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Multinationals’ sins pave the way to the

expansion of domestic companies


Slawomir Wycislak

Slawomir Wycislak is Introduction


Assistant Professor in the
Economists attempt to examine factors influencing the position of multinationals versus
Department of International
Relations and Foreign domestic companies, but many studies focus only on India, China, (Pillania, 2009; Chen,
Policy, Institute of Political 2004), or Brazil, Mexico (Cuervo-Cazurra, 2008). Those studies also to some extent raise an
Science and International issue of expansion of local companies within the region of heritage. For example, the
Relations, Jagiellonian companies which developed strongly across Latin America, and derive from this region are
University, Krakow, Poland. defined as Multi Latinas.
The perception of multinational companies has witnessed substantial changes since 1970s
(Dunning, 1993; Kogut and Zander, 2003). Early definitions stressed the ability of
multinational companies to reduce transactional costs through the internalization of
activities. The latest definition of multinationals highlights knowledge and learning as main
components of their competitive advantage.
Good understanding of nature of multinationals and domestic businesses is also a subject of
attention within representatives of business practice. Market research companies or
consultancy firms provide definitions of local, regional, international business. For example,
one global market research company set up the following definitions of domestic/regional/
international brand:
B Domestic/local brand. 90 percent or more of its volumes sold in a particular country.
B Regional brand. 80 percent or more of volumes sold in a particular region.
B International brand. Available in at least two regions and no more than 79.9 percent can
be sold in its biggest region.

These rules are not fixed, however. An international brand can be a brand with more than 80
percent of its volume in one region as long as its volume exceeds certain threshold (i.e. 4
million 9-litre cases in the alcoholic drinks industry) and is sold in at least 2 regions. What is
more, producers are asked which category they think their brand is, in order to confirm the
classification is correct.
The definition of multinationals and domestic companies is based on both the approach of
academicians and contribution provided by business practice.
Geographical dispersion, global effectiveness, complexity, sovereignty, ability to integrate,
flexibility, were used as criteria to identify multinationals. Domestic company is defined as a
business that generates at least 70 percent of revenues in Poland. Company should
generate at least 30 percent of revenues within at least two countries of the Eastern Europe
region to be seen as regional business. The region of Eastern Europe encompasses:
Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia,
Hungary, Latvia, Lithuania, Macedonia, Moldova, Poland, Romania, Russia, Serbia and

DOI 10.1108/17515631011013087 VOL. 11 NO. 1 2010, pp. 13-19, Q Emerald Group Publishing Limited, ISSN 1751-5637 j BUSINESS STRATEGY SERIES j PAGE 13
Montenegro, Slovakia, Slovenia, Ukraine. The nature of multinational, regional and domestic
business was discussed with manufacturers during interviews conducted by the author.
Company should have at least 1 percent share in the market to be included within the study.

Multinationals vs domestic companies vs regional companies


The non alcoholic drinks market includes following sectors: coffee, tea, juices, carbonates,
bottled water, energy drinks, sport drinks, ready-to-drink tea, ready-to-drink coffee. Shares
of multinationals and domestic companies are calculated within off-trade value retail sales of
non alcoholic drinks. On-trade plays small role in sales, and its share does not exceed 15
percent of total sales (see Figure 1).
Multinationals’ share increased from 45 percent in 2004 to nearly 50 percent in 2008,
respectively, share of domestic companies suffered from a decline from 25 percent to almost
14 percent. However, three of the domestic companies transformed into regional
businesses, and gained about 15 percent. Both domestic and regional companies had 29
percent share of the non alcoholic drinks market in Poland in 2008.
With regard to intensive efforts of multinationals devoted to gain market shares, the position
of domestic and regional companies is very solid.
Coca-Cola, Nestlé, Kraft Foods, Pepsi Co, Danone, Tchibo, Unilever are leading
multinationals. Grupa Maspex Wadowice is the leader in sales of both domestic and
regional players included in the study.

Strategy
The first mover advantage is an important component of strategic orientation of multinational
companies. For example, in 2002 Nestlé became the first company to introduce a 3-in-1
instant speciality coffee brand. The success of Red Bull arose from to the first mover
advantage in energy drinks segment.
After the breakthrough in 1989, the year the iron curtain fell, domestic companies suffered
from problems associated with having to adjust to the new economic system. However,
domestic players adopted new management methods and defended themselves against a
growing power of multinationals. What is more, at the beginning of 1990s small domestic
players mushroomed across a country, some of them managed to convert from a distribution
businesses into production giants. Grupa Maspex Wadowice was an example of a
successful transformation of a small entity that operated within distribution into large

Figure 1 Multinationals v. domestic companies on the soft drinks market in Poland over the
period of 2004-2008

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business with many successful brands not only in Poland, but also across the whole Eastern
Europe.
The fact that local players are often quicker to respond to changing consumer trends gives
them a significant first mover advantage within emerging market segments. For this reason,
global giants overlooked potential opportunities. For example, domestic Grupa Maspex
Wadowice managed to transform a small niche of carrot juices aimed at children, into a new
soft drinks segment. It was a breakthrough within the company’s history. The launch of
cappuccino type of instant coffee represented a major breakthrough for domestic player
Mokate, then one of the leading players in coffee segment.
Most of multinationals targeted high price and high-end segments when entering Poland.
However, the relatively high price sensitivity of Poles forced manufacturers to apply low
pricing strategy as the competitive weapon. The latter benefits domestic companies.
The high price strategy of multinationals provided local firms with opportunities to grow their
businesses, and increase sales in lower mainstream and economy segments. After gaining
competitive strengths, domestic companies upgraded their products to challenge higher
mainstream and premium segments. Domestic companies offer lower priced products than
equivalents from the portfolio of multinationals in mainstream and premium segment. For
example, the Cisowianka brand available in sales of bottled water outpaced the Kropla
Beskidu brand from the portfolio of Coca Cola on the back of lower prices. The risks
associated with the strategy of high pricing is shown best on the example of the Ocean
Spray cranberry juices brand. Though Ocean Spray brand pricing was partially adjusted to
the purchasing power of local consumers, domestic companies introduced lower priced
alternatives with minimal cranberry juice content. Through this move however domestic
companies showed better understanding of local consumers’ needs. Despite the high
availability, the Ocean Spray was almost completely withdrawn from the domestic market.
The advantage of multinationals arises from the co-operation with international retail chains,
international manufacturers of ingredients or packaging. This co-operation tends to exclude
domestic companies from the supply chain. For example, one of the multinationals signed a
large contract with a producer of glass bottles under the condition that this producer will stop
the co-operation with a local manufacturer of non alcoholic drinks. Domestic producer
Mokate has invested significant sums in the production of semi-finished products i.e.
foaming agents, creamers, toppings, and milk to gain better control over supply chains, and
to diversify its revenue streams.
The fact that multinational companies generally have very strong links with international retail
chains means that their sales continue to increase in-line with the expansion of such outlets.
High-level fees for the access to shelves of retail chains are high barrier of entry for domestic
players. Supermarkets and hypermarkets distribute only about 40 percent of non alcoholic
drinks, however. Independent food stores continue to dominate non alcoholic distribution in
Poland. This situation benefits domestic companies.
There are also examples of mutual co-operation of multinationals. For example, Pepsi Cola is
the distributor of the Lipton Ice Tea, one of Unilever brands.

Brand
In the heart of strategy of multinationals is building of loyalty to global brands such as Coca
Cola, Pepsi Cola, Lipton, Jacobs, Nescafe, Tetley. Multinationals are the biggest advertisers.
High brand loyalty means low price sensitivity of demand, and high mark-ups.
A few domestic companies capitalize on the high awareness of old brands. Such awareness
was built on the base of their availability under the Communist regime before 1989. The
choice of products was limited and available brands enjoyed a very high awareness among
consumers. For example, Polo Cockta, was a successful carbonates brand during the Soviet

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era and has proven particularly popular with consumers nowadays. Herbapol, a brand
which was synonymous with herbal tea, currently benefits the position of this local company.

New product developments


Domestic companies introduced 75 percent of new product developments throughout the
period of 2004-2006. Interesting is also a fact that, domestic firms took longer time to catch
up with mega trends, i.e. raising health awareness, fair trade, and to launch novelties
accordingly.
The strategic approach of domestic companies was defined under the term ‘‘strategy
oriented towards new product developments’’.
In terms of confrontation of domestic and regional players against multinationals, there are
three types of behavior:
1. novelties as the source of the first mover advantage i.e domestic Food Care that
introduced energy drinks in a plastic bottles and managed to overtake Red Bull brand as
the leader in energy drinks segment;
2. novelties as the element of the direct confrontation; and
3. novelties as the way to avoid competition against multinational companies, local firm
attempted to avoid the competition against multinationals by developing new products,
and targeting a niche such as Pu-erh tea or Rooibos tea.
There are examples of multinationals that did not manage to gain good position in the market
due to the high rate of innovation of domestic companies. Pepsi stays a few steps behind
competitors in terms of new product developments. The international giant in juice sales,
Eckes Granini has partially withdrawn from the Polish market.
The consumers’ loyalty towards domestically produced brands was leveraged by Coca
Cola. In 2004, Coca Cola introduced the Kropla Beskidu brand. It is a product manufactured
only for the local Polish market.
The strategic premise of Maspex is to track the time that products spent on shelves, and
react accordingly. If a product does not win a good response among consumers after a year
of market presence it is withdrawn from company’s portfolio.

Cultural sensitivity
Polish consumers are more receptive to emotional arguments than rational line of reasoning.
The Poles are rather mistrustful, conservative. When it comes to food and beverages, they
show high level of ethnocentrism.
The cultural factor affects purchasing decision of consumers. Low trust results in high
popularity of translucent packaging items. Conservatism translates into demand for bottled
water that symbolize Polish origin., i.e. Naleczowianka, Kropla Beskidu, Zywiec Zdroj. Coca
Cola withdrew the Bonaqua brand from the market and replaced it with the product that
brings associations with regional values. Pepsi Cola also did not manage to raise share in
bottled water on the back of international Acqua Mineral brand. For this reason locally
developed Gorska Natura brand was launched on the domestic market..
The marketing message is based on the emotional line of reasoning. The strong bond to
local values is also reflected by high share of independent grocers in sales of non alcoholic
drinks.

Learning
Domestic companies learned fast and managed to gain a relatively strong position within the
brand intensive industry.

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Domestic players have surprised their larger rivals by quickly introducing their own
competitive brands and also by leading the way in terms of the launch of new larger plastic
bottle format brands within energy drinks – a development which multinationals are reluctant
to follow since it would involve a reduction in the very high profit margins currently enjoyed by
such companies.
Multinationals Danone and Nestlé distribute domestically produced brands Zywiec Zdroj
and Naleczowianka respectively. Poland has large underground water resources, the quality
of which is amongst the highest in Europe, and many Polish consumers believe that
imported brands are of lower quality.
Coca-Cola, despite heavy advertising, was forced to withdraw its Bonaqua brand due to
disappointing sales as a result of the high level of ethnocentricity amongst Polish
consumers. There were also claims that Bonaqua is unsafe.
Unilever also drew conclusions on behavior of domestic consumers and launched the
mainstream tea brand – Saga. As the result international Brooke Bond brand tea almost
disappeared from store’s shelves.
Both Kropla Beskidu and Saga brands were developed exclusively for the Polish market.
Following unsuccessful performance of international brands, Pepsi Cola decided to roll out
the bottled water brand developed only for the domestic market.

Crisis
Brands which compete within the lower the premium and standard price segments perform
well within the times of financial crisis. With buying these brands, consumers sustain the
status of consumption despite of lower incomes. This provides better position to domestic
companies in confrontation against multinationals.
For example, domestic Maspex surprised market with numerous new launches in order to
outpace multinationals.

Other factors
The global nature of the coffee and, to some extent, tea segments favors multinational
players. Global companies are able to realize significant economies of scale with regard to
coffee bean, tea leaf, and logistics costs.
Polish per capita tea consumption is one of the highest in Europe, just behind Russia,
Ireland, Turkey. The long tradition of tea drinking resulted in established companies that
were familiar with tea business before the iron curtain fell in 1989. The experienced
managers set up private business after 1989. Moreover production of fruit and herbal teas
was well developed. There are also smaller companies that pull out niche strategies,
benefiting from domestically available, high quality herbs. Before 1989, coffee was seen as a
luxury product. It was due to the supply shortages. The entry of multinationals translated into
the introduction of new products, educational campaigns, and building of coffee culture. On
the side of consumers, speeding lifestyles translated into raising demand for coffee.
Multinationals also profit from the global nature of coffee business. Global companies reach
large-scale benefits on the back of better access to coffee beans and lower logistics cost..
There are still many domestic players that grew on the back of good quality water. A few of
them such as Muszynianka, Staropolanka gained nationwide popularity. There are plenty of
bottling plants in Poland, in total about 160.

Limits
The expansion of multinationals will be limited by their ability or even willingness to adjust to a
very local requirements of consumers. The scale of these local requirements could be too

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limited for multinationals to explore profitably. However, the successful transformation of
niche into a large business constitute the success of companies that challenge the position
of multinationals not only in Poland but also across Eastern Europe. Domestic players better
transform global trends to local requirements. The financial crisis could also hamper the
expansion of multinationals since domestic companies are relatively resistant to the impact
of global downturn. What is more, consumers tend to choose lower priced domestic
alternatives in times of downturn. The expansion of multinationals will also be dependant on
their ability to shape industry to accept high-mark up products that dominate the portfolio of
multinational companies. The co-operation with stakeholders and third parties such as trade
association will be important in this matter.

References
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multinationals’’, Journal of Business Strategy, Vol. 26 No. 6, pp. 45-50.

Cuervo-Cazurra, A. (2008), ‘‘The multinationalization of developing country MNEs: the case of


multilatinas’’, Journal of International Management;, Vol. 14 No. 2, pp. 138-54.
Dunning, J.H. (1993), Multinational Enterprises and the Global Economy, Addison-Wesley, Wokingham.
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Pillania, R.K. (2009), ‘‘Multinationals and emerging markets’’, Business Strategy Series, Vol. 10 No. 2,
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Further reading
ACNielsen (2005), ‘‘Executive summary’’, Soft Drinks in Poland, Dubai.
ACNielsen (2006), ‘‘Executive summary’’, Soft Drinks in Poland, Dubai.
ACNielsen (2007), ‘‘Executive summary’’, Soft Drinks in Poland, Dubai.
Bhattacharya, A. and Michael, M.J. (2008), ‘‘The BCG 50 local dynamos: how dynamic RDE-based
companies are mastering their home markets – and what MNCs need to learn from them’’, available at:
www.bcg.com/publications/files/The_BCG_50_Local_Dynamos_March2008.pdf (accessed 16 July 2009).
Buckley, P.J. and Casson, M. (1976), The Future of Multinational Enterprise, Macmillan Press, London,
Basingstoke.
Canadean (2005), The Soft Drinks Service, Annual Report – 2005, Cycle Poland, Basingstoke.
Canadean (2007), The Soft Drinks Service, Annual Report – 2007, Cycle Poland, Basingstoke.
Chandra, M. and Neelankavil, J. (2008), ‘‘Product development and innovation for developing
countries’’, Journal of Management Development, Vol. 27 No. 10, pp. 1017-25.

Dicken, P. (1992), Global Shift. Internationalization of Economic Activity, The Guilford Press, London,
New York, NY.
Euromonitor International (2007), Hot Drinks – Poland, London.
Euromonitor International (2008), Hot Drinks – Poland, London.
Ghemawat, P. and Hout, T. (2008), ‘‘Tomorrow’s global giants not the usual suspects’’, Harvard Business
Review, No. 11, pp. 107-11.
Handel (2004), Handel issues from years 2004, 2005, 2006, 2007.
IDB (2008), ‘‘From multinationals to global Latinas. The new Latin American multinationals’’, available at:
www.iadb.org/intal/intalcdi/PE/2009/03415.pdf (accessed 12 July 2009).
Isenberg, D.J. (2008), ‘‘The global entrepreneur’’, Harvard Business Review, No. 11, pp. 80-8.

Nohria, N. and Ghosal, S. (1997), The Differentiated Network. Organizing Multinational Corporations for
Value Creation, Jossey-Bass Publishers, San Francisco, CA.
Poradnik Handlowca (2004), Poradnik Handlowca, issues from years 2004, 2005, 2006, 2007.

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World Investment Report (2002), ‘‘Transnational corporations and export competitiveness’’, United
Nations Conference on Trade and Development, New York, NY, Geneva.

Word Investment Report (2005), ‘‘Transnational corporations and the internationalization of R&D’’,
United Nations Conference on Trade and Development, New York, NY, Geneva.

World Investment Report (2007), ‘‘Transnational corporations, extractive industries and development’’,
United Nations Conference on Trade and Development, New York, NY, Geneva.

Zorska, A. (2007), Transnational Corporations, PWE, Warsaw.

About the author


Slawomir Wycislak obtained his doctorate from the University of Economics in Krakow. He
has over seven years’ experience of working with companies of various sizes, including
mid-sizes firms and multinationals. His academic interests focus on analysis of activity of
companies across international markets, and in particular the reason behind expansion of
multinational corporations as well as international marketing, risk management, methods
and techniques of diagnosis in the social sciences. Slawomir Wycislak can be contacted at:
slawomir.wycislak@gmail.com

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