Strategic Challenges Encountered by Multinational Firms from Emerging Nations - Assignment Example

CASE STUDY: HYUNDAI MOTOR COMPANY BY Strategic challenges encountered by multinational firms from emerging nations trying to enter and set operations in more developed nations Developed nations are nations which have gone through the development process and are well endowed with economic and social resources. The less developed countries are countries that are still in the development process and are facing various challenges that need to be addressed for them to be developed (SANFORD, & SANDHU, 2003, p.6) Multinational firms from developing nations may want to expand their operations to other nations to compliment their income from the local market thus being more financially secure and having global presence (Ghemawat and Hout 2008, p. 82). In the process, the companies are faced with numerous challenges in the developed countries that are not there in their countries which are still developing (Ghemawat 2001, 138). To start with, the multinationals suffer from poor managerial skills practiced in their home country (Saka-Helmhout A, and Geppert M, 2011, p.567). Most multinationals employ the same managerial skills they are used to from their home country. Developing countries suffer from poor managerial skills among other challenges that are not common in the developed countries. By having the senior manager from the head office in the branch to help establish the branch, the managerial skills from the developing country are transferred o the branch in the developed country. Dictatorship kind of management is a common practice in developing nations yet developed nations prefers an involved type of management incorporating both the senior management and the employees (Basu 2008, p.26). Being a family owned company, the owner of HMC had the power to dictate the direction the company will take and opposing the orders will lead to loss of job. The same management practice delayed the success of HMA since they had to rely on the headquarters for any major decisions. The delay in decision making led to the numerous failure of the firm in the American market. The firm was also not ready to enter the American market but the CEO made the hasty decision which could not be questioned by any employee. As a result, poor planning for the entry led to confused entry into the market increasing chances of failure. Also, consumer awareness of the products affect operation of multinational firms from developing nations in developed countries (KRARUP & RUSSELL 2005, p.152; LEBEL & LOREK 2010, p.74) . Developed countries are characterized by wide spread information asymmetry in the market thus no firm can take advantage of any information in the market. Consumers are also aware of and conscious about the quality of products they consume as well as the possible side effects of the product. Frequent measurement of product’s efficiency in the interest of consumers is a common practice in developed countries. As a result, any slight defect in a product will lead to drop off sale of the product since consumers are not willing to consume defective products especially when a close substitute is at range. The great consumer enlightenment led to the short life of the boom in the American market by MHA, a subsidiary of HMC. When consumers learnt that the cars from the particular firm are more likely to break down due to the low quality, they withdrew from purchasing the vehicles. Though the low price had attracted the consumers, it was not long before consumers discovered the low quality of the vehicle leading to drastic drop of sale. Most consumers in developing countries are price conscious and prefer purchasing cheaper products to save on cost but know very little about quality. Therefore, multinationals from developing nations may tend to have the same assumption about the developed economies which is not true leading to failure in the market. Furthermore, the developed countries have many firms both local and multinationals operating there leading to increased competition (EL-GOHARY & EID 2013, p.94). The economies of developed countries are well established and rarely face major economic downturns leading to a good working environment for both the consumers and firms. Further, the infrastructures of these countries are well established so that firms easily access all necessary infrastructures such as transport and communication enabling firms operate smoothly. As a result, many firms are interested in investing in this good environment leading to increased competition. Moreover, most developed countries have undergone trade liberalization leading enabling as many multinationals as possible carrying out legal business to open branches in these countries. The more firms there are, the more the competition. The great competition was a challenge to HMC when it entered the American market since it had to compete with Japanese imports which were of better quality. Though they had a price advantage over other cars from other firms, the firm faced a major threat in the near future from Chinese exporters who were likely to enter the American market with cheaper cars than those of HMA (Southerton 2012, p. 12). Therefore, HMA was not assured of their market share and had to frequently change tactics to remain relevant in the market. There is a general attitude among consumers in developed countries that products from developing country are generally cheap and of poor quality (McNamara 2009, p.126). The attitude is caused by the general perception that the cost of labor in developing countries are cheap thus leading to lower production cost thus lower prices. Moreover, the developing countries are suffering from technological gap. The technological gap leads to a lower quality of products in most developing countries. Therefore, even when the firms from developing countries produce good quality products for the developed market, there is low acceptance due to the stereotyping of the products. Furthermore, when operating in developed countries the multinationals from developed countries incur higher cost of labor leading to higher prices that consumers may not be willing to pay for (GEREFFI & WYMAN 2014, p.102). The quality and price challenge was a major huddle for the HMA; even after improving the quality, sales did not go up. Moreover, developed economies are less dependent on other countries thus make independent regulations which are subject to change without consulting other countries (BROWN 2012, p.155). Laws concerning trade operations and imports are made without consideration for any country leading to unfavorable laws for some firms. When the tariffs for imports were increased, the firms incur more expense which the government is less concerned about thus leading to higher prices which reduces price competition of imports with local firms. Question 2: porter five analysis of South Korea as home to multinational firms The porter five analyses highlight four important factors that affect the competitive power of a firm. These forces are either an advantage or a disadvantage to the firm thus either increase or decrease their competitive advantage in the given market. The factors affecting the competitiveness of a firm include competitive rivalry, suppliers’ power, buyer’s power, threat of substitution and new entry into the market. Suppliers are the heart of every business; without them, businesses cannot run their operations. Therefore, suppliers are the number one determinants of production. As such in the case of South Korea, car parts have several suppliers in the market. Initially, the Korean market was dependent on supplies imported from Japan and America. Therefore, the Korean based car companies majorly did the assembly of imported parts. However, with time, the industry developed and firms started the process of designing and developing their own parts. Therefore the supply of parts is now available locally. Firms further developed and invested heavily in research to come up with their own models thus accessing supplies internally. Given the high number of suppliers of major key components of car companies both locally and imports, the firms in the industry can operate efficiently without facing any shortages or unprecedented price increase. Suppliers cannot increase their prices as they wish due to their high number. The other major determinants of success of an industry are buyers. The buyers determine the quantity of products sold by a firm in the market. In the case of South Korea, the motor vehicle industry enjoys a good local market on top of the international market. The local demand for cars has been growing steadily since 1989 (GEREFFI & WYMAN 2014, p.105). During this period, there was a domestic surge in the local market increasing the demand for cars significantly. This was also evident with the doubling up of car imports an indication of a higher demand which may have surpassed local supply. There are several factors that led to the substantive increase in the domestic demand for cars which include doubling up of wages of workers. The trend of doubling wages has been on increasing the income of consumers thus increasing their purchasing power parity (STEINBERG, DAVID 2004, p.326). The demand is also motivated by reduced cut of special consumption taxes and reduced fuel tax enabling consumers purchase motor vehicles and fuel at a lower cost. The many buyers are an advantage to the firms as no single buyer can dictate prices for the firm. With more wage increase for consumers, the demand for cars especially for new buyers is bound to keep increasing over the years thus the demand is suitable for the operation of a motor vehicle company in South Korea. Moreover, competitive rivalry is another area to be analyzed to get the competitive edge of the firm in the market. Competitive rivalry refers to the number of competitors in the industry offering similar products to the same market. The more competitors are the higher the chances of substitution of the firm’s product by competitors’ product. The motor vehicle industry has little competition due to the amount of initial investment required in the industry (BILHAM-BOULT 2001, p.155). Most firms starting up are not able to raise the amount of initial capital requirement for the investment. Furthermore, the firms already operating in the industry enjoy economies of scale enabling them sell at lower costs thus new competitors cannot enter the market. The major firms in the industry in South Korea are Kia Motors and Hyundai Motors Company. Hyundai having acquired Kia motors makes Hyundai the market leader in South Korea in motor vehicle manufacturing. Other competitors include Samsung motors and CT&T Company. Therefore, it is clear that there is little competition in the motor vehicle industry in South Korea giving current manufacturers in this market an assurance of certain degree of market dominance. Furthermore, threat of substitution also form part of the competitive analysis. Substitution is finding another product that can satisfy the same need for consumers. The easier it is for consumers to substitute the firm’s product, the higher the chances of the firm losing clients. Substitution I the motor vehicle industry is rare since each firm produces its own different models. The differentiation of the product allows the industry to operate in a monopolistic manner each firm producing differentiated products (EBERSTADT & ELLINGS 2001, p.46). Firms usually patent their models and designs preventing other firms from producing exactly the same product. The copyright laws prevent duplication of one firm’s patented product by another firm thus making the product unique (HENERIC, LICHT, G., & SOFKA, 2005, p.97). Though the products serve the same purpose and may have closely related features, they are not exactly the same thus no threat of substitution. Finally, threat of new entry into the market is a factor to consider when analyzing competitiveness of a firm (cooper 2011, p.10; Canis 2011, p.7). South Korea has laws that require all car manufacturers to comply with before being licensed especially those producing cars to be used for public transport. The regulation is a major hindrance to the entry into this industry. Initially, when the regulations were put in place, only Hyundai had complied and dominated the market for some time before other firms which were already operating in the market complied. The technology and capital requirement for the industry also bars many firms from entering the industry. Furthermore, firms patent their products thus requiring new entries into the market to start from scratch; that is research and development to be able to come up with their own unique models to enable them enter the market. The barriers to entry thus prevent new firms from joining the industry thus very little threat from new entries. From the above analysis, South Korea is fit to host the headquarters of motor vehicles industry for multinational firms. The country has readily available supply of materials, equipment and labor, has a huge market demand to be satisfied especially with the branding so that different consumers prefer different brands, few competitors, lesser chances of substitution and little threat by new entries. However, the information from the porter five analyses should not inform the globalization strategies for Hyundai motors beyond the period in the case study. The reason being the conditions in the global market may be different from those in the local market (HOMANN, KOSLOWSKI & LUETGE 2007, p.45); for example, more firms in the global market may have the required financing and technological advantage to enter the industry thus threatening the existence of Hyundai motors. Question 3: how industry as a strategic context has influenced Hyundai strategies The motor vehicle industry had a major influence into the strategies applied by Hyundai motor company. To start with, the motor vehicle industry is rapidly expanding with new competitors coming into the market. The more competitors a firm have the lower its market share. Therefore, a firm has to secure greener markets early in advance to enable it withstand competition (Bartlett and Ghoshal, 1986, p.1). With the local motor vehicle industry in South Korea experiencing growth, there was need for Hyundai Company to find another market for its products so as to maintain its profitability over time. Motor vehicles are non-perishable goods which can serve the buyer for several years without replacement. Therefore, after the product has gone through the research and development, production, introduction and maturity, decline comes in. at decline stage of the product life cycle, the market is saturated and the product experiences decline in demand since almost every consumer has purchased the product. In such a case, if the firm does not find an alternative strategy, the profitability of the firm is at risk. For Hyundai motor company, the alternative was to enter into the American market to find an alternative market for its products. The management of the firm hinted this when it maintained that the firm did not want to have the largest market share but rather just maintain its profitability. Furthermore, the motor vehicle industry is becoming more competitive each day with new firms entering the market with different strategies. Firms that enter the market first have the added advantage of creating a lasting impression in the minds of consumers thus having loyal customers (LEE & TRIM 2008, p.220). The faster rate of market changes requires firms to act and act fast to get their share in the market (Bartlett 2000, p. 2). The rate of market change inspired the CEO of HMC to make the bold decision to enter the American market. Though many employees felt it was not yet time to enter the market for lack of preparation, the entry was the best move for the firm. Though the firm did not record continuous success from inception of HMA, it was a learning process for the firm. The more time the firm spent in the market, the more it was able to conform to the market requirements. Eventually, the firm was able to make profit after years of struggle in the American market. Furthermore, demand for cheaper motor vehicles in the industry also influenced the strategies of Hyundai motor company. The motor vehicle industry has been biased for long producing only expensive vehicles so that the middle income earners are unable to afford (HENERIC, LICHT, & SOFKA, 2005, p.94; BERGERON 2009, p.8). The firms especially those that were operating in America would mostly target the high income earners creating a major market niche in the industry. This was an opportunity for Hyundai motors to come in and fill the gap b providing the cheaper cars that the middle income earners cold afford. Most of the first customers that bought cars from HMA were young couples and young people fresh from college with little income. The cheaper cars from Hyundai motors were an advantage to these groups since they could now drive their own cars. Lower operational cost coupled with scale of production of Hyundai motor made the cheaper car initiative successful. The changing market structure further informed the strategies applied by Hyundai motors. Having been the cheapest motor vehicle seller in America, there was need to change the notion that all its products were of low quality. With the change of consumer taste and preference overtime, there is need for a firm to also change in line with consumer’s preference (STACKELBERG, BAZIN, URCH, & HILL, 2011, p.12). With time, the American market did not only consider price of goods but also took into consideration quality of the goods to make buying decisions. As a result, demand for Hyundai’s cheap motor vehicle reduced significantly affecting the profitability of the firm. Drastic measures had to be taken to correct the decline in revenue and revive profit. One such move was the production of a higher quality vehicle that would compete with the Japanese imports. Furthermore, there was slight increase in prices accompanied by increased features in the new model. The firm produced a car that was more expensive that the competitor’s similar model but had some features that are optional in the competitors’ model be an essential part of the model. Moreover, competition is the order of the day for the motor vehicle industry thus firms strive to achieve a competitive edge by utilizing various strategies. With the various strategies used to increase sales not bringing forth the desired sales, a new strategy in the market has to be applied to ensure the firm gets the attention of consumers (yan, Eynard and Ion 2008, p.168). The new strategy used by Hyundai motors not only shocked the whole industry but also pushed sales up by more than 100%. Offering of a ten years warranty seemed impossible for most firms since the costs was expected to outdo the benefit. However, it turned out the opposite. With proper quality management technique, the firm was able to give the best quality vehicles to consumers who were attracted majorly by the warranty while keeping costs of repair at minimum. The business created value for its product resulting to more income (Teece 2010, p.173). It was just a matter of having everything working right and the firm was back in the American market. BIBLIOGRAPHY AHLSTROM, D., & BRUTON, G. D., 2010, International management: strategy and culture in the emerging world. 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