Multinational Enterprises - Coursework Example

Multinational Enterprises Introduction: The end of the Cold War, symbolized by the disintegration of the Soviet Union has resulted in the emergence of a new global era (Meyer et al 1997, p 174) where the competition between the former super powers is being replaced by a consumer driven social, political and economic scenario. (Freidman, 2000). The technological advancement and an age of communication with the Internet has revolutionized the availability of information, creating a knowledge based economy (Thurow 2000, p 116). The Internet has been described as “a decentralized, global medium of communication comprising a global web of linked networks and computers.” (Thurow, 2000, p 116). It enables instant communication across geographical boundaries and globalization is the resulting phenomenon, represented through the dissolving of boundaries between nations. Kellner has pointed out the emergence of the new “techno-capitalism” which is focused on economic interests at the expense of cultural interests and is therefore “characterized by a decline in the power of the State and increased power of the market.” (Kellner, 1999, p 246). According to Thomas Friedman, globalization is the “inexorable integration of markets, nation states and technologies…..the spread of free market capitalism to virtually every country in the world.” (Friedman, 2000, p 7-8). Mittelman also refers to globalization as a historical transformation - “a political response to the expansion of market power” resulting in a transformation “in the economy, of livelihoods and modes of existence” (Mittelman, 2000, p 6) and McMichael corroborates this view, seeing the process of global integration taking place on the basis of “market rule on a global scale”(McMichael, 2000, p 149). The purpose of this report is to examine the issues that will be relevant in determining the kind of organizational system that is likely to be the most effective for a multinational enterprise in order to achieve a competitive advantage in a rapidly globalizing market. Types of multinational enterprises: Schwarz and George (n.d) have pointed out that there may be differences in organizational structure even within MNCs themselves. They have identified there different approaches to strategy and planning in an MNE, depending upon the location of the decision making nodes within the firm. (a) The multi-domestic MNC, were there is a higher degree of autonomy in decision making available to the subsidiary companies, so that decision making is highly decentralized and carried out by the subsidiary organizations rather than the parent office. Therefore enterprises with such a decentralized system are likely to consist of diversified products applicable to the location of the subsidiary, which are found to be most conducive to operation within the local environment. Moreover, there is likely to be a greater degree of pressure exerted by the Governments of the host countries upon these firms– the demands and regulations that they must meet and the standards that they must conform to, especially on technology issues such as Spam. The degree of data sharing that takes place between the head office of the firm and its subsidiaries will also be small and restricted within a small number of users. Hence, the strategy utilized in such a firm is that of localization, which takes into account the differences in the local culture and practices at individual locations in the world and adjusts and modifies its strategy accordingly to suit the local tastes and preferences, operating at higher costs if deemed necessary. (b) The Transnational MNC, where decision making may be only partly decentralized and part of the decision making process may be more centralized with a greater degree of control from the head office and less autonomy for the subordinates. IT systems in such cases for example, will not be such that qualified IT staff can only be found within specific small areas, who know how to tailor the requirements of an IT system to address the particular concerns of the local environment. While there is likely to be a degree of specialization and variation in the IT system hardware and software to tailor it to local conditions, the greater portion of the hardware add software specifications; the manner of operation may be partially under the control of the head office. This will also apply in terms of decisions made on production, distribution and marketing where some degree of supervisory controls will be exerted by the head office. (c) The Global MNC where decision making is completely centralized and handled by the parent company, therefore the manner and method by which the subsidiaries function will be a standardized one that is designed within the parent company and be uniformly used across all subsidiaries in all where the MNC conducts its business. In such cases pressures from the host Government will be lower and the products used are likely to be highly standardized, with IT systems being configures such that there are large amounts of data sharing and transfer of information within the system network. This is the strategy of globalization, which means that the corporation considers the entire world as one homogenous marketplace and thereby devises a uniform marketing strategy that operates at a relatively low cost and functions in the same way in every corner of the globe. MNE strategy: Ramarapu et al (1999) have highlighted in detail the factors that will condition the decisions of a corporate body when it is expanding into the international market. There are two major strategies that a business can consider as it expands its operations. It can choose between globalization and localization as its strategic thrust in commencing its marketing efforts within other nations. Ramarapu et al (1999) in their study, have suggested how such a strategic thrust could be fit in with cultural dynamics in order to create a model which is best likely to achieve the desired results. They have highlighted the views of Willis, Samli and Jacobs (1991) who have stated that in order for a multinational firm to be successful in the international marketplace, its marketing strategies should be targeted towards “being global and acting local.” Some examples of multinationals that have successfully employed a localized effort are Coco Cola and Levi Strauss, while other corporations such as Campbell Soups and Nestle have not fared so successfully, since it is difficult to standardize products in such a manner that they will be suitable for every world market (Ramarapu et al, 1999). Willis, Samli and Jacobs (1991) have advocated that multinationals not restrict themselves to a globalization strategy since (a) standardized products will rarely suit every market (b) existing company networks are likely to be undermined and (c) standardizing products restricts innovation in developing successful marketing strategies in other countries where corporations set up their operations. Hence, every MNE must employ its own unique approach to localize its approach as much as possible. Weiss (2002) has also supported this position as she points out that in order to achieve success in an increasingly global market, more and more firms are turning to innovation firms to help in determining how successful long term decisions are likely to be in assuring a firm’s success. These innovation services help to provide expertise and fresh new ideas in developing effective marketing strategies for the international arena. She illustrates her point with the example of IDEO, which worked with a computer technology company to introduce innovation into its services. IDEO was keen to develop a strategic vision for the future and the nature of its Internet presence was to be tailored to reflect user goals and their needs in its internal structure. Therefore, in this case, the client (IDEO’s) vision had to be coordinated with the objectives that were to be achieved in terms of brand and business, through the unique combination of globalization and localization. Cultural differences: Cultural differences could pose a problem for multinational firms who do not pay attention to this aspect when making the decision to internationalize their operations (Rosenbaum 1999). For instance, Rosenbaum points out how when the Dutch Company Canon set up its operations in Dubai, the underlying beliefs about business behavior posed a potentially conflicting situation, since the blunt honesty of the Dutch raised the possibility of its being offensive to Arab sensibilities where negative absolutes were frowned upon. Therefore, by attention to the varying cultural sensibilities in two countries, a corporate firm that is planning to expand its operations overseas can avoid many of the pitfalls arising out of cultural differences, which could undermine its potential success in the new market. Organizational structures: Businesses have traditionally functioned in a vertical hierarchical type of structure, where the functions of every level of employee is clearly defined. However, in today’s competitive era of globalization, it is increasingly being claimed that classic organizational structures like the bureaucracy are no longer viable, and that organizational culture needs to change in order to adopt to horizontal hierarchies and networking that is developing within organizations. . Courtney has pointed out that decision making scenarios must be vision driven scenarios if they are to enable an organization to survive within a tough and competitive environment. “Vision driven scenarios help management to think “outside the box” and question their assumptions about the future.” (Courtney, 2003:14). Globalization has produced a business environment of continuous change, where the failure to anticipate can be deadly (Ashley et al, 1997:1). Therefore good leadership calls for the ability to anticipate, coupled with visionary leadership geared towards imparting a competitive advantage to an organization. Mintzberg however, emphasizes the fact that “Learning a set of competencies does not per se make a manager competent.” (Mintzberg, 2004:140). Rather, effective management and leadership skills require the creation of a team oriented culture within the organization, building team based incentive and reward systems, encouraging self direction of team work and creative problem solving (Hughes, 2003:8). Within such an environment, where there is cooperation between the employees and the management, it will be the managers who will be able to function best as the decision makers, because they are the ones who motivate and propel the members of their team or their employees towards the achievement of the goals of the organization. Managers in multinational firms face a difficult task as far as the development of common initiatives are concerned in view of cultural differences between employees. Moreover the differences in ethical standards in different countries and variations in Government regulations and other conditions of operational magnitude make the manager’s task even more difficult. Uncertainty in the business environment has become pronounced, especially with competition and globalization, outsourcing and the need to improve human resource management. Therefore, in the new and emerging networked organization, traditional bureaucratic controls that seek to control employee activity from the top are unlikely to be successful, and the methods of humanistic control and symbiotic /culture control that have been identified by Linstead et al (2004) are likely to be more effective. Organizational structure therefore needs to be revamped by a manipulation of the culture within an organization and through distribution of power among employees so that their motivation is heightened and decision making tends to conform to the goals of the organization (Linstead, Follop and Lilley, 2004: 211). One of the most important aspects of staying competitive in an uncertain environment is to eschew the old, authoritarian, bureaucratic system of decision making. As identified by Linstead et al, if an organization is to stay in a state of preparedness, then its employees must be in a state where they are learning continuously in order to avoid stagnation. (Linstead, Folop and Lilley, 2004:39-55). They have also identified the weakness in the traditional bureaucratic systems of control where top down authority is exercised in making decisions, which does not work very well in a globalized atmosphere. Spitzer and Evans (1997) have pointed out how leadership styles have been changing in the 1990s an old breed of managers in big corporations has yielded way to a new breed of managers who are less concerned with decision making and are more concerned with quality and customer service to improve competitive advantage in the marketplace. In a similar manner, Hughes has also identified the weaknesses inherent in traditional organizational models that function more like “Newtonian mechanical models by putting responsibilities into functions and people into roles with boundaries.”(Hughes, 2003:8). By slotting people into distinct levels with distinct responsibilities, there is an element of stagnation and inflexibility that sets in, which is detrimental to an organization in responding quickly and effectively to the problems that it faces on a daily basis. If decision making is relegated into the hands of the top most persona, while managers and employees must constantly seek sanction before they can take decisions, then the organization will be handicapped by its own bureaucratic controls. According to Hughes, “innovation is the spark that makes good companies great.” (Hughes, 2003:6). However, innovation requires a degree of flexibility and adaptability so that decision making becomes effective. There are few precedents that may be applied in today’s rapidly changing environment and in order to function effectively in today’s competitive business environment, decision making requires speed, which is aided by the development of proactive metrics and organizational instinct.[Mourier, 2001, pp 26]. An example of good decision making that may be cited is the case of the Vermont Bear company, in the development of its “bear gram” advertising strategy.(www.ir.vtbearcompany.com). The bears were initially sold through limited retail outlets but in the wake of the mergers and store closings of the late eighties, a decision was taken by the small firm’s managers to re-orient the marketing strategy to advertising through radio. This resulted in the Company’s highly successfully marketing strategy of “bear grams’ or using radio personalities to advertise the product so that customers could call into the radio station and order bears as gifts using a 1-800 number. In this case, the decision was taken by a small management team that was in touch with the daily running of the business but also had the required degree of control to make decisions. However, this same company later suffered losses when it tried to expand too soon, and this was the result of a decision made by the staff without an adequate amount of information or a detailed evaluation of possible outcomes that could result from a move to expand into the retail sector by opening retail outlets instead of continuing its radio advertising strategy. Therefore, through this example, it may be seen that bad decision making by people without adequate knowledge and information about the day to day realities and without the overall perspective, resulted in wrong decisions being made later on. Competitive advantage: In today’s global marketplace, creativity and innovation have assumed a great deal of importance and it is important for a Company to have a fresh and novel strategy if it is to succeed in the market place, as identified by Porter (1996: 68). multinational firms are subjected to greater challenges as compared to domestic firms, in terms of devising advertising strategies and discount policies that capitalize on local and international markets simultaneously and provide fresh offers that would attract customers, because competition is fierce in the global market (Hughes, 2003, p. 6). Adding some creativity to the decision process will result in the generation of new ideas (Hughes, 2003, pp 9). Some domestic firms are adapting quite well to working within an internationally competitive environment through the process of re-engineering and the introduction of innovation. For example, a recent study explored how several domestic firms in China are coping with the entry of multinational firms – according to Niu Gensheng, the Chairman of the Meng Niu Dairy group, “For our industry, the home market is already a playfield of complete competition.”(PR Newswire, 2006). As a result, this Company has started training its top management personnel so that they are exposed to all market know-how available to the multinational players, so that they can compete effectively. In a similar manner a bankcard Company founded in 2002 that was facing stiff competition from international players, decided to introduce innovative, value added services that were not offered by the multinational players and thereby was able to gain a significant advantage in the Chinese market.(PR Newswire, 2006). Another Chinese company names XinAo Gas Holdings was able to raise efficiency of the Company with an outreach of 50 Chinese cities, by the re-engineering of the internal work processes of its operations team, thereby placing it in a position to compete effectively with multinational companies rather than suffering a disadvantage.(PR Newswire, 2006). A model of pure competition implies that competition between firms drives profits down to zero and risk adjusted returns across firms should be constant. However, the reality is that firms try to maintain a competitive edge over one another, as a result of which several other factors play a pivotal role and alter the equations (Porter 1980). The degree of rivalry among firms is measured by factors such as industry concentration, which measures the market share of the four largest firms in the industry, who have gained a competitive edge over their competitors. Porter provides a three pronged strategy to counter the threat of the five forces, that may be implemented at the corporate levels, the business unit level and the functional or department level. Porter also states that major strategies that can be employed include cost leadership, differentiation and focus, all of which are to be implemented at the core business unit level and could be helpful to a business sin sustaining its competitive advantage (Porter, 1980). Since multinational corporations are competing within a global marketplace where the customer base is wide and diverse, they will work harder to develop innovative products that are likely to appeal to customers across a spectrum of cultures and tastes, as identified by Porter’s national Diamond Framework.(Porter 1990). These companies have to work harder and better to develop the kind of advertising strategies and techniques that are likely to ensure that their products gain a worldwide market, while they must be simultaneously careful not to offend local sensibilities. One notable example of a country that has been able to benefit from multinational activity within its terrain is the case of Ireland.(Wall Street Journal, 2005). Microsoft Corporation pays taxes to Ireland and the resultant funds that pour into the Irish treasury are sufficient to contribute up to $77 for each Irish citizen and therefore, function as a great boost to the Irish economy. Although Microsoft Corporation has also considered other countries to set up operations, Ireland was able to successfully emerge as the preferred location on account of the superior quality of the physical and economic infrastructure that is available in this country, which helped it to beat out other competitors such as the Caymen islands where infrastructure development is poor. One factor that needs to be borne in mind is that Ireland is a developed country and has therefore been able to gain a competitive advantage for business activity within its own country for its own citizens, as opposed to multinational activity packing an adverse impact. Most multinational companies are also forced to deal with a more complex political/legal environment that is not restricted to their own country alone. For instance, there may be import and export limitations, restrictions placed by the Governments on the kind of hardware or software that may be used, imports and exports, the banning of use of certain kinds of telecommunications equipment and production activity, etc. Moreover, regulations may be different in the host country as compared to the home country as a result of which managers must address the complexities arising out of taking into account these differing regulations and ensuring that they stay with the Government regulatory and legal framework in their operations.(Schwarz and George, n.d). Multinational Corporate Behavior: Multinational corporate behavior was examined in detail by Anastakos (2005) for organizations in the United States and Germany, especially as related to work and employment relations. This study examined the nature of changing work practices that result from mergers and acquisitions that take place on an international level and whether such mergers create a uniformity in the nature of work practices across multinational firms. The organizations that were the subject of this study were the automobile sector (the Daimler/Chrysler merger) and the banking sector (Deutsche Bank/Bankers Trust), in which German and American firms have merged into multinational firms. However, the results obtained in this study suggested that globalization does not automatically produce employment relations at individual firm level that conform to a single universal business model. Corporate behavior within organizations is still largely conditioned by national standards as far as labor relations are concerned and multinational firms, although foreign input may introduce a faster pace of innovation. This study demonstrated that the net result is not a convergence of the two systems to produce a uniform business model governing employment relations within the multinational organization, rather a complex process of employment relations is created that incorporates elements of the best from both countries to produce a hybrid system that reflects the best global practices. Thus, globalization is not a “zero-sum game between employers and workers” (Anastakos, 2005) with predetermined effects that may be reliably predicted. However, while this still be relevant within a domestic framework, Spritzer and Evans (1997) also indicated a study that was conducted by Yankelovich/ KepnerTregoe in 1995 of 300 senior executives in large multinational corporations, which found that eighty percent of the executives surveyed felt that the decision making prowess in large multinational corporations is limited. Transformational leaders operate along a more diffused style of networking within the organization. They have vision, realize the need for change and inspire others to work cooperatively towards a common goal. (McCollum 2005). Therefore, organizational structure needs to be changed to introduce more networking rather than a hierarchical framework. Multinational firms, in particular, are rapidly eschewing traditional hierarchical frameworks in favor of a more loosely organized, networked kind of leadership. Conclusions: On the basis of the above, it may therefore be concluded that an approach that is global but acts local will be best for MNE’s. A strictly hierarchical system of control appears ineffective and greater horizontal networking and innovation appear to be critical in achieving success, with transformational leadership being a vital ingredient in achieving the competitive advantage in the marketplace. 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