One of the most common entry strategies for MNCs is the joint venture. Why are so many companies opting for this strategy as they attempt to expand into overseas markets (E.g. US based Wal-Mart, the world's largest retailer, entered Brazil in 1995 by forming a 60:40 joint venture with one of the country's leading business conglomerates, Grupo Garantia)? Please provide specific examples and a rationale for your response.
It is extremely common for MNC’s to use joint venture to build local alliances when entering into business in a new country or market. Joint ventures allow the international brand to leverage its management system, while partnering with a local company, in order to borrow its voice, recognition, and trust within the target consumer base. The partnership is formed between a host-company, or a company already operating in country, and a home-company, or the company that is trying to establish a new home in the nation, which means that formally the two join to form a totally new third firm (Geringer & Hebert, 1989).
This agreement is key because it gives the MNC knowledge of the local market. Other anticipated benefits also include increased sales capacity within the country, increased access to loyal local markets associated with the host-partner, and access to in-country assets, including greater resources, staff trained within the country, technology that does not have to be imported (Park & Ungson, 1997). There is also the equity and financial considerations. Forming a joint venture allows the two businesses to share the financial risk and benefit of the venture, with each accruing equity according to their investment in, or contribution to the venture (Blodgett, 1991).
This type of agreement is designed to, essentially, increase control over the operations as a whole. The international firm does not have relationships or a local supply chain, and so needs the partner to provide those local connections (Geringer & Hebert, 1989). However, this creates a situation where the local firm can gain the benefits of international market exposure, and larger business sales and profitability, while less exposed to the risks of expansion and exploration (Geringer & Hebert, 1989).
This is a highly attractive method for brands entering the Chinese market. Entering the Chinese market can be extremely unsuccessful for international brands that are unfamiliar with the local culture, because China operates on a less open market. As such, when MCN’s elect to enter China, because it is an extremely large, and developing market, a joint venture can provide the resources needed to launch successfully (Lu 1998). As such, the selection of a local brand to partner with is fundamental to the joint ventures success. Resarch demonstrates that MNC’s should consider there primary points when deciding what local partners to work with: strategy, organization, and financial performance (Lu, 1998). These are all three important, becacuse failure in any area, can lead to related failure. More specifically, according to Lu (1998), if the company the MNC partners with is strategically strong, but organizationally poor, it can lead to instability in the joint venture, as the result of poor organization in local matters. In contrast, a partner with poor financial strength, or a lack of financial strategy, and lead the joint venture, and so the MCN into unprofitability. If it only lacks strategy, the joint venture will lack sustainability. In each case, the importance of strong management, and of being extremely selective when selecting a local business to partner with is expressly highlighted. This kind of strategic planning, and partnership selection, can be seen not in China alone, but in partner selection for all joint ventures. Take, as an example, Walmart’s partnership with Grupo Garantia in Brazil, which featured both local prominence and strong business strengths of its own, before its joint venture with the Walmart MNC.
References:
Blodgett, L. (1991). Partner Contributions as Predictors of Equity Share in International Joint Ventures. Journal of International Business Studies, 22(1), 63-78. Retrieved from http://www.jstor.org/stable/155240
Geringer, J., & Hebert, L. (1989). Control and Performance of International Joint Ventures. Journal of International Business Studies, 20(2), 235-254. Retrieved from http://www.jstor.org/stable/154831
Luo, Y. (1998). Joint Venture Success in China: How Should We Select a Good Partner? Journal of World Business, 33(2), 145-166. doi:10.1016/s1090-9516(99)80068-6
Park, S. H., & Ungson, G. R. (1997). The Effect Of National Culture, Organizational Complementarity, And Economic Motivation On Joint Venture Dissolution. Academy of Management Journal, 40(2), 279-307. doi:10.2307/256884
What is the base (or bottom) of the pyramid strategy? Do you think this approach can be beneficial for a multi-national firm? Provide specific examples and a rationale for your response.
The base or bottom of the pyramid strategy is based on effectively marketing to the poorest sector of the target market, or actively engaging in doing business with the poor. As such, the base of the pyramid is the lowest economic population, which make up a market of roughly 4 billion individuals (Simanis, 2012). The end of the cold war encouraged investment in foreign markets that “cascaded” or considered the growth opportunities for MNCs willing to consider marketing to, or actively pursuing business with, those at the bottom of the economic pyramid (Prahald & Hart, 2002). The concept was that it fought against the global trend for international investment to slow, while providing a major opportunity for growth (Prahald & Hart, 2002).
There are potential benefits of the bottom of the pyramid strategy that hold great promise for MNCs, and so using this approach can be beneficial to mutli-national firms. However, with that said, there are also a number of significant risk factors involved which should be very carefully explored, or prepared for. In terms of benefits, MNC’s that work to meet the bottom economic sector in developing economies have the largest target market within their grasp and so stand to gain substantially. The reality is that there are an estimated 700 million individuals who are among bottom tier, in the 20 largest growth in economies, who together, have an annual income of $1.7 trillion per year (Anderson & Billou, 2007). This is an extremely large body of purchasing power, if it can be effectively accessed.
Success in these markets depend on the MNC’s ability to develop affordable products and services (Anderson & Markides, 2007). Because the bottom of the pyramid strategy depends on the purchasing power of the poorest sector, the brands targeting that factor must accommodate the fact that these individuals have an extremely limited disposable income (Anderson & Markides, 2007). “Strategic Innovation” is thus key, to develop products that match both budget and demand for the bottom of the pyramid (Anderson & Markides, 2007). Generally, the adage “low price, low margin, high volume” has been used to drive such ventures, and in fact, MNCs that have found success with this strategy include fast moving consumer goods, financial services, telecommunitions, construction, healthcare, and home appliences (Saminis, 2012). These, when taken as a whole in a study by Anderson & Billou (2007), can be used as the basis for a basic framework of best practices. More specifically, “At the heart of virtually all of these organizations’ success has been the development of an approach that delivers the 4As - availability, affordability, acceptability and awareness” (Anderson & Markides, 2007).
Unfortunately, even when effective strategy is used, there are certain challenges which it can be exceedingly difficult for the business to overcome when using a bottom of the pyramid approach. At least one recent study, based on looking back over two decades of experience, suggest that in order to accomplish the number of sales necessary brands need a penetration rate of more than 30% (Saminis, 2012). Unfortunately, standard penetration rates are closer to 10%, at which the bottom of pyramid approach cannot turn a profit. For example, Proctor and Gamble, for example, achieved a penetration rate of between 5 and 10% in for test markets, based on the bottom of the pyramid approach, marketing the Pur water purification powder, but earned a profit margin of only 50% when compared with other products and markets worldwide, ultimately forcing them to use the products solely as a humanitarian effort and not as a for profit venture (Saminis, 2012).
References:
Anderson, J., & Billou, N. (2007). Serving the world's poor: Innovation at the base of the economic pyramid. Journal of Business Strategy, 28(2), 14-21. doi:10.1108/02756660710732611
Anderson, J., & Markides, C. (2007). Strategic Innovation at the Base of the Pyramid. MIT Sloan management review, 49(1), 83-88. Retrieved from http://sloanreview.mit.edu/article/strategic-innovation-at-the-base-of-the-pyramid/
Prahalad, C.K & Hart, S. L. (2002). The Fortune at the Bottom of the Pyramid. Strategy+Business 02(26): 1-7. Retrieved from http://people.eecs.berkeley.edu/~brewer/ict4b/Fortune-BoP.pdf
Simanis, E. (2012). Reality Check at the Bottom of the Pyramid. The Harvard Business Review (June 2012): 2-6. Retrieved from http://eriksimanis.com/wp-content/uploads/2014/06/Simanis-Reality-Check-at-BOP-June-2012-HBR.pdf
3) Two prominent economic arguments against free trade are 1) the need to protect domestic industries and 2) the need to shield infant industries. Do you agree with this argument? Please provide a rationale and specific examples for your response.
There is a long held debate over whether or not free trade should be supported, both nationally, and as a part of the global economic system. The two most prominent arguments are shielding infant industries, and protecting domestic industry. It is important to understand the basis of these arguments before determining their validity, and discussing their greater implications on both the local and global economies.
The concept of protecting infant industries emerged during WWII, as developing countries tried to protect their young attempts at industry, through governmental policies (Krueger & Tuncer, 1982). These measures are designed to shelter industry while it is young so a nation can build up a major industrial base in a specific market, so that it is more capable of demanding market shares in the global setting. The idea is, that while free market trade may be optimal, holding back, in specific areas, will pay off over time (Sercovich & Teubal, 2013). According to Baldwin (1969) however, the theoretical validity of these measures is based on assumptions, and empiricism, which apply in specific, infrequent circumstances and so may not apply to the global market as a whole.
In contrast, the argument in favor of protecting domestic industry against free trade, sometimes called protectionism economic policy, is that it creates fairer competition between importuned goods, and those produced domestically, to encourage domestic job growth, and product purchasing (Krugman, 1993). Unfortunately, evidence suggests that restricting free trade, in the name of protectionism, through tariffs and other economic policy that limits trade, ultimately does more harm to an domestic economy, than it does good (Krugman, 1993).
Today, it would be safe to say that the global economy has moved economic strategy away from the concepts that supported the limitation of free trade, at the time that protectionism, and infant protection, were actively employed. The G20 Summit went so far as to state “We will not repeat the historic mistakes of protectionism of previous eras.” (Global Trade Alert, 2013) The summit conquered that there should be efforts to maintain and build confidence the in the global economy and cooperation of international trade systems (Global Trade Alert, 2013).
In summary, there was a time, after WWII when nations were both developing and rebuilding that there was a strong economic reason for the development of policies, like the protection of domestic and infant industry, in order to grow the local economy, and grab control of a meaningful sector of the global market share. However, in today’s global economy, the practices that once protected create barriers to trade, and become self limiting. It is essential that nations move away from these policies and toward free trade in order to benefit their local economies and overall economic growth. This means the cancelation of tariffs and control measures that reduce the impact of international factors, and the increased pursuit of exportation opportunities, instead of relying on government assistance to capture local revenue.
References:
Baldwin, R. (1969). The Case against Infant-Industry Tariff Protection. Journal of Political Economy, 77(3), 295-305. Retrieved from http://www.jstor.org/stable/1828905
DOI:10.1080/09537325.2013.815713
Global Trade Alert (2013). Independent Monitoring of the policies that effect free trade. Retrieved from http://www.globaltradealert.org/
Krueger, A., & Tuncer, B. (1982). An Empirical Test of the Infant Industry Argument. The American Economic Review, 72(5), 1142-1152. Retrieved from http://www.jstor.org/stable/1812029
Krugman, P. (1993). The Narrow and Broad Arguments for Free Trade. The American Economic Review, 83(2), 362-366. Retrieved from http://www.jstor.org/stable/2117691
Sercovich, F.C. & Teubal M. (2013). An evolutionary view of the infant-industry argument. Technology Analysis & Strategic Management, 25 (7): 799-815.
3. Should companies start monitoring labor standards within their global supply chain?
In today’s global economy, there is an increased need for businesses to control the ethical standards, and sustainability of the global supply chain. This includes, more specifically, monitoring, and creating internal policies to control labor standards within the supply chain as a whole. A growing number of brands are concerned with the use of inappropriate labor practices by brand partners, or supply chain members, and the impact those labor practices can have on their global reputation, and long-term stability and sustainability. These non-governmental, multi-steakholder approaches ultimately create a more meaningful change in the supply chains standards and are highly complementary to existing governmental regulation (O’Rourke, 2003). As such, it is crucial that as part of a movement to create more global business standards, labor conditions be specifically considered.
It can be easy for a brand to get distracted by the drive to increase profits, however, now more than every brands are in the public eye. As such, it is crucial that brands focus their energy on becoming good corporate citizens with a high level of corporate social responsibility (CSR) (Gutherie, 2012). If the supply chain becomes separated from positive labor practices ultimately controversy will pop up, and the long-term cost of the scandal, or reputational damage this is done will override the benefit gained from “expedient and profitable” outsourcing (Gutherie, 2012).
The labor standard in question include work hours, pay per hour, and labor conditions. It is not uncommon, in nations that labor is predominantly outsourced to, for members of a supply chain, or labor providers, to employ child labor, maintain hazardous working conditions, to require workers to labor for long hours, to pay below the cost of living, and otherwise treat laborers in unethical ways (Locke & Romis, 2007).
In one well publicized example, Nike came under extreme fire, and damaged their profitability and level of trust when consumers when the poor conditions in their eastern factories were made known (Locke, Qin, & Brause, 2007). As a result, hey increased their monitoring of conditions, and the level of control that they maintained over their supply chain members. A case study of their monitoring standards found that between 1998 and 2005, through increased monitoring of labor standards, and increased enforcement of local governmental policies regarding labor. While conditions did improve considerably, however, the study raised the question of whether or not simply monitoring is enough (Locke, Qin, & Brause, 2007).
Because of the limited social and governmental controls over labor conditions in many of the countries where labor is routinely provided, there is a growing cry for companies to provide independent review of their policies, and to enforce a supply chain wide, and conservative policy for the protection of laborers (Locke & Romis, 2007). In a comparative study of two Mexican factories, conducted by Locke & Romis (2007), it became apparent that companies need to collaborate with suppliers generate and actively implement specific remediation for labor violations. Ultimately, making these changes is key to a brands long term sustainability (Guthrie, 2012).
References:
Guthrie, D. (2012). Building Sustainable and Ethical Supply Chains. Forbes. Retrieved from http://www.forbes.com/sites/dougguthrie/2012/03/09/building-sustainable-and-ethical-supply-chains/#160a53655cf2
Locke, R.M. & Romix, M. (2007). Improving Work Conditions in a Global Supply Chain. MIT Sloan management review, (Winter 2007). Retrieved from http://sloanreview.mit.edu/article/improving-work-conditions-in-a-global-supply-chain/
Locke, R. M., Qin, F., & Brause, A. (2007). Does Monitoring Improve Labor Standards?: Lessons from Nike. SSRN Electronic Journal SSRN Journal, 61(1): 3-31. doi:10.2139/ssrn.916771
O'rourke, D. (2003). Outsourcing Regulation: Analyzing Nongovernmental Systems of Labor Standards and Monitoring. Policy Studies Journal, 31(1), 1-29. doi:10.1111/1541-0072.00001
