MNCs’ competitive advantages against domestic firms

By | April 18, 2014

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1.     Background of the topic…………………………………………………………………………….. 2

2.     Literature review on competitive advantage………………………………………………….. 2

3.     Creation and innovation relative………………………………………………………………….. 3

3.1      New product……………………………………………………………………………………. 3

3.2      Superior corporate culture…………………………………………………………………. 4

3.3      Organizational learning……………………………………………………………………… 5

4.     Competition relative…………………………………………………………………………………… 5

4.1      First move advantage……………………………………………………………………….. 5

5.     Cooperation………………………………………………………………………………………………. 6

5.1      Learning from partners……………………………………………………………………… 6

6.     Co-option…………………………………………………………………………………………………. 7

6.1      Placating influential stakeholders……………………………………………………….. 7

7.     Conclusion……………………………………………………………………………………………….. 7

1.        Background of the topic

 

With the accelerating trend of globalization in the new century, most countries have witnessed an increasing important role that the Multinational Corporations (MNCs) or Transnational Corporations (TNCs) have played in the business world. But there have been debates over the source of the MNCs’ competitive advantages since the in general understanding local firms seems to be at advantageous position against the MNCs because of the local assets that they possessed in term of well established market base, distribution channels, governmental protection and preference and so on. This assignment will focus on this topic and try to discuss the various sources from which the MNCs gain their competitiveness which are not available to the domestic firm and so making them running in a different way from the domestic rivals.

 

2.        Literature review on competitive advantage

 

Competitive advantage stem from the superior value that offers lower prices than competitors when benefits provided are equivalent or offering unique benefits (Porter 1985) which the competitor could not provide to the customers. Competitive advantages in a particular company could be gained from different levels: environmental factors, organizational factors or personal factors, and they could classified into three groups: ownership based, access based and proficiency based (Ma 1999). Below is a 4Cs framework that analyze the four determinants of global competitive advantage: Creation and innovation relative, Competition relative, Co-Option and Cooperation as illustrated in the figure below which also be framework that this study is constructed.

 

 

Figure 1.0 The determinants of global competitive advantage

 

3.        Creation and innovation relative

 

3.1    New product

 

 

Figure 2.0 Product life circle (Source: Benwaicome.blog.com 2009)

Product life circle theory treats product as life which will go through four major steps as shows above in the figure 2.0: Research and development (also called as Introduction), Growth, Maturity and decline. As the green line shows, in the first stage when the product is first introduced into the market, other competitor have not even started yet about the R&D of the product or have the idea of the services, depending on different product and service, this time lag could be longer if other competitors have difficulties to develop similar products to bring equivalent benefits to the consumers. For example, Windows series system are the red chip product of Microsoft Corporations, still contribute major advantages to the companies for its uniqueness that others companies have not yet developed similar products. Since multinational corporations in many cases tend to possess more research and development (R&D) power than the domestic companies, in this point rapid and frequent new product development is one of the most important sources of competitiveness to the multinational corporations (MNCs).

 

3.2    Superior corporate culture

 

Corporate culture could be defined as the way things get done around here (in the company) (Deal & Kennedy 1982). And the concept of corporate culture in other words could also refer to the common value, convention or visions widely shared by the staffs within the organization. And corporate culture is usually considered as an important source of competitiveness since it is internal and difficult to change thus most companies would build up their own corporate culture that best fit their own situations. Generally speaking, multinational corporations (MNCs) would have more superior corporate culture than their domestic rivals because of their global vision, embracing more diversified talents and cultures and more powerful corporate learning capability and what’s more some local firms may still on the way to build up their own culture. So the well established corporate culture could bring competitiveness to the multinational corporations (MNCs) against the domestic firms.

3.3    Organizational learning

 

Organizational learning refers to the process of improving actions through better knowledge and understanding (Fiol & Lyles 1985). Because knowledge is too some extent scattered geographically, and in a country or a market, companies usually share similar knowledge through learning from competitors and partners, then transnational corporations (TNCs) that have subsidiaries more than one country or one market could control more knowledge so as to increase their competitiveness to over perform the domestic firms. The way that a transnational corporation (TNC) enjoy knowledge base competitiveness from organizational learning is like this: the headquarter of a multinational company could encourage the flow of possessed by different subsidiaries in different markets so that a single subsidiary could have more knowledge than their domestic rivals.

 

4.        Competition relative

 

4.1    First move advantage

 

As mentioned above MNCs tend to own more R&D resources and more effective organizational structure that allow the companies to move faster and maintain leading positions in their respective industries. The first move advantage is defined as the initial occupant of the access to resources that the followers could not match or taking a leading strategic position (Grant 2005). The most usual form of first move strategy is to apply for the patent of products to keep the competitors away from copying the product in term of product design for example. There are three major benefits that the first mover could enjoy: firstly, the industrial leaders by taking first move could build up reputation of the company and  product branding among the consumers; secondly the first movers in some industries also can set up the industrial and product standard which is still blank when the market is developed first time by the industrial leaders, such standard setting is common in the IT and telecommunication industries and it can help the industrial leaders to created leading position against the followers; thirdly, the industrial leaders could keep the position of cost leadership by moving faster than the followers along the industrial learning curve. As the figure below demonstrates, the average unit cost of product would be reduced when the companies benefit from “learning by doing” as the cumulative output increases (Open.ac.uk 2009).

 

 

Figure 3.0 Industrial learning curve

 

5.        Cooperation

 

Cooperation refers to the collaborative arrangements with other players in the company’s business environment (Dyer & Singh 1998). Companies tend to cooperate with partners usually competitors to gain resources or share risks by setting collaborative arrangements such as a joint venture.

 

5.1    Learning from partners

 

In a fast changing business environment, companies could cooperate with each other and learn from partners to make both party stronger competitors in the industry. For example, in a competitive and rapidly changing industrial environment two or more large companies with excellent learning capacity and resources could cooperate with each other and take the first move action together and thus to squeeze the survival room for other competitors especially those of small scale. Since multinational companies are usually of larger scales, the relatively smaller domestic firms would not have comparably sufficient resources and talents to carry out the inter-firm technology transfer (Stobaugh 1998). So the better learning capability also helps the multinational companies to over perform the domestic firms.

 

6.        Co-option

 

6.1    Placating influential stakeholders

 

Eyeing on the global market but still treated as foreign companies, many multinational corporations (MNCs) would turn to building up good network relationship with the influential stakeholders such as the various nongovernmental organizations (NGOs), such non-market relative effort could have non-trivial influence on the multinational corporations’ success and competitive advantages in a world wide scale (Baron 1985). Generally speaking, large multinational corporations usually have more experiences and motivations in participating the charity activities through which they can co-opt the influential stakeholders and build up good reputations among the society not only for the companies but also for the branding of the products. In this way multinational corporations (MNCs)  could also gain competitive advantage against the domestic firms by contributing more to the society and having more social marketing efforts.

 

7.        Conclusion

 

Global competitiveness could be sourced from creation and innovation relative, competition relative, co-option and cooperation, but sources of global competitiveness are not confined to these four sides. So based on the analysis above, transnational corporations (TNCs) though in general understanding does not enjoy some resources that the local firms could enjoy such as government preference, but they still can outperform the domestic competitors in their home market through extra effort to utilize their unique resources to create competitiveness that could not be copied by the local firms due to some resources are not available tot eh domestic firm.

 

 


 

Reference:

 

Benwaicome.blog.com 2009, Product life circle, view on 9 Nov 2010,[online] available:http://benwaicome.blog.com/2009/01/10/product-life-cycle/

 

Ma 1999, Creation and preemption for competitive advantages, Management decision, Vol.37, No.3, pp.259-66

 

Porter, M. E. 1985, Competitive advantage: creating and sustaining superior performance, The Free Press: New York

 

Grant, R. M. 2005, Contemporary Strategy Analysis, Fifth Edition,Blackwell Publishing Ltd: Oxford

 

Open.ac.uk 2009, Knowledge and learning in the industry life cycle, view on 10 Nov 2010, [online] available:http://openlearn.open.ac.uk/mod/oucontent/view.php?id=399104&section=4.3.1]

 

Dyer, J. H. & Singh, H. 1998, The relational view: cooperative strategy and source of inter-organizational competitive advantage, Academy of management review, Vol.23, No.4, pp. 660-79

 

Stobaugh, R. 1998, Innovation and competition, Cambridge, Mass: Harvard Business School Press

 

Baron, D. 1985, Integrated strategy: market and non market components, California Management Review, Vol. 37 No. 3, pp. 47-65

 

Fiol, C. M. & Lyles, M. 1985, Organizational Learning, Academy of Management Review, Vol. 10, No. 4, 803-813

 

Deal, T. E. & Kennedy, A. A, 1982 Corporate cultures: The Rites and Rituals of  Corporate Life,. Addison-Wesley Co., London