MCS 496 Global Strategy

Unit 5: International Strategies and Structures

Learning Objectives

By the end of this unit, students should be able to:

• Show the relationship between the dynamic global context in which

strategy is made and the type of strategy that is effective in that context

• Demonstrate how the international strategies of firms evolve in relation

to the pressures for cost reduction and pressures for local responsiveness
Introduction
• External Environmental factors that affect International
Businesses include political, economic, and cultural
institutions found in nations, the international trade and
investment framework, and the international monetary
system.
• We now focus on the firm itself discuss the different
strategies that firms pursue when competing
internationally, consider the pros and cons of these
strategies, and study the various factors that affect a
firm’s choice of strategy.
The Dynamic Context of Global Strategy:
Nations and Firms
• Despite the social, cultural and technological changes behind the
development of global market segments, there are additional economic
and political pressures on governments to create barriers to this increasing
transnational flow of goods and services.
• Fierce global competition and the changed economic structures of many industries
• Calls for protectionist policies e.g. quotas and tariffs
• Protectionist policies restrain competition
• Deregulation does the opposite: opens up market competition to ensure
efficiency
• Global strategies rest on the interplay of the competitive advantage of firms
and the comparative advantage of nations
Configuration and Co-ordination
• MNCs have more organizational choices and options than are
available to a national firm.
• Global strategy choices by an MNC are complex and involve the
search for competitive advantage from global configuration/co-
ordination choices throughout the entire value chain of the firm.

• Configuration concerns decisions as to where to locate the firm’s

value chain activities to achieve the optimal form of configuration
• Co-ordination concerns how to set up the appropriate organizational
structure and systems to support the actual choice of configuration of
the MNC
Forms of configuration/co-ordination
• Dispersed configuration means having value chain activities in many
countries
• Concentrated configuration means having value chain activities
mostly in the home country
• High co-ordination refers often to mainly centralized decision-making
• Low co-ordination also refers to mainly decentralized decision-
making
The ‘stages’ model of internationalization
• Product life cycle model of internationalization (Vernon, 1966)
• Stage 1 (i.e. development stage): a product is developed and sold
domestically
• Stage 2 (i.e. introduction stage): it is exported
• Stage 3 (i.e. growth stage): as scale develops, exporting will be replaced by
FDI so that the product will start being produced in the countries in which
demand is large.
• Stage 4 (i.e. maturity stage), production moves to lower wage cost developing
economies.
• Stage 5 (i.e. decline stage) is when the product is imported into the country
from which it originally emerged
The ‘stages’ model of internationalization
• The Uppsala model developed by Johanson and Valne (1977)

• This model saw the firm gradually internationalizing through increased commitment to, and
knowledge of foreign markets.

• The firm is most likely to enter markets with successfully greater psychic distance, that is less
and less similar to the home base

• Thus, at the outset it sells to countries culturally similar to itself.

• This model depends on the notion that uncertainty, and hence risk, increases with
increasing psychic distance and unfamiliarity.

• Evidence, however, shows internationalizing firms going for larger markets instead of familiar
markets and also, for many markets at the same time
The ‘stages’ model of internationalization

• The contrast is between the so-called ‘waterfall’ model of global

expansion (one country at a time) and the contrasting ‘sprinkler’ model
(many countries at a time).

• In current markets with ever-shortening product life cycles, and the

strategic importance of ‘time-to-market’, there is often insufficient time to
adopt the waterfall approach.

• In the current global economy the more recent model of ‘born global’
internationalization is becoming increasingly common. ‘Born globals’ are
companies that internationalize at or near their founding. This clearly
involves no stages at all since they are launched as global firms from birth.
Pressures for cost reduction and local
responsiveness
• Firms that compete in the global marketplace typically face two types
of competitive pressures that affect their ability to realize location
economies and experience effects and, to leverage products and
transfer competencies and skills within the enterprise.

• They face pressures for cost reductions and pressures to be locally

responsive
Cost Pressures and Pressures for Local
Responsiveness
• Responding to pressures for cost reductions requires that a firm try to
minimize its unit costs.
• But responding to pressures to be locally responsive requires that a
firm differentiate its product offering and marketing strategy from
country to country in an effort to accommodate the diverse demands
arising from national differences in consumer tastes and preferences,
business practices, distribution channels, competitive conditions, and
government policies.
• Because differentiation across countries can involve significant
duplication and a lack of product standardization, it may raise costs
Pressures for Cost Reductions
• Responding to pressures for cost reduction requires a firm to try to lower
the costs of value creation
• A manufacturer might mass-produce a standardized product at the optimal
location in the world, wherever that might be, to realize economies of scale,
learning effects, and location economies.
• A firm might outsource certain functions to low-cost foreign suppliers.
• Pressures for cost reduction can be particularly intense in industries
producing commodity-type products where meaningful differentiation on
nonprice factors is difficult and price is the main competitive weapon.
• This tends to be the case for products that serve universal needs.
• Universal needs exist when the tastes and preferences of consumers in
different nations are similar if not identical.
• This is the case for conventional commodity products such as bulk
chemicals, petroleum, steel, sugar, and the like.
• It also tends to be the case for many industrial and consumer
products, for example, handheld calculators, semiconductor chips,
personal computers, and liquid crystal display screens.
• Pressures for cost reductions are also intense in industries where
major competitors are based in low-cost locations, where there is
persistent excess capacity, and where consumers are powerful and
face low switching costs.
• The liberalization of the world trade and investment environment in
recent decades, by facilitating greater international competition, has
generally increased cost pressures.
Pressures for Local Responsiveness
• Pressures for local responsiveness arise from national differences in
consumer tastes and preferences, infrastructure, accepted business
practices, and distribution channels, and from host-government
demands.
• Responding to pressures to be locally responsive requires a firm to
differentiate its products and marketing strategy from country to
country to accommodate these factors, all of which tends to raise the
firm’s cost structure.
Differences in Customer Tastes and Preferences
• Strong pressures for local responsiveness emerge when customer
tastes and preferences differ significantly between countries, as they
often do for deeply embedded historic or cultural reasons.
• In such cases, a multinational’s products and marketing message have
to be customized to appeal to the tastes and preferences of local
customers.
• This typically creates pressure to delegate production and marketing
responsibilities and functions to a firm’s overseas subsidiaries.
Differences in Infrastructure and Traditional Practices
• Pressures for local responsiveness arise from differences in infrastructure
or traditional practices among countries, creating a need to customize
products accordingly.
• Fulfilling this need may require the delegation of manufacturing and
production functions to foreign subsidiaries.
• For example, in North America, consumer electrical systems are based on
110 volts, whereas in some European countries, 240-volt systems are
standard- infrastructure.
• Also in Britain, people drive on the left-hand side of the road, creating a
demand for right-hand drive cars, whereas in France (and the rest of
Europe), people drive on the right-hand side of the road and therefore
want left-hand-drive cars- tradition.
Differences in Distribution Channels
• A firm’s marketing strategies may have to be responsive to differences
in distribution channels among countries, which may necessitate the
delegation of marketing functions to national subsidiaries.
• E.g. Poland, Brazil, and Russia all have similar per capita income on a
purchasing power parity basis, but there are big differences in
distribution systems across the three countries.
• In Brazil, supermarkets account for 36 percent of food retailing, in
Poland for 18 percent, and in Russia for less than 1 percent.
• These differences in channels require that companies adapt their
own distribution and sales strategy
Host Government Demands
• Economic and political demands imposed by host-country
governments may require local responsiveness.
• E.g., pharmaceutical companies are subject to local clinical testing,
registration procedures, and pricing restrictions, all of which make it
necessary that the manufacturing and marketing of a drug should meet
local requirements.
• Because governments and government agencies control a significant
proportion of the health care budget in most countries, they are in a
powerful position to demand a high level of local responsiveness.
• More generally, threats of protectionism, economic nationalism, and
local content rules dictate that international businesses manufacture
locally.
Choosing a strategy
• How do differences in the strength of pressures for cost reductions
versus those for local responsiveness affect a firm’s choice of
strategy?
• Firms typically choose among four main strategic postures when
competing internationally. These can be characterized as a global
standardization strategy, a localization strategy (multidomestic, a
transnational strategy, and an international strategy.
• The appropriateness of each strategy varies given the extent of
pressures for cost reductions and local responsiveness.
Four Basic Strategies
 Global Standardization Strategy
• Focus on increasing profitability and profit growth through economies of
scale, learning effects, and location economies; i.e., their strategic goal is to
pursue a low-cost strategy on a global scale.
• The production, marketing, and R&D activities of firms pursuing a global
standardization strategy are concentrated in a few favorable locations.
• Do not customize products because customization involves shorter
production runs and the duplication of functions, which tends to raise costs.
• Prefer to market a standardized product worldwide.
• Tend to use their cost advantage to support aggressive pricing in world
markets.
• This strategy makes most sense when there are strong pressures for cost
reductions and demands for local responsiveness are minimal.
Localization Strategy
• Focuses on increasing profitability by customizing the firm’s goods or services so that
they provide a good match to tastes and preferences in different national markets.
• Localization is most appropriate when there are substantial differences across nations
with regard to consumer tastes and preferences, and where cost pressures are not too
intense.
• By customizing the product offering to local demands, the firm increases the value of
that product in the local market.
• On the downside, because it involves some duplication of functions and shorter
production runs, customization limits the ability of the firm to capture the cost
reductions associated with mass-producing a standardized product for global
consumption.
• The strategy may make sense, however, if the added value associated with local
customization supports higher pricing, which enables the firm to recoup its higher costs,
or if it leads to substantially greater local demand, enabling the firm to reduce costs
through the attainment of some scale economies in the local market.
Transnational strategy
• A global standardization strategy makes most sense when cost
pressures are intense, and demands for local responsiveness limited.
• Conversely, a localization strategy makes most sense when demands
for local responsiveness are high, but cost pressures are moderate or
low.
• What happens, however, when the firm simultaneously faces both
strong cost pressures and strong pressure for local responsiveness?
• According to some researchers, the answer is to pursue what has
been called a transnational strategy
Transnational strategy
• Two of these researchers, Christopher Bartlett and Sumantra Ghoshal, argue that in
today’s global environment, competitive conditions are so intense that to survive,
firms must do all they can to respond to both pressures for cost reductions and local
responsiveness.

• Bartlett and Ghoshal note that in the modern multinational enterprise, core
competencies and skills do not reside just in the home country but can develop in any
of the firm’s worldwide operations.

• Thus, they maintain that the flow of skills and product offerings should not be all one
way, from home country to foreign subsidiary. Rather, the flow should also be from
foreign subsidiary to home country and from foreign subsidiary to another foreign
subsidiary.
Transnational strategy
• In essence, firms that pursue a transnational strategy are trying to
simultaneously …
• achieve low costs through location economies, economies of scale,
and learning effects;
• differentiate their product offering across geographic markets to
account for local differences; and
• foster a multidirectional flow of skills between different subsidiaries in
the firm’s global network of operations.
• As attractive as this may sound in theory, the strategy is not an easy
one to pursue since it places conflicting demands on the company.
Transnational strategy Caterpillar vs.
Komatsu
• Few if any enterprises have perfected this strategic posture
• For an example, consider the case of Caterpillar. The need to compete
with low-cost competitors such as Komatsu of Japan forced Caterpillar
to look for greater cost economies.
• However, variations in construction practices and government
regulations across countries mean that Caterpillar also has to be
responsive to local demands.
• Therefore, Caterpillar confronted significant pressures for cost
reductions and for local responsiveness.
Transnational strategy Caterpillar vs. Komatsu
• To deal with cost pressures, Caterpillar redesigned its products to use many
identical components and invested in a few large-scale component
manufacturing facilities, sited at favorable locations, to fill global demand and
realize scale economies.

• At the same time, the company augments the centralized manufacturing of

components with assembly plants in each of its major global markets. At these
plants, Caterpillar adds local product features, tailoring the finished product to
local needs.

• Thus, Caterpillar is able to realize many of the benefits of global manufacturing

while reacting to pressures for local responsiveness by differentiating its product
among national markets.
International Strategy
• Sometimes it is possible to identify multinational firms that find
themselves in the fortunate position of being confronted with low
cost pressures and low pressures for local responsiveness.
• Many of these enterprises have pursued an international strategy,
taking products first produced for their domestic market and selling
them internationally with only minimal local customization
• The distinguishing feature of many such firms is that they are selling a
product that serves universal needs, but they do not face significant
competitors, and thus unlike firms pursuing a global standardization
strategy, they are not confronted with pressures to reduce their cost
structure
Company using an International Strategy: XEROX
• Xerox found itself in this position in the 1960s after its invention and
commercialization of the photocopier.
• The technology underlying the photocopier was protected by strong
patents, so for several years Xerox did not face competitors—it had a
monopoly.
• The product serves universal needs, and it was highly valued in most
developed nations. Thus, Xerox was able to sell the same basic product the
world over, charging a relatively high price for that product.
• Since Xerox did not face direct competitors, it did not have to deal with
strong pressures to minimize its cost structure.
International Strategy: Xerox
• Enterprises pursuing an international strategy have followed a similar
developmental pattern as they expanded into foreign markets. They
tend to centralize product development functions such as R&D at
home.
• However, they also tend to establish manufacturing and marketing
functions in each major country or geographic region in which they do
business. The resulting duplication can raise costs, but this is less of an
issue if the firm does not face strong pressures for cost reductions.
• Although they may undertake some local customization of product
offering and marketing strategy, this tends to be rather limited in
scope
• Other firms that have pursued this strategy include Procter & Gamble
and Microsoft.
• Historically, Procter & Gamble developed innovative new products in
Cincinnati and then transferred them wholesale to local markets (see
the accompanying Management Focus Charles Hill pg. 440 ).
• Similarly, the bulk of Microsoft’s product development work occurs in
Redmond, Washington, where the company is headquartered.
• Although some localization work is undertaken elsewhere, this is
limited to producing foreign-language versions of popular Microsoft
programs.
THE EVOLUTION OF STRATEGY
• A weakness of the international strategy is that over time, competitors inevitably
emerge, and if managers do not take proactive steps to reduce their firm’s cost
structure, it will be rapidly outflanked by efficient global competitors. This is exactly
what happened to Xerox.
• Japanese companies such as Canon ultimately invented their way around Xerox’s
patents, produced their own photocopiers in very efficient manufacturing plants,
priced them below Xerox’s products, and rapidly took global market share from
Xerox.
• In the final analysis, Xerox’s demise was not due to the emergence of competitors,
for ultimately that was bound to occur, but due to its failure to proactively reduce its
cost structure in advance of the emergence of efficient global competitors.
• The message in this story is that an international strategy may not be viable in the
long term, and to survive, firms need to shift toward a global standardization
strategy or a transnational strategy in advance of competitors
• The same can be said about a localization strategy. Localization may give
a firm a competitive edge, but if it is simultaneously facing aggressive
competitors, the company will also have to reduce its cost structure, and
the only way to do that may be to shift toward a transnational strategy.
This is what Procter & Gamble has been doing (see the accompanying
Management Focus pp. 440).

• Thus, as competition intensifies, international and localization strategies

tend to become less viable, and managers need to orientate their
companies toward either a global standardization strategy or a
transnational strategy.