Chapter Eight Global Strategy and Organization

Chapter Objectives Learn about the integration- responsiveness framework Distinctive MNE strategies emerging from the framework Organizational arrangements associated with the MNE strategies Understanding how to build a transnational MNE

Opening Case – IKEA’s Global Strategy IKEA’s operations encompass 35 nations, 240 stores, 100000 employees, 20 franchises, 2,000 suppliers IKEA’s strategy offers Scandinavian design quality furniture at low prices. 90 percent of the product line is standardized around the world, the product development, purchasing, and warehousing are consolidated at its headquarters in Sweden. target segment is families with limited income and limited living space IKEA’s Organization has an informal corporate culture, with few titles stores maintain direct contact with IKEA headquarters for speedy decision making and easy globalization. Managers rely on a consensus building approach, and readily share their knowledge and skills with coworkers.

The Role of Strategy in International Context Three Objectives (Bartlett and Ghoshal) Efficiency: achieving cost leadership. Flexibility: developing responsiveness to the diversity and volatility of different country environments. Learning: the ability to learn from international exposure and leverage learning on a worldwide basis. MNEs find it challenging to achieve all three objectives The US firms have excelled in achieving efficiency via scale economies and standardized products, building on the large domestic market base. The European firms have succeeded by being locally responsive, building on the diversity of the European nations. The East Asian firms have succeeded by tapping international learning from and across various nations, and leveraging that worldwide.

The Integration- Responsiveness Framework Global integration: coordination of the MNE’s value chain activities across nations to achieve worldwide efficiency, synergy, and cross- fertilization. focus is on convergent customer needs, competitive environments, functional imperatives, and operating systems across nations. strategic decisions are made on a global basis, to avoid the costs of adapting to local situations. Local responsiveness: flexibility towards country-specific situations, needs, and opportunities. focus is on adaptation, accommodation, and adjustment to country-specific customer needs, competitive environment, functional imperatives, technological capabilities, and operating systems. strategic decisions made on a local basis, to assure entrepreneurial flexibility and cultural responsiveness.

Global business strategies High Low Pressures for Local Responsiveness Global Integration/ Cost Reduction Home replication Strategy Global Transnational Multi-local

Globalization Drivers in an Industry (George Yip, 2003) Market Drivers: Consumer lifestyles around the world are converging – global media, global advertising, global brands, MNEs as global customers, and rising middle class Cost Drivers: Opportunities for cost-effectiveness through global coordination are increasing, - emerging markets with low cost productive capability; funding and quickly recovering the cost of technological innovations; revolution in IT, communication, travel, & transportation systems; and global financial markets. Competitive Drivers: Need for a coordinated response to competitors is increasing – rise in the global value chains in different industries, emerging market MNEs, international collaborations and FDI, web-based “born global” MNEs, and the MNEs having coordinated global strategies. Government Drivers: Governments are reducing tariff and non- tariff barriers, adopting open market systems, encouraging their firms to participate globally, and supporting world trade institutions, such as the World Trade Organization.

Evaluating the Strength of Globalization Drivers in an Inbdustry Customer Drivers Common customer needs Global customers Global channels Transferable marketing know-how and global brands Location of strategic resources Differences in country costs Potential for economies of scale, innovation, flexibility Cost of shipping (value/bulk) Industry globalization potential Cost Drivers Government Drivers Trade policies – tariff/non-tariff barriers Trading blocs Global technical standards Regulations – labor laws, role of govt as producer and consumer Global competitors Global alliances and multiple battlegrounds Competitors leveraging global position (i.e. cross subsidizing. Competitive Drivers

Strategic Levers for Conforming to Globalization Drivers (Yip, 2003) Market participation: stronger participation in larger markets, and in markets where needs are similar to those around the world. Functional strategies: standardized or similar functional strategies across nations. E.g. in marketing, there is standardization or similarity across nations in product/ service, promotion, pricing, channels of distribution, and positioning. Value-chain configuration: the entire value-added chain – from research to production to after-sales services – is broken up and each activity may be conducted in a different country Competitive strategy: competitive moves in individual markets as part of a global competitive strategy.  Alongside, each driver of globalization is also experiencing a drive for localization. Importantly, these localization elements of strategy offer opportunities for new learning and for the out- of-box approaches for dramatic cost reduction and efficiencies.

Distinctive MNE Strategies Home replication strategy: When drive for global integration is low & drive for local responsiveness is low. the MNEs who are early in the internationalization process. view international business as secondary to their domestic business - to generate incremental revenues for the products designed with domestic customers in mind. Multi-local strategy: When drive for global integration is low, but for local responsiveness is high. emphasize differences among national markets, and delegate autonomy for local decision-making to each country manager. products, business practices, and functional strategies are adapted to each nation, and vary across nations.

Distinctive MNE Strategies Global strategy: When drive for global integration is high, but for local responsiveness is low. Grant worldwide responsibilities or mandates to various product or business managers. Upstream functions, such as R&D, IT, and manufacturing, are centralized in the HQ or in the centers of excellence worldwide Emphasis is on worldwide efficiency and on cross- national learning and cross-fertilization of the knowledge base. To address local needs, the focus is on adapting the worldwide products, policies, and strategies, with limited local autonomy.

Distinctive MNE Strategies Transnational strategy: When drive for global integration is high and for local responsiveness is also high. standardize across nations where feasible Some value chain activities on a global scale, based on the regional comparative advantages / global centers of excellence. Standardize some functional strategies, e.g. some core products or positioning. Global knowledge sharing and learning, shared global corporate culture adapt locally where appropriate Duplicate some value chain activities to experiment and to cater to the emergent and distinct local needs and opportunities. Local managers have some autonomy to develop local competitive tactics, and adopt local functional strategies. may be complemented with a regional approach may also involve shared responsibility of subsidiaries and headquarters

Organizational Arrangements for the Various MNE Strategies Export Department or International Division: Early internationalizers set up a separate export department to oversee international logistics, marketing and sales, and any special requirements, such as labeling language on products. As the firm begins other modes of global participation, such as licensing and small-scale FDI, a separate International Division created– staffed with international experts Geographic Area Division: Often favored by the firms that rely on the differentiation business strategy, based on branding and/or R&D, in industries with long product life cycles, as in pharmaceutical, food, automotive, cosmetic, and beverage. Within each region, the subsidiaries communicate well with each other; but across regions, the communications occurs through regional heads.

Organizational Arrangements for the Various MNE Strategies Global Product Division: Often favored by firms that rely on the cost leadership or state-of-the-art technology focus strategy Each product division operates as a centralized profit center to achieve greater economies of scale and to leverage product knowledge and technology across borders. All major functions, such as R&D and marketing, within each product division. Global Functional Division Favored by firms that require high level of functional expertise. May face challenges in managing diversity across nations or across products.

Organizational Arrangements for the Various MNE Strategies Worldwide Matrix: blend the geographic, product, and functional expertise. The area or country heads are situated locally, and strive to build knowledge about and responsiveness to local culture and environment. The product heads are situated in different centers of excellence, and have worldwide mandates. The functional heads are often based at the worldwide Headquarters, and strive to coordinate functional knowledge and best practices. Individual managers often have dual reporting relationships – a primary one and a secondary one, based on the corporate priorities and the national environments.  As the MNEs from different nations compete with one another, they are being challenged to adopt strategies and structures achieve all three objectives – efficiency, flexibility, and learning. For instance, Unilever, like most other European MNEs, used a multi-local strategy with Geographical Area divisions focused on local responsiveness and flexibility objective P&G, like most other American MNEs, pursued a global strategy with Global Product divisions focused on global integration and efficiency objectives. In the late 1990s, P&G’s sales were roughly similar to that of Unilever, but it employed only half of 230,000 employees that Unilever had.

Building a Transnational Firm Transnational Leadership Promote global mindset, i.e. openness to and awareness of diversity of cultures. Articulate global strategic vision, i.e. the future of the MNE and how it will get there. Show willingness to commit resources to achieve the global strategic vision Invest in human assets capable of operating globally, and in local communities Transnational Organizational Culture Emphasize global competence and cross-cultural skills Promote global exchange and communication between the HQ and the subsidiaries Have sustainable business orientation, to serve the planet, people, and prosperity Align their practices with the locally as well as globally endorsed values. Transnational Organizational Processes mobilize people of different expertise and nations into teams who work virtually or otherwise for global mandates enable various nations to share and learn from each other promote global careers and talent development. Appreciate, recognize, protect, develop, exploit and share the unique knowledge bases of different regions.

Global Organization Factors ORGANIZATION STRUCTURE  PEOPLE  CULTURE  ABILITY TO DEVELOP AND IMPLEMENT GLOBAL STRATEGY  MANAGEMENT PROCESSES ORGANIZATION STRUCTURE

Centralized global authority No international division ELEMENTS OF GLOBAL ORGANIZATION Global strategy information system Cross-country coordination Global strategic planning Global budgeting Global performance review and compensation Centralized global authority No international division Strong business dimension ORGANIZATION STRUCTURE MANAGEMENT PROCESSES PEOPLE ABILITY TO DEVELOP AND IMPLEMENT GLOBAL STRATEGY Use of foreign nationals Multicountry careers Frequent travel Statements and actions of leaders CULTURE Global identity Commitment to worldwide (vs.) domestic employment Interdependence (vs. autonomy) of businesses Source: George Yip (1995), Total Global Strategy.