Multidomestic Strategy in Preference to a Global Marketing Strategy - Essay Example

1.0 Introduction 2 2.0 Globalisation of Production 2 3.0 The OLI Advantages for Marketing 4 4.0 Ethnocentri and Country of Origin Concept 6 5.0 International Marketing – New Opportunities 9 6.0 Problems of International Marketing – the Emerging Markets 9 7.0 New Strategies 11 8.0 IHRM – The Need of the Hour 13 9.0 Impact of Recession on Global Marketing 16 10.0 Conclusions 19 Bibliography 20 1.0 Introduction To be successful companies have to become competitive and look for competitive advantage (Porter 1996) through various strategies. Companies have to seek competitive advantage and competitive opportunities at every stage of their activities. Starting from Purchase to the Manufacture of goods and final Dispatch to the customer, each area must be covered by strategies aimed at becoming competitive. This means that the company and all its stakeholders, internal as well as external must be on this loop, as one weak link can mean failure of strategy. Over a period of time since Dunning (1977) has driven home the point of why and how does a Multinational Enterprises (MNE) obtain this advantage away from their home bases. He developed the eclectic paradigm that explains the various factors that influence the MNE’s to decide on Internationalization through Foreign Direct Investment (FDI). Globalisation has become a necessity for companies in search of competitive advantage (Porter 1980). This has meant shifting of operations, especially production to other countries in preference over home countries. There is a twin objective for companies to go global; the first is to find new and cost effective production centres and the second is to find new markets. 2.0 Globalisation of Production Motives for locating Production away from home countries may be summarised in a categorization formulated by Behrman (1972). The classification identifies four types of multinational activity; the resource seekers, the market seekers, efficiency seekers and strategic asset or capability seekers. The market versus hierarchy organisation of production (internalisation) was modified by the eclectic paradigm of Dunning (1980; 1988a; 1988b) who has evaluated Foreign Direct Investments (FDI) in terms of ownership, location and internalisation (OLI). Market and Resource seeking motives have been the two most recognised categories of motives (Dunning 2000). These two are the main reasons for most first time internationalisation attempts by firms. It often happens that resources fall short in the home country which limit growth of firms and in turn maces them inefficient, whereas the required resources may be readily available abroad. This would tempt the firm to go international for just the reason of acquiring resources to become competitive in the home market. Many an MNE have exploited cheaper labour and raw material abroad for reducing costs of their products for sale in the home countries. This has direct bearing on the profits of the company. Most Western companies prefer the emerging economies of the BRIC (Brazil, Russia, India and China) as they find better infrastructure and cheap labour which satisfy their resource and seeking motive. Similarly markets at home saturate sooner or later forcing firms to seek larger markets for maintaining economies of scale and consequent competitive advantage. With globalization and liberalisation, many emerging economies are becoming viable markets with large middle classes now having much larger disposable incomes and a penchant for quality goods. This gives impetus to firms to internationalise seeking larger markets. This will also improve the bottom line of the company. However, efficiency seeking and strategic asset seeking motives increase in importance and are more common as motives for those companies who are already engaged in multinational activity. As competition increases in the home countries, costs also go up along with rising standards of living. Servicing now forms an integral part of marketing and retention of customers is becoming vital to the economic well being of firms. Hence these services which are non-productive yet vital are cheaper to maintain from locations in host countries with large and cheaper educated labour force that can accept such outsourced jobs at a fraction of the rate increase the efficiency of the firm. In the same manner the strategic asset seeking motives are gaining more ground than ever before. The fact is that it takes a very long gestation period to commence production facilities in any location. Firms wanting to increase their presence in international markets now resort to takeovers, both friendly and hostile, of rivals and competitors to enhance their capacities. The new mergers and acquisitions (M&A) are becoming popular as they provide immediate sources of production, marketing as well as sourcing facilities which would otherwise take very long time to materialize and mature. They also reduce the pains of erecting, assembling, organising and planning of new facilities and a host of other problems like obtaining permissions and clearances from authorities. The strategic assets are sought after for reasons of FDI as they present an opportunity for foreign investments minus the initial headaches. 3.0 The OLI Advantages for Marketing Under the influence of the Product Life Cycle theory (Vernon 1966) Production expanded exponentially using the Location advantage excessively. This theory justifies spreading of production on basis of low cost of production and supports the argument for expanding the life cycle of the product by moving production to the most effective cost centre in the world. That it was market seeking is obvious as competition either reduces the life of the product or forces it to seek new markets. This creates both opportunities and problems for multinationals. However companies have always taken up the challenge and global production emerged and evolved into a much bigger concept than before. Dunning’s eclectic paradigm is useful in analysing the complex decisions made by manufacturing to go international. The three OLI factors help to explain why production is based in a foreign land in place of home country. It explains the value additions available to a company in host countries on account of OLI. Each of these factors offers some advantage that enhances the competitiveness and performance of the firm. Basically the home advantage of Ownership is transferred to the host countries for competitiveness. These are then transferred to specific host country where the best the Locational factors exist through FDI. Finally the Internalisation or the internal expertise and competencies, partly due to O factors, accounts for the competitive advantage that was originally the objective of the exercise. In fact a large number of production facilities and factories have come up in the under-developed and developing countries of the world. The foreign countries offer locational or L advantage. It is profitable to serve the home market through low-cost international production rather than by costlier production at home. Multinationals set up global production to increase their market share of the products that they can now produce at lower cost and in larger quantities. Marketing in the home country is relatively easier as the set of customers, their preferences and needs are well known, the demographics have been well mapped and the distribution channels have been set up over a long period of time. Usually when a company goes for international production, it does so first for its home markets where its rivals are doing the same for reduction in costs. The OLI advantages assist an MNE to produce products at lower costs primarily for its home markets. 4.0 Ethnocentricity and Country of Origin Concept However not all companies opt for International production. Similarly not all consumers are willing to buy products not made in their home country. Ever since production has been disintegrated and shifted to under developed countries by the multinationals on economic grounds a new concept of Country of Origin (COO) has gained prominence and has influenced consumer perceptions about quality, brand and other variables associated with it (O’Cass and Lim 2002). There is difference of opinion about what is COO; according to Yong (1996) the COO is where the product is manufactured while Johansson et al (1985) describe it as the place where the company has its headquarters. Much later in a study by Thakor and Lavack (2003) it was determined that place of manufacture had less importance in the minds of the consumers as compared to the brand of the product. The brand is what eventually evaluates the product. This is the main reason that production moves to low cost centres and still be accepted in the home country; one of the greatest examples being Nike products that are made in the Far East for US and European markets. A prominent sociologist (Summer 1906) studied the herd mentality of humans and used this concept to distinguish between the in-group and the out-group phenomenon. This produced further study and observation by LeVine and Campbell (1972) that ethnocentricity can be used to distinguish various groups by virtue of their common interest, outlook, preferences, feeling of honesty due to superiority or viewing others as weak and dishonest because of it. This sociological concept of ethnocentrism was used as a platform by Shimp and Sharma (1987) and applied to markets and consumer behaviour and they coined the words ‘consumer ethnocentricity’ for the first time. This describes the feeling of a section of the consumers of a particular geography as being superior to others and therefore having a myopic view of their superiority that extended to the superiority of their domestic manufacture. When this belief became stronger it resulted in conviction that it was unpatriotic to buy goods produced in other geographic regions and that it will hurt national interests and have adverse effects on the domestic economy and employment (Netemeyer et al 1991; Kayank and Kara 2002). The country of origin (COO) as a concept was developed by LeClerc and Schmitt (1994) to ascertain that this established the place of manufacture not withstanding the ownership of the products. However consumers generally linked ethnocentricism to the country of origin to strengthen their belief (Sharma et al 1995; Shimp and Sharma 1987). This combination became lethal in the hands of domestic producers, local labour unions and some consumers and produced a bias against products manufactured at overseas locations (Bilkey and Nes, 1982; Netemyer et al 1991). Shimp and Sharma (1987) are also credited for the development of the CETSCALE, a tool to measure the extent and depth of ethnocentricity that went to prove that indeed this prevailed on purchase decisions by consumers. Their studies confirmed the existence of a bias in favour of domestic products over those produced externally and the tendency to avoid patronising products produced elsewhere. According to Klein et al (1998) consumer animosity, the result of ethnocentricity is strongly influenced by history. They proved this point in a study of Chinese consumers’ animosity against the Japanese products due to historical reasons of the former against the other. Later Klein (2002) studied the ethnocentric bias of the US consumers against Japanese for similar reasons. The tendencies of both ethnocentricity and consumer animosity originate from the perception of superiority that believes that products of foreign origin are either inferior in quality or have been produced by use of unfair trade practices. This is a sociological phenomenon that is used in marketing domestic products. When consumers prefer their domestic brand it is termed as economic nationalism and is a form of consumer preference that is developed out of patriotism. This is yet another social phenomenon that is propagated by marketers to promote feelings against goods produced in overseas locations and has its roots in the perception that such patriotism is essential to save home country jobs, to protect domestic products and guard against threat to the domestic economy (Mort and Duncan 2003). The promotion of economic nationalism is different from ethnocentricity as it is a national trend and goes beyond the judgement of the quality of the product (Klein et al 1998); however the writers conceded that both are not entirely unconnected as one aspect influences the other. Despite the above economic nationalism is usually used as a marketing tool rather than a spontaneous development as by nature consumers look for favourable prices and usefulness of the product when making purchase decisions. Several country of origin studies portray cultural and natural prejudices as the cause of ethnocentricity (Wall and Heslop 1986; Han1988) but the reality is that it is the inflaming of national and cultural egos by governments and marketers that is usually behind such developments (Sharma et al 1995). 5.0 International Marketing – New Opportunities Fortunately there have been two developments that have served to save International production from the worries over resistance by ethnocentric consumers or patriotic nationalism. The first is that the developing countries where they had set up the production facilities have opted for open market policies and have liberalised their economies to join the world community. The free market concept has raised their domestic demand. This has been further facilitated by the rising income levels of their middle class that has got more jobs opening due to the MNEs opening their branches and production facilities. The second has been the worldwide recession that has reduced demand in their home countries as the developed nations were the hardest hit by the financial crisis in 2008. This means that either the MNEs have to reduce production and thereby reduce employment that will lead to greater fall in demand or they should create new markets and look to replace the present set of consumers with new ones to maintain or even increase their production levels. But International Marketing is beset with its own problems. 6.0 Problems of International Marketing – the Emerging Markets By its very nature International Marketing is fraught with vested interests found both in nations and its own industry. Almost everywhere there is some element of Protectionism that is overtly or covertly practiced. Most countries, led by US declare that they favour Open Market policies but indeed protect their own home industries with some form of duties, tariffs or taxations that discourage or at least restrict outsiders from invading their home territories. According to Doole and Lowe (2004), there are many companies with export prospects that keep away from doing business beyond their home market. Often the reason is apprehension. They are afraid of failure on account of the challenges of competence and cultural factors. The concept of 4Ps and &7Ps in domestic marketing are well known and their application in an International setting has been well explained by Hollensen (2002). He stated that selling one standard product or set of standard products that are also sold in the Home market help in saving money on market research and product development. But not many firms have been successful with this strategy. With adaptation to the requirements of the buyers preferences of the target market the company can achieve success but will have to bear the additional cost of such changes. Yet another strategy is to have separate set of Products for both Home and Export markets. This will have a bearing on Pricing Policies. Setting a standard price across markets may be a good policy to convey uniformity but it can mean loosing out on opportunities and exposing weakness that can be exploited by competition. Having a separate pricing is however difficult as it could lead to customer resentment and will bring in greater profits in the short run only. Regulation of Tariffs, Taxes and Duties all affect the prices in a given country (Cavusgil et al 1993). In reality no single strategy in any given condition and Global marketing decisions on Price, Promotion and Distribution depends entirely upon the local environment (Jain 1989). Although standardization brings in homogeneity across markets as well as customer satisfaction and cost savings in many ways, it has been argued that it also causes economies of scale and offers a low-cost competitive position in the global market (Cavusgil et al 1993). However this is a very simplistic view and, as explained elsewhere, an adaptive view of pricing which takes local factors into account is more practical. (Douglas & Wind 1987; Wind 1986). Doole and Lowe (2004) opine that the reputation of a company depends upon the good relationships of the customers and stakeholders. The internal relationship depends on the awareness of the marketing strategies. Communications at different levels have to be addressed with full knowledge of local cultures. Internal competencies of a company will not be sufficient to guarantee success. Apparently new marketing strategies are required but that means the MNEs have to first understand the local markets and the international situation before they develop these strategies. 7.0 New Strategies Multinationals have adopted a variety of approaches to market their products in host countries where they have set up manufacturing for the purpose of expanding their markets locally. Schollhammer (1973) has explained that the three strategies were Ethnocentric Strategy, Polycentric Strategy and the Geocentric Strategy. The ethnocentric strategy as the name suggests strongly believes in the superiority of their product and its prices and the company in such a case attempts to implement the values, policies and sentiments of the parent company regardless of environmental differences regardless of the effect it might have on its operations or marketing effects. Examples of this can be seen in fashion products which are unique in nature and cannot be copied easily and carry a brand image that consumers will be willing to pay for at any cost. However in case of such products the companies normally prefer to manufacture them in their home countries only. The Polycentric Strategy accepts the local requirements, respects the local needs and its culture and recognises the need for it to adapt to the environmental differences. In such cases the parent company at the headquarter will by deliberate choice make foreign operations as local as possible. This will include hiring of local managers and workers as well as accepting local partners if the situation so demands. There is a third strategy called Geocentric and it is really a compromise between the earlier two. Having a global outlook it first accepts that environmental and cultural differences need to be respected and adhered to but uses the inter-relationships with such uncontrollable external situations on a purely functional basis only. It does not accept it as any kind of dominant factor and limits its influence to local production and marketing only. The emerging economies, especially China and India, are the two huge markets that are emerging. China deserves a special mention as it has a huge population that has great purchasing power and can sustain several MNEs for a long period of time. China has also become a manufacturing hub of the world and almost all MNEs worth their name have established manufacturing facilities in that country. They all need this market to keep up the production and to make up for the loss of demand in their home countries and in those countries where they were exporting from their Chinese operations. Indeed China is the savior for all of them. Therefore it becomes essential for them to become polycentric in their marketing policies for survival and growth. Since sustaining of competitive advantage is the objective companies should adopt new IHRM practices in accordance with polycentricism. 8.0 IHRM – The Need of the Hour Globalisation has taken companies to unfamiliar regions of the world and it is common to find that the operational heads of most companies are from the parent companies. Such appointments are known as expatriates and they face enormous difficulties in adjusting to local cultures. It is especially noted that companies making their first foray into the international scene start with larger number of expatriates for reasons of comfort, control and continuity of policy. This results from overemphasis on their ethnocentric culture (Mayrhofer and Brewster, 1996). The expatriates are considered as the fulcrum of organisational control (Beechler 1992). But it is quite common to find that expatriate managers are not successful in local environments. It is the result of the culture shock that they cannot easily accept or absorb, especially between western and eastern cultures. This reduces their ability to function effectively across cross-cultural situations (Early 1987). The local language and cultural factors, the environmental differences and the presence of local networks that looked at them with great suspicion are barriers that affect their output and the L advantage is lost under this threat. A further addition to their woes is that the local supply chain too is not comfortable with them as they too were part of the same culture. When this supply chain was exporting to them the problem was not acute as it was a question of just following the contractual obligation. But when production is being conducted on their soil their involvement became greater as relationship becomes a daily routine instead of a one time affair. This causes hardships especially when networking comes into greater play for better inventory and supply management. Besides research has already proved that subsidiaries “in host countries performing specific value-creating activities are fundamentally embedded in these host countries knowledge development systems” (Rugman and Verbeke, 2001, pg. 237), consequently only local managers are able to capitalise on them. There are a number of serious problems that arise due to extensive use of expatriates at managerial levels. These can result in breeding discontent, lowering of morale of local talent, and indeed high attrition rate of local mangers whose aspirations get hurt (Kopp, 1994). This causes lower performances due to lower responses from local employees who either do not comprehend their expatriate bosses or resent them. Hofstede (1993) made an interesting observation saying that what we learn as children remains with us for our lifetime. Calling this as software of the mind he elaborates that this has a bearing in IHRM as this becomes a barrier for local hiring when the MNE wishes strongly to carry forward its policies based on its own organisational culture. Despite pros and cons generally it is accepted by academics that both expatriates and locals do contribute positively towards the company goals in their own way. Unifying and closely following company policies, coordinating between the headquarters and subsidiaries and smooth transfer of management is possible with expatriates (Bonache et al 2001). As against this the local managers are effective in enabling local requirements and overcoming limitations and barriers in the local decision making process (Doz and Prahalad, 1986). Bartlett and Ghoshal (1989) were the premier supporters of those companies which have followed the doctrine of think globally, act locally. Taylor (1991) and Maljers (1992) have also observed that balancing the opposite factors of organisational integration and differentiation has paid rich dividends to companies. But this capability cannot be easily developed or sustained. It requires far sighted strategies and the ability to overcome fear of loss of control. It needs to be conceded by the MNE’s that there must be diversity at the workplace, particularly in the global environment. This means that local talent must be nurtured not only to meet their aspirations but also to be able to promote the company and its products through the insights of the local managers. While it is true that overall company policies must be laid down by the headquarters; the local units or subsidiaries must have the operational control, through local managers for higher performances and better results. Newcomers to any organisation, especially in the international context, are filled with apprehensions about their jobs and their performance evaluation, and are especially conscious of the interpersonal relationships and social practices that they will be facing (Miller 1996). A successful socialization will certainly help in reduction of these tensions and will build productive working relations between the old and the new members for the eventual benefit of the organisation (Jablin 2001). The real test of the individual fitting the organization, or the person-organisation fit, is tentative at best and has been defined as the similarity of patterns of the organisational values and individual values. These may be further defined as those things that the individual values in an organisation, such as being team-oriented or innovative (Chatman, 1989). Values are fundamental building blocks in most definitions of organisational culture (Barley et al 1988), and culture plays a key role in determining how well an individual fits into an organisational framework (Rousseau, 1990). When individual values and priorities match the values and priorities of a particular organisation the individual is happier and will be more likely to maintain an association with that organisation. Value systems offer detailed and comprehensive justifications both for suitable associate behavior and for the activities and functions of the system (Enz 1988). Organizational values are often considered as a group or collective product (Schein 1985), and while all members of the group may not hold the same values they will support a given value. A common value system will then come into existence when key values and behaviors are shared in an organisation. In different cultures production synergies are possible when there is language or religious affinity. It is difficult to take advantage of management and technical know-how transfers in different cultural contexts and these results in lower efficiency and performance (Bartlett and Ghoshal 1990; Jain 1989). Firms that effectively manage their workforce through diversity management practices experience positive outcomes. 9.0 Impact of Recession on Global Marketing The current global recession has seen contracting of economies as a result of near failure of the financial system. This has led to loss of jobs that has resulted in lower demand resulting in lower production. IHRM has to deal with a situation that it has rarely faced on a global scale. Earlier small blips in disparate regions could be overcome by increments in other regions and the overall bottom line still remains healthy. Current recession has seen demand falling off almost in the entire spectrum of the developed world. This has put a big question mark on globalisation itself. The best way to come out of this is to become polycentric especially in the emerging markets of BRIC countries where markets are still on a growth path and production is still increasing, although at a lower level than before. The cause of recessions as per the recession theory of Keynes is the fall in demand. Therefore creation of demand is a priority. However this is a difficult situation. Drop in demand has resulted in reduction in production as a consequence of which jobs have been lost which cause drop in demand due to lower disposable incomes. It can be seen as a vicious circle. This has a new affect on companies that now have to reorganise their marketing efforts to cater to the local demands of the host countries to replace the lost or lower demand of their home countries. What is required is to create new methodologies that can adapt to the new environment. It can impact companies in two ways; by developing new technologies and innovations that can create both demand and jobs and by state interventions through benevolent policy of stimulation of economies to re-create demand. However what is most important is to recognize that the local economies where they work have greater potential for consumption than their home countries; and companies to become more polycentric than before if they wish to survive the global recession. As against the recession theory of Keynes the neoclassical approach to the root causes of a recession is quite different. They do not believe in the drop in demand as the cause of recession; rather that unexpected changes in technology, preferences, endowments, or government policies lead output or production to deviate from its existing steady state growth and cause declines leading to recession. This also enhances the duration of a business cycle making a long recession that becomes painful to endure. A study of the great depression of 1929-33 indicates that the decline in production was as much as 33% and decline in employment was a high 25%, both are about 10 times the decline of a normal business cycle. The duration of the recession and recovery during 1934-38 also lasted for a much longer period than that of a normal business cycle. The core of the neo-classical view is the aggregate production technology, which describes how labor and capital services are combined to create output, and the willingness and ability of households to substitute commodities over time, which govern how households allocate their time between market and non-market activities and how households allocate their income between consumption and savings. The result is that instead of demand the technological innovations and their acceptance become the key to both the creation and recovery from recession (Cole and Ohanian 1998). If a shift is made from the Keynian concept to the neo-classical concept of recession then it calls for a marked shift in OM procedures and strategies. Multinationals should now be guided by demand as well as innovations as the new drivers and shift the emphasis to polycentricism along with innovations in products and technology. This itself will create new products, new jobs hence new demands. The cycle will continue but demand will go to the periphery and development will take the central position under the new policies. 10.0 Conclusions To overcome the current situation companies have to look for new ways to evolve. A cue from the Emerging economies of the BRIC nations, especially from China and India will be helpful in illustrating the point. They have been least impacted by the worldwide recession and a study of their situation will reveal the reasons. Multinationals can take heart from this as they have already entered these countries. They are indeed already aware and involved as due to globalisation of their operations they are already not only present in these countries in large numbers; they are also actively using localisation in these environments. They now need to hasten this process in earnest for both survival and growth. The Product lifecycle theory of Vernon (1966) has stood the test of times and should continue to be followed, of course with due consideration of technology that can enhance the shelf life of the product. Production and marketing should become more localised in the countries that it has been shifted to. This will help improve the bottom lines of the multinationals as the local managers will cost less, be more acclimatised to local cultural requirements and also take advantage of local networking that has proved to be beneficial in the emerging economies. Indeed IHRM should now be made more regional than global. 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