Analysis of the Global and the Multi Domestic Strategy - Coursework Example

Multinational enterprises: Introduction: the comparative advantage theory by David Ricardo depicts why countries trade and also why some countries will produce certain products, Porter (1990)attempts to replace the comparative advantage theory with his competitive advantage concept by showing why certain industries are more competitive than others in the international market, Porter (1990) also criticizes the Hecksher Ohlin theory on factor endowment, According to him factor conditions refers to the production factors available in a nation that enable competition among firms, he categorizes factors into two major categories which include basic and advanced factors. With reference to related industry he point out the importance of support industries and the linkages in gaining competitive advantage. He points out that domestic demand will shape the firm, if domestic consumers are very demanding than the firms will be forced to be innovative and this helps in gaining competitive advantage in the global market, finally he points out firm strategies and this include the structure and organization of a firm that aid in realizing competitive advantage internationally. In this paper we focus on the four strategies as presented in the book by Harrison (2001) which provides the strategies used by multinational companies which include the global strategy, multidomestic strategy, transnational strategy and the international strategy. A. Global strategy: In the recent past barriers to trade have significantly declined, however it still evident that other nations and industries have comparative advantage over others. Competitive advantage of a multination firm can be gained through the global strategy; this advantage rises from a number of factors which include (Harrison (2001)) Efficiency: A firm will gain advantage if it is efficient and efficiency will be gained if the firm realizes economies of scale through the production of large amounts of goods for a wider market and this brings the cost of production and prices down, the multinational will also utilize this strategy if the company exploits the host country resources in the production process, efficiency will also be achieved where the some products that may be outdated and are no longer demanded in the domestic market can be sold in the new markets. Product strategy: This stands for the possibility where the multinational company is the first company to introduce a certain product to the country, therefore the firm is the only provider of the product in the market and therefore the firm gains competitive advantage, also if countries involved have subsidized products whereby products are made more cheap by subsidies. Risk: The firm may also pursue the global strategy by entering a market where rivals are less likely to enter, example areas faced with war and natural disasters, the firm will be the only provider of the product and therefore gain competitive advantage. Learning and innovation: A firm will gain advantage if it expands to different markets and this will diversify learning opportunities of the firm, the firm may also introduce brands and consumer loyalty in these areas leading to competitive advantage. The appropriateness of this strategy will depend on a number of factors and this includes the cost, customer, government and competition. Cost: This refers to the ability and source of cost advantage a company may utilize, this depends on the strategic resources location, countries cost of production differences, scale economies potential and the cost of transportation. Customers: This refers to characteristics of customers and this include whether customers favor globalization, whether the customers are other business established globally, distribution channels and whether the brand name of a product is already known to consumers. Competitors: This includes factors such as the existence of many competitors in the global market and whether companies are shutting down in the global markets. The government: This include factors including trade policies and other policies imposed on multinational firms, product standards requirements by government and business regulation in international markets. B. International strategy: This is a strategy whereby the multinational company aims at expanding into international markets when international markets have a higher yield potential. This strategy aims at transferring its skills to other regions where these skills are not present. This strategy is aimed at the exploitation of location economies and the transfer of the skills to local markets to gain competitive advantage, Firm will choose this strategy due to various factors and they include: (Harrison (2001)) Increase market share: The firm will expand to other countries in order to realize economies of scale; this occurs if the domestic market share is not sufficient enough for the firm tom realize economies of scale. Return on investment: A firm may have a large capital stock that may require investment in international markets in order to improve on the returns on investment, this may occur if the products produced by the firm can be easily imitated and therefore the firm expands to other countries with patent protection. Location advantage; The firm may locate in international markets due to advantages associated with transport costs and raw material availability and transportation cost, therefore the firm will locate in these countries in order to have access to raw materials, have access to consumers and suppliers. C. Multi domestic strategy: This strategy involves decentralizing command in individual countries and this helps reduce management problems arising from centralized control form of management, in this form of strategy products offered are tailored to meet the local needs of the multination companies, this is based on the assumption that markets differ in each country and therefore better products that meet consumer demands are produced and therefore improving competitiveness. (Harrison (2001)) This strategy has an advantage in that it focuses on competition in each country given that business units in the countries are independent. This strategy also takes into consideration the cultural differences in each country and therefore products offered are tailored to meet the needs of the local consumers. This strategy therefore is based on achieving maximum responsiveness at the local level. (Harrison (2001)) D. Transnational strategy: This strategy is aimed at achieving maximum responsiveness at the local level and also at the global level, this strategy however is difficult to achieve due to the requirements of a strong central control and the flexibility at the local level. This strategy is aimed at achieving the benefits of both a multinational strategy and a global strategy and therefore this strategy involves incorporation of both the overall corporate requirements and the local market requirements. (Ghoshal( 1998)) The multinational integrates its activities through corporation with its international subsidiaries and its headquarters. It is a hybrid strategy that incorporates the characteristics of the multinational strategy and the global strategy, however an appropriate structure is required to achieve efficiency. (Ghoshal( 1998)) Analysis of the global and the multi domestic strategy: Global strategy: Advantages: Business units are interdependent given that in this form of strategy we have centralized command and control of the firm. Decision making and the formulation of strategies are made by a centralized office and these results into faster development and implementation of strategies and products. This strategy also reduces the cost of running the firm, given that the firm has a centralized control the cost of running the firm is considered to be lower. Centralized control of the firm also helps in easier coordination of activities across business units. Disadvantages: Products are the same in all countries and therefore products are not tailored to meet the needs of local consumers in each country This strategy is characterized by a Centralized control of the firm and this leads to control of operations across borders and the sharing of resources between business units which may lead to inefficiencies. This strategy is only effective if there are only small differences in the countries the multinational operates in due to cultural and social differences that may affect the demand of products. Multi domestic strategy: Advantages: Decentralized command that allow flexibility at the local level in order to meet consumer needs. This strategy focuses on competition in each country given that business units in the countries are independent. it takes into consideration the cultural differences in each country and therefore products offered are tailored to meet the needs of the local consumers. Disadvantages: The multinational firm may not realize location economies The firm will not be in a position to exploit its skills in the domestic market which include exploiting foreign competitive strategies in the domestic market. The firms experience in other markets may not be utilized in this case due to the decentralized control of the business units. References: Bartlett, C, and S. Ghoshal, 1998, Managing Across Borders. The Transnational Solution. Boston: Harvard Business School Press. Porter, Michael, 1990, The Competitive Advantage of Nations, New York: The Free Press. Michael Hitt, Edward Freeman and Jeffrey Harrison, 2001, The Blackwell handbook of strategic management, New York: Blackwell. Read More