The senior management teams of multinational organizations, particularly in the United States of America, Europe, and Asia, are in agreement that globalization is the most significant obstacle they must overcome in the modern era. For these corporations it has become increasingly difficult to create internationalization strategies and determine which countries to do business with in the previous decade. Despite this, most corporations are continuing to their tried-and-true tactics for entering new markets, which prioritize standardization while allowing for a few local tweaks. Thus, many multinational firms are having difficulty developing viable strategies for emerging markets. With a growing economy and a booming emergent market, China is poised to preserve its position as the world’s largest economy for at least the next decade. As a result of China’s enormous market, global corporations are increasingly looking to enter the country as their principal entry point into emerging markets.
Internationalization is the process through which a company expands its reach outside the borders of its home market. A company’s growth may be greatly accelerated by expanding into new markets outside of its home country. The multi-domestic strategy, the global strategy, and the transnational strategy are the three different types of internationalization strategies. Multi-domestic strategy does not put the emphasis on cost or efficiency, but rather on a company’s ability to respond quickly to local needs among each of its market segments. In the multi-domestic business strategy, the company invests in establishing itself in a foreign market and customizing its goods to that market’s specific needs and preferences. In order to reach a global market, companies must alter their goods and services as well as their marketing approaches. This involves taking into consideration foreign conventions, traditions, and cultural aspects.
Global strategy forgoes the ability to respond quickly to changes in local markets in favor of lower operating costs and increased productivity. Contrary to the multi-domestic strategy, it concentrates only on the market in the immediate vicinity. It also emphasizes the necessity of cheap pricing and economies of scale by providing almost identical items or services in each market. A transnational strategy finds a medium ground between a global strategy and a multi-domestic plan for the company utilizing it. Such a company seeks to strike a balance between the demand for reduced costs and efficiency and the necessity to adapt to local tastes across different countries.
Some of the advantages of internationalization strategy include expanded market size and development of new markets, enhanced competitive advantage by location, worldwide brand awareness and global customer satisfaction. Some disadvantages to consider while implementing an internationalization approach, include increasing prices, impediments to commerce, and reduced sensitivity to local demand.
Strategies at Different Levels of the MNC: Corporate Level
The business areas in which your company intends to operate are defined by the company’s corporate strategy. The corporate level entails coordinating the allocation of resources across a variety of business units, no matter how closely linked or dissimilar they may be (Victory, 2021). Some of the MNC’s corporate-level strategies include the following:
The stability strategy calls for the company to keep operating in its current business and product markets. Additionally, the company will keep its level of effort at the same level it is now operating, since it is content with its rate of marginal growth. If the MNC is doing well under this existing paradigm, this plan presume it will continue to do so. An uncertain growth path in China calls for a stable approach that involves techniques such as R&D and product innovation to assure incremental advancement while still generating income.
This strategy involves reassessing the firm’s operations with the goal of expanding the capacity and scope of commercial operations while significantly boosting the total amount invested in the organization. To use this strategy, it is necessary that the MNC is operating in a region with a robust economy, such as China, or that its primary goal is to increase its market share.
Due to the company’s financial difficulties, the retrenchment plan is used to reduce the number of business operations that are carried out. In certain cases, the business itself is sold or liquidated and is no longer viable. This may imply that a company’s production has been halted or that its functioning has been reduced. Thus, this strategy is only employed when the corporation wants to take preventative actions in order to keep the business solvent.
This strategy integrates any or all of the three corporate strategies in order to meet the needs of the company. It is possible that the company will decide to consolidate some of their operations while expanding in others and scaling back in others. Its primary objective is to improve the performance of the company and to identify those aspects of the business that can expand or contract in response to changes in market conditions. MNCs have greater flexibility in allocating time and resources to each of the functions of their strategy when they employ this technique.
Strategic business units and distinct product markets are the focus of business level strategies, which are developed for specific business units. A strategic business unit’s competitive position is defined through this process. Some of the MNC’s business-level strategies include:
Cost Leadership Strategy
Customers’ behaviors are used to determine the best price for a product as part of the cost leadership strategy. A company that implements a cost leadership strategy is compelled to examine the expenses associated with the production process. These costs are significant because they determine the price point at which the company can sell its product while still generating a profit. The purpose of this tactic is to undercut competitors who have higher price points by discovering the most cost-effective approach to market and sell a product to clients, hence gaining a competitive advantage.
The low-cost strategy prioritizes sales to specific businesses or markets over sales to the general public as its primary target audience. This tactic is utilized in a manner somewhat similar to that of cost leadership; however, instead of undercutting competitors’ prices, the goal is to make the user appear to businesses as a more appealing and cost-effective option to purchase from.
With the differentiation approach, a company’s odds versus rivals are improved by focusing more on the quality of the product rather than its price. There are a number of criteria that can be implemented by organizations who aim to attract customers based on quality rather than price.
The integrated approach makes use of the primary components of low-cost and differentiation methods to produce a product of mid-level quality. Customers that are looking for the next best thing at a lesser price than high-quality things can be interested in a firm that employs this strategy.
An organization’s functional level strategies refer to the several departments within a strategic business unit, including production and operations, finance, marketing, and human resources. Some of the functional level strategies include:
Identifying customers’ requirements and providing products and services that meet those needs is the primary goal of marketing. When it comes to a company’s marketing strategy, its marketing mix is the most critical component. It encompasses aspects such as the product, pricing, place, promotion, people, process, and physical proof.
Acquisition, planning, exploitation, and control over business finances are all part of a corporation’s overall financial strategy. Raising capital, generating budgets, identifying funding sources and applying funds, making investments, acquiring assets, managing working capital, paying dividends, estimating a company’s net worth, and so on are all part of this process.
Human Resource Strategy
Personnel policy describes how an organization tries to help employees grow professionally while also providing the conditions for their success at work. To choose the best employee for a specific position also falls within this definition. It coordinates all aspects of human resources management, including hiring, training, development, retention, and contacts with labor unions.
The production strategy of a company concentrates on the management of the complete manufacturing system, as well as logistics, supply chain management, and operational planning and control. The fundamental goal of the production strategy is to improve product quality, increase output, and lower production costs.
Importance and Implications of the External Environments for the Management of International Firms
It is impossible for businesses to manage macroeconomic elements that affect the global economy; yet, these macroeconomic issues can have a significant impact on the success of enterprises both nationally and internationally (Summer, 2021). An examination of China’s external business environment will make use of the PESTEL framework. International companies entering emerging countries have a variety of challenges, and PESTEL is a framework for assessing such challenges in terms of their potential impact on their business, including political, economic, social, technological, legal, and environmental considerations.
Political factors refer to how much a country’s government has an effect on a certain business or economy sector. Quotas, Tariffs, embargoes, and other limitations imposed by the government can have an impact on the global environment. As a punitive measure against China’s home market, the Indian government has banned 118 Chinese apps due to China’s rising military confrontation with India along the Kashmir border. This resulted in a significant loss of revenue for Chinese internet companies because India is a major market with an estimated 345.92 million smartphone users (Yasir, and Kumar, 2020). These political conflicts make it difficult for businesses to strategically plan their moves since it is difficult to predict how China and India, or even countries that are associated with India, will interact in the future.
It is important to remember that economic considerations have an impact on businesses because they determine how well the economy is doing. The GDP of a country, has a significant bearing on the economy (Fagan, 2019). With a GDP of USD 14.86 trillion and a recent growth rate of above 14% (O’Neill, 2022), China’s economy has demonstrated amazing strength. China is also the world’s most populous country, with a quality infrastructure index of 4.53, indicating that the country is a desirable place for foreign investment (Worldometers, 2021). This results in a greater mobility of resources across China’s borders and is attractive to multinational corporations that are considering shifting their operations to China. It is because of this dependence on China that China’s GDP continues to increase.
China had a population of 1.39 billion, which caused them to be cautious with their population growth rate. As a result, they implemented a one-child policy, which led to a number of issues in subsequent years (Textor, 2022). Due to a decline in the country’s birth rate, China may no longer be the world’s second-largest economy due to the fact that a smaller population implies less entitlement spending, which would have a significant impact on China’s growth (Worldometers, 2021). The original policy has been replaced by a two-child policy, and China has given incentives for families to minimize the obligation of having another child (Zheng Fa, 2018). This, however, may not be sufficient for Chinese companies, as a diminishing pool of workers would cause China’s wages to rise. As a result, international companies may decide to relocate to countries with lower labor costs.
The technological aspect, which relates to technological advancement, is quite important. Because of the worldwide Covid-19 outbreak, it is strongly recommended that everyone remain indoors (Baker, 2020). This has sparked a wider range of technologies, from satellites to robotics to e-commerce, to use this technology. China’s corporate and consumer communities are increasingly turning to online shopping in the wake of the Covid-19 outbreak.
As a result of China’s rapid industrialization to meet the needs of the global market, pollution has become a major concern in China. The rise of the middle class in China has resulted in an increase in the number of individuals able to afford cars, which has resulted in an increase in air pollution (Kharas and Dooley, 2020). For instance, China is a country that is home to more than 300 million automobiles, which are responsible for approximately 45% of the air pollution (Wang et al., 2019). A country’s progress toward environmental health is therefore shown to have an international impact.
Policies and laws affecting a firm or an industry are referred to as legal factors. Uighur and Muslim minorities are suspected of being compelled to work in cotton fields, which has resulted in Calvin Klein company cutting relations with factories that utilize cotton from Xinjiang costing China’s cotton suppliers’ significant revenues (Dou, 2020). As a result, Huafu Fashion reported a loss of USD 62.5 million (Dou et al., 2021). This demonstrates that globalization has the potential to stop the violation of human rights that a society is entitled to but is unaware of it.
Theoretical Approaches: Theory of Transaction Costs
According to transaction cost theory, foreign multinational corporations (MNCs) should select the most cost-effective strategy of entering a new market. An MNC’s proprietary know-how, which may be spread when it licenses or transfers it to another company to make or market a product, is one factor that contributes to this cost. It is not uncommon for corporations to incur higher transaction costs since they must control the behavior of those who signed the contracts. Complex and uncertain markets are filled with people who have limited rationality and tend to take advantage of opportunities when they arise, therefore transaction costs are likely to be non-trivial. Profits from proprietary know-how often led companies to prefer a more control-oriented structure such as a wholly owned subsidiary since it reduces transaction costs by centralizing operations within the company.
Forsgren’s Institutional Theory
Entering the overseas market is not just about creating business relationships with clients and vendors, but rather gaining legitimacy from the surrounding society under Forsgren’s institutional theory. Many scholars have found evidence to support the hypothesis that foreign multi-national corporations (MNCs) were able to gain legitimacy in developing nations by selecting an entrance mode that was permitted by the local institutional environment. Government intervention, norms, and regulations make up the institutional environment. MNC strategy and operations in the host country are severely constrained by a host government’s intervention policy, and the government agencies may employ authoritative directives or legal forces to directly control the behavior of companies, or provide incentives and instructions to influence their actions.
Due to the unique characteristics of China’s economy and its long-term trajectory, it can be assumed that, unlike other important emerging markets, China would be unlikely to join the group of developed markets within the next decade or more. For international investors, China is still an appealing market, but its development and willingness to accept foreign investors cannot be predicted. It’s impossible to plan long-term in the market because of the state’s large involvement in the industry and the irregular reforms that are frequently implemented. As a result, even if it is never implemented, an exit strategy should be in place. The following business success techniques should be kept in mind while the market is in its infancy:
- The market must be thoroughly analyzed before deciding on the best strategy for entering and succeeding in the industry.
- A winning strategy for this market needs to take into account all marketing methods that do not conflict with government policies or the cultural norms of the natives.
- Always be prepared to leave the situation by having a contingency plan in place.
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