Multinational Business Strategies and Globalization’s Impact
Multinational Business Strategies
In a multi-branch strategy, each country’s operations are completely autonomous, and differences between them are remarkable because they have little interaction. Usually, there is a mechanism to coordinate with each other, but typically only financial strategies and advertising are aligned. Products are totally different. The subsidiaries are separate.
Overall Strategy
Multinationals that use this strategy behave as a single unit, avoiding duplication of functions and using the same products manufactured in plants that cover the entire world. An example is Levi Strauss. These companies tend to have highly centralized structures, as the parent company makes all decisions. Both the national identity of the country of origin and subsidiaries around the world are governed by the parent company. Therefore, the roles of the subsidiaries are totally passive. The subsidiaries are dependent.
Transnational Strategy
Companies that operate on a transnational level are both global and locally targeted. They are equally efficient as they operate in an international network of resources and capabilities. Affiliates in each country contribute ideas to adapt to local circumstances, leveraging their autonomy without losing sight of the overall profit goals. The parent company acts as the central hub, and affiliates are autonomous. Hewlett-Packard (HP) is an example.
SMEs and Multinationals: Effects of Globalization
Globalization is a process that has been developing over the last 25 years or so. The economies of most developed countries have been expanding their strategies, unifying their market vision, making it much easier to share market knowledge and strategies. Globalization has led to different consequences for the structure of companies, increasingly enhancing the size of firms. This implies that the number of SMEs worldwide is falling because their export capacity is less than their productivity levels. They also have more difficulty accessing innovation, as they usually operate in mature sectors. Globalization makes it hard for SMEs to differentiate their products. In contrast, the effects on multinational companies are different because they have less expensive access to technology and therefore invest more in R&D. They tend to have higher productivity, and other consequences involving economies of scale mean that with equal productive investment, performance is greater than in SMEs.
One negative consequence is the increase in bureaucracy (paperwork) because of the growth of the organizational structure of the company.
Financial Metrics for Businesses
Average Collection Period (ACP) is the average time it takes for a company to collect its receivables.
- Operating Cycle:
- Industrial Company: Time elapsed since the raw materials are purchased until the finished product is sold and collected. It is calculated by the Days of Inventory + Days of Production + Days of Sales + Days of Collection.
- Commercial Enterprise: Time elapsed from when the stock is purchased until it is sold and collected. It is estimated by Days of Inventory + Days of Collection.
- Cash Conversion Cycle: Operating Cycle – Days Payable Outstanding. The part of the operating cycle that is not financed by suppliers.
For example, a commercial company pays its suppliers within 60 days and has a sales period of 14 days. If the collection period is 0, the cash conversion cycle is also 0 because the suppliers finance the entire process.
Investment Project Analysis
A company in the wood sector has the opportunity to undertake an investment project with the following characteristics:
- Duration of the project: 2 years
- Initial Investment: 1,100 thousand euros
- Annual cost of money: 4%
- Expected cash flows: 450 thousand euros in the first year and 800 thousand euros in the second year
Calculate and interpret the payback period (recovery period) and the Net Present Value (NPV) of this investment.
Payback Period Calculation
After the first year, 650 thousand euros are still needed to recover the initial investment. We can use a proportion to find the remaining time:
12 months / 800 thousand euros = X months / 650 thousand euros
X = (12 * 650) / 800 = 9.75 months
0.75 months * 30 days/month = 22.5 days
Therefore, the payback period is 1 year, 9 months, and 22.5 days.
Net Present Value (NPV) Calculation
NPV = -Initial Investment + Σ [Cash Flow / (1 + Discount Rate)n]
NPV = -1100 + 450 / (1.04)1 + 800 / (1.04)2
NPV = -1100 + 432.69 + 739.64 = 72.33 thousand euros
The company would benefit if it carried out the investment project. Therefore, it is advisable to do it. We can say that the Internal Rate of Return (IRR) of the project exceeds 4% (the cost of capital), as the NPV is positive.