Major Challenges Facing Multinational Enterprises Economics Essay
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Published: Mon, 5 Dec 2016
Porter’s notes that ‘firms, not individual nations, compete in international markets’. How does this statement help to explain some of the major challenges facing MNE’s .How do the determinants of national competitive advantage help explain how companies can maintain their economic competitiveness?
Porter’s note that firms and not individual nations compete in the international market is a very valid statement that cannot be overemphasized. The involvement of nations in the international market is to weigh and justify their existence in terms of the total output of production from the nation. A nation with a high production rate will be rated high in terms of its GDP which is the market value of the total amount of goods and services made within the borders of that particular country in a calendar year. This makes nations to encourage firms to establish in their countries while they provide a conducive environment for such firms to operate. These firms are always beneficiary to the people of the nation by providing employment, goods and services, income to the government, etc.For example, Toyota is an automobile company in Japan, but its success internationally was achieved as a firm based or located in Japan, it’s not Japan as a country competing in the industry just that it offers a conducive environment for their operation. Same is the case of BMW and Mercedes Benz in Germany.
However, firms’ not individual nation competes in international market (Porter’s; Competitive Advantage of firm in Global industries) and thus faces various challenges to have a competitive advantage over other firms in the same industry. Some of the major challenges firms faces includes; economic weakness, cultural adaptation, price competition, terrorism, higher expense, environmental concern, change of government/regulation problems, health problems/hazard, government policies etc. The extent to which these problems affect firms could be based on the structure of the industry or on the positioning of a firm within the industry. In another hand, some challenges are encountered in an altered environment in foreign nations at the same time. The alteration in the system of the environments which could bring in the changes can be analysed and divided into various aspects using the PESTEL ANALYSIS; namely, political system, economic environment, social/cultural environment, technological advancement and legal environment issues. All the changed environments generate various challenges to multinational companies. In particular, challenges generated by changed cultural environment cannot be undermined because it could be seen as one of the most severe aspect of running a multinational business. (http://www.oppapers.com/essays/Discuss-Management-Problems-Facing-Multinational-Companies/120224)
MNE in various industries in nations faces different challenges. This could be explained with the Porters five competitive force where all these challenges are embodied.
These five competitive forces determine the level of competitiveness and the structure of various industries. It could also be used to explain major challenges facing MNE. Porter’s five forces is a structure for the industry breakdown and business strategy development. Three of Porter’s five forces could be seen as competition from the external while the remaining two are internal threats. Five Forces Analysis assumes that there are five vital forces that verify competitive power in circumstances in the industry which are:
1. The threat of new entrants: if there are few economies of scale in place, or if you have slight protection for your key technologies, it becomes easier for new competitors to quickly enter your market and weaken your position. If you have well-built and durable barriers to entry, then you can preserve a favourable position and take fair advantage of it.
2. The threat of substitute products or services: The strength or the weakness of the substitute product determines its threat to the existing product.
3. The bargaining power of suppliers: The smaller number of supplier choices you have and the more you become subject to the suppliers, the more powerful and relevant your suppliers become. Problem arises when supplier feels they can make the organisation stranded if they don’t dance to their tune.
4. The bargaining power of buyers: This is where the marketing strategy of the organisation, must come in. The higher the bargaining power of the firm, the higher the profit made. Buyers will always want to drive the price down and wanting to sell on the high side to make good profit. Again, this is determined by the volume of buyers, the significance of each individual buyer to your organisation, the cost to them of switching from your products and services to substitutes, and so on. If you make transaction with few dominant buyers, they are often able to dictate terms to you.
5. The rivalry between the existing competitors: Rivalry in business in very normal because it gives room for firms to improve in the quality and quantity of product been produced or services been rendered to have a competitive advantage over other competitors in the market. Using the SWOT analysis, we will see that the strength and the weakness of any organisations make or mar it in situation of serious rivalry. However,’ if no-one else can do what you do, then you can often have tremendous strength’. (http://www.mindtools.com/pages/article/newTMC_08.htm)
In another vein, Porters determinant of national competitive advantage could help to explain how companies can maintain their economic competitiveness. Progressively, more corporate strategies have to be looked at from a global perspective. Even if a firm does not intend to go into foreign trade or do its imports or exports directly, a structure has to be put in place to fit into the international business outfit where activity of buyers, sellers, new entrants or substitute services or products provider could curtail even in the local market.
Michael Porter introduced a model that is useful in analyzing competitiveness amongst nations and amongst industries within nations. This model is used as a determinant factor of national advantage and is known as the Porters Diamond.
It postulates that the role played by an organizational home base is significant, dictating the level at which competitive advantage on the global scale can be achieved.Basic factors are provided by the home base, which could make or mar the efforts of organizations in building advantages in global competition. Porter distinguishes four determinants which are shown in the diagram below.
This has to do with the availability of the basic factors of production as learnt in the elementary economics such as availability of skilled labour, infrastructural facilities which will technologically give room for competition in the specific industry,etc. Considering these factors, we can classify them into basic units such as human resources (availability and cost of getting skilled labour), material resources (mineral resources which serves as raw material), capital resources and social resources/amenities (accessibility to internet, good road network). Also included are factors like quality of research in higher institutions, deregulation of labor markets, and liquidity of national stock markets,etc
These national determinants often produce initial advantages for companies, and eventually, serve as frameworks which are subsequently built upon. Each nation has its own determinant factors thus; nations develop those strategic industries for which the set of factor conditions optimizes its competitive edge. This explains the existence of low-labor-cost-nations), agricultural countries (large countries with fertile soil), or the nascent culture in the United States (well developed venture capital market).
Home Demand Conditions
This is explained as the state of home demand for products and services produced in a nation. Home demand conditions influence the structuring of particular factor conditions. These impact on the pace and direction of innovation and product development. According to Porter, home demand is basically determined by three major characteristics: their mix (the blend of customers needs and wants), their scope and growth rate, and the mechanisms which transmit domestic preferences to foreign markets.
According to Porters, national advantages could be achieved by a nation in an industry or market segment if home demand provides clearer and earlier signals of demand trends to home suppliers than to foreign competitors. Ideally, home markets have a much higher influence on an organization’s abilities to be familiar with customer’ needs than international markets do.
Related and Supporting Industries
This is the availability or non-availability of internationally competitive supplying and supporting industries.
A specific internationally successful industry may cause advantages in other related or supporting industries. Competing supplying industries reinforce innovation and internationalization in the industrial system at later stages in the value system. Moreover the suppliers’ related industries are also significant. These industries are those that can manage particular activities in the value chain together, or, those that are concerned with complementary products (e.g. hardware and software).
A good example is the Italian shoe and leather industry. Italy is not only successful with shoes and leather, but with other related products and services such as leather working machinery, design, etc.
Firm Strategy, Structure, and Rivalry
These are determining conditions in a country that dictate how companies are established, organized, managed, they also determine the characteristics of domestic competition
In these, cultural aspects play a significant role, factors like management structures, working morale, or interactions between companies are shaped differently in different nations. This gives advantages and disadvantages from particular industries to another.
Corporate objectives are typically of special magnitude in relation to patterns of commitment among workforce, they are heavily influenced by frame work of ownership and control. i.e. Family-business based industries that are dominated by owner-managers will behave differently than publicly quoted companies.
Porter argues that home rivalry and the pursuit of competitive advantage within a nation can help provide organizations with basis for achieving such advantage on a more global scale. More so, economic advantage could be achieved through strategy of lower cost of product and differentiation where differentiation could be described as the uniqueness in value of product, its quality, features, and after sales services. (http://www.themanager.org/models/diamond.htm)
Conclusively, critically looking into the porters’ diamond, it is clear that its application cannot be over emphasized. Organizations may use the model to identify the extent to which they can build on home-based advantages to create competitive advantage in relation to other industries on a global front. The progress of any organization is dependent on the structure of the industry and the positioning of the firm in that industry.Ultimately, nations could help in their own capability by creating a kind of environment that is conducive for business transaction which stimulates firms to upgrade and widen their advantage over time. Barriers to entry only could not solve the problem of competition but barrier to imitation will really help the growth of organizations and encourages innovations.
Porter, M. (1980a), How Competition Forces Shape Strategy, Harvard Business Review, September-October, pp.137-145.
Porter, M. (1980b) Competitive Strategy, New York: Free Press.
Porter, M.E., Ed Competition in Global industries.Boston.Harvard business school press, 1986.
Porter, M. (1998) Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: Free Press.
O’Shaughnessy, N. (1996), Michael Porter’s revisited, Management Decision, Vol. 34 Issue 6, pp.12-20.
Porter, M. (1979) how competitive forces shape strategy, Harvard Business Review, Vol. 57 Issue 2, pp.5-8.
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