Essay: How and why firms become multinationals enterprise?

Explain how and why firms become multinationals enterprise:

A firm becomes a Multinational when it decides to go across by national boundaries of business and get transferred to countries out of its own. This is an act wherein the company is expanding its origin for more prospects of business. While doing so culture of the other country is to be adapted to the business operations so that that particular consumer can be served. For example when McDonald’s cam to Indian ,it launched “Aloo Tikki “ burger a flavor that is customized to the Indian consumers.

Some MNCs see such a culture is coming up to solve problems posed by situations that people encounter in organizational settings or expansion to other countries ; yet others see a culture as the ways in which people cope with experience. Many talk of it as’ social glue’. Those who express affection to the idea of a foreign country culture say that what it does is sensitize people to the softer, less tangible, more better aspects of customer’s life. Talking about culture seems to mean talking about the importance for people of symbolism – of rituals, myths, stories, and legends – and about the understanding of events, ideas and experiences that are effect and shaped by the group within which they live. This is critical to be understood before a company tries to become an MNC. This approach draws people’s attention to the company and the meanings attached to them, and to know the history, of the past this organizations having a bearing on the present and the future of the organizations’. Many ideas about culture and their role in MNC expansion seem to be shared by organizational researchers, there are important differences. Aaker, David and Joachimsthaler, E. (1999).

2. Why is the technology contribution of multinationals is potentially is so important for developing countries ?which factor will determine whether or not the transferred technology actually provide the benefit for the host developing countries.?

The fact that technology is very important is because for any company to become an MNC it has to first see the compatibility of its present technology with the one in the other country. In marketing, positioning has come to mean the process by which marketers try to create an image or identity in the minds of their target market for its product, brand, or organization. It is the ‘relative competitive comparison’ their product occupies in a given market as perceived by the target market. This can sometimes only be achieved by technological leadership. Another way technology helps is differentiation.Analyzing differentiation requires looking at both the firm (the supply side) and its customers (the demand side). While supply-side analysis identifies the firm’s potential to create uniqueness, the critical issue is whether such differentiation creates value for customers, and whether the value created exceeds the cost of the differentiation. Hence, in this chapter we shall be concerned especially with the demand side of the market. By understanding what customers want, how they choose, and what motivates them, we can identify opportunities for profitable differentiation. Differentiation extends beyond the physical characteristics of the product or service to encompass everything about the product or service that influences the value customers derive from it. This means that differentiation includes every aspect of the way in which a company relates to its customers. This value can be given by MNCs  as a brand to the people who look for authenticity of product. Agrawal, Madhu (1994).

In analyzing differentiation opportunities, we can distinguish tangible and intangible dimensions of differentiation. Tangible differentiation is concerned with the observable characteristics of a product or service that are relevant to customers’ preferences and choice processes. These include size, shape, color, weight, design, material, and technology. Thus here aging in the tangible segment of a product ,the MNC has to work on technology. Tangible differentiation also includes the performance of the product or service in terms of reliability, consistency, taste, speed, durability, and safety. Tangible differentiation extends to products and services that complement the product in question for the MNCs. The differentiation lies in the speed with which they are delivered, the flexibility with which customers can configure their own systems, and after-sales services including technical support, on-line training courses, repair service, upgrading service, and customer discussion forum – to mention but a few. Opportunities for intangible differentiation arise because the value that customers perceive in a product or service does not depend exclusively on the tangible aspects of the offering. Anon. (1979).

There are few products where customer choice is determined solely by observable product features or objective performance criteria. For example Gloke as a company has already differentiated itself on the tangible factors like the product and it is also good on the variety of products. Archawski, Jean-Loup (1995).

There are many a factors in a country which the MNCs have to see before launching a new technology. This includes the study of the business environment and risk analysis of the country. For this Porter’s fie forces analysis is critical. Archawski, Jean-Loup (1995).

Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy for technology should be to modify these competitive forces in a way that improves the position of the MNC. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, MNC can decide how to influence or to exploit particular characteristics of their industry like technology .

1. Rivalry

This force describes the intensity of competition between existing players (companies) in an industry. High competitive pressure results in pressure on prices, margins, technological development and hence, on profitability for every single company in the industry. Thus rivalry in this industry is vast and a good topic of study in the MNC context under consideration. Baalbaki, Imad B; Malhotra, Naresh K

Competition between existing players is likely to be high and technological need even higher to differentiate the product of the MNC when

• There are many players of about the same size,
• Players have similar strategies
• There is not much differentiation between players and their products, hence, there is much price competition
• Low market growth rates (growth of a particular company is possible only at the expense of a competitor),
• Barriers for exit are high (e.g. expensive and highly specialized equipment).

2. Threat of Substitutes

This force describes the intensity of competition between existing players (companies) in an industry. High competitive pressure results in pressure on prices, margins, technology , and hence, on profitability for every single company in the industry. Baalbaki, Imad B; Malhotra, Naresh K

Competition in technological innovation between existing players is likely to be high when

• There are many players of about the same size,
• Players have similar strategies
• There is not much differentiation between players and their products, hence, there is much price competition
• Low market growth rates (growth of a particular company is possible only at the expense of a competitor),
• Barriers for exit are high (e.g. expensive and highly specialized equipment)in the health industry.

3. Buyer Power

Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes. Also if the buyer cannot pay for the technology then their is no use brining it to the country while expansion

Customers bargaining power is likely to be high when

• They buy large volumes, there is a concentration of buyers,
• The supplying industry comprises a large number of small operators
• The supplying industry operates with high fixed costs,
• The product is undifferentiated and can be replaces by substitutes,
• Switching to an alternative product is relatively simple and is not related to high costs,
• Customers have low margins and are price-sensitive,
• Customers could produce the product themselves,
• The product is not of strategically importance for the customer,
• The customer knows about the production costs of the product
• There is the possibility for the customer integrating backwards.

4. Supplier Power

The term ‘suppliers’ comprises all sources for inputs that are needed in order to provide goods or services with an effective technology.

Supplier bargaining power is likely to be high when:

• The market is dominated by a few large suppliers rather than a fragmented source of supply,
• There are no substitutes for the particular input,
• The suppliers customers are fragmented, so their bargaining power is low,
• The switching costs from one supplier to another are high,
• There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high when
• The buying industry has a higher profitability than the supplying industry,
• Forward integration provides economies of scale for the supplier,
• The buying industry hinders the supplying industry in their development (e.g. reluctance to accept new releases of products),
• The buying industry has low barriers to entry.

In such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization. Baalbaki, Imad B; Malhotra, Naresh K

5. barriers to Entry

The competition in an industry will be the higher, the easier it is for other companies or MNCs to enter this industry. In such a situation, new MNCs could change major determinants of the market environment (e.g. market shares, prices, customer loyalty) at any time with their new technology. There is always a latent pressure for reaction and adjustment for existing players in this industry.

The threat of new entries and thus new technology of the product will depend on the extent to which there are barriers to entry. These are typically

• Economies of scale (minimum size requirements for profitable operations),
• High initial investments and fixed costs,
• Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets,
• Brand loyalty of customers
• Protected intellectual property like patents, licenses etc,
• Scarcity of important resources, e.g. qualified expert staff
• Access to raw materials is controlled by existing players,
• Distribution channels are controlled by existing players,
• Existing players have close customer relations, e.g. from long-term service contracts,
• High switching costs for customers
• Legislation and government action

Thus for any technological development to another country ,it is important to learn what the characteristic of the country, its business environment and consumer psyche and purchasing power is. Also the competition study is vital to decide on technology in a new country by the MNC. Baalbaki, Imad B; Malhotra, Naresh K