“As multinationals mature, they become aware of the opportunities to be gained from integrating and creating a single strategy on a global scale.” Discuss, with reference to theories regarding economies of scale, scope and global competitiveness, drawing on real world organisation to illustrate your answer.
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“Clearly, a substantial challenge for multinational corporations (MNCs), in the current environment of intensified competition and rapid industry consolidation, is one of much greater worldwide integration. Necessitated by intense competitive pressures, MNCs are integrating their disparate country operations in order to achieve economies across markets and operating units. Preliminary results from a pilot study of the characteristics of common global practices among a sample of MNCs…explore the benefits MNCs derive from the implementation of common practices across their worldwide operations, in pursuit of a global strategy.” (Cavusgil, Yeniyurt and Townsend, 2004)
It is clear from this most recent piece of research into the worldwide integration of multinational corporations that there are immense potential benefits to multinationals from pursuing a strategy of integration across markets and regions. However, expanding internationally requires managerial adaptation due to differences between national cultures, and these dynamics have not necessarily been used to represent the cultural diversity that may hinder efforts to integrate and coordinate efforts as required by global strategies. Tempering popular perspectives that extol the benefits of diversity, some theories claim that cultural diversity among international divisions of a global firm may actually impede efforts to merge activities and expertise between those units. Specifically, direct, such as market, production and technology, and indirect: knowledge-based benefits are more difficult to exploit when cultural diversity makes activity sharing and expertise transfer less efficient. Parallel to established product relatedness theory, this postulates that culturally related international firms will enjoy greater efficiencies than culturally diverse multinationals. (Johnson and Scholes, 2002)
Nowhere is this better seen than in the strategies of Novotel, a strategic business unit of the Accor group, and one of the world’s major hotel chains, occupying a leading place in Europe and with locations globally. Calori, Baden-Fuller and Hunt (2000) interpreted Novotel’s change management programme in the 1990s, summarising the actions that managers took in terms of strategy and organization, also carefully considering the sequence and timing of events, and how this resulted in rapid transformation in an organisation employing more than 30,000 people. They also strongly emphasised the dialectical nature of the change processes: an element often ignored in the literature, observing both deliberation and experimentation; both integration and differentiation. They found that, Novotel was careful to offer different offerings in each nation it operates, dependent upon the local customs, culture and expectations for a hotel. However they also found that, in line with several of Morrisey’s (1996) theories on long range strategic planning, the managers were careful to always ensure that the company’s global direction and overall strategy were clear and consistent in the minds of staff, and were strongly projected to the customers. Nowhere is this more clearly seen than on Novotel’s website, with its headline: “412 Hotels & Resort in 56 countries. Novotel guarantees you the best price”, showing that no matter where in the world you go, Novotel always aims to offer you a budget hotel room. Such clear positioning and marketing is one of the main reasons the company has been so successful for so long.
Another important consideration in integrating a strategy is that competitive advantage can be gained through quality, even in mature commodity industries, but that a quality-based competitive strategy will be successful only if managers understand both how quality is perceived by their customers and their company ‘s level of quality performance. As such, the critical issue of many modern strategies is the importance of gaining customer attention: the underlying view that a global business strategy can be simply programmed and customers merely involved in the activity as rational agents ignores the value of seasoned judgment and, ultimately, critical thinking. The essential objective is clearly to engage in producing a value- added customer relationship, and therefore, gaining customer attention is equally, or indeed, more important than a simple focus on customer relationship management. What is required is a strategic focus on the real complexity of the relationship which organizations are initially able to establish with customers. (Pearson, 1999)
Nowhere is this more apparent than in the UK’s food and beverage sector, which remains the country’s single largest manufacturing sector, thanks in part to a general economic recovery and its world-renowned high quality and innovative products. In recent years, the economic performance of the UK has been robust, owing to low inflation, resilient growth, strong job creation and increases in consumer spending: “According to the Office for National Statistics (ONS), the UK’s GDP rose 3.1% in 2004, compared with 2.2% in 2003. As a result, household spending on food has been increasing over the past few years. Merger and acquisiton activity in the UK is on the rise. According to the Office of National Statistics, the number of M&A in the food industry increased 14.4% in 2004 to 278 deals from 243 in 2003.” (Mergent Industry Reports, 2005) There is a significant foreign investor interest in UK companies, which shows a general confidence in the UK economy. In addition, the increase in convenience stores and hypermarkets: which sell groceries and offer a much wider choice of brand products, along with intense competition, has had a large impact on the food industry. As a result, many food companies are looking to consolidate their business to maximize competitiveness in terms of price, innovation and coverage. As companies seek to improve corporate profitability in a competitive market environment, further consolidation is expected. The growth of convenience stores and hypermarkets is likely to be the main force in the food and drink sector over the next few years. (Mergent Industry Reports, 2005)
Judith Bevan (2005) examines the battle between the supermarkets in a recent book: “Trolley Wars”, where the ‘wars’ in question are not just price wars; they are space and strategy wars. With UK retail being the most competitive sector in one of the most competitive countries in the world, supermarkets desperate for supremacy fight over prices, squeeze suppliers and grab land in order to win. Each of the players has brought the industry forward at a crucial time: “Whether it was Sainsbury for quality, M&S for innovation or Tesco for value, one message is clear: the winners, and today this is Tesco by a long way, never forget that the customer is king and that only by constantly listening, anticipating and reacting can they survive in today’s market.” (Bevan 2005) UK supermarket customers are in search of quality, price and value, and are among the savviest in the world. The lesson is clear: complacency kills, and a fragmented, unclear, strategy, as witnessed in Sainsbury’s recent advertising campaigns, which have driven away some of the chains traditionally loyal customers. (Finch, 1999)
However, it is also vitally important for firms to consider that any strategy they formulate should not only offer customers what they want and expect from the overall corporation, but should also be financially and commercially viable. In particular, managerial considerations, desires, priorities and egos should not override the need to remain profitable and fulfil shareholder, and other stakeholder, goals and expectations. This is covered quite clearly in the managerially theory of the firm, developed by Stoelhorst and van Raaij (2004) as a meaningful alternative to the neoclassical theory of the firm. Their paper argues that the main use of a managerial theory of the firm is explaining performance differentials between firms, especially in the area of marketing strategy, which we have already seen is of great import to multinational corporations. Indeed, the authors explicitly state that: “Marketing shares an interest in explaining performance differentials with strategic management and organizational economics.” (Stoelhorst and van Raaij, 2004) Likewise, they show that a generic understanding of the sources of performance differentials is emerging across these three disciplines, and incorporate this understanding in a unifying conceptual framework that is both managerially relevant and embedded in economic theory.
The lessons from this paper would be well learnt by easyGroup ltd. director, and well known entrepreneur, Stelios Haji-Ioannou. In 2003, Haji-Ioannou announced that easyCinema would open in Milton Keynes, England, with the introductory cinema chain aimed at providing an addition to the existing easyGroup architecture, which at the time encompassed rental cars, internet cafés and an airline. (Ritson, 2003) Haji-Ioannou has frequently admitted that price elasticities are ‘the core’ of the easy brand, and is careful to always select markets where consumers will make differential trade-offs between time and price. “For example, if one is a price-sensitive European student flying home to spend holidays, he is likely to book months in advance and will probably accept an early morning departure.” (Ritson, 2003) By using technology and just-in-time inventory systems, easyGroup allows its component firms to flexibly set prices and automatically respond to market elasticities.
However, just two months after Ritson’s article, Haji-Ioannou was forced to admit, in June 2003, that he may have to close the easyCinema in Milton Keynes by the end of the year. EasyGroup companies, excluding the publicly owned easyJet, in fact lost about £120m over the past four years, with EasyInternetCafe forming the bulk of this, turning in about £90m in losses between 1999 and 2003. However, in the same time period, easyCar lost about £20m, the Internet shopping portal easyValue lost £5m and the easyMoney credit card £2.7m.
The basis for these losses can be seen in the fate of easyCinema, a good model for the management style of Stelios Haji-Ioannou and “his declining empire, EasyGroup.” (Kroll, 2004) Kroll’s article recalls the earlier giveaway of airplane tickets on the steps of an Athens courthouse, where he was being sued by travel agents, but focuses on his ‘potshot’ at U.S. film distributors, which initially refused to give EasyCinema first runs because his ticket prices were too low to offer them a decent cut. The US film distributors’ move was mirrored by distributors in Britain, which meant that, although Stelios had found another price elastic market: in its first week, easyCinema filled 56% of its seats, patronage has dropped steadily since. (Wylie, 2003) The main reason for this is the lack of recent release, as traditionally distributors make money by creaming a high percentage of box-office revenue in the first weeks of a film’s run, a percentage that easyCinema was unwilling and unable to provide. Stelios tried to persuade Britain’s Office of Fair Trading to investigate what he alleges is illegal collusion and resale price maintenance among distributors (Wylie, 2003); but this appeared to be yet another publicity stunt from the self-styled ‘consumer’s champion’, who had yet again failed to address the concerns of some of the most powerful stakeholders in one of his ventures.
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Of course, a single, integrated strategy pursued to it’s fullest: by integrating the strategy of a multinational corporation involved in just one market, can reap the highest rewards of all. Research into this was recently conducted by Kim and Lee (2001), who admit to being “motivated by an empirical observation that two Korean carmakers, Daewoo and Hyundai, have pursued very different globalisation strategies despite their structural similarities.” Using in-depth case studies and extensive interviews with top managers, they explained several lessons that can be drawn from these strategies. Being direct competitors in the Korean automobile industry has affected the firms’ globalisation strategies to a great extent: each company took into account its competitive position, vis-à-vis the other’s, when forging its global strategy. For instance, Daewoo focused on achieving economies of scale by targeting the East European markets for its overseas capacity expansion, as a way of overcoming its manufacturing cost disadvantage in the domestic market vis-à-vis Hyundai’s. Likewise, Hyundai’s globalisation strategy: exporting supported by technological advancement; was driven by an implicit assumption of its competitive advantage vis-à-vis Daewoo’s.
This initial observed pattern of decisions was formed mostly by such determining factors as top management’s commitment to specific strategic decisions and resources, both managerial and financial, from each company’s parent business group. It is vital to note here that, unlike easyGroup’s strategy, driven largely by the ego and self-image of it’s director, was in fact driven by the core competencies of each company: developing and exploiting new markets to obtain economies of scale, and maintaining a technological advantage. Subsequently, these integrated strategies were altered or reinforced as each company accumulated different learning experiences, demonstrating that unless the learning process is well managed, it can do as much harm as good to a company. (Kim and Lee, 2001)
Indeed, Hamid (2002) has shown that leading companies around the world are developing integrated global compensation and benefit strategies in order to help them stay ahead of the competition. “These companies are finding that their human resource strategy can be structured using similar philosophies to reward people regardless of their geographic boundaries.” (Hamid, 2002) The need to develop more consistent global strategies in concert with reward practices worldwide, is driven by companies finding that global compensation and benefit strategies can also, in fact, achieve cost savings through economies of scale. The ability to shed the costs of communicating, administering and coordinating several compensation strategies is proof positive that multinational corporations can derive benefits from integrating their global strategies in almost any area of their operations.
An excellent example of this is Ryanair, which in August of this year (2005) shrugged off “soaring fuel charges, fierce competition and an ongoing row with pilots, to announce record pre-tax profits of €76.9m for the three months to July. Despite increasing capacity by 30pc, the airline managed to increase its yield per seat by 3pc, while simultaneously cutting costs per passenger by 6pc. Yesterday, by way of an encore, it released figures which showed that it carried a record 3,198,977 passengers in July, breaking the 3m barrier for the first time, and taking the number of passengers it has carried over the past 12 months to just over 30m. But, according to Michael Cawley, Ryanair’s chief operating officer, whether you are talking about expansion, cost cutting or alternative revenues, the airline, which now operates on 250 routes across 21 countries, is only just beginning.” (McEnaney, 2005)
One of the key messages from the latest results is that Ryanair has no trouble cutting costs and generating economies of scale: both vital advantages in the global budget air travel market. In fact, when you factor out fuel costs, over which the company has only limited control, Ryanair managed to reduce costs by 11pc in the last quarter. This is despite the fact that Ryanair is now unable to significantly reduce costs by cutting back on the trimmings: with no trimming left to cut, the company has been forced to take a ‘big-picture approach’, through a single intergrated global strategy: take as many passengers as cheaply as possible. According to Mr Cawley, much of the current cost reduction is due to the replacement of the company’s 737-200 airplanes, which carry 130 passengers, with new 737-800 aircraft, which carry 189. “The 737-800 has boosted passenger numbers per plane by 45pc. As we get more and more of them in the fleet, our costs per passenger go down. Also, newer aircraft have lower costs.” (McEnaney, 2005)
There seems to be no end to the expansion of Ryanair, which also recently announced that it would fly eight routes to Poland by November, and recently made Pisa in Italy its fourteenth European base. In the coming months, the airline is expected to announce two new European bases. One of these will most likely be Beauvais in France, which is the only major European country where Ryanair does not yet have a base. The second is likely to be either in Spain or in Scandinavia. According to Cawley, this expansion also helps to lower costs: “We enjoy significant economies of scale. We used to have three routes from Pisa. Now we have eight, but there is no increase in our Italian advertising costs.” (McEnaney, 2005)
Thus, the potential opportunities gained by multinationals that develop integrated global strategies are almost too large to measure, with economies of scope and scale, and large technological and consumer based advantages However, it is also extremely important that, as well as aim for these advantages, and the associated global competitiveness benefits, that MNC’s ensure that they are not pursuing a single integrated strategy for the wrong reasons, as easyGroup has done recently. They must also continue to monitor and analyse the needs and demands of all shareholders and stakeholders, especially the major ones, and remember that the most important stakeholders in many markets, regions, cultures and industries may not be the customers, as is usually believed. This task is far from easy, but for a multinational with the required knowledge, capabilities and learning capacity, the benefits cannot be overstated, and the potential to grow, diversify and consolidate, as Ryannair has recently shown, can be huge.
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