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 statement that is very valid and cannot be overemphasized. The involvement of nations in the international market is just to weigh and to justify their existence in terms of the total output in term 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 conducive environment for such firms to operate. These firms are always beneficiary to the people of the nation by providing employments, goods and services, income to the government, and most importantly increase the GDP of the nation. The standard of living of people in the nation increases by a reasonable income per capita.
However, firms’ not individual nation competes in international market (Porter’s; competitive advantage) and faces various challenges to have a competitive advantage over other firms in the same industry.
Competitiveness is often confused with productivity. Productivity refers to the internal capability of an organization, while competitiveness refers to the relative position of an organization against its competitors. These two important concepts are often confused and interchangeably used. For example, in his famous book, The Competitive Advantage of Nations. Porter (1990, p. 6) says that the only meaningful concept of competitiveness at the national level is national productivity. Competitiveness may also have a distinctly different meaning at different levels of analysis — product, firm, industry, and nation. Porter (1990, p. 33) says that the basic unit of analysis for understanding competition is the “industry,” while the title of his book refers to “nations.” He also says that firms, not nations, compete in international markets. (http://www.emeraldinsight.com/10.1108/eb046319 )
To grow to the level of becoming a MNE, the company must have achieved to an extent in its home country before extending the production/services to the other country. In modern international competition, firms need not to be confined to their home nation; they can compete with global strategies in which activities are located in many countries (Michael .E. Porter, The Competitive Advantage of Nations). In achieving this, lot of things have to be put in place and various principles regarding to location of an industry have to be considered.
There are various challenges been faced by multinational companies but first and foremost, I will like to explain what a multinational company is, and what it entails for a company to be a multinational. Moreover, I will like to look into reasons why companies go multinational and considering the major challenges they will have to overcome, using typical examples.
Mullti-national Corporation (MNC) or transnational corporation (TNC), also called multinational enterprise (MNE), is a corporation or enterprise that manages production or delivers services in more than one country. Multinational corporations (MNCs) are corporations that “own or control production or service facilities outside the country in which they are based.”(United Nations, 1973, P. 23) The rise of Globalisation has forced and enabled more companies to venture abroad in order to thrive for more profitability: bigger market, cheaper raw materials, and lower labour costs. However, MNCs have also noticed that the more countries they enter, the more ethical issues appear. At best, even when MNCs are dealing with one only one culture, they are already facing ethical difficulties; as they encounter two or more different cultures, it would become extremely problematical. http://www.cheathouse.com/essay/essay_view.php?p_essay_id=50620#ixzz0fA3KI9ss
Some of the major challenges firms faces includes; economic weakness, price competition, terrorism, higher expense, environmental concern, change of government/regulation problems, health problems/hazard, government policies etc. . By following the globalization campaign, multinational companies’ supply chains can be enriched, high costs work force can be transformed and potential markets can be expanded. Consequentially, competitive advantages of companies can be strengthened in a global market. Otherwise, some problems are met in the changed environments in foreign countries at the same time. The changed environments can be divided into four main aspects, namely, cultural environment, legal environment, economic environment and political system problems. All the changed environments make problems to multinational companies. In particular, problems which are caused by changed culture environment are the most serious aspect of running a multinational business. . (http://www.oppapers.com/essays/Discuss-Management-Problems-Facing-Multinational-Companies/120224)
Firms in various industries faces different challenges whether domestic or internatonal, this could be explained with the five competitive force where all the challenges are embodied. The five competitive forces according to Porters are:
- The threat of new entrants
- The threat of substitute products or services
- The bargaining power of suppliers
- The bargaining power of buyers
- The rivalry between the existing competitors.
These five competitive forces determine the level of competitiveness and the structure of various industries. Porter’s five forces is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. It uses concepts developing, Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An “unattractive” industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching “pure competition”.
Three of Porter’s five forces refer to competition from external sources while the remaining two are internal threats. For proper and qualitative understanding, it is useful to use Porter’s five forces in conjunction with SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats).
Five Forces Analysis assumes that there are five important forces that determine competitive power in a situation. These are:
- Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers’ help, the more powerful your suppliers are.
- Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, they are often able to dictate terms to you.
- Competitive Rivalry: What is important here is the number and capability of your competitors – if you have many competitors, and they offer equally attractive products and services, then you’ll most likely have little power in the situation. If suppliers and buyers don’t get a good deal from you, they’ll go elsewhere. On the other hand, if no-one else can do what you do, then you can often have tremendous strength.
- Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power.
- Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favourable position and take fair advantage of it. http://www.mindtools.com/pages/article/newTMC_08.htm
Nation’s role too could not be undermined in any international business. Using thePEST analysis (Political.Economical, Social and Technological), one will see that firms/industries can only flourish in areas where there is a stabilised political, economic, social, and technological activity. Considering the case of dell in Brazil, dell was at a point of dilemma just because of political issues (change of government). For multinational companies, political riskrefers to the risks been faced when a host country l make political decisions thatwill prove to have adverse effects on the multinational’s profits and/or goals. Adverse political actions can range from very detrimental,such as widespread destruction due to revolution, to those of a more financial nature, such as the creation of laws that prevent the movement of capital. For example,after Fidel Castro’s government took control of Cubain 1959,hundreds of millions of dollars worth of American-ownedassets and companies wereexpropriated.Unfortunately, most, if not all, of theseAmerican companies had no recoursefor getting any of that money back. (http://www.investopedia.com/ask/answers/06/politicalrisk.asp)
NATIONAL COMPETITIVE ADVANTAGE
- NEW TECHNOLOGY-new possibility of producing/design of new product
- NEW OR SHIFTING BUYER NEEDS-change in priority
- THE EMMERGENCE OF NEW INDUSTRY SEGMENT
- CHANGES IN GOVT REGULATIONS
- SHIFTING INPUT COSTS OR AVAILABILITY
How do the determinants of national competitive advantage help explain how companies can maintain their economic competitiveness?
Porter’s Diamond – Determining Factors of National Advantage
Increasingly, corporate strategies have to be seen in a global context. Even if an organization does not plan to import or to export directly, management has to look at an international business environment, in which actions of competitors, buyers, sellers, new entrants of providers of substitutes may influence the domestic market. Information technology is reinforcing this trend.
Michael Porter introduced a model that allows analyzing why some nations are more competitive than others are, and why some industries within nations are more competitive than others are, in his book The Competitive Advantage of Nations. This model of determining factors of national advantage has become known as Porters Diamond. It suggests that the national home base of an organization plays an important role in shaping the extent to which it is likely to achieve advantage on a global scale. This home base provides basic factors, which support or hinder organizations from building advantages in global competition. Porter distinguishes four determinants:
The situation in a country regarding production factors, like skilled labor, infrastructure, etc., which are relevant for competition in particular industries. These factors can be grouped into human resources (qualification level, cost of labor, commitment etc.), material resources (natural resources, vegetation, space etc.), knowledge resources, capital resources, and infrastructure. They also include factors like quality of research on universities, deregulation of labor markets, or liquidity of national stock markets.
These national factors often provide initial advantages, which are subsequently built upon. Each country has its own particular set of factor conditions; hence, in each country will develop those industries for which the particular set of factor conditions is optimal. This explains the existence of so-called low-cost-countries (low costs of labor), agricultural countries (large countries with fertile soil), or the start-up culture in the United States (well developed venture capital market).
Porter points out that these factors are not necessarily nature-made or inherited. They may develop and change. Political initiatives, technological progress or socio-cultural changes, for instance, may shape national factor conditions. A good example is the discussion on the ethics of genetic engineering and cloning that will influence knowledge capital in this field in North America and Europe.
Home Demand Conditions
Describes the state of home demand for products and services produced in a country.Home demand conditions influence the shaping of particular factor conditions. They have impact on the pace and direction of innovation and product development. According to Porter, home demand is determined by three major characteristics: their mixture (the mix of customers needs and wants), their scope and growth rate, and the mechanisms that transmit domestic preferences to foreign markets.
Porter states that a country can achieve national advantages in an industry or market segment, if home demand provides clearer and earlier signals of demand trends to domestic suppliers than to foreign competitors. Normally, home markets have a much higher influence on an organization’s ability to recognize customers’ needs than foreign markets do.
Related and Supporting Industries
The existence or non-existence of internationally competitive supplying industries and supporting industries.
One internationally successful industry may lead to advantages in other related or supporting industries. Competitive supplying industries will reinforce innovation and internationalization in industries at later stages in the value system. Besides suppliers, related industries are of importance. These are industries that can use and coordinate particular activities in the value chain together, or that are concerned with complementary products (e.g. hardware and software).
A typical example is the shoe and leather industry in Italy. Italy is not only successful with shoes and leather, but with related products and services such as leather working machinery, design, etc.
Firm Strategy, Structure, and Rivalry
The conditions in a country that determine how companies are established, are organized and are managed, and that determine the characteristics of domestic competition
Here, cultural aspects play an important role. In different nations, factors like management structures, working morale, or interactions between companies are shaped differently. This will provide advantages and disadvantages for particular industries.
Typical corporate objectives in relation to patterns of commitment among workforce are of special importance. They are heavily influenced by structures of ownership and control. Family-business based industries that are dominated by owner-managers will behave differently than publicly quoted companies.
Porter argues that domestic rivalry and the search for competitive advantage within a nation can help provide organizations with bases for achieving such advantage on a more global scale.
Porters Diamond has been used in various ways.
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 others on a global front.
On national level, governments can (and should) consider the policies that they should follow to establish national advantages, which enable industries in their country to develop a strong competitive position globally. According to Porter, governments can foster such advantages by ensuring high expectations of product performance, safety or environmental standards, or encouraging vertical co-operation between suppliers and buyers on a domestic level etc.