Q1. What is a Multinational Company ?
Stage: 3 Multinational Company
Sooner or later, the international companies learn that the extension strategy (i.e., extending the domestic product, price and promotion to foreign markets) will not work. The best example is that Toyota exported Toyopet cars produced for Japan in Japan to USA in 1957. Toyopet was not successful in USA. Toyota could not sell these cars in USA as they were over priced, underpowered and built like tanks. Thus these cars were not suitable for the US markets. The unsold cars were shipped back to Japan.
Toyota took this failure as a rich learning experience and as a source of invaluable intelligence but not as failure. Toyota, based on this experience designed new models of cars suitable for the US market. The international companies turn into multinational companies when they start responding to the specific needs of the different country markets regarding product, price and promotion.
This statue of multinational company is also referred to as multidomestic. Multidomestic company formulates different strategies for different markets; thus, the orientation shifts from ethnocentric to polycentric. Under polycentric orientation the offices /branches/subsidiaries of a multinational company work like domestic company in each country where they operate with distinct policies and strategies suitable to that country concerned. Thus they operate like a domestic company of the country concerned in each of their markets.
Philips of Netherlands was a multidomestic company of this stage during 1960s. It used to have autonomous national organizations and formulate the strategies separately for each country. Its strategy did work effectively until the Japanese companies and Matsushita started competing with this company based oil global strategy. Global strategy was based on focusing the company resources to serve tile world market.
Philips strategy was to work like a domestic company, and produce a number of models of the product consequently it increased the cost of production and price of the product. But the Matsushita’s strategy was to give the value, quality, design and low price to the customer. Philips lost its market share as Matsushita offered more value to the customer Consequently Philips changed its strategy and created “industry main groups” in Netherlands which are responsible for formulating a global strategy for producing, marketing and R & D.
Cultural Diversity
There are many ways of examining cultural differences and their impact on international management. Culture can affect technology transfer, managerial attitudes, managerial ideology, and even business-government relations. Perhaps most important, culture affects how people think and behave. Culture affects a host of business-related activities, even including the common handshake. Here are some contrasting examples:
Culture Type of Handshake
United States Firm
Asian Gentle (shaking hands is unfamiliar and uncomfortable for some; the exception is the Korean, who usually has a firm handshake)
British Soft
French Light and quick (not offered to superiors); repeated on arrival and departure
German Brusk and firm; repeated on arrival and departure
Latin American Moderate grasp; repeated frequently
Middle Eastern Gentle; repeated frequently'
Q. Describe Chandler’s thesis concerning the growth and development of an organization strategy and culture and bring out its implications for global management.
Chandler’s thesis (1962) that an organization’s strategy shapes its structure is based upon
two logics. First, an organization’s strategy should fit with its environment; that is, a single-
product strategy aligns with static environments. However, in dynamic situations, firms require
new diversification strategies. Second, and key, is Chandler’s statement that functional structures
are appropriate with single-product strategies, but that diversified strategies require more
complex divisional structures (Engdahl et al., 2000).
Chandler’s seminal work will continue to have lasting impact in management literature
(Engdahl et al., 2000); however, our environment has changed. In the last ten years, knowledge
explosion resulting from increasing internationalization and rapid technological advancement,
therefore, most firms are no longer competing in static environments and are no longer
competing on a single product. According to Ireland and Hitt (1999), internationalization
activities have changed the landscape of our business environment. Firms conducting business
now span borders and time (Bartlett and Ghoshal, 1989). Most firms cannot survive with a single
product. Even Coke needs a product line extension across countries. Therefore, Chandler is
correct that ‘diversified strategies require more complex divisional structures’. What he suggests
about ‘complex divisional structures’ I posit, can be best supported by ambidextrous
organization structures, especially for firms competing internationally.
Q Discuss generic competitive strategies evolved by porter.
Porter's Generic Strategies
In his 1980 classic Competitive Strategy: Techniques for Analysing Industries and Competitors, Porter simplifies the scheme by reducing it down to the three best strategies. They are cost leadership, differentiation, and market segmentation (or focus). Market segmentation is narrow in scope while both cost leadership and differentiation are relatively broad in market scope.
Empirical research on the profit impact of marketing strategy indicated that firms with a high market share were often quite profitable, but so were many firms with low market share. The least profitable firms were those with moderate market share. This was sometimes referred to as the hole in the middle problem. Porter’s explanation of this is that firms with high market share were successful because they pursued a cost leadership strategy and firms with low market share were successful because they used market segmentation to focus on a small but profitable market niche. Firms in the middle were less profitable because they did not have a viable generic strategy.
Combining multiple strategies is successful in only one case. Combining a market segmentation strategy with a product differentiation strategy is an effective way of matching your firm’s product strategy (supply side) to the characteristics of your target market segments (demand side). But combinations like cost leadership with product differentiation are hard (but not impossible) to implement due to the potential for conflict between cost minimization and the additional cost of value-added differentiation.
Since that time, some commentators have made a distinction between cost leadership, that is, low cost strategies, and best cost strategies. They claim that a low cost strategy is rarely able to provide a sustainable competitive advantage. In most cases firms end up in price wars. Instead, they claim a best cost strategy is preferred. This involves providing the best value for a relatively low price.
Q What do you understand and by Competitive Advantage? How can a firm achieve it and sustain it? Discuss it with reference to any organization.
Competitive Advantage
When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage.
Michael Porter identified two basic types of competitive advantage:cost advantagedifferentiation advantage
A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.
Cost and differentiation advantages are known as positional advantages since they describe the firm's position in the industry as a leader in either cost or differentiation.
A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. The following diagram combines the resource-based and positioning views to illustrate the concept of competitive advantage:
A Model of Competitive AdvantageResources
DistinctiveCompetencies
Cost AdvantageorDifferentiation Advantage
ValueCreation
Capabilities
Resources and Capabilities
According to the resource-based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear.
Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. The following are some examples of such resources:Patents and trademarksProprietary know-howInstalled customer baseReputation of the firmBrand equity
Capabilities refer to the firm's ability to utilize its resources effectively. An example of a capability is the ability to bring a product to market faster than competitors. Such capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult for competitors to replicate.
The firm's resources and capabilities together form its distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage.
Cost Advantage and Differentiation Advantage
Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure or a differentiated product. A firm positions itself in its industry through its choice of low cost or differentiation. This decision is a central component of the firm's competitive strategy.
Another important decision is how broad or narrow a market segment to target. Porter formed a matrix using cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic strategies that the firm can pursue to create and sustain a competitive advantage.
Value Creation
The firm creates value by performing a series of activities that Porter identified as the value chain. In addition to the firm's own value-creating activities, the firm operates in a value system of vertical activities including those of upstream suppliers and downstream channel members.
To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than do competitors. Superior value is created through lower costs or superior benefits to the consumer (differentiation).
Short note on WTO
is an international organization designed to supervise and liberalize international trade. The WTO came into being on January 1, 1995, and is the successor to the General Agreement on Tariffs and Trade (GATT), which was created in 1947, and continued to operate for almost five decades as a de facto international organization.
The World Trade Organization deals with the rules of trade between nations at a near-global level; it is responsible for negotiating and implementing new trade agreements, and is in charge of policing member countries' adherence to all the WTO agreements, signed by the bulk of the world's trading nations and ratified in their parliaments. Most of the WTO's current work comes from the 1986-94 negotiations called the Uruguay Round, and earlier negotiations under the GATT. The organization is currently the host to new negotiations, under the Doha Development Agenda (DDA) launched in 2001.
The WTO is governed by a Ministerial Conference, which meets every two years; a General Council, which implements the conference's policy decisions and is responsible for day-to-day administration; and a director-general, who is appointed by the Ministerial Conference. The WTO's headquarters are in Geneva, Switzerland.
Franchising (from the French for honesty or freedom) is a method of doing business wherein a "franchisor" licenses proven methods of doing business to a "franchisee" in exchange for a recurring payment, fees and a percentage of sales or profits. Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor, and may indeed be required by the franchisor, which generally requires audited books, and may subject the franchisee or the outlet to periodic and surprise spot checks. Failure of such tests typically involve non-renewal or cancellation of franchise rights.
According to Financial Times, if sales by US franchise businesses were translated into national product, they would qualify as the 7th largest economy in the world.
The term "franchising" is used to describe business systems which may or may not fall into the legal definition provided above. For example, a vending machine operator may receive a franchise for a particular kind of vending machine, including a trademark and a royalty, but no method of doing business. This is called "product franchising" or "trade name franchising".
A franchise agreement will usually specify the given territory the franchisee retains exclusive control over, as well as the extent to which the franchisee will be supported by the franchisor (e.g. training and marketing campaigns).
Advantages
Quick start
As practiced in retailing, franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators). A well run franchise would offer a turnkey business: from site selection to lease negotiation, training, mentoring and ongoing support as well as statutory requirements and troubleshooting.
Expansion
After their brand and formula are carefully designed and properly executed, franchisors are able to expand rapidly across countries and continents, and can earn profits commensurate with their contribution to those societies. Additionally, the franchisor may choose to leverage the franchisee to build a distribution network.
Training
Franchisors often offer franchisees significant training, which is not available for free to individuals starting their own business.
Disadvantages
Control
For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, marketing, the franchisee is required to follow the system and get approval for changes from the franchisor. For these reasons, franchisees and entrepreneurs are very different.
Price
It can be expensive. Because of standards set by the franchisor, the franchisee often has no choice as to signage, shop fitting, uniforms etc. and may not be allowed to source less expensive alternatives. Added to that is the franchise fee and ongoing royalties and advertising contributions. The franchisee may also be contractually bound to spend money on upgrading or alterations as demanded by the franchisor from time to time.
In response to the soaring popularity of franchising, an increasing number of communities are taking steps to limit these chain businesses and reduce displacement of independent businesses through limits on "formula businesses."
Conflicts
Another problem is that the franchisor/franchisee relationship can easily cause conflict if either side is incompetent (or not acting in good faith). For example, an incompetent franchisee can easily damage the public's goodwill towards the franchisor's brand by providing inferior goods and services, and an incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits.
