STRATEGIC ALTERNATIVES – Based upon the above identification of the key issues at hand and your analysis of the overall situation, you should now be able to generate a few options for the firm in terms of what course of action it might take. You should list each of these strategic alternatives and discuss the relative merits (pros and cons) of each.
Note: It has to be answered in 2-3 pages and you have to do a PowerPoint based on the part V (5)
Case Study 1.3: Mabe: Learning to Be a Multinational (A)
The company we are analyzing is Mabe, which began manufacturing cabinets and expanded to developing kitchen appliances. Mabe began the internationalization process by manufacturing appliance in Mexico and exporting them to the United States, this was the first step in globalizing the brand. After three decades of production, Mabe entered a joint venture with General Electric to gain knowledge and enter new markets. Through acquiring plants and other joint ventures, Mabe became known in North America, Latin America, and Europe. They acquired Fagor operations, a Spanish manufacturer, in Argentina in 1998 and Dako, GE operations in Brazil, in 2002. With these acquisitions they realized that locals with knowledge of the industry were best to lead the foreign operations.
One of the biggest aspects of business globalization and expansion is knowing which countries are the best to invest in and which have the most risk. When going through the internationalization process, companies research Brazil, Russia, India, and China, also known as BRIC countries. These countries are very attractive to companies because they are known for having fast growing markets, perfect for companies looking for foreign investments. With an attractive market and room for profitability, Mabe decided to enter a joint venture in Russia.
Throughout this case, there were many issues discussed that Mabe encountered. One key issue Mabe faced was having to train U.S. suppliers who were not used to exporting components to developing countries. This was due to the fact that Mabe and GE had their largest manufacturing facility in Mexico. Another problem was when the company expanded to Brazil. By acquiring Bosch and GE operations, they had a difficult time coming together because of all the different cultures. Cultures such as American, German, Brazilian, and Mexican all had to work together. This type of diversity can make it hard on employees to work and cooperate with each other.
An issue Mabe faced was the increase of fresh food consumption. This meant less demand for appliances, such as freezers. Some challenges presented in this case were the mainly focused on the challenges of doing business in Russia. While Russia offers innovation programs and government funding for foreign companies, there are many risks to doing business in Russia. One issue Russia faces is a decreasing population and the deterioration of human capital. Those are not the only issues Mabe faces in Russia, they also face the government of Russia. The Russian government is known for having weak legislature that might make it difficult for companies to do business in Russia. Another issue faced in Russia is the vastness of the country. By having such a large country, religion, language, and sometimes culture can change depending on the region of where you are located. Therefore, Mabe must have an open-mind about how they would approach the diversity of the country.
General Environmental Analysis
As mentioned previously, a political issue that externally affects Mabe is the political environment of Russia. The case discussed how corruption and bribery play a big part in Russian politics. The government interferes with businesses, the Russian tax system is very complex, and laws are only applied randomly. This type of political environment makes companies not want to invest in Russia because of its instability. Managers feared that corrupt law enforcement and a lack of property rights would make investing in Russia a poor decision. Understanding the political external environment of a foreign country is important for investors and managers to know in order to make the right decisions on where to expand their company.
Another issue Mabe externally faces is the social environment of Russia. The decreasing population and low human capital shows the type of social environment Russia has. Whether it’s due to accidents or violence, the population decrease in Russia is greater than countries in Africa. The deterioration of human capital is due to low levels of health and knowledge in Russia. As the text said, “Natural resources cannot on their own replace the value of human capital,” which shows how the conditions in Russia might make it unattractive for Mabe to do business there. Another social issue presented to Mabe was how Russians handled business. Russia’s culture is known for being collectivist, paternalist, and sometimes still Communist. The case discussed how Russians distrust outsiders and prefer short-term projects. This becomes a social problem for Mabe because it could be challenging to find Russians who are willing to work with people from other countries or who come from a different culture.
Mabe entered the joint venture in Russia because investors believed that Russia would be a “last frontier” for investments. However, when the financial crisis of 2008 began, it was clear that Russia was not the place to invest. Economically, Russia only had one big bank and loans were hard to obtain. The case states “The mortgage market was virtually nonexistent, representing only three per cent of GDP, the lowest of any emerging market.” This lack of economic attractiveness would make companies not want to invest in Russia. There is essentially more economic risk than reward by taking a company to Russia. Russia has only one place to make transactions and investments, they have no mortgage market, and loans cannot be acquired. Whether political, social, or economical, the external issues from Russia became a big influence on how Mabe was going to do business over there.
SWOT Analysis (Michelle)
SWOT analyses are used to measure a company’s (S) Strengths, (W) Weaknesses, (O) Opportunities, and (T) Threats. The strengths and weaknesses of a company are the internal factors affecting it, while the opportunities and threats are the external factors affecting it. To succeed and maximize profits, companies need to conduct thorough SWOT analyses to convert their external threats into their internal strengths, and their internal weaknesses into their external opportunities. From the case presented in the book, a scrupulous SWOT analysis of Mabe was made, and it goes as follows:
Mabe is aware of the environments that it conducts business in, and adapts itself to that particular environment to succeed. That is a major strength for any multinational firm to possess. There have been so many instances when companies open operations abroad and conduct business in the foreign country like they do business in their domestic countries, without taking into account the difference between the two cultures. Companies who do this usually realize that they are wrong, and then adapt themselves to the foreign country. Mabe happened to experience a similar issue when it went into Brazil with Mexican-Americans. This presented some challenges for them. From those challenges, they learned that “the best people to operate businesses are the locals who know the industry.”
As strengths, Mabe also has a strong brand name and a great international strategy. It functions in three continents so far: North America, Latin America, and Europe. Its products are sold and distributed in more than 70 countries around the world. It offers a wide range of products, and holds a great majority of market share in the home appliances industry. Lastly, Mabe partners only with the top multinational companies. It has participated in Joint ventures to enter foreign markets and to gain access to advanced technologies, technical advice and raw materials.
Just as it is considered a strength for Mabe to rely on joint ventures to enter foreign markets, gain access to advanced technology and technical advice, that can also be considered to be a weakness. It is a weakness in the sense that Mabe does not have enough intellectual property, or innovative skills within its walls to come up with advanced technologies, so it has to engage in joint ventures. It can also be deemed a weakness in the sense that, Mabe partakes in joint ventures because it does not have enough resources or capital to enter foreign markets on larger scales, or on its own.
From the case, it can be inferred that there are many opportunities that Mabe can take advantage of in the BRIC countries. The BRIC countries are Brazil, where Mabe currently has operations, Russia, where it’s considering ceasing operations, India and China, where it’s considering opening operations. The BRIC countries are expected to overtake the largest industrialized countries in size and in GDP by 2050. With these countries on the brink of economic expansion, Mabe can benefit from their economic development if it starts to do business in them.
Lastly, the threats that Mabe faces are similar to that of all multinational companies’ threats. Those are tough competition, currency risk, governmental, and environmental policies. Mabe should keep in mind that whenever it enters a foreign market, the risk of competition awaits it; therefore it should be ready to compete. Currency risk is one of the most important threats that Mabe has to hedge against. Currency risk, or exchange rate risk, is the likelihood that the currencies of the countries in which Mabe does business might depreciate or appreciate. For Mabe, there are no problems when currencies depreciate, it is when they appreciate. When those currencies appreciate, Mabe’s products become cheaper in those countries, and operations become more expensive to run. Lastly, there are governmental and environmental policies that can affect Mabe’s foreign sites. Environmental laws are subject to becoming stricter as the world is becoming more environmentally conscious, and if there are no political stability in those countries, governmental laws can hurt foreign businesses.