Critical Analysis of Challenges Encountered by Multi-National Companies - Case Study Example

Introduction

Since every business owner strives to increase their profitability objectives, this goal often necessitates the expansion of the business to other countries. Moreover, the acceptance of globalisation by many countries has created a platform for expansion to most businesses. Multi-national companies (MNCs) enter a market using various methods including subsidiaries, franchising, licensing, partnerships, joint ventures, exportation, and Greenfield ventures. Whereas many MNCs have reported tremendous profits from their business activities abroad, such undertakings are not always seamless. Companies face a myriad of challenges some of which tend to affect a business and eventually lead to closure. In some instances, businesses overcome these barriers and proceed to remain not only profitable but also dominant in a foreign land. Considering that most companies are expanding to other countries, it is imperative to critically discuss the challenges encountered while forming business alliances by MNCs.

Research background

The examples of companies analysed in the following section were keenly scrutinised prior to their usage. The paper has used major companies such as Toyota, GM, KFC, Macdonald’s, Google, HSBC, and Walmart purposely to show that the challenges faced overseas are not unique to small companies. There is a misconception assuming that only small companies struggle in their quest for international expansion. Similarly, smaller companies such as Matra-Harris, Intel, and Luxottica have been cited to show that success for MNCs depends mainly on how a firm addresses the challenges, not its size. The examples were searched through news channels, company websites, and published materials such as journals and books. Thus, the composition of small and major companies will enrich this paper as it will show that these challenges are universal and that overcoming them is not related to a firm's size.

Analysis and discussion of challenges

Reputation, mistrust, and premature termination

Despite the advantages that come with business alliances, the issue of reputation is a major one. A company seeking an alliance can suffer reputational issues as was the case in the Alliance Capital Management Holdings (ACMH) and Enron Energy (EE). When the ACMH purchased substantial shares from the EE, the company faced legal actions later in 2003. Apparently, The ACMH’s purchase of the scandal-ridden company led to the loss of $280 million and, subsequently, the Florida State Board of Administration filed a suit (Lublin, 2002; Hirsch, 2003). The selection of these companies is informed by the reputation suffered by the ACMH just because it allied itself with another company. Usually, firms forming alliances with others abroad risk the reputational threat.

Additionally, some alliances encounter mistrust and lack of commitment, effectively leading to premature separation. A relevant case underpinning this assertion is the Matra-Harris and Intel alliance that was formed late 1986. Surprisingly, the alliance was prematurely terminated in 1987 before the two companies could produce the planned VLSI chips (Chesbrough, n.d.). Mistrust is a barrier that tends to work to the detriment of the company entering a company and causes it to suffer significantly especially when it had dedicated its resources (Dunning and Narula, 2004). Again, the choice of these companies is meant to show just how costly mistrust can be to an MNC. While there are other such cases, this one was preferred as it clearly shows the impact mistrust can have on any partnership irrespective of the stature of the involved companies.

Also, MNCs following the alliance method grapple with continuity issues if a partner leaves before the set time and such an eventuality often results in high opportunity costs. In some countries such as China, all foreign companies need a local partner with whom to form a type of an alliance (Gaff, Choy, and Chan, 2012). While this step is meant to protect Chinese business persons, it often works to the detriment of the MNCs. For instance, the American retailer giant, Wal-mart, separated from its Chinese partners and the effects were inevitably negative. In the unfolding events, the company dismissed its Chinese partner responsible for the e-commerce site but took some time before it got another hence losing out significantly (Young, 2015). Wal-mart was used in this case to show just impactful these challenges can become to any company expanding overseas.

Cultural and structural differences

In addition to these issues, cultural differences form part of the barriers that many MNCs encounter. HSBC is a UK financial company operating in several continents including Asia. It has formed alliances with several banks in some parts of Asia but still encountered cultural issues. The bank’s adverts were once termed as controversial as they depicted Asians as sleeping, though the company’s intention was devoid of malice (Mogaji and Wright, 2016; Doss, 2011; McKinsey, 2012). However, such issues are rampant in abroad and tend to threaten the stability of an MNC regardless of its dominance in its origin. Thus, it not surprising that “the failure rate for alliances hovers between 60% and 70%” (Hughes and Weiss, 2007 pp.1). Therefore, cultural differences can negatively impact an alliance.

Furthermore, company executives mandated with the expansion of business to other countries always complain that alliances encounter the challenge of structuring and negotiating. Incredibly, the challenges are further compounded during the implementation especially when the partners fail to reach a consensus. An example proving these assertions to be factual is the Google-Luxottica alliance. Though there were no challenges in the implementation stage, it was reported that the negotiations took more time than expected (Fontevecchia, 2014; Greenwald, 2015). Even though the partnership eventually went through, the issue of negotiations is critical when MNCs are entering foreign markets. Using this case of Google is essential to prove that these challenges can affect any company; other examples have been overlooked to demystify the notion that small companies are the only ones prone to these problems.

Consumer perception and market trends

Again, MNCs have to overcome the challenge of the ally’s lack of comprehension of the locals’ ever-changing perception and buying decision. A company may successfully negotiate an alliance but fail to comprehend the consumer perception in a region. Sadly, an alliance with a local company does not always reveal the local consumers’ needs, perception, and buying decisions. MacDonald’s is one company whose overseas ambitions had been curtailed in 2003 due to these issues despite having an alliance. The company sought to expand to Trinidad and Tobago (TT) but its sales plummeted hence necessitating its exit from the Latin American country. Ironically, the company exited the market yet another American rival, KFC, thrived in the same country (The Guardian, 2016). The difference between the two was that KFC had grasped the culture, needs, and behaviors of its consumers, unlike MacDonald’s.

Overreliance of the other partner concerning the market environment tends to inconvenience a company’s plans. Since the company entering a market is new, there is little knowledge of the market thus has to rely on the other party to provide such analyses. In the case of Macdonald’s, it was reported that higher prices contributed significantly to its failure in TT. While KFC conducted its analysis, MacDonald’s relied heavily on the partner (The Guardian, 2016). The use of these two cases is meant to show how some companies succeed while others fail in the same region primarily due to alliance-based issues. It, therefore, means that a company can overcome such challenges by remaining keen on the reliability and credibility of the identified ally.

Perception by crucial stakeholders

Again, MNCs face the problem of perception by crucial stakeholders particularly the suppliers. While suppliers may not have a direct role to play in the negotiation of an alliance their perception can impact the process. As a result, the success of the alliance is significantly intertwined with the suppliers’ perceptions. That is to say, if the supplying firms or organisations perceive an alliance to be detrimental to their interest, their subsequent actions can sabotage it. It is an observation reported in the Macdonald’s first-time attempt to enter TT. Apparently, many suppliers in the country did not have a positive perception toward the partnership (The Guardian, 2016). Conversely, Wal-mart’s success in some Asian countries is attributed mainly to suppliers’ perception of the company being consumer-oriented (Sinkovics and Ghauri, 2009). Therefore, there is indeed a strong link between suppliers’ perceptions and an MNC’s success.

Political risks and organisational culture

Unforeseen political risks that can manifest anytime add to the long list of challenges MNCs face abroad. The passage of unanticipated legislations can affect a company as the case with the Japanese automobile company, Toyota in 1985. In this year, the US Congress subjected the company to import restrictions that threatened the automaker's business. In response, Toyota had to form an alliance with its rival, General Motors (GM) which was experiencing a cash crunch (Langfitt, 2009). In this instance, Toyota did not agree to the deal to benefit from the almost-bankrupt GM but due to political risks. In almost every part of the world, MNCs have to be wary of these risks and can often rush into alliances that do not eventually yield results that are in tandem with the organisational goals.

Varied perception on organisational learning is an additional issue that almost all MNCs face fueled by the organisational culture. Typically, organisational learning (OL) entails the creation, retention, and transfer of knowledge in an organisation. While forming alliances, one firm might encounter challenges in this area if the other party does not embrace learning or is significantly lacking in the same. For an alliance to be productive, both parties need to ensure their respective organisations adopt a knowledge-oriented culture (Joseph, 2009). A contrast can be seen in the Google-Luxottica and Matra-Harris and Intel alliances. While Luxottica’s organisational culture embraced learning, it was different in the Matra-Harris hence different results. Clearly, when respective parties lack an organisational culture that embraces OL, the alliance can hardly thrive.

Addressing the challenges

In response to the challenges above, many companies have sought various strategies one of which is embracing diversity. Instead of sulking into the pressure of cultural barriers, many of the companies mentioned above accept the uniqueness of individuals including their race, age, gender ethnicity, religion, and sexual orientation. For instance, HSBC has hired many Asians and proceeded to win an award for embracing diversity (HSBC, 2016). Similarly, MacDonald’s diversity is evident as it has 70% women and other minority groups as employees; 25% of these are in leadership and 45% of its franchisees are either women or minority groups (“Inclusion & Diversity”, 2015). The trend is replicated at Toyota and Wal-mart where the women, blacks, Latinos, and the LGBT community are part of the leadership (“Diversity”, 2016; “Opportunity”, 2015). As a result of this initiative, many companies have since overcome some cultural barriers.

Besides diversity, many MNCs have overcome many of the stated challenges through change and innovation. As globalisation increases competition, most MNCs have resorted to innovation in addressing the alliance-related challenges such as fierce competition. As companies such as Toyota and other automakers expand internationally, firms such as GM have expanded their innovation. In 2006, it was reported that “the first Chinese-design car model for GM would be introduced to and made in Taiwan” (Chen and Wen, 2007 pp.126). By the same token, MacDonald’s has shown innovation and change by realigning its menu with the customer demands in Australia (Mohapatra and Singh, 2012). A similar initiative has been taken by the rest of the companies analysed especially due to the triggers of innovation such as technology, societal change, and customer needs.

Reflection

Admittedly, the feedback I received in Assignment 1 has been helpful in the completion of this task. Analysing or critiquing data was instrumental both in conveying a message and interpreting findings. Thus far, I have learned that data interpretation is crucial to any research assignment, and I believe I have showcased these skills in this paper. Evidently, I have learned precious academic skills over this duration one of which is the understanding of the complexities of MNCs. Earlier, it never occurred to me that globalisation has such a flipside. Instead, I viewed it just as an opportunity to expand the business.

However, I can now attest that there are indeed challenges whose ramifications can lead to business closure. Learning from the examples above, it is apparent MNCs do face challenges but many of which could be overcome through the lessons we have learned in the module. For instance, innovation seems to be the most effective in dealing with these challenges. If a company’s products fail to meet the expectations of the locals, changing the style could work to the firm’s advantage. Similarly, it is interesting to note the impact of diversity. Essentially, I can now articulate the issues faced by MNCs abroad and provide the relevant remedies; all that is due to this course.

Summary

In conclusion, MNCs face a wide range of challenges when expanding elsewhere including cultural barriers, political risks, and mistrust, misconception by consumers and suppliers, and incompetence of the partners. However understanding their respective remedies is imperative as it could help in the mitigation and avoidance of such problems. The remedies include embracing diversity- whereby firms recognise and appreciate the uniqueness of different backgrounds. Additionally, advancing innovation and change is equally important as it eliminates misconception while mitigating the effects of competition. The assertion can be seen in the case of Google alliance with Luxottica. Similarly, Macdonald’s decision to accept the Australian consumers’ needs impacted it positively. From own perspective, this study is vital to all MNCs and the opinion held here is that the success of any MNC depends largely on its understanding and response to the issues discussed here.