• The University of Queensland

• IBUS 7302

THE MULTINATIONAL ENTERPRISE

Contents

Introduction 38 The nature of MNEs 39 Strategic management and MNEs 46 A framework for global strategies: the FSA–CSA matrix 49 It’s regional, not flat 52 Multinationals in action 52 Appendix A to Chapter 2 64 Appendix B to Chapter 2 67 ■ Active Learning Case Disneyland in Europe 37

■ International Business Strategy in Action

Italian family firms 44 Nestlé 48 ■ Real Cases Starbucks 59 Sony 60

Objectives of the chapter

Most of the best-known companies in the world are multinational enterprises, and many of their names are easily recognized because their products and services are so popular. This is true for US multinational enterprises, such as General Electric, Exxon Mobil, and Ford, but for others as well. Consider, for example, some of the largest industrial multinationals headquartered in the European Union: Unilever (UK/Netherlands), Fiat (Italy), Nokia (Finland), Volkswagen (Germany), Philips (Netherlands), and Peugeot (France); and in Japan: Sony, Fuji, and Toyota. There are also MNEs from non-triad areas such as Sinopec (China), Samsung (South Korea), Codelco (Chile), AngloGold (South Africa), and Bombardier (Canada). The primary objective of this chapter is to examine the nature and operations of multinational enterprises.

The specific objectives of this chapter are to:

1 Describe the characteristics of multinational enterprises.

2 Explain the internationalization process.

3 Explain why firms become multinational enterprises.

4 Discuss the strategic philosophy of these firms.

5 Introduce a country/firm framework for examining a firm’s

competitiveness.

6 Study some of the ways in which these firms use strategic

management.

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CHAPTER 2 THE MULTINATIONAL ENTERPRISE 37

Between 1988 and 1990 three $150 million amusement parks opened in France. By 1991 two of them were bankrupt and the third was doing poorly. Despite this, the Walt Disney Company went ahead with a plan to open Europe’s first Disneyland in 1992. Far from being concerned about the theme park doing well, Disney executives were worried that Euro Disneyland would be too small to handle the giant crowds. The $4.4 billion project was to be located on 5,000 acres in Seine-et-Marne, 20 miles (32 km) east of Paris. And the city seemed to be an excellent location; there were 17 million people within a two-hour drive of Euro Disneyland, 41 million within a four-hour drive, and 109 million within six hours of the park. This included people from seven countries: France, Switzerland, Germany, Luxembourg, the Netherlands, Belgium, and the UK.

Disney officials were optimistic about the project. Their US parks, Disneyland and Disneyworld, were extremely successful, and Tokyo Disneyland was so popular that on some days it could not accommodate the large number of visitors. Simply put, the company was making a great deal of money from its parks. However, the Tokyo park was franchised to others—and Disney management felt that it had given up too much profit with this arrangement. This would not be the case at Euro Disneyland. The company’s share of the venture was to be 49 percent for which it would put up $160 million. Other investors put in $1.2 billion, the French government provided a low-interest $900 million loan, banks loaned the business $1.6 billion, and the remaining $400 million was to come from special partnerships formed to buy properties and to lease them back. For its investment and management of the operation, the Walt Disney Company was to receive 10 percent of Euro Disney’s admission fees, 5 percent of food and merchandise revenues, and 49 percent of all profits.

The location of the amusement park was thoroughly researched. The number of people who could be attracted to various locations throughout Europe and the amount of money they were likely to spend during a visit to the park were carefully calculated. In the end, France and Spain had proved to offer the best locations. Both countries were well aware of the park’s capability for creating jobs and stimulating their economy. As a result, each actively wooed the company. In addition to offering a central location in the heart of Europe, France was prepared to provide considerable financial incentives. Among other things, the French government promised to build a train line to connect the amusement park to the European train system.

Thus after carefully comparing the advantages offered by both countries, France was chosen as the site for the park.

At first things appeared to be off to a roaring start. Unfortunately, by the time the park was ready to open, a number of problems had developed, and some of these had a very dampening effect on early operations. One was the concern of some French people that Euro Disney was nothing more than a transplanting of Disneyland into Europe. In their view the park did not fit into the local culture, and some of the French press accused Disney of “cultural imperialism.” Others objected to the fact that the French government, as promised in the contract, had expropriated the necessary land and sold it without profit to the Euro Disneyland development people. Signs reading “Don’t gnaw away our national wealth” and “Disney go home” began appearing along roadways. These negative feelings may well have accounted for the fact that on opening day only 50,000 visitors showed up, in contrast to the 500,000 that were expected. Soon thereafter, operations at the park came under criticism from both visitors and employees. Many visitors were upset about the high prices. In the case of British tourists, for example, because of the franc exchange rate, it was cheaper for them to go to Florida than to Euro Disney. In the case of employees, many of them objected to the pay rates and the working conditions. They also raised concerns about a variety of company policies ranging from personal grooming to having to speak English in meetings, even if most people in attendance spoke French. Within the first month 3,000 employees quit. Some of the other operating problems were a result of Disney’s previous experiences. In the United States, for example, liquor was not sold outside of the hotels or specific areas. The general park was kept alcohol free, including the restaurants, in order to maintain a family atmosphere. In Japan, this policy was accepted and worked very well. However, Europeans were used to having outings with alcoholic beverages. As a result of these types of problems, Euro Disney soon ran into financial problems.

In 1994, after three years of heavy losses, the operation was in such bad shape that some people were predicting that the park would close. However, a variety of developments saved the operation. For one thing, a major investor purchased 24.6 percent (reducing Disney’s share to 39 percent) of the company, injecting $500 million of much needed cash. Additionally, Disney waived its royalty fees and worked out a new loan repayment plan with the banks, and new shares were issued. These measures allowed Euro Disney

ACTIVE LEARNING CASE

Disneyland in Europe

▼

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38 PART ONE THE WORLD OF INTERNATIONAL BUSINESS

to buy time while it restructured its marketing and general policies to fit the European market.

In October 1994, Euro Disney officially changed its name to “Disneyland Paris.” This made the park more French and permitted it to capitalize on the romanticism that the word “Paris” conveys. Most importantly, the new name allowed for a new beginning, disassociating the park from the failure of Euro Disney. This was accompanied with measures designed to remedy past failures. The park changed its most offensive labor rules, reduced prices, and began being more culturally conscious. Among other things, alcoholic beverages were now allowed to be served just about anywhere.

The company also began making the park more appealing to local visitors by giving it a “European” focus: 92 percent of the park’s visitors are from eight nearby European countries. Disney Tomorrowland, with its dated images of the space age, was jettisoned entirely and replaced by a gleaming brass and wood complex called Discoveryland, which was based on themes of Jules Verne and Leonardo da Vinci. In Disneyland food services were designed to reflect the fable’s country of origin: Pinocchio’s facility served German food, Cinderella’s had French offerings, and at Bella Notte’s the cuisine was Italian. The company also shot a 360-degree movie about French culture and showed it in the “Visionarium” exhibit.

These changes were designed to draw more visitors, and they seemed to have worked. Disneyland Paris reported a slight profit in 1996, and the park continued to make a modest profit through to the early 2000s. In 2002 and 2003, the company was once again making losses, and new deals had to be worked out with creditors. This time, however, it wasn’t insensitivity to local customs but a slump in the travel and tourism industry, strikes and stoppages in France, and an economic downturn in many of the surrounding markets.

1 What are some of the characteristics of multinational enterprises that are displayed by the Walt

Disney Company?

2 Why did Disney take an ownership position in the firm rather than simply licensing some other firm

to build and operate the park and settling for a royalty on all sales?

3 In what way did Euro Disney reflect the strategic philosophy of Walt Disney as a multinational

enterprise?

4 Did Disney management conduct an external environmental analysis before going forward with Euro

Disney? Explain.

Geographic description of Disneyland Paris visitors, 2002

Source: Adapted from Euro Disney S.C.A., Annual Report, 2002.

Euro Disney has cut its annual losses by 28 percent, despite a fall in visitor numbers to Disneyland Paris. The company that runs the theme park said its net loss for the 12 months to 30 September, 2010 was €45.2m ($62m; £38m), down from €63m a year ago. Euro Disney said that while visitor numbers to Disneyland Paris fell 2.6 percent to 15 million, average spending per tourist rose 2.4 percent to €45.30. Annual revenues at the company were up 4 percent to €1.28bn. Euro Disney is 40 percent owned by Walt Disney, 10 percent by the Saudi royal family, and 50 percent by other shareholders. Philippe Gas, Euro Disney chief executive, said that despite a difficult economic context, Disneyland Paris remained Europe’s most popular tourist destination.

Websites: www.disneyinternational.com ; www.disneylandparis.com ; www.disney.com .

Sources: Adapted from Euro Disney SCA, Annual Report, 2002; “Euro Disney Theme Park Cuts Loss, Shares Fall,” Yahoo News: Reuters, April 22, 1998; Paulo Prada, “Euro Disney Does Nicely. So Why Are Investors Grumpy?” Wall Street Journal, September 6, 2000, p. A20; “Disneyland Paris Cuts Losses Despite Fewer Visitors,” BBC Online, http://www.bbc.co.uk/news/ business-11726261, November 10, 2010.

A multinational enterprise (MNE) is a company that is headquartered in one country but has operations in one or more other countries. Sometimes it is difficult to know if a firm is an MNE because multinationals often downplay the fact that they are foreign held. For

Multinational INTRODUCTION

enterprise (MNE)

A company headquartered in one country but having operations in other countries

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