International Human Resource Management MGT 556 Lecture 7 International Human Resource Management MGT 556

Competitive strategies and ownership, location and internalization advantages Rugman and Verbeke distinguish two types of ownership specific advantages – which they call firm-specific advantages (FSAs) – namely location-bound firm-specific advantages and non-location-bound firm-specific advantages. The benefits of location-bound firm-specific advantages depend on their being used in one particular location (or a set of locations). They cannot easily be transferred and cannot be used in other locations without significant adaptation. An example would be a firm’s expertise in dealing with the idiosyncrasies of the Japanese distribution system. Transferring this specific expertise to other locations would be useless. Non-location-bound firm-specific advantages do not depend on their being used in one particular location. They can be used on a global scale, because transferring them to other locations can be done at low cost and without substantial adaptation.

With regard to location advantages – or country-specific advantages (CSAs) as Rugman and Verbeke call them – they distinguish two sources: home and host country and two ways of using them: ‘static’ and ‘leveraged’. Home country country-specific advantages, for example a highly skilled technical work-force, may be used in a ‘static’ way, that is to support current firm-specific advantages. However, they can also be used in a ‘leveraged’ way, that is to develop new firm-specific advantages, for instance a new type of technology. The same goes for host country country-specific advantages. In Figure below Rugman and Verbeke distinguish the two types of firm-specific advantages discussed above, location-bound and non-location-bound, and three different combinations of country-specific advantages:

• home country country-specific advantages, used in a leveraged way; • host country country-specific advantages, used in a static way; • a combination of home and host country country-specific advantages, used in either a static or a leveraged way. The four types of competitive strategies distinguished by Bartlett and Ghoshal (1989, 2000) have been situated in this figure. The type of strategy that is captured best by the original theory on multinational firms (Dunning’s eclectic theory) is the international company. The original framework assumes that firm-specific advantages are non-location bound, that is that they can be used anywhere in the world. The actual choice for the optimum location for subsidiaries in this type of company is based on static host country country specific advantages (such as a cheap labor force).

In the case of a multidomestic strategy, differences between countries with regard to customer preferences, market conditions and government regulation force companies to develop location-bound firm-specific advantages. These location-bound firm-specific advantages will often complement the country specific advantages of the countries involved, such as the local marketing infrastructure or protected government markets. A global strategy would obviously be based on non-location-bound firm specific advantages that can be exploited on a global scale. Home country country-specific advantages are more important than host country country specific advantages, because production operations are often concentrated in the home country. The transnational strategy is based on a combination of location-bound and non-location-bound firm-specific advantages. Location-bound firm-specific advantages would be necessary in countries with a need for national responsiveness. Non-location-bound firm-specific advantages would permit global exploitation. With regard to country-specific advantages, the transnational strategy draws on advantages from both home and host countries. And in contrast to the situation in international and multidomestic strategies, host country country-specific advantages can also be used in a leveraged way.

STRUCTURING MULTINATIONAL COMPANIES Although the choice of a company’s competitive strategy is a very important decision, a successful implementation of this strategy depends to a large extent on the structure and processes of the company in question. We will first discuss the early studies with regard to MNC structure, focusing on Stopford and Wells’s now classic stages model.

Strategy and structure: the early studies Chandler distinguished four growth strategies: expansion of volume, geographic dispersion, vertical integration, and product diversification. These strategies called for different structures, hence his adage ‘structure follows strategy’. Stopford and Wells’s (1972) classic study investigated this relationship in an international context. In an empirical investigation of 187 large American multinational companies, they identified two strategic variables that were able to ‘predict’ organizational structure: foreign product diversity and Percentage of foreign sales.

A model was constructed (see Figure below) that showed how MNCs adopt different organizational structures at different stages of international expansion. When firms start to internationalize and both their foreign sales and foreign product diversity are limited, the preferred organizational structure is usually an international division. The domestic organizational structure is left untouched and all international activities are simply concentrated in one international division. This might be an advantage if international presence is still very limited. It does not require a complete overhaul of the organization and the structure is simple and understandable. In addition, it creates a central pool of international experience and expertise. The international division structure does create a number of problems, however. First, it tends to underplay the importance of international activities, since the international division is only one of the many divisions of the company. It also underestimates the diversity that might be inherent in international operations: the head of the international division is assumed to represent the interest of all countries in which the company operates. In addition, the isolation of domestic and international Activities may create duplication of efforts and limits the transfer of knowledge in the company. Because of the structural separation, there is a complete lack of coordination between domestic and foreign operations, which might hinder both the company’s effectiveness and efficiency.

Therefore, once companies expand their international operations, they usually choose one of two worldwide structures: the area division structure or the product division structure. The choice is again dependent on the two variables identified by Stopford and Wells. For companies that increase their foreign sales without significantly increasing product diversity, the most likely choice is a worldwide area division. In this type of structure, the world is divided into separate areas, which might be either a country or a group of countries, depending on the size of the market. In this case, the country in which the headquarters is located is simply one of the areas. Each area division usually operates in a rather autonomous way and oversees its own production, R&D, marketing, etc. This approach might work well if the company has a narrow product line (low level of foreign product diversity), which needs to be adapted to different local tastes and values. Local responsiveness is usually a key competitive advantage of these structures. Even more so than for the international division structure, however, this type of structure suffers from a lack of coordination. Activities will be duplicated and because each unit functions independently, essential information and experience may not be transferred from one unit to another. Area structures are therefore usually complemented with staff specialists for specific product categories. These staff specialists facilitate information transfer and strive to limit duplication.

Companies that are reasonably diversified (high level of foreign product diversity) usually adopt a worldwide product structure. In this type of structure, divisions are created for each major product or product group. Again divisions are relatively independent and autonomous and are responsible for their own value-creating activities (production, R&D, marketing, etc.). A major advantage of this approach is that it improves efficiency, because activities can be easily coordinated and rationalized within the product group. Transfer of core competences and knowledge is also much easier than in the area division structure. This structure works well for industries in which cost-efficiency and coordination are of paramount importance. In contrast to the area structure, however, this structure makes attention to local differences far more difficult, sometimes resulting in a lack of local responsiveness.

According to Stopford and Wells, yet another structure may be necessary if the company enters a subsequent stage, one in which both foreign sales and product diversity are high. They see the global matrix as the ideal structure for this stage of international development. This structure should combine the advantages of the area and product structure: local responsiveness and global efficiency. In the matrix structure, responsibility for a particular product is shared by both product and area managers. Many managers will have to report to two bosses: one in the product division and one in the area division. The advantage of the matrix is that it should enable a company to balance product and area requirements and achieve both efficiency and responsiveness. The reality is often different. Many matrix structures are associated with conflict, bureaucracy and slowness of decision-making. Because of shared decision making, it is difficult to assign individual responsibility and the result may be chaos, lack of direction and inflexibility. Both in academic literature and in practice, attention has therefore shifted from matrix structures to matrix cultures and in general to the ‘softer’ aspects of the organization, such as people, processes and control mechanisms.

Strategy and structure: recent developments In the previous section we discussed the early approaches to the structuring of MNCs, based on Stopford and Wells’s seminal work. We also indicated that nowadays more sophisticated approaches have developed. These approaches take a more integrated approach by looking at the interaction between environment, strategy, structure and processes. Table below summarizes these ideas. It is based on the environment–strategy–structure paradigm, which suggests that superior company performance comes from a good fit between strategy and environmental demands, and between organizational structure (and processes) and strategy. A prime example of this more integrated type of approach described above, is Bartlett and Ghoshal’s (1989, 2000) typology of international firms that includes a discussion of the changing international and industry environment as well as the company’s strategy, structure and processes. Bartlett and Ghoshal distinguish four types of MNCs: multidomestic, international, global and transnational.