Global Market Analysis of an MNE - Roche Pharmaceutical Company - Case Study Example

Global market analysis of an MNE Name Unit Course Supervisor Date of submission Introduction Multinational Enterprises (MNEs) are main actors in global business, according to Bartlett and Ghoshal (2000, p.14), an MNE is a firm that has direct foreign investment (FDI) and it is involved in actively managing the firm in a foreign country. This paper analyses factors leading to an MNE engaging in foreign direct investment. The MNE under analysis is Roche, a leading pharmaceutical company with a global outlook and the country of entry is Indonesia. There are many factors that affect business in Indonesia and that may serve as attracting factors for Roche to enter the market. This will be discussed in detail by analyzing Indonesia and ASEAN region as a whole. SWOT analysis will be used to analyze MNE firm and recommendation for strategies that the firm can employ in expanding to Indonesia. The analysis will help in identifying the entry mode that can be adopted by Roche in entering Indonesia, the analysis will be aided by relevant theories that influence the mode of FDI. MNE Analysis: ROCHE Roche is a multinational enterprise dealing with pharmaceutical products; the company is headquartered in Basel, Switzerland and has been in operation for over a century. It produces drugs for autoimmune diseases, virology, metabolic disorders, central nervous system diseases and it is a world leader in in-vitro diagnostics and cancer drugs (Hummer 2005, p. 12). SWOT analysis of Roche Strengths In 2009 Roche completed the acquisition of Genentech for $ 4.6 billion (Hummer 2005, p. 13). Therefore, the company got access to the portfolio of oncology which strategically aligned the company to revenue growth and increased its competitive advantage in the oncology market. As a result, the company share in oncology market augmented to 30.4% and shields the company from exposure to non patents in future (Hearing 2005, p. 2). Roche holds revenue of over 47.7 billion Swiss Francs. In order to ensure quality and maintain its competitiveness across the globe, Roche has 80,000 employees who include 25,000 scientists (Hummer 2005, p. 17). The division of diagnostics and pharmacy work under one command which is a strategy in ensuring efficient decision making process and ensures that the products are analyzed at every step of production hence, ensuring quality. Weakness Roche holds patent to drugs such as Taimiflu, however, the drug is massively produced in the developing countries and there is no efficient distribution channels which has made the company not to fairly utilize its patents (Hummer 2005, p. 22). In addition, Roche experiences high cost of production which lowers its price competitiveness in the global market. Opportunities Indonesia presents a great opportunity to Roche; the country has been recording economic growth and has a population of over 250 million making a ready market for Roche. High capital base and production of pharmaceuticals based on research will be key entry factor that Roche has capability in. According Hearing (2005, p. 3), Roche diagnostic system is one of best and has made it to be a competitive edge in the international market. Threats Roche faces stiff competition from other world leaders who already have distribution channels in Indonesia such as Aboot, Sanofi Aventis and Siemens. The market share in pharmaceutical business is also limited due to patent products and generic drugs. Industry/sector analysis The analysis is based on porter five forces model Supplier Power According to Porter (2008, p. 2) the fewer the suppliers, the more likely that they will have power over the business. Pharmaceutical suppliers in Indonesia are many which include both domestic and foreign businesses. In pharmaceuticals, competition is very high especially from generic drugs and thus forces of demand and supply affect suppliers. However, Roche has strong power over suppliers in terms of in-vitro diagnostic systems. The suppliers of the best systems have to depend on Roche hence Roche enjoys power over suppliers in diagnostic and oncology products. Buyer Power Buyers are very important for any business. In analyzing the power of the buyers, the key factor to consider is how the buyers can dictate the price of a product a business is offering (Porter 2008, p.2). Roche will enjoy a big pool of buyers from wholesale and retail drug stores. However, these customers are also target for the competitors dealing in similar products. Target customers can easily switch to competitors products, if they do not get value for their money making Roche have low power over the customers especially in pharmaceuticals. Competitive Rivalry Roche faces stiff competition from other multinational pharmaceutical companies such as Aboot, Sanofi Aventis and Siemens The companies enjoy economies of scale and have stable capital bases. They have the ability to offer attractive packages and prices. However, Roche has strong power over the competitors due to the dominance the company has enjoyed in oncology and in-vitro diagnostic systems. Threat of substitution Businesses that have easy substitution weaken their power (Porter 2008, p. 3). Roche buyers depend on the company to get pharmaceuticals. Roche does manufacture pharmaceuticals; this implies that the pharmaceuticals unique to Roche cannot be accessed from other companies except the generics. Roche faces weak threat for substitution. Threat of New Entry Roche will experience a lot of competition from both small and other multinationals. Pharmaceutical manufacturing industry is capital intensive and depends on a lot of research hence limited threat of entry. Country Analysis Opportunities Indonesia has a population of over 250 million people which makes it the 5th most populous nation, this population is a key attraction for businesses. Over the years, Indonesia experiences tremendous economic growth, for instance the economy grew from 6.3 in 2003 to 6.8% in 2008. Modern education in the country is the key driver to increased number of trained personnel in different disciplines hence providing ready labor for companies intending to enter the market. The country is well covered with economical public transport such as taxis, trains and commuter buses. Air transport is also available in the country but a bit expensive compared to these other means of transport. The government policy on investment allows foreign investment with 100% ownership (Hadiwinata, Arsono & Rekan, 2009, p. 3). Threats Despite of the policies to promote foreign investments, trade barriers that limit international business in Indonesia poses a challenge to businesses. Tariffs such as import duty range from 5 to as high as 30%. There is also value added tax that varies from 0-10%. In addition, there are bureaucratic licensing processes for manufacturing companies and drug companies that have to go through a rigorous process (Hadiwinata, Arsono & Rekan, 2009, p. 4). These factors limit the prospects of multinational intending to enter Indonesia. Competition Like in many developing countries, Indonesia enjoys the right to import cheap patent drugs and generics. This will be a major source of competition to Roche due to price issues. In addition, Roche faces competition from both domestic suppliers of pharmaceuticals and other multinationals already existing with established distribution channels. Analysis of regional organization Government policy affects the operation of business in any country. The government plays an important role in enhancing the business environment in terms of policy, trade and investment, infrastructure, economic development, education, training and other initiatives that aim to improve trade and ease business operations (Foss & Pederson 2004, p. 341). Regional organisation Indonesia is a member of the Association of Southeast Asian Nations (ASEAN) which over the years has become an important destination for foreign investment. The ASEAN regional block has a population of more than 600 million people and has a nominal GSD of $2.3 trillion (ASEAN 2014, p. 1). With such an enticing nominal GDP and growth rates and well educated workforce, ASEAN presents a good market for MNEs. PESTEL analysis a) Political organization After 1997 economic downturn in Indonesia, the successive governments passed policies and legislation that promote foreign investment in the country especially in manufacturing and technological fields. Indonesia has a policy that allows 100% ownership by foreigners which fundamentally attract small, medium and large scale enterprises in the country (Hadiwinata, Arsono & Rekan, 2009, p. 4). b) Economic As ASEAN continues to record growth, Indonesia experiences the growth more than the other ASEAN members. This is attributable to the increasing foreign investment whichis accounted from the country’s economic stimulus. For instance, the country has good telecommunication and transport infrastructure and banking system (Hadiwinata, Arsono & Rekan, 2009, p. 5). c) Social Indonesia has a population 250 million people. Due to modern education in Indonesia, most of the population is educated which has led to integration of the different cultures and is open to foreign investments (Hadiwinata, Arsono & Rekan, 2009, p. 5). The population also presents a diverse workforce. d) Technological Technological factors have direct impact on business operations, they affect ways in which goods and services are produced, distributed and enhance communication with the target market. Indonesia has good transport and communication network and fast internet is available in the country (Hadiwinata, Arsono & Rekan, 2009, p. 6). e) Environmental and Over the past one and half decade, consumer awareness has been on increase in relation to environmental matters. Consumers insist that the products they purchase should be produced in a sustainable and ethical manner. In line with global climatic changes Indonesia has legislations aimed at ensuring that carbon footprint is reduced and hence processes that encourage sustainable production are upheld in the country (Hadiwinata, Arsono & Rekan, 2009, p. 6). f) Legal factors These entail government policies on various issues such as safety, consumer rights and registration process/ Indonesia legal framework on foreign investment is aimed at supporting corporations but at the same time the businesses have to comply with standards. Some processes such as registration of products are lengthy and time consuming (Hadiwinata, Arsono & Rekan, 2009, p. 6). FMSS/Mode of Entry Analysis and Recommendation In the advent of globalization and technological advancements, many multinational enterprises find it easy to expand to other countries (Brouthers & Brouthers 2000, p. 92). Both pull and push factors necessitated the expansion. The push factors exists when the domestic business environment seems unfavorable for business growth while the pull factors are market attractiveness exhibited by target market (Aguera 2009, p. 2). For instance, Indonesia presents an attractive environment due to the high population, educated diverse workforce, and government policy on foreign investment. Based on the pull or push factors, an enterprise can employ different strategies to leverage on in entry to the international markets. The principal motives for MNEs expansion to international markets are to utilize location economies, to increase revenues through economies of scale or to exploit the market through economies of scope (Aguera 2009, p 3). Figure 1 below is a summary for the principal motives leading to international expansion for many MNEs. Source: Aguera, 2009 FDI Mode of Entry Foreign direct investment (FDI) includes building new oversea facilities, mergers and acquisitions; it entails ownership control in a business enterprise in another country by a firm that is based in another country (Johnson 2006, p.3). FDI can be through incorporation of a wholly owned subsidiary, by purchase of shares in an associated enterprise in host country, through mergers and acquisitions or through joint venture (Aguera 2009, p 4). Theories of FDI a) Internalization theory This theory is applied in analyzing behavior assumed by MNEs in the global business. The theory specifically focuses on imperfections found in intermediate product markets. The theory is based on knowledge flow (Horaguchi & Toyne 2000, p 488). Internalization theory states that it is easier to put appropriate knowledge in cases where intellectual rights happen to be weak. With a lot of protection, multinational firms apply secrecy to protect their knowledge and thus instead of licensing the knowledge to other firms, they find it right to exploit the knowledge themselves using their own production facilities. The internalization process of knowledge thus leads to emergence of more multinational enterprises as knowledge acts as a public good in driving expansion. However, Buckley and Hashai (2009, p. 59) noted that internalization is not absolute for all MNEs, it only takes place when a firm perceives benefits will exceed costs. Thus internalization theory can lead to expansion to foreign markets that predisposes the firm to commercial and political risks associated with entering a new market (Horaguchi & Toyne 2000, p 488).  Oligopolistic reaction theory When a firm decides to invest in overseas it acts as a stimuli for raising competing firms to invest in the same country, this forms the basis of oligopolistic reaction theory. The theory tries to explain why rival firms tend to follow each other in foreign markets (Etienne 2009, p. 3). According to the stipulation of the theory, if industries are more concentrated, they would likely exhibit oligopolistic reactions. In discussion of the enterprise choice of location, this theory stipulates that competing firms would follow each in foreign countries in order to obtain greater profits that can be realized from clustering due to agglomeration economies that exist in firms that are geographically proximal to each other (Hansen & Rand 2006, p. 32). Therefore, FDI mode of entry in relation to this theory is due to risk aversion in which firms endeavor to minimize their risks by matching their rivals. The follower firm thus basis FDI on strategic compliment arising from positive spill over (Etienne 2009, p. 3). In choosing to enter the Indonesian market, Roche will already be entering a market where its rivals are already operating; the competitors include Aboot, Sanofi Aventis and Siemens  Dunning’s Eclectic Paradigm Dunning is the core author of the Dunning’s electric paradigm. The paradigm is used as a determinant for foreign direct investment (Gray & Peter, p 4). The theory offers framework feasible in investigation of the factors that affect expansion of multinationals into foreign countries and factors that lead to their growth. The basic assumption of this approach to FDI is based on three crucial factors for MNE as they expand to the international market. The factors include: i. Ownership advantages: this relates to competitive advantage of the firm. According to Gray and Peter (2003, p. 5) the higher the competitive advantage the higher the chances of engaging in FDI. ii. Location advantages: These include the attractive factors present in the host country such as existence of raw materials, experienced workforce and ready market. If the attractive resources are immobile and favour expansion the higher the chances of expansion (Gray & Peter, p 5). iii. Internationalisation: This relates to the advantages an MNE is to accrue in entering the foreign country doing its own production rather than in a joint venture plan. For countries that illustrate greater benefits of internalisation the more a firm will be involved in investing in the country (Gray & Peter, p 5). Roche mode of entry to Indonesia There are a myriad of factors that influence entry mode and that can be used to justify the choice of entry mode the MNE chooses. The factors can be micro or macro. The micro factors include the core competencies, competitive advantage of the firm, products offered by the firm and the key strategy and structure of the firm (Porter 2000, p. 11). However, there are macro factors that can influence the entry mode that a firm chooses. These factors include the competitive characteristic of the sector /industry of operation. The competitive factors are determined upon comparing firms that produce similar products or services (Hashai and Buckley 2014, p. 3). The inherent factors in the host country remain key determinants of the entry mode to be adopted. A country or region can provide enabling or can serve as a barrier to entry. This is depended on political factors that touch on tariffs, non-tariff barriers, and policies, geographic and social factors. The mode of entry entails the channel in which an organization uses to gain entry into the targeted market (Aguera 2009, p.2). The common mode of entry for MNEs include foreign direct investment (FDI) that can either be through licensing, franchising, joint ventures, strategic alliances, acquisitions and/ or international sales subsidiaries (Aguera 2009, p.3). The form of entry is normally dictated The company corporate culture, the host country policies and legislation on foreign investment dictates the mode of entry. Indonesia allows 100% ownership and thus Roche will be suited to enter the country as a new entity with 100% ownership i.e. Green field entry (Brouthers & Brouthers 2000, p. 94). This is advantageous as it gives the new entry company autonomy to control its businesses which is crucial to avoid integration linked tribulations. It serves as basis of leveraging on company’s skills applied in other countries, it thus prepares the MNE to learn and prepare for future expansion (Aguera 2009, p. 9). However, this requires the MNE to have rich knowledge of foreign management employees from diverse backgrounds. Roche has been in global business for many years; specifically it has been in operation for over a century, thus the experience gained in management in other countries will best be duplicated for entry in Indonesia. Figure 2 is an illustration of probable mode of entry Roche can employ. Figure 2: Forms of FDI. Source: Aguera 2009 In the advent of globalisation that is characterised by stiff competition, an MNE needs to employ strategies that ensues faster integration while at the same time upholding diversity and keeping the needs of the customers at fore front (Hansen and Rand 2006, p. 4). Fast integration to the new market can be achieved through various service strategies that an MNE can employ such as maintaining ethics and ethical behaviour, corporate social responsibility and value addition to products. Maintaining ethics and ethical behaviour is sometimes challenging for many international businesses. This is normally due to cross cultural differences and varying legal structures in the host country (Johnson 2006, p. 9). Therefore, to ensure integration and easy penetration, an MNE is supposed to maintain the ethical climate of the host country. This can be achieved by inclusion of all employees both domestic and international in creating an ethical program that aligns with the host country. According to Porter (2000, p.17) the inclusion of local customs should be based on discretion of the company and should align with ethical issues of the company. Roche been experienced in the global business for many years, it will easily integrate in Indonesia leveraging on its corporate culture and international business ethics Corporate social responsibility (CSR) plays a critical role in influencing the expansion of strategy of any company whether domestic or international (O’Brien 2001, p. 2). Corporate social responsibility is crucial for companies in carrying out their responsibility as local and global citizens in the globalised world and also acts as a key driver to integration and gaining a competitive edge. This ensures that organizations act in a socially responsible manner that is ethical and that positively touches on the lives of the customers and society at large. CSR promotes inclusiveness as the company merges with local community. According to (O’Brien 2001, p. 2) CSR serves as continuing commitment by an organization while improving quality of society. CSR boosts the competitive advantage of business because customers are more willing to remain loyal to brands that are ethical and those that integrate with the society (O’Brien 2001, p. 2). Competitive Advantages of MNEs that may relate to Roche Competitive advantage is the cornerstone of global business and international strategy. MNEs secure competitive advantage using different means. One of the key means is through securing assets in the new market at a reasonable cost (Hashai & Buckley 2009, p. 15). For instance, Roche should set production plant in Indonesia; this can act as a means to circumvent the exercise of competitive power in the new market. The entry strategy of many MNEs is also based on specialization in a given market segments that the MNEs are best suited to serve in the global market (Hashai & Buckley 2009, p. 16). Roche leads in pharmaceutical and in -vitro diagnostic system market. The pharmaceutical industry in many parts of the world is characterized by monopolistic competition and high economies of scale, with the stable capital base, Roche will have competitive advantage in entering Indonesian market through a 100% ownership. Conclusion Myriad of factors determine the entry of Multinational Enterprises (MNEs) into the foreign markets. Key to the factors is the business environmental factor that is inherent in the host country. Indonesian political, legal and environmental factors present pull factors that Roche should look into entering the Indonesia by 100% direct investment. The economic growth, regional growth, good communication and transport network serve as Roche’s crucial pull factors. The government policy on investment allows foreign investment with 100% ownership. Despite of the factors that are attractive, Roche will face competition from other multinationals in the pharmaceutical industries already operating in the Indonesia and market forces of supply and demand that are driven by international policies that govern pharmaceutical drug business such as right of developing countries to import cheap patents. References Aguera, R.2009. Going it alone: Strategy into foreign markets. 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