Multinational Corporation Strategy

Friday - 04/12/2020 15:50
What Are Two Strategies Commonly Used by Multinational Companies? A multinational company operates out of several countries. The parent company typically is based in the home country, and it sets up units in other countries called host countries.
Multinational Corporation Strategy
A multinational structure might be appealing to small businesses because a large amount of capital is not necessary to start. A multinational company could be one that moves some of its operations or sets up subsidiaries in other countries, or it could hire or partner with people from other countries. Two strategies multinational companies use to capture markets in other countries are vertical and horizontal expansions.

Vertical Expansion - Manufacturing

Vertical expansion occurs when multinational companies expand production processes to other countries. This strategy allows them to take advantage of factors such as the low costs of labor and raw materials, lower capital investment requirements and less stringent local laws and regulations. This means these companies can lower production costs and maximize profits. Some developing countries encourage multinational companies because of the innovative technology they bring to the host country and because they typically offer higher wages than the national average.

Vertical Expansion - Sales

Multinational companies also might expand by setting up sales units in host countries instead of marketing their products through local agencies. This allows the companies to ensure that their products reach their buyers and that they are in control of prices. Multinationals also may enter foreign markets when other brands offering the same products set up operations there. Competition makes it necessary for these companies to follow suit with units of their own. Multinational companies can give their sales units a level of autonomy, which allows them to operate and adapt their sales efforts according to market conditions in the host country.

Horizontal Expansion - Production

Often, multinational companies set up production units in other countries for the sole purpose of catering to the local market. They manufacture products in the host country for distribution in the same country. This helps companies save on transportation costs and shields their operations from uncertainties arising from fluctuations in currency values. They also use sequential marketing, a strategy that edges out the local competition by offering better and more state-of-the-art products. Another method they might use to eliminate competition is to merge with or acquire local companies.

Horizontal Expansion - Sales

When offering products in the host countries, multinational companies may present their goods and services just as they are offered in their home countries. Examples include branded and packaged food and beverages. They carry similar brand names and are similar in appearance. Companies also might set up showrooms and outlets to mimic international norms. Other companies adapt their products to suit local demand, tastes and customer requirements.

How Do Multinational Companies Affect Local Businesses?

A multinational company is a commercial organization that conducts business in several countries but has headquarters in its home country. It operates overseas by setting up units such as subsidiaries or affiliates, or takes over or merges with local companies. Because of the size of their operations, multinational companies sometimes can have both a positive and a negative impact on the economies and business of local companies in their host countries, depending on the circumstances.

Better Economic Conditions

To encourage multinational companies to invest in their countries, governments sometimes offer incentives such as lower taxes and administrative support. They also might ease labor and environmental regulations. Local governments also develop infrastructure facilities such as transportation, roads, communication channels and utilities for the use of multinational companies, which results in the host country’s overall development. Local businesses often benefit from these easier regulations and advanced facilities.

Vertical Affiliation

To conduct operations more effectively, multinational companies partner with local companies for supplies. They also might use resident businesses to get their products to local consumers. They employ local companies on contracts and rent out franchises, which results in growth for the local companies. To accommodate their multinational partners and provide efficient support, local businesses must develop advanced methods of conducting business. This might include using lean methods, providing better workplace conditions, hiring skilled staff and adopting efficient marketing plans. Also, affiliation with international companies often put local companies in direct contact with better technology.

Advanced Products

Multinational companies often bring better and more advanced products into local markets, and resident companies must match them to stay in business. This means that local businesses must adopt equivalent technologies and products. Because multinational companies have more resources at their disposal, they can explore new markets in the host country. These markets are usually untapped by local businesses, which often aim their operations at exporting their goods and services. Local businesses, therefore, can grow by entering the new markets that the multinational companies uncover.

Labor Force

Multinational companies often create more products and receive more revenues. Therefore, they can offer better wages and invest in highly skilled workers. This can be disadvantageous to local companies because they have to match the better wage scale to prevent employee turnover in their own operations. The flip side to this scenario is that multinational companies often train their employees and make better technical skills available to them. When these employees leave the multinational company, they might take their skills and experiences to local companies.

Downside

When governments create support systems for multinational companies, they don’t always extend the same privileges to local businesses. This gives the multinational companies an advantage. Also, multinational companies often edge local businesses out of the market because the multinationals frequently sell better products, and these products are often cheaper than those at local competitors. Because of the direct investment they bring into the country, multinational companies exert influence on governments to adapt policies that are suitable to multinational companies. These policies aren't always advantageous to local businesses.

What Are Vertical Sales?

Vertical sales are sales of a product or service to a limited number of market sectors, rather than to all markets. A manufacturing company, for example, might design and produce products tailored to the needs of customers in the aerospace and automotive industries. A professional services company might tailor its services to the needs of clients in the insurance and banking sectors. By contrast, a horizontal sales strategy is suitable for companies that market products that meet the needs of a number of different industry sectors. Companies marketing office supplies or maintenance services, for example, would operate a horizontal strategy.

Specialization

Companies with a vertical sales strategy develop products and services tailored to the needs of groups of customers with similar requirements. By developing tailored products, they can differentiate themselves from competitors that offer products suitable for all markets. A defense supplier, for example, might specialize in a specific market niche such as components for naval vessels,

Sales Organization

By organizing their teams according to vertical markets, sales managers can focus on increasing market share in specific sectors rather than spreading resources across all markets. To succeed in vertical sales, representatives must have an understanding of the specific needs, issues and challenges of the industries they target. Some companies recruit only sales reps with experience in a particular market to ensure they have the market knowledge and contacts to succeed. Representatives with a good understanding of industry challenges can become trusted advisors to customers, making it easier to build relationships and long-term customer loyalty.

Sales Costs

Companies selling to vertical markets must make an initial investment in recruiting and training sales representatives and developing industry expertise. By developing strong relationships with customers, companies can increase long-term revenue and reduce the cost of sales. It’s important to identify opportunities for sales of additional products and services to customers in vertical sectors and focus new product development programs on those opportunities.

Marketing Integration

To support sales in vertical markets, it’s important to integrate marketing campaigns with sales drives. For example, advertising should aim to raise the company’s profile in the target sector as well as generating leads for the sales force. A company's website should include product pages focused on the vertical market, together with pages that describe the company’s capability in the sector.

What Polycentric Orientation Means

Businesses with a polycentric orientation adopt the belief that every country is unique and needs a different approach to match cultural and societal norms. Under this assumption, a company uses a country-specific business and marketing strategy for successfully developing and building its presence in each country it expands to. Large polycentric-oriented companies are often referred to as multinational companies or multinationals. A polycentric orientation contrasts with ethnocentric orientation, in which a company uses the same products and marketing strategy in each country as it does in its home country.

Underlying Belief

The polycentric orientation operates under the premise that countries around the world have so many differences in cultural and economic mores that striving to translate practices from one country to another may be fruitless. Therefore, when a company assumes a polycentric orientation, it adapts its products, marketing and support functions for each country it operates in. Companies often employ a country manager or divisional president, where the division solely represents one country. In a multinational company country managers operate autonomously and adapt the product, marketing and sales process, literature, messaging and packaging to their particular country.

Advantages

Operating under a polycentric approach affords companies several advantages. One advantage is that prospective customers in each country often identify the products as local, not foreign. With a well-marketed product, this often leads to greater sales and reduces or eliminates nationalistic backlash. Another advantage: Companies reduce or eliminate marketing faux pas that arise from cultural misunderstandings. In addition, a skilled country manager can greatly increase sales and profitability locally.

Disadvantages

Most of the disadvantages of a company operating under a polycentric approach arise from the level of decentralization. Multinational companies typically have reduced economies of scale because products tailored for each country market require localized marketing efforts and smaller productions sizes. The cost of tailoring products for each market drives product costs higher. In addition, because each country division operates autonomously, companies often replicate functions in each market.

What Is a Multidomestic Corporation?

As global access expands, the ability and desire to communicate with other parts of the world increases. Corporations in the U.S. buy companies in Russia or Korea to expand their footprint. Corporations in Korea purchase companies in the U.S. or England for similar reasons. More corporations are becoming multinational corporations with a market presence in many different countries. When multinationals localize their presence, they are considered multidomestic corporations.

Multidomestic Corporation Definition

A multidomestic corporation is a multinational corporation that operates on a localized management structure. Instead of centralizing and making all decisions from one primary location, the multinational corporation decentralizes. It allows managers, presidents or their equivalents and others in the country of operation to make the decisions. Because of this focus on assigning significant management and operational powers to the countries in which they operate, this structure is termed "multidomestic."

Exploiting Domestic Markets

Multinational corporations that operate as multidomestic corporations believe that the way to replicate their success in their home market is to leverage the market know-how and cultural intelligence of the various domestic markets in which they have sizable enterprises. Every country has cultural nuances that foreigners may not be able to fully understand and exploit. In addition, multidomestic corporations tend to encounter significantly less resistance when waves of nationalism sweep through a country. This is because many citizens identify these companies as one of their own.

Example

The products sold in different countries are tailored to meet the consumer demand in each specific country. Coca Cola has locally based operations in countries in which it has significant sales.

Small Multinational Corporations

Not all multinational corporations are corporate behemoths such. With the advent and rapid spread of the Internet, deep-water telecommunication fiber optics and wireless phones, it is easier for small- to medium-size businesses to conduct business internationally with a multidomestic structure. A mid-size construction services firm may not send employees and subcontractors to foreign countries. Instead, it hires a country manager to source and oversee construction projects. That country manager hires local or regional project managers, superintendents and subcontractors.

Adaptations in International Marketing

Companies that experience enough success to warrant expanding into international markets must take into account several things before deciding to do so. The most important thing to consider is the company's ability to adapt to the differences in international markets. Offering identical products and using the same marketing strategies across all markets is likely going to hurt a company's chance of success. Adaptation allows a company to individualize its marketing strategies and optimize itself for success in international markets.

Adapting the Brand Message

International markets will likely have differences in language and culture, which means companies should adapt their brand's message to resonate with the local consumers. A marketing message that works well in one market is not guaranteed to work well in other markets - especially when it is centered around the product or service's provided benefit.

Consumers in international markets may have different pain points - or problems - than ones in domestic markets, so a marketing campaign that focuses on a domestic problem may not resonate with international consumers. Part of a company's adaptation may include changes to a brand's imaging and word choice in order to avoid misinterpretations when translated to the international language. The wrong interpretation could turn potential customers off from a company's brand and cost it business.

Legal and Regulatory Adaptions

There will likely be differences in business regulations and laws that must be taken into consideration as companies enter international markets. This is common with product labels, as they generally have specific requirements that vary by country. Country-specific regulations may also affect the channels a company can use to advertise its products and services.

Adaptation of Products

To put a company in a better position to succeed internationally, product adjustments may be needed to incorporate the specific taste, needs and cultural practices of the local region.

Acquiring Local Companies

As part of its adaptation strategy, a company may choose to acquire a local company and leverage its existing brand power in the region. By acquiring a presumably established business in the region, the acquiring company can learn about the local marketplace from people who have firsthand knowledge and experiences. This reduces the learning curve as a company begins to embed its presence into the new market and craft its new marketing strategy. Acquiring a local business also gives a company access to an existing customer base and they will not have to spend as much effort winning over customer loyalty.

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