Critically assess the contention that multi-national companies (MNCs) must corporate in international business to survive.
INTRODUCTION
The world is undergoing tremendous changes and part of this change is the rise of state-of-the-art technology that changes how contemporary world carry out their tasks. Changes are occurring in the very nature of the business organization as it responds to the pressures and opportunities of the global marketplace.
Globalization of business has been one of the dominant characteristics of the past two decades. In the international business environment, many companies have become multinational players seeking business opportunities across countries. Globalization has become the cornerstone of a company’s overall business strategies. Globalization is no longer only a business option but also a part of effective corporate strategizing ( 2002).
The impacts of globalization on the business world are many, but the most important is competition. All of this competition is pushing multi-national companies into strategic responses. As global competition increases, many companies are forced to reevaluate their position in the global marketplace. For some companies this entails strengthening their domestic position against competing foreign products. Other firms respond by expanding their undertakings into foreign markets. For many, collaborative/cooperative agreements with other businesses are an effective alternative to the more traditional approaches (1993).
This paper examines the strategies of multi-national companies to respond to the opportunities and pressures created by the process of globalization of business.
MAIN BODY
International business is increasingly developing multi-national networks composed of alliances, affiliates, licensees, and other partnerships. The most rapidly changing route for large multi-national companies entering overseas market / international business is through a growing variety of joint ventures and strategic alliances (1993).
Multi-national companies have come to characterize global business, and to dominate industries and national economies. Multi-national companies evolve from domestic firms that go beyond simple exporting and importing activities to acquire foreign affiliates. The growth and prosperity of the company become interlinked with business linkages to foreign firms. As the business linkages deepen between the two companies, the need for broad coordination and cooperation emerges ( 1995).
Many companies increasingly understand the significance of a growing global marketplace. They realize that exporting and establishing overseas ventures are no longer the only choices they have in participating in international business. Cooperation, like in the form of an alliance, with businesses abroad is becoming significantly evident as an alternative response (1993). Alliances have become an important strategic option in international business ( 2002).
The presence of an emerging worldwide market underscores the necessity for firms to develop strategies that will enable them to compete successfully on a global scale. Although many strategies are available for companies to pursue -- cooperative contractual relationships, strategic alliances and joint ventures, and the establishment or acquisition of overseas production facilities -- the need for globally oriented companies to get their products into foreign markets is paramount (1993).
A strategic alliance means forming a long-term collaboration between at least two firms without one firm fully owning the other. A strategic alliance presents two distinct properties: long-term commitment and contribution to strategic performance of the partnering firm(s) (Culpan, 2002).
Strategic alliances are not a guaranteed formula for successfully competing in international business. Many companies believe that alliances are necessary to reduce the risks associated with operating in an uncertain and fast-changing global marketplace. Yet the nature of alliances is essentially one of a trade-off between risk-sharing and innovation. Risk-sharing may help ensure that a company obtains or maintains a competitive position in the short run, but innovation and the ability to adapt to changes in the world market are far more important in determining a company’s position in the long run (1993).
In collaborations and alliances there may well be factors that remain hidden. Not all technologies are disclosed to the partners and some knowledge will remain confidential. For example, Coca Cola has many franchise bottlers whose job is to process and bottle the condensed Coca-Cola syrup, but the recipe for which is never disclosed. The bottlers understand this and make a profit by working at the lower end of the value chain (2001).
Driver of Alliances
The motivations for strategic alliances are complex and varied. The major external forces behind international strategic alliance formation are often interrelated and may stem from varying causes. The key identifiable current factors seem to be the globalization of markets and technologies, the shortening of product life cycles, and the consequent need for enterprises large enough to take advantage of scale and scope economies, and to be able to access adequate resources and competencies. Other factors exist in specific situations (1998).
A motive behind the conclusion of strategic alliances is the need for speed in reaching the market or the need to compete in all major markets. In the economic world of the 1990s, first-mover advantages are becoming dominant, and often the conclusion of an alliance between a technologically strong company with new products, and a company with strong market access is the only way to take advantage of an opportunity in time.
Alliances are the fastest means of achieving market goals to meet an opportunity, if the partners each have strong resources and competencies, but alone insufficient to achieve critical mass.
A second reflects the continued importance of national boundaries: government preferences for 'local' firms in industries such as aerospace where an alliance with a national or regional firm may be a necessary requisite of sales to either the military or a national airline.
The most important motivation for alliance formation, however, is the increasing cost, risk, and complexity of technology. The high cost of technological development has encouraged companies to collaborate to share both the costs and the risks of this activity. The need to limit financial risk is a further factor advancing alliance formation as opposed to merger/acquisition or organic development. Even the world's largest and most international companies can no longer 'bet the company' on the next generation of semiconductors or jumbo jets; in many industries the cost of a competitive R&D budget has risen to the point where it is no longer possible to 'go it alone' (1999).
In other cases, collaboration may take the form of interaction between assemblers and component suppliers - a common situation in the automotive and electronic appliance sectors.
Objectives
Performance measure for strategic alliances is whether gains are achieved as a result of the collaborative/alliance venture. The companies exist to create value for stakeholders. Following the same logic, alliances should also be established to create value for their stakeholders. An alliance can only be justified when the value created by the alliance exceeds the value that can be created by the companies alone. The combined effort of working together of two or more business organizations should produce a result that is greater than the sum of each company’s individual effects or capabilities. Otherwise, there is no need for an alliance. That is, in an alliance context, synergy exists when the alliance partners produce greater value together for their given constituents (for example, shareholders) than those partners produce individually. From a synergistic point view, strategic alliances create joint economies of scope between two or more firms. By creating synergy across multiple functions or multiple businesses between partner firms, strategic alliances are supposed to facilitate competitive advantage (2002).
One of the considerations in choosing whether to cooperate with other companies, and the form of that cooperation, is the level of transaction costs. In the absence of common interests and mutual trust, an alliance needs to provide each partner with adequate incentives not to take advantage of the other and with systems to monitor their respective contributions. There is a need to balance and reconcile cooperation and competition between partners (1998).
Advantages
Cooperation and alliances have become commonplace for a number of reasons to the benefit of the multi-national companies. For one, cooperative strategies can enhance market power.
Corporations form business relationships with others for a wide variety of reasons, largely because the partner has some asset or can perform some function which the firm needs in order to pursue its own strategic objectives (1994).
Alliances can tend to create a sheltered, secure and stable environment because of the members' monopolistic position. Alliances should increase the opportunity for initial mutual learning. Not only should current knowledge be passed on but each partner should acquire and generate new knowledge as the environment and technology changes (2001).
The preference of companies to stick to what they do best, or their core competencies, means they must let others outside the organization, often abroad, help them with everything else. In this way, the best practice can be called upon irrespective of source in all aspects of the company's market offering. By bringing together different companies with unique skills and capabilities, alliances can create powerful learning opportunities. As alliances become more common, exploiting the learning potential of alliances will become more important ( 2004).
Overall, alliances and collaborations enable companies to leverage the assets, skills and experiences of their partners for the purpose of enhancing competitive advantage (2003).
Disadvantages
Business alliances are anything but easy. They require extreme clarity in regard to objectives, strategies, policies, relationships, and people ( 1993).
In a strategic alliance, both companies share some risk in the investments they have made, financially or otherwise, in the common activity (James, 1993). The problems associated with joint ventures and their high failure rate implies that great attention needs to be paid to the effective planning, negotiation, and management of such deals. While effective management of the joint venture process will never guarantee success, it will considerably reduce the likelihood of failure (1996).
The following are potential pitfalls/drawbacks of strategic alliances according to leading authors in the field: coordination costs, erosion of competitive position, creation of an adverse bargaining position, mutual dependency, uncertainty regarding outcomes, division of authority and decision-making power, top management time and effort, risks, imbalance in benefits, imbalance in commitment and motivation, difficulties in achieving an agreement, communication problems, conflict between partners, retaliation from governments and competition, resource generation and redistribution, adjustments to environmental changes, developing new business to meet emerging growth opportunities, delaying with internal conflict, competitive compromise, dependency spiral and distrust and conflict ( 1996).
An alliance can expose the partners to the temptation to steal each others' secret and run, so long as the alliance is of indeterminate length, the penalties for defection are high, and reputations matter (1998).
The GM-Fiat alliance
US-based General Motors (GM), the world’s largest automobile producer, formed a strategic alliance with the Italian automobile company Fiat in March 2000, creating an important partnership for the companies in two of the world’s largest automotive markets: Europe and Latin America.
The alliance promises significant benefits for both GM and Fiat through synergies in the areas of material cost reductions, the leveraging of each group’s power train activities, efficiency in financial service operations, the cross-sharing of automotive technologies, and the effective leveraging of each other’s platforms ( 2002).
In this alliance, GM acquired a 20 percent stake in Fiat while Fiat bought approximately 5.1 percent of GM. Fiat expects a cost leadership status based on the unique synergies provided by this alliance and the capability to draw upon the great R&D resources of GM to face the increasing technological challenges of this new century. Importantly, GM and Fiat will remain independent from one another and will continue to compete in markets around the world (2002).
To realize its key strategic objective of strengthening its position in Europe and South America, GM is aggressively moving ahead to grow its global automotive business. By creating an alliance with a large and technologically strong company like Fiat in a capital-efficient manner, GM serves its objective. The alliance enables GM to capture significant benefits in the areas of platform and component sharing as well as cost efficiencies, thus providing a more competitive base for GM brands. It is an important illustration of the commitment of GM’s approach to grow profitably through the use of alliances. On the other hand, Fiat is aggressively creating key sources of cost advantage based on the combined strengths in Europe and Latin America and on the opportunities that both companies are seeking to capture the growth trends in emerging markets. This situation will enable Fiat to further accelerate with structural measures and ongoing profitability recovery. Fiat believes that such an alliance helps the company focus more clearly on serving the customer with a leaner organization. Both companies try to build upon each other’s strengths while continuing to operate autonomously and competing aggressively in the marketplace (2002).
CONCLUSION
The process of globalization forces multi-national companies to sell their goods and services to as many different places as possible - a practice which frequently requires help from other people and other organizations. Economic globalization, world competition and the consequent need of expanding markets beyond national and continental borders have driven and are still driving multi-national companies towards cooperation with other companies through mergers and alliances.
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