Potential Disadvantages Facing Multinational Companies Doing Business Overseas - Essay Example

Potential disadvantages facing MNCs doing business overseas in the same way that they do domestically Individual Critical Evaluation Essay Submitted on: 30th March 2009 Prepared By: Introduction A Multinational company (MNC), also known as transnational or an international company (TNC) is one which has gone global and thus is able to capture R&D and production gains as well as marketing and financial advantages through operating in more than one country, thereby gaining over costs and reputation which is not available to domestic competitors. These companies have production and service premises outside their home countries where their base is (United Nations, 1973). A global company of this stature views the entire world as one market; they rise above the limitations of national boundaries. These enterprises sell their products in most countries and manufacture in many. They believe in getting the job done the best way they can and in the best suited place in terms of market and other business conditions. Such a company would demonstrate certain characteristics: A common parent ownership headquartered in a particular country would manage a group of several other smaller units located in different parts of the world. These multiple units are managed with their exclusive set of manufacturing and distribution centers and even a separate sales organization. Generally a hub & spoke model is followed where these multiple units draw upon their resources, money, credit, patents, information and organization culture from the parent firm and thus have a shared pool of resources, expertise and also database and information systems which supports these enterprises business models spreading over multiple locations across various nations. There is a centralized strategy which is replicated in all business units throughout the globe. Earn an estimated 25 to 45 percent of revenue from foreign markets (Sturdivant & Vernon-Wortzel, 1990). The motivation to move across national borders lies in the various costs, value and other strategic benefits. Alliances such as joint ventures, mergers, acquisitions and such collaborations add value by enhancing market reach, skills, resources and experience. A need to expand the market share which would be limited in a domestic framework merits moving beyond regional and territorial boundaries. Japanese have flooded the U.S. market with automobiles and electronic items as the amount of their production was too large to be absorbed in the home market. The concepts of foreign direct investment in other countries explore the possibilities of capturing untapped raw material resources, skilled labor, land and lower taxes. There are several examples of such multinational companies like Cadbury, Nestle International, Unilever and many more which have gone global. Honeywell operates in more than 100 countries and has 120,000 employees and 13 global lines of business with over $24 billion in sales (Weiss, 2003). Xerox’s global strategy in the 1960s took it from a high-cost, low-quality company to a low-cost, higher quality, more innovative firm when it partnered with Fuji to introduce its products in Japan (Jacobson & Hillkirk, 1986). George Enderle (n.d.) has identified four distinctive international decision making styles that companies use when making decisions abroad: (a) Foreign Country Style: Refers to the company applying norms and values of the host company and thus following “When in Rome, do as Romans do”; (b) Empire Style: Refers to the company applying its centralized values and norms irrespective of the host country; (c) Interconnection Style: Refers to application of shared norms with other companies and commercial decisions are made in consultation with NAFTA or EU members to provide mutually agreed-on processes and procedures; (d) Global Style: Refers to the company establishing a cosmopolitan and universally accepted standards and solutions. In this paper, we are discussing “The potential disadvantages facing MNCs doing business overseas in the same way that they do domestically”. The indication of doing business overseas in the same way as a company does domestically goes towards ‘The Empire Style” of decision making. Enterprises which believe in employing similar or same norms and values in their subsidiaries operating in foreign nation as they do in their home countries would be seen as an imperialistic practice. Apart from this there are several other inconveniences they would have to face owing to their disregard for the host countries local policies and cultural setups. The challenges in front of such organizations are two fold. Firstly, a need to become aware of differences in values and perpetual variation in cultures across nations at all levels. Secondly, a need to become proficient in negotiating differences into consensual agreements. Cultural Inconsistencies across Nations: Impacting MNCs Globalization as the term signifies has led to the integration of multinational and national enterprises and international interests with local and regional concerns. In the process, it has given rise to opportunities both economic as well as political and has also increased the risk for conflicts between organizations and professionals with conflicting or differing values and codes of conduct. Thus, a rigid attitude of conducting business internationally with the same codes of conduct and vales as they would follow nationally, poses grave dangers. Cultural issues in organization communication between headquarters and the subsidiary units present constant challenges in integrating corporate world. Communication between headquarters and their business units have been unidirectional as illustrated by various researches (Williamson, 2004). Tendency for the headquarters to define and direct the product marketing, distribution channels and intermediaries, communicating avenues and other task related roles of its business partners in foreign countries lead to a culture of domination and inflexible procedures. As rightly pointed out by Brannen & Salk (2000), A ‘negotiated culture’ should ideally be developed when members of two or more distinct culture nationally as well as organizationally, merge together. In order for the alliance of two cultures to succeed, certain amount of compromise and negotiation has to be made. A stiff standpoint of the parent company and a stern adherence to standardized policies and norms might complicate the cultural integration. According to Hofstede’s (2004) framework for assessing culture, there are five dimensions on whose parameters we can measure the culture across different nations which also have an impact on the businesses operating there. The first dimension is “Low vs. High power distance” cultures. Places where subordinates and less powerful members of institutions are treated as equals and are consulted in decisive matters so as to have a democratic environment is said to be ‘Low power distance’ culture as what prevails in Denmark, New Zealand, Austria etc. whereas cultures which are paternalistic and authoritative in nature, where subordinates have to acknowledge the power and supremacy of their superiors is said to be a ‘High power distance culture’ as what prevails in Malaysia. A high power distance culture is usually characterized by vertical or hierarchical flow of ideas and decisions. Companies which operate in an open environment with free flow of information if goes on to adopt a similar approach in its unit based in a high power distance countries will face several drawbacks such as disrespect and disregard of superiors by juniors and a state of chaos and anarchy due to absence of disciplinarian or authority head. The same situation occurs in a reverse pattern if a company which has domestically been operating with top-down approach applies the same to its unit in a low power distance country; it will lead to dissatisfaction and disharmony among its employees especially the subordinates and workers, and a stifling work environment hindering growth of the company. The second dimension is “Individualism vs. Collectivism”. The tendency of an individual to usually associate himself/ herself with a group or an organization is “Collectivism” outlook as in the Latin American cultures whereas standing up for an individual’s own affiliations and beliefs is the ideology of “Individualism” as seen in western countries like U.S.A., Australia, The Great Britain. Countries where a sense of individualism is predominant, the citizens would value personal space more, even when they are socializing. This is an important aspect to consider because if a multinational company has one of its business units situated in a country of such culture, then its employees would be satisfied and contended only when they have an avenue of personal growth attached with the company; in cases where a company does not deviate from its home policy of ‘no individuals, only teams’ focus, it would lose out on its employee count and increase the risk of high attrition rate. There are many other similar issues involved. The third dimension “Masculinity vs. Femininity” refers to masculine characteristics of ambition, assertiveness, competition being given predominance in a culture as done in Japan which has a masculine culture chasing wealth accumulation or as Sweden which has the most feminine culture and gives priority to relationships and quality of life. A company which refuses to mould from a feminine culture to masculine or vice versa in accordance with the host country’s culture might not be enable to sustain and stabilize itself in the foreign environment. The fourth dimension of “Uncertainty Avoidance” refers to the extent to which the inhabitants of a society tend to minimize uncertainty to eliminate anxiety. Cultures prevailing in Japan, Latin America and Mediterranean cultures emphasize on rules and structured circumstances so as to score high on ‘Uncertainty Avoidance’. Employees of these cultures show a greater tendency to stay longer with their present employer. Finally, the fifth dimension of “Long vs. Short term orientation” refers to the future as against the past and the present. Asian countries and countries like China, Japan lay more emphasis to values like perseverance, persistence and a savings culture which makes them long-term oriented whereas western nations score high on merriment and spending culture thus emphasizing short-term orientation. From these Hosfstede’s dimension, we can clearly understand that cultures across the world vary and have certain unique traits, customs and way of life. These dimensions elaborate the average tendencies prevalent in a country and how it is contrastingly distinct from another country’s culture. It is foolish to assume that a particular operating strategy successful in some culture can merge into a new one without any alterations. Hence, when we see from the perspective of a company which had its operations in home country, a move of operation overseas brings into account the issue of either the same culture in that new environment or otherwise a different set of beliefs, values and cultural inclination which is completely different from the existing one. In such a scenario, carrying out operations in the same way as done domestically would mean running the risk of being unaccepted by the consumers, government and society in general. For example, in a country where subordinates are not comfortable discussing heir issues freely with their superiors, the employee and supplier base would also consist of similarly conditioned people; in such a scenario, a company which originally comes from a low power distance culture assumes that the employees, workers, staffs, suppliers etc are mature enough to report any sort of dissatisfaction occurring due to their association with the company. The bosses and superiors might thus interpret the absence of complaint as the absence of any problem which would be a misinterpretation since the reason for absence of complaints is the long established power distance mindset. However, such a situation might turn out to be harmful for the company as piling up of such suppressed dissatisfaction would over the period get converted to suppressed anger which might someday burst out in the form of mass protest and agitation which would mean a serious burden on the company’s resources. This is indeed true, as researches have shown that the way people act, think or feel is usually determined by their national culture (Hall, 1976; Hampden-Turner and Trompenaars, 1993; Hofstede, 1980). This strengthens the argument that a parent company’s or the headquarter perspective cannot always be incorporated into its subsidiaries’ or units’ culture, situated across different locations in this world without modification. In fact, initial rigidity to align the organizations business model and operation in sync with the host country’s culture might prove to be a financial burden as well. For instance, it might so happen that a company inflexible enough to negotiate with the suppliers or distributers based on the parameters prevalent in the host country or estimating the preferences of teenage consumers in the host country to be identical to that of the teenagers in the domestic country might mean a drastic cost to the company. The suppliers and distributers in mass unionized protest might refuse to supply raw materials to the company’s plants or distribute the company’s finished good to market. According to Japanese president, the presence and power of wholesalers is tremendously strong in Japanese market, and many businesses are dependent on them. Skipping these wholesalers and selling directly goes against the Japanese tradition and is thus not an option at all. Foreigners have a difficulty comprehending the intricacy of the situation and the uniqueness of regional constraints and cultural heritage which prevail here (Clausen Lisbeth, 2007). The consumers might out rightly reject the company’s product owing to its failure to conform to their cultural and demographical requirements since every market has a unique history and distinctive positioning. This would mean a huge cost to the company both in terms of re-work on the previously developed system already in place as well as improving their reputation as a company worth being associated with whether as a supplier, distributer, employee or a customer. It would have been much economical to start establishment of the company in the new environment after a thorough study of their cultural specifications and create an atmosphere of mutual co-operation and sustenance. Another vital observation as made in the example above is that of changing consumer preferences with changing national boundaries. Owing to a pattern of beliefs and perceptions rampant and established over years of practice and conformance, certain lifestyle habit and fondness have developed. These patterns affect the choices customers make while buying a product or accepting a brand’s inclusion into their everyday life. This consequently affects the brand/ product marketing strategy. For decades, the product and branding strategy have percolated down from the head quarters to the various units across the globe. A company which disregards the host country’s consumer lifestyle and adopts the same strategy as it does domestically will lose out not only on market share but in brand identity also. Not only the positioning or the marketing strategy, the features contained in the products should also reflect the inclusion of ingredients as demanded by the country’s consumers in which it is to be launched. Customization is the need of the hour and an MNC which produces and sells standard, monosyllabic products cannot hope to compete with a diverse range of product portfolio of companies which conform to the consumers’ whims. Although the integration of markets world over has led to the development of some global preferences, this would also require an adaptation according to the needs and wants of the customer. Strict adherence to domestic ideas, rules and norms would in no way be able to compete with the cut throat competition given by several global companies. As an illustration towards this opinion, we discuss the case of EuroDisney (Weiss, 2003). The highly successful American entertainment company Disney ventured to replicate its success with its first experiment in Paris as Disney’s European theme park, EuroDisney (ED). This attempt to transplant its vision, mission, and culture, values, business model into a new country provides a lot of lessons about doing business overseas. Set to capture the opportunities of the European market, Chairman and CEO of Walt Disney Company (WD) planned setting up Euro Disney as a sister company. The park was designated as an example of American cultural imperialism by French socialist establishments. The employees at EuroDisney also started complaining about the 13-page Disney employee manuals on dress and mannerisms which disrupts their French individualism. The U.S. theme park in Europe was not such a success at the start because of cultural clashes and Walt Disney operating with its set of beliefs and framework as it did in U.S. Disney learned a lot many lessons. In early 1992, right after the launch of EuroDisney, Disney realised that Europeans travel in tour-buses. EuroDisney had no provision for driver’s stay and this led to a mass boycott. Initially there was a strict ban on wine and beer in the park which is how Walt Disney operated. However, there was a complaint for lack of wine from French visitors on one hand; and demand for beer by Germans on the other hand. A very distinctive habit of Europeans to eat at an everyday set time is also in complete contrast to an American culture of wandering around with a hot dog in hand. A lot of these shortcomings were corrected or improved upon (Several park restaurants started serving alcoholic beverages like wine and beer). Thus, EuroDisney which is now a success has learned its lessons the hard way. Tim O’Brien of Nashville-based Amusement Business magazine says “You don’t create an American park in a foreign country. You use your know-how to build an American-style park in the heart of a European culture. There is a difference.” A discussion on suppliers, wholesalers, distributers and customers consist of the environment external to a company. For a company to grow and prosper, another crucial component is its internal environment which is constituted of its staff, employees and workers. A foreign company has to employ its human resources from among the inhabitants of the host country. In such situations, for a proper synchrony between the company’s as well as its employees’ expectations from each other, there is a need to eliminate or minimize cultural mismatches. An important role would thereby be played by communication channels within the organization. A company has to make its employees comfortable and convenient in order to achieve a productive output from them. While devising the appropriate communication strategy within the organization, what needs to be given due importance is the belief systems and culture that the people of that country are used to. Whether they have a ‘low or high power distance’ tendencies, whether they are individualistic in nature or prefer collectivism, are they used to leisure time and work time balance or do they have workaholic tendencies and whether they have a masculine or feminine pattern of lifestyle and the other dimensions of cultural pluralism should all be given due consideration. Lack of a clear channel of communication indicates a lack of effort on the part of headquarter to carry out a scrupulous study of the foreign country’s culture; it will also obstruct the successful implementation of other corporate strategies. Communication also brings out the issue of language barrier. A company in a foreign country cannot argue to have its policies written, read and displayed in its home country’s language. It has to be flexible enough to make official communications in bi-lingual format, often so with the host country’s language as the primary one. Rigidity to carry out business in the same manner as done domestically would mean following labor policies and human resource policies which are a misfit in a different country. If managers are hesitant to talk about cultural differences clearly, the staff and subordinates in general would never be comfortable talking about it. This will gradually develop into unsatisfied employees who do not consider themselves a part of the organization and thus would not associate themselves with the gains and progress of the company. Dissatisfied employees are unproductive and create an unhealthy working environment which ultimately harms the enterprise on the whole. Conclusion A healthy illustration of the hypothesis as elaborated above discusses “Potential disadvantages faced by the MNCs doing business overseas in the same manner as they do domestically” in the viewpoint of a plethora of cultural variations which exists all over the world. “Despite increasing globalization, almost all MNCs have home bases which give them resolutely national identities. General Electric and Microsoft are clearly American just as Honda and Toyota are Japanese. However, an inherent disadvantage that MNCs possess is that they are playing away from home both in national and cultural terms” (The Multinational Corporation). For all multinational organizations, changing complexities when shifting or moving out operations requires a receptive and amicable attitude towards external as well as internal forces of an organization. Enterprises which realize early the importance of mutual ‘gain and loss’ attitude and is open to negotiations for better stability and hold of the company within the organization wins the deal and competition over all those companies which have steadfast rules and do not believe in bending them for adjustment in another country’s or nation’s cultural setup. Cross-cultural conflicts are an obvious disadvantage which multinational companies face in foreign nations; however, in order to overcome these and eliminate these disadvantages, the company has to do away with its old set of belief systems and operational models. A new model of collaboration and accommodation along with negotiation and persuasion can help a company win over the new cultural bondages. There are several types of decision making styles generally adopted by companies which move out their operation into foreign countries. However carrying out operations in the same manner as they do domestically would be the most rigid and inflexible, imperialistic nature of decision making style which poses several disadvantages for such a company adopting it. Companies ideally should identify universal principles and values to devise operating strategies in various countries; however, a major component of such strategies is how to mould it according to the culture of the country they are specifically moving into so as to avoid the drawbacks which company face when they are regarded as foreign companies and are not received well into the new society. Read More