wake of globalization, LG’s localization strategy indicates some of the adjustments MNEs have to make to their strategies while operating in emerging markets (Cullen and Parboteeah, 2013). In comparison, although both companies were successful in implementation of their respective strategies aimed at increasing sales, LG’s localization strategy was more effective than Unilever’s rebranding considering the increase in sales for the two companies. LG in the Indian market engages with local partners through the regional channel strategy where all distributors operate directly with the company. In regard to supply strategies adopted by the two companies, LG opted for the regional channel strategy while Unilever implemented its supply chain strategy by outsourcing to its suppliers who are involved in approximately 15% of total production. To overcome high import costs that are generally associated with emerging market economies, LG Electronics, India localized its manufacturing by establishing plants for manufacture of PCs and refrigerators in the country. The company has also adopted various technologies as cost cutting innovations, a strategy also adopted by Unilever to reduce fixed costs and increase volume of sales. Both strategies adopted by the two companies proved successful and suggests some of the approaches that can be taken up by MNEs operating in emerging markets in order to remain competitive. To maintain its market competitive position in the wake of globalization, Unilever implemented its path to growth strategy aimed at consolidating and simplifying the company’s business and entailed an elaborate restructuring and reorganization strategies. The company adopted two different reorganizational strategies by first organizing its own production chain, and then forming strategic alliances to inns core supplying firms. Although the business results of this strategy were below expectations, the company’s continued stay at the top of this emerging market suggests that MNEs need to adopt strategies that fit such markets. While Unilever did not take leverage the Argentinean advantage and the country’s R&D potential, LG, which emerged in Korea after the Second World War, has been faced with numerous challenges that greatly affected its capacity to continue with desired expansion into the emerging economies of Brazil, India, and China. The Korean market was a very competitive one, and this influenced LG’s strategy of coming from behind and working its way up the economic pyramid to become one of the biggest electronic brands. These come from behind approaches that LG, unlike Unilever in Argentina, employed in its strategy to win the Korean economy, were further cemented by the government’s strong emphasis on R&D within the domestic economy (Rugman and Oh, 2008). Firstly, the significance of high quality R&D that enables faster and efficient localization of products and services played a critical role in LG’s approach to intensifying its presence in emerging economies. Secondly, LG exploited the gained experience of working with governments to promote its growth, and this strategy proved very effective and successful in the Brazilian market. LG also benefited from the Korean government’s encouragement of foreign direct investment (FDI) which enabled it to partner with Hitachi from Japan. This overseas experience was very essential in facilitating the company’s undertaking of joint ventures in the emerging economies (Rugman and Oh, 2008). Conclusion Top management officials of large corporations particularly in North America, parts of Europe and Japan contend that globalization is one of the critical problems facing their advancement today. The problems affecting MNEs is partly due to their inability to develop international strategies that stimulate a wise choice of business location. As a result, the strategies that they eventually develop fall short of meeting their expectations in emerging markets (Khanna, Palepu& Bullock, 2010). The lack of specialized conduits, which include regulatory systems and contract enforcing mechanisms sometimes referred to as “institutional voids”, has been an impediment in the development and implementation of globalization strategies. This also stems from the ignorance of the important role played by “soft infrastructure” in the execution of business models in their home markets. However, it should be noted that such infrastructure is usually absent or underdeveloped in the emerging markets, and this may negatively affect companies that lack the capacity to carry out research that can readily inform them of customer preferences in the emerging markets. The cost of doing business in emerging markets is also considerably low as such companies can set up manufacturing facilities and service centres in these areas since skilled labour and supply for trained managers are relatively low. Several developing country transnational corporations have entered North America and Europe with low cost strategies (China’s Haier Group which deal with household electrical appliances and business models (novel) which include India’s Infosys which deals in information technology services. Any counter strategies by MNEs wishing to enter into emerging markets need to dig a little bit deeper and nurture a different genre of innovations relevant to emerging markets. Failure by such companies to develop strategies for engaging across their value chains with the developing countries will only reduce their competitiveness for a very long period. In spite of the favourable changes for doing business, which include reduction of tariff barriers, the spread of internet and cable television and the increased physical infrastructure in these countries, such companies cannot assume that they can engage in business in more or less the same manner that they do in developed nations. This is partly due to differences in the quality of market infrastructure from country to country. In summary developed countries have a variety of complimentary conduits that have made doing business in well-developed economies easy and effective. This sharply contrasts the situation in less developed markets which are characterized by unskilled intermediaries and less effective legal systems. The global economic situation is currently at a stage where emerging market economies provide lucrative opportunities for doing business, which the MNEs have to utilize in order to maintain their existence in the global arena. Although it is acknowledged that doing business in emerging markets comes with its unique risks and challenges, it is important to note that these pitfalls can be circumvented if effective and appropriate strategies are put in place. References Arnold, D.J. and Quelch, J.A. 1998. ‘New strategies in emergingmarkets’, Sloan Management Review 40(1): 7–20. Cullen, J. B., &Parboteeah, P. 2013. Multinational management.Cengage Learning Delios, A. and Henisz, W.J. 2000 ‘‘Japanese firms’ investment strategies in emerging economies’, Academy of Management Journal 43(3): 305–323. Ellison, B., Moller, D. and Rodriguez, M.A. 2002. 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