Saturday, July 26, 2008

Reasons for Growth of multinational enterprise

There are various forces driving the growth of MNCs:

The search for growth markets
Globalisation of markets
Desire to reduce production costs
Desire to shift production to countries with lower unit labour costs
Desire to avoid transportation costs
Desire to avoid tariff and non tariff barriers
Forward vertical integration
Extension of product life cycles
Deregulation of capital markets

Key features of globalisation

Rapid expansion of international trade
Internationalisation of products and services by large firms
Growing importance of multinational corporations
Increase in capital transfers across national borders
Globalisation of technology
Shifts in production from country to country
Increased freedom and capacity and firms to undertake economic transactions across national
Fusing of national markets
Economic integration
Global economic interdependence

What is globalisation?

Globalisation is a business philosophy based on the belief that the world is becoming more homogeneous - national distinctions are fading and will eventually disappear.
Globalisation is an increase in interconnectedness and interdependence of economic activity and social relations.
If the world is homogeneous then companies need to think globally and standardise their strategy across national boundaries.

Global business - competitiveness

International competitiveness
This refers to the ability of a country (or firm) to provide goods and services which provide better value than their overseas rivals. This is competitive advantage but on a international scale. As there is constant threat from foreign competition it is essential for business to strive to improve competitiveness.
Some determinants of International competitiveness
Price relative to competitors
Productivity - output per worker
Unit costs
State of technology
Investment in capital equipment
Lead time
Exchange rate
Relative inflation
Tax rates
Interest rates
Increasing competitiveness-Firms can increase their international competitiveness by:
Rationalisation output to get rid of high cost plants
Relocating to places where labour costs are lower
Process innovation
Product innovation
Incorporating the latest technology into investment
Sourcing from abroad where appropriate
Seeking out new market opportunities
Improving relationships with suppliers and customer
Government’s role to improve international competitivenessGovernments seek policies which aim to:
Encourage R&D spending (e.g. through tax breaks)
Improve the skills base
Improve the economic infrastructure
Promote competition between firms
Operate macro-economic policies favourable to business expansion
Reduce interest rates to stimulate investment
Reduce tax rates to stimulate enterprise, effort and investment
Deregulation to promote competition
Reduce bureaucracy
Encourage sharing of ideas and best practice
Reduce protectionist barriers to stimulate competition
Encourage investment in human capital

Porter Five forces model

Defining an industry

An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry).
Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of competitive structure in an industry.
The most influential analytical model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model, which is described in the beginning :

Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability. These five "competitive forces" are
- The threat of entry of new competitors (new entrants)- The threat of substitutes- The bargaining power of buyers- The bargaining power of suppliers- The degree of rivalry between existing competitors

Threat of New Entrants
New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include
- Economies of scale- Capital / investment requirements- Customer switching costs- Access to industry distribution channels- The likelihood of retaliation from existing industry players.

Threat of Substitutes
The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on:
- Buyers' willingness to substitute- The relative price and performance of substitutes- The costs of switching to substitutes

Bargaining Power of Suppliers
Suppliers are the businesses that supply materials & other products into the industry.
The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when:
- There are many buyers and few dominant suppliers- There are undifferentiated, highly valued products- Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)- Buyers do not threaten to integrate backwards into supply- The industry is not a key customer group to the suppliers

Bargaining Power of Buyers
Buyers are the people / organisations who create demand in an industry
The bargaining power of buyers is greater when
- There are few dominant buyers and many sellers in the industry- Products are standardised- Buyers threaten to integrate backward into the industry- Suppliers do not threaten to integrate forward into the buyer's industry - The industry is not a key supplying group for buyers
Intensity of Rivalry
The intensity of rivalry between competitors in an industry will depend on:
- The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader
- The structure of industry costs - for example, industries with high fixed costs encourage competitors to fill unused capacity by price cutting
- Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry
- Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier
- Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less
- Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry.

SWOT analysis

SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats

SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment.

Once key strategic issues have been identified, they feed into business objectives, particularly marketing objectives. SWOT analysis can be used in conjunction with other tools for audit and analysis, such as PEST analysis and porter five force model. It is also a very popular tool with business and marketing students because it is quick and easy to learn.

The Key Distinction - Internal and External Issues
Strengths and weaknesses are Internal factors. For example, a strength could be your specialist marketing expertise. A weakness could be the lack of a new product.

Opportunities and threats are external factors. For example, an opportunity could be a developing distribution channel such as the Internet, or changing consumer lifestyles that potentially increase demand for a company's products. A threat could be a new competitor in an important existing market or a technological change that makes existing products potentially obsolete.

it is worth pointing out that SWOT analysis can be very subjective - two people rarely come-up with the same version of a SWOT analysis even when given the same information about the same business and its environment. Accordingly, SWOT analysis is best used as a guide and not a prescription. Adding and weighting criteria to each factor increases the validity of the analysis.