At the start, we should identify what is a multinational enterprise. This is a type of company, which has operations in one or more countries. That’s why it is hard to find out MNE’s as they usually hide down this fact.
So what are key characteristics which will help to identify multinational enterprises?
At the starting point, we should look at the environment in which they operate. MNE has two major areas of concern: the home country of its headquarters and the host countries in which it does business.
After this we are coming to characteristics:
First, their affiliates must be responsive to a number of important environmental forces, including competitors, customers, suppliers, financial institutions, and government. MNEs often use same suppliers overseas that they work with on their home market.
Second, MNE draws on a common pool of resources, including assets, patents, trademarks, information and human resources. As all of these resources allocates in the company that uses them, this makes access to other competitors unavailable.
Third, multinational enterprises link together the affiliates and business partners with a common strategic vision. So put all of the firms with whom multinational company works into the company’s overall plan of what it wants to do and how it intends to go about it.
Now we are coming towards the key question of this assignment, why firms want to become MNEs?
The first reason is that companies want to diversify themselves against risks and uncertainties of the domestic business cycle. For instance, if the economic situation in your country is negative, by having business worldwide will help you to cover a loss.
The second reason is to reduce cost. By building up operations close to the foreign customers, firms can get rid of transportation expenses, react quickly to customers needs and use local recourses or labor.
The third reason is to avoid barriers, like tariffs, which are designed in order to protect local businesses. For example, in the EU companies from outside are subject to tariffs on goods exported to the countries who are the members of this union. And firms producing goods within the EU can transfer their goods to any country in the bloc without paying any fees or duties.
Developing and having a strategic philosophy as a base for their business is very important for any multinational company. It consists of different stages:
1- Developing a basic mission. This is usually done by answering two main questions: What is the firm’s business? and What is the reason for existence?
2- Evaluation the external and internal environment. The reason for internal analysis is to examine company’s strength and weaknesses in terms of financing. This will help to decide what it can do in terms of expansion and capital investment.
Also, such analysis helps to identify long-term (2-5 years) and short-term (less than 2 years) goals. After this plan is divided into parts and each department will be assigned goals and responsibilities.
3- Implementation of the plan
4- Evaluation and control of operations.
After all theoretical approaches, I think we should look at few examples of how multinational companies internationalize and what motivated them to do so. I decided to look at two companies that focus on different customer types. One is Kaspersky Lab, which is more B-to-B (business-to-business) company, the other – Netflix, is purely B-to-C company (business-to-client). Is going international brings the same result or are there any differencies?
First company which I choose is ‘Kaspersky Lab’, which started as a local company in Russia in 1991 and had grown to one of the largest private cybersecurity companies.
These days the company operates in 200 countries and has 35 offices in 31 countries. Over 3,800 specialists are hired for them. It is a global company with the focus on international markets.
By their opinion being independent company helped them to be more agile, to think differently and act faster. They are forever innovating, delivering protection that’s effective, usable and accessible.
There are 400 million users and 270 000 corporate clients who use Kaspersky antivirus systems.
Being international allowed Kaspersky Lab’ to start working with global IT security vendors, international organizations and national and regional law enforcement agencies world widely. For example, the company takes part in joint cyberthreat investigations with such companies as Adoble, Dell Secureworks and etc. These companies as we can see are very big on their local market, so this helps Kaspersky Lab to better and faster to come into new markets. Also, Interpol and Europol are their strategic and official partners correspondingly. They help to analyze and identify harmful programs. This perfectly prove my earlier statement that having doing business with partners engaged in different industries helps them to diversify the risk of dependence on a single counterparty.
Respect and protection of peoples’ private life is the key rule for Kaspersky Lab, as the company works with personal data of their users. The information being processed is extremely important for determining new and unknown threats (for example WannaCry and ExPetr) this is how they can offer users better protection.
In 2016 Kaspersky Lab showed their financial statement for the last 10 years in business. During these years their worldwide income was growing at 34% each year. Also in 2012 company was mentioned in the international rating of the 500 fastest growing technological companies. Since 2007 their income increased by 864%. Such dynamic growth rate became possible only after the company expended its operations outside of Russia. Before that their revenue growth rate was in average 20% annually. This fact proves another reason to become international that I spoke about in the introduction – going international contributes to rapid increase in profitability a company as it starts to work with much larger number of customers in various industries.
Also, we should mention that ‘Kaspersky Lab’ is a corporate social responsible company. Their main mission is to protect the world, this unites the company’s business goals and approach to corporate social responsibility.
They are supporting and protecting FIDE and the World Chess Championships 2017 – 2018, as official cybersecurity partner. For the four years in a row, Kaspersky Lab has continued its sponsorship of the Kaspersky Riga Masters – the first professional snooker tournament to be held in Latvia, which started in 2014. Te founder of the company, Eugeny Kaspersky says that ‘chess is a beautiful game that involves lots of passion and tension. It is a human brainpower that is an ultimate differentiator in chess’.
Supporting a chess federation, in my opinion, is very logic for the company which fights with cybersecurity threats, in their business, it is very important to anticipate potential viruses as soon as possible, just like in chess game where you need also to anticipate the opponent’s next move.
So we can see, that ‘Kaspersky Lab’ matches with definitions and characteristics of MNE, which I mentioned above. Like, operating in more than one country, then it diversifies their risks, so if the local company will end contracts with them, a partnership with Interpol or FIDE will help them not to lose lots of profits. Also, they have a developed philosophy which is basically to protect their customers from cyber threats.
The second company which I chose is ‘Netflix’. It is interesting to look if going international for an Internet company leads to fast growth of customer base and profitability as in my case of traditional company like Kaspersky Lab’. According to statistics, worldwide membership grew up to 93.8 million by the end of 2017. Last year the company announced their plans for global domination as it launched in more than 130 countries. From the graph below we can suppose that the 100 million barrier will be easily overcome in the first quarter of 2018.
Comparing to their rivals, Netflix is a world leader of subscribers, their next competitors ‘Amazon Prime’ has more than 20 million fewer subscribes, but experts estimate that only 40 per cent actually use its video service. These figures show that Netflix tries to follow their mission statement:
‘Our core strategy is to grow our streaming subscriptions business domestically and globally, through continuous improving the customer experience, with a focus on expanding our streaming service to more Internet connected devices, while staying within the parameters of our consolidated net income and operating segment contribution profit targets’
In the modern world it is easier for an internet company to become international, but there are certain challenges that such companies will face. To become international and rapidly increase their subscribtion base they have to adopt their content to local or national standards, traditions and mentality. This requires large investments that Netflix is doing (pls refer to the graphs below).
Exactly for this reason they are not yet highly them profitable in global markets,
But by the projection of analytics in 2018 (on a free cash flow basis) and grow strongly thereafter.
In 2013 Netflix started to produce their original shows. In 2017 they spend nearly 6 bn dollars on it. An enormous part of this budget was invested in highly popular shows like ‘Stranger Thing’ and the drama about UK royal family ‘The Crown’, which even won to ‘Golden globe’ nominations.
Also in last few years, Netflix is also producing their own movies, which are not inferior to Hollywood blockbusters.
What else they should do in order to become more international then they are now?
In my opinion, to attract more subscribers, Netflix should have a wide content library which can satisfy all the preferences of the wide multinational audience. Instead of having shows which are only licensed for the US users.
Creating more original and local content should be the main aim for Netflix in the nearest future. It is a very expensive process, but worth it because as result they will enormously increase their audience.
Making international segment an already difficult task for the company, it requires an enormous investment in local content and higher quality over low bandwidth connections to attract subscribers.
In nearby future, I suggest that Netflix will face enormous competition from Disney, which is planning to launch their own online streaming service. They may take down tv shows which are based on Marvel comics such as Daredevil, Jessica Jones, The Punisher and etc, due to it being owned by Disney.
This proves the fact that becoming international for on-line company like Netflix has different challenges then a regular company that brings its product to a new market. For a company that sells content it is very important to adopt it to local mentality and traditions so that customers start buying it.
So we can see that in the 21st century it became important for any company to be international/multinational in order to be profitable, find more potential customers and to diversify their risks. From another hand, some multinational companies are bringing services to other countries which can’t be provided by local firms, like ‘Kaspersky Lab’ with their cybersecurity programs.
Personally, I think internationalization is inevitable, as the technologies were developing very fast in last two decades and it helps companies to spread their business worldwide and gives the opportunity to customers in different countries get the same services. I also think that internationalization contributes to increased competition on the market and leads to better quality of products and services, as when a foreign company enters a market, local companies have to catch up with new technologies that are coming to their original market.