Strategic Challenges Encountered by MNEs to Enter Developed Nations - Assignment Example

International Business Strategy work Two Table of Contents Q Strategic Challenges Encountered By MNEs to Enter Developed Nations 3 Introduction 3 Challenges 3 Conclusion 6 Q.2. Application of Porter’s Diamond Model in Assessment of the Advantages and Disadvantages of South Korea as the Home Base for MNEs. 7 Introduction 7 Porter’s Diamond Model 7 Conclusion 10 Q.3. Relationship between Hyundai’s Head Office and US Subsidiary 11 Introduction 11 Existence of Strong Relationship 11 Conclusion 14 References 15 Q.1. Strategic Challenges Encountered By MNEs to Enter Developed Nations Introduction Multinational Enterprises (MNEs) are becoming popular phenomena around the globe, with an increasing number of MNEs, trying to capture one market after another and widen opportunities, these enterprises has gained momentum in the global arena. MNEs are mostly concerned with fulfillment of long-term goals, including gaining high amount of profits in return of the goods and services they provide to their customers. Hyundai Motor Company is one such established MNE, which has gained significant level of reputation and huge market popularity as one of the top players in the automobile industry, especially within its car segment (Teece, 2010). Hyundai is a South Korea based MNE, which encountered several challenges, while trying to establish itself in the developed nations such as the U.S. MNEs, other than Hyundai, has also faced a number of challenges while entering the foreign market, especially in the developed nations (Southerton, 2014). Hence, the aim of the question is to provide an insight towards developing better knowledge of the various challenges that are being faced by MNEs while trying to enter the foreign markets. Challenges One of the prominent challenges faced by the MNEs in developed nations is the presence of high level of competition prevailing in those nations. High level of competitiveness that are imposed by already established global and local players, can act as a hindrance since it would lead to the inability of the MNEs to gain valuable market share and enhance profitability in a new market. Furthermore, high level of competition can act as a barrier to entry, since it could possibly lead to chances of facing severe losses. In addition, MNEs face challenge of understanding new environment in the developed nations, which may be dissimilar to the different rules prevailing in the home country environment. Understanding of new environment requires making use of CAGE framework, which provides an outline of the various Cultural, Administrative, Geographic and Economic (CAGE) differences, underlying a developed nation and the home nation (Son, 2006). Understanding of CAGE framework is essential; however, MNEs can face challenges regarding the implementation of CAGE framework and can even face huge amount of differences, if they are unable to design the CAGE framework prior to entering the foreign developed market. Another potential challenge, which can act as a hindrance for the MNEs to enter the foreign market is the Liability of Foreignness (LOF). LOF can be considered as a major challenge, since it concerned with the economic as well as social costs that the MNEs have to face while conducting business operations in foreign nations. MNEs must try to formulate plans in order to overcome the LOF’s without which they would be incapable of serving the markets in the foreign developed nations (Son, 2006). Negative value provided by the local players can be another challenge for the MNEs to establish themselves in foreign countries and markets. Value of local partners needs to be appropriate, without the existence of which the MNEs can face substantial level of problems while dealing with the economic and political business scenarios existing in the developed nations. The presence of a positive value would ensure success in the path of establishment, whereas, a negative value generation for the same would lead to diminishing sales and rise in costs (Tulder & et. al., 2012). The inability of the MNEs to cope with the circumstances undermining global uncertainties can be considered as another potential challenge behind the failure of MNEs in establishing themselves in developed nations. Global scenarios include concepts of nationalism, which requires every MNE entering the foreign market to respect the nationality of the person as well as the country and frame its products and services accordingly. In addition, the evolution of regional fundamentalism can be considered as another vital challenge, owing to which many of the MNEs have to indulge themselves in acts of bribery and have to face negligence from government of the nation they are planning to enter (Tulder & et. al., 2012). Other potential challenges encompassing the global business environment and establishment of MNEs in developed nations are changing lifestyles of the people residing in those nations. One such concern amongst the people in urban nations is the rise in the ill effects of global warming, owing to which many of the nations are facing detrimental problems and severe health-related issues. Hence, MNEs face challenges to modify themselves and their products as per the customers’ requirements, which ensure that the company is in a position to face the challenges posed by competitors. In addition, rapid changes in the nation’s political as well as social scenario can hamper the productivity of the MNEs and can lead to non-establishment of the MNEs within the foreign nation (Saka-Helmhout & Geppert, 2011). A number of local level risks, associated with the local governmental and political scenarios, can act as a major challenge to be surpassed by the MNEs in order to establish themselves in the foreign developed nations. In developed and developing nations, high levels of fluctuations in the exchange rates are observable, which can either enhance or diminish the MNE’s situation while they ate operating in these nations. Changes in the taxation policies, apart from the global economies can be aligned with the legal challenges, which can hamper the productivity of the organization in terms of enhancements in costs, such as excise and sales taxes (Bartlett & Ghoshal, 1986). Furthermore, international concerns such as situations encompassing war can be considered as another important challenge that may be faced by the MNEs broadly revolves around the economic challenges such as fall in disposable income of customers as well as GDP rates in the foreign nation. In addition, situations of theft and confiscation of assets can hamper the growth and development of organization. Hyundai, as an established MNE, also faced a number of challenges as it tried to enter the foreign market. Furthermore, instances of disputes amongst the labor and management are another challenge faced by the MNEs in their process of implementing business operations in the foreign nations. Similar level of threat is also encountered by MNEs to synchronize the brand image with the offered products while penetrating foreign markets. MNEs face challenges in branding their products, owing to the existence of already known brands who occupy the market (Ghemawat & Hout 2008). Conclusion The aforementioned study provides a comprehensive knowledge of the various challenges that are faced by the MNEs to establish themselves in the developed economies. A number of political, social and economical challenges were located in the study, which play a key role in hampering the growth and expansion of the MNEs in developed nations. Some of the prominent challenges outlined in the study were labor conflicts and global uncertainties, which can have a negative effect over the establishment of MNEs. Q.2. Application of Porter’s Diamond Model in Assessment of the Advantages and Disadvantages of South Korea as the Home Base for MNEs. Introduction Hyundai has its headquarters located in Seoul, South Korea. Hyundai has been the no.1 car manufacturer in the country, owing to its long-term efforts of providing maximized services to its customers. Hyundai has achieved the market position, owing to a number of advantages as well as disadvantages possessed by its home country, which could be better understood with the help of Porter’s Diamond Model (Amsden, 1992). Porter’s Diamond Model Michael Porter, in the year 1990, devised the concept of Diamond Model, which emphasizes upon four essential factors that determine the success or failure of a company within a particular geographical framework. The Diamond Model particularly emphasizes upon the question of “why some companies tend to be competitive in certain locations” and aims at providing explanation to the “competitive advantage of the companies at the national level”. One of the factors determining the advantage and disadvantages of South Korea is the Firm’s strategy, structure and rivalry (Amsden, 1992). The firm has adopted global diversification strategy, however this has been made possible with the help of Hyundai’s ability to develop and establish a competitive environment in its home nation. Furthermore, one of the advantages underlying South Korea and success of Hyundai is the comparative advantage of the nation. In the car manufacturing and sales sector, South Korea has gained its competitive advantage in terms of skilled and cost-effective labor and use of high-class technology amongst others. However, one of the disadvantages of South Korea is the lack of availability of the skilled labor at the time of need and unequal demand patterns (Amsden, 1992). South Korea has an advantage in terms of Foreign Direct Investments (FDI), which allows Hyundai to establish and run its business operations in the developed nations. In addition, South Korea also serves as a manufacturing hub for automotive parts, which strengthen the competitiveness and acts as an added advantage for the company. In addition, Hyundai works in collaboration with the small companies who are engaged in production of automobiles and spare parts, which enables them to gain vital knowledge pertaining to the development of innovative ideas and compete in the market. In South Korea, Hyundai is influenced by the factors such as domestic capital markets, which play a key role in determination of the business strategy (Tamer, 2009). Next important factor underlying the Diamond Model are the Factor Conditions, which comprises of the basic and advanced factors. In terms of factor conditions in the field of car manufacturing, South Korea is equipped with the advantages of skilled work force and huge technological domain. These facilitate the progress of Hyundai, by making optimum utilization of the available resources and challenge the competitors. South Korea has substantial advantage in terms of competitive factors, such as the favorable climatic conditions and availability of raw materials for manufacturing car components (Lansbury & et. al., 2007). Advanced factors such as innovation, also helps Hyundai to gain a competitive advantage over the market, which is a result of modernized innovations. Substantial level of innovations in South Korea can be regarded as another advantage for Hyundai, which is a result of unavailability of the required inputs and leads to the development of newer mechanisms in cars by the company. Innovation plays a key role in gaining national competitive advantage as it helps in gaining customer loyalty (Gray, 2008). Next are the Demand Factors, which are considered an essential part in the Diamond Model. The demand conditions reflect the demand of Hyundai cars in South Korea, as well as in other nations. South Koreas offer an advantage to Hyundai, in terms of providing the company with adequate demand, owing to which the company has been ranked at the no.1 position in the country. Furthermore, the demand ensures that the local companies based in South Korea, focuses more upon the development of Hyundai Cars (Vandenbussche & Konings, 1998). In addition, the demand factors include the quantity as well as quality of the demand patterns in South Korea. South Korea provides a favorable atmosphere in terms of knowledgeable customers, who possess the potential to purchase such cars and can provide the company with required feedback on purchased cars (Kirk, 1994). Demand conditions are influenced by the factors that have an effect over the demand of the company, such as the availability of the resources in a nation. South Korea has an advantage of providing Hyundai with the required resources for production and exporting cars to other nations as well. Furthermore, availability of the resources and high demand ensures that the company has a strong reputation amongst its customers (Bartlett & Ghoshal, 2000). Related and Supporting industries are another major factor encompassing the Porter’s Diamond Model. Related and supporting industries comprise of supporting firms, which provide support to Hyundai in gaining competitive advantage. South Korea provides a competitive advantage by integrating larger number of supporting firms to Hyundai, which enables the car manufacturer to take benefit of the cost-effective raw materials and deliver quality products and services to the customers (Lee, 2004). Related and supporting industries in South Korea have an advantage in terms of cluster firms, which allow the companies to work together towards the fulfillment of organizational goals and achieving competitive advantage (Abo, 2010). Hyundai is able to ensure that the company is able to attain competitive position through development of a stronger relationship with other firms who share valuable knowledge and resources. Similarly, Korea provides competitive advantage to Hyundai in terms of the governmental support. Hyundai receives support from the Korean government while establishing new manufacturing hubs in national and international markets (Saee, 2007). Furthermore, government plays a key role in Hyundai’s competitive advantage, since the government of South Korea is concerned with maintaining quality checks of cars, which ensures that the cars meet the highest possible standards (Ghemawat, 2001). Conclusion The aforementioned study provides a clear illustration of the various factors surrounding the advantages and disadvantages of South Korea, in accordance to Porter’s Diamond Model and discusses how such factors can act as a competitive advantage for Hyundai. Furthermore, it can be learnt from the study that some of the factors such as competition and governmental policies can play a key role in the globalization strategy of the firm in future. It can further be assessed from the study that the degree of rivalry, availability of resources, and demand factors can play a significant role in determining the competitive advantage of Hyundai in near future (Cho & Moon, 2000). Q.3. Relationship between Hyundai’s Head Office and US Subsidiary Introduction Hyundai has achieved a competitive market position, owing to its ability to maintain an effective relationship between its operations in the U.S. and South Korea. Development and establishment of a strong relationship of the company with its subsidiary, has enabled the company to mark itself as one of the dominant players in the automotive segment and eliminate the wrongful perception of low standard products, prevailing amongst the U.S. customers. Hence, the study would disclose the facts associated with prevalence of an effective relationship between Hyundai’s head office and its US subsidiaries (Huggins & Izushi, 2011). Existence of Strong Relationship The strong relationship existing amongst Hyundai’s business operations in the home country and the U.S. is a result of the global business diversification strategy applied by the company towards the development of organization in foreign markets. Hyundai inaugurated its U.S. subsidiary unit, named Hyundai Motor America (HMA) in 1986, with the prime objective of catering quality services to customers and increasing sales (Dunning, 2005). In 2002, the company established its assembly plant in the U.S., with the aim of manufacturing quality cars. However, owing to its low price in comparison to the competitor prices, the company faced challenges in regards to the perception of the cars being lower quality hence cheap (Toncar & Fetscherin, 2007). Conversely, a number of initiatives taken by the company, such as ‘The Best Warranty’, ensured customer loyalty and attracted potential customers in the U.S. Furthermore, owing to high labor costs and tariff duties in the U.S., Hyundai decided to design and launch expensive range of cars, which enabled it to gain higher returns and establish itself as a dominant player in the U.S. automobile industry (Jeong, 2004). In order to maintain effective relationship with the subsidiary units, Hyundai has adopted the concept of coordinated federation, as part of the internationalization strategy, which aims at attainment of the market seeking motives. Furthermore, the emergence of a strong leadership played a key role in ensuring establishment of strong relationship and management of business operations with the subsidiary companies (Cartwright, 1993). Leaders play a key role in determining business decisions at the global level and motivation of the managers working in the U.S. subsidiary. Leadership roles are being played in terms of gaining efficiency and providing managerial decisions, which enabled the company to manage its subsidiary units with the help of a number of techniques (Maneschi, 1998). One is the formal control mechanism, which are being applied with the help of financial reporting systems. Another technique used by managers to ensure successful business operations is the due process (Kwon & Donnell, 2001). Due process enabled managers working at Hyundai to gain operational efficiency through communication and build understanding with the managers working in the U.S. subsidiary. In addition, interactions at the local level enabled the company to ensure that they have a control over the operations and engage themselves with the subsidiary unit managers in an open manner (Truett & Truett, 2003). Hyundai was earlier, facing the challenges of customer’s wrong perception towards the products, such as lower quality, owing to its lower prices. However, with changes in the global scenario, the company made use of a number of strategies to develop and expand its U.S. subsidiary (Waverman & et. al., 1997). One of the prominent strategies adopted by Hyundai to ensure success in the U.S. subsidiary was ‘Best Warranty’, under which the company engaged itself in providing a 10-year warranty and 100,000-mile protection. This led to an increase in the development of the business operations and profitability in the U.S. As part of the strategy, managers at the U.S. subsidiary became more conscious with the product quality and emphasized upon the development of providing high quality services to the U.S. customers. Managers at the U.S. subsidiary ensured that the Research and development wing of the U.S. subsidiary of Hyundai is capable enough to develop the quality standards aligned with the manufacturing of cars and enhance the durability and reliability of the product (Sardy & Fetscherin, 2009). Another strategy used by Hyundai is the ‘packaging strategy’, with the aim of ensuring a successful brand image perception amongst its U.S. customers. Earlier, Hyundai was thought of as a cheap quality car manufacturing company in the U.S. however, with the implementation of the packaging strategy, Hyundai was able to introduce optional features in the cars. One example is the popular ‘Santa Fe’ model, which saw a rise in sales with an increased pricing mechanism and additional features over the competing cars. Providing added features enabled Hyundai to price its car higher than that of its rivals in the U.S. subsidiary market, which helped in conducting successful business operations and gain prominence in the foreign market (Alon & et. al., 2008). The U.S. subsidiary played a key role in ‘support and implementation’ of the strategies, which were backed by the financial control mechanism used by the leaders in home nation. Furthermore, the decisions made by home country involved the use and implementation of similar mission and provide direction in operation by the business group (Moon & et. al., 1998). The strategic direction also included the scope and scale of business activities in the U.S. subsidiary, which were similar to those of the home nation. Finally, the centrally made decisions in South Korea were concerned with high level of off shoring and outsourcing efforts in the U.S., which could be observed with the establishment of Hyundai’s car manufacturing hub in the subsidiary nation (Brown & Sessions, 2001). Conclusion The aforementioned study provides a clear illustration of the various strategies adopted by Hyundai with the aim of ensuring a successful relationship between its operations in the home nation as well as in the U.S. subsidiary unit. In addition, the study also outlined the factors such as the development of coordinated federation as part of the international strategy, apart from making use of the concept of due process in order to manage its operations effectively. Furthermore, the study also laid equal emphasis on the emergence of leadership as an influential reason behind the success of the U.S. subsidiary apart from development of the warranty as well as packaging strategies (Lagrosen, 2007). 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