Brendan Boyle 2007 International Business Strategy Lecture 5 : Global Strategies and the Organization and Control of Multinational Companies

Brendan Boyle 2007 Principle Learning Objectives Develop an understanding of the Integration-Responsiveness Framework and the conflicting pressures MNCs face for cost reduction and local responsiveness. Develop an understanding of the four basic IB strategies - Global, Home Replication, Transnational and Multi-Domestic Strategy. Develop an understanding of the implications of these strategy choices for organizational structure and coordination and control of a MNC. Develop an understanding of the implications of all of the above for international business strategy and practice.

Brendan Boyle 2007 Multinational strategic choices Major challenge: Balancing Global and Local pressures  Global integration (standardization)  Local Responsiveness (adaptation)  MNEs cannot afford to focus on one dimension at the expense of another

Brendan Boyle 2007 Global Standardization The interest in marketing a “global” version of products and services is driven by cost pressures  Standardized consumer products such as Coke Classic, Levi Strauss jeans, and Sony color TV, which are successful on a worldwide basis  Ford, GM, and Mitsubishi experimented with “world car” designs  Other examples?

Brendan Boyle 2007 Barbie: The “ All-American ” Girl Goes Overseas Barbie is in her 40s Sold in 130 countries National adaptations: –Physical features –Costumes –Activity sets Standardized physique: –Scaled to 6 ’ 2 ”, 110 lbs. –

Brendan Boyle 2007 Effective Adaptation Local responsiveness is unique to international competition and is reflected in different aspects:  Consumer preferences  Product design & packaging  Distribution channels  Host country demands

Brendan Boyle 2007 Pressures for Cost Reduction & Local Responsiveness Company A Company C Company B High Cost pressures Low Low High Pressures for local responsiveness

Brendan Boyle 2007 Four Basic Strategies Figure 12.5 High Cost pressures Low Low High Global Strategy Transnational Strategy Multi domestic Strategy Home replication Strategy Pressures for local responsiveness

Brendan Boyle 2007 Strategic Choice Home Replication Strategy Go where locals don’t have your skills. Little adaptation. Products developed at home (centralization). Manufacturing and marketing in each location. –Core value creation activities developed at home (e.g. product development with actual production going overseas) Makes sense where local responsiveness is not important

Brendan Boyle 2007 Strategic Choice Multi Domestic Strategy Maximize local responsiveness. –Customize the product and marketing strategy to national demands. Skill and product transfer. Transfer all value-creation activities, no location economies. Good for high local responsiveness and low cost reduction pressures. Lots of Duplication.

Brendan Boyle 2007 Strategic Choice Global Strategy: Best use of the experience curve and location economies. Production, marketing, and R&D concentrated in few favorable functions This is the low cost strategy. Utilize product standardization. Not good where local responsiveness demand is high. Some products serve universal needs… others are designed to! 12-19

Brendan Boyle 2007 Strategic Choice Transnational Strategy: Christopher Bartlett and Sumantra Ghoshal Core competencies can develop in any of the firm’s worldwide operations. Flow of skills and product offerings occurs throughout the firm - not only from home firm to foreign subsidiary (global learning). Makes sense where there is pressure for both cost reduction and local responsiveness.

Brendan Boyle 2007 Strategic Choices Home Replications create value by transferring skills to local markets where skills are not present. Home Replications create value by transferring skills to local markets where skills are not present. Global increase profitability through cost reductions from experience curve effects and location economies. Global increase profitability through cost reductions from experience curve effects and location economies. Multidomestic oriented toward achieving maximum local responsiveness. Multidomestic oriented toward achieving maximum local responsiveness. Transnational Exploit experienced based cost and location economies, transfer core competencies within the firm, and pay attention to local responsiveness needs. Transnational Exploit experienced based cost and location economies, transfer core competencies within the firm, and pay attention to local responsiveness needs.

Brendan Boyle 2007 Multinational Structures ♪ Organizational Structure  The firm ’ s formal reporting relationships, procedures, and controls (organizational design or organizational architecture).  Strategy and structure: A reciprocal relationship –Strategy drives organizational structure; structure can also enable and constrain strategy..

Brendan Boyle 2007 Four strategies and four structures: The Integration – Responsiveness Framework Figure 10.1

Brendan Boyle 2007 International Division Structure at Cardinal Health – Home Replication Strategy Figure 10.2 Source: Based on author’s interview and (accessed August 10, 2004). Cardinal Health is headquartered in Dublin, Ohio. Also see Integrative Case 3.1.

Brendan Boyle 2007 International Division  International Division –With domestic business and all international operations shifted to a “ specialist ” international division –Typically set up when firms initially expand abroad  Problems: –Foreign subsidiary managers are not given sufficient voice relative to the heads of domestic divisions. –International division activities are not coordinated with the rest of the firm, which focuses on domestic activities. –Firms often phase out this structure after their initial overseas expansion.

Brendan Boyle 2007 Geographic Area Structure at Ispat – Multidomestic Strategy Figure 10.3 Source: Adapted from (accessed June 30, 2004). Ispat is headquartered in London, United Kingdom. Also see Chapter 3 Closing Case.

Brendan Boyle 2007  Geographic Area Structure –Organizes the MNE according to different geographic areas (countries and regions).  Problems: –While being locally responsive can be a virtue, it may also encourage the fragmentation of the MNE into highly autonomous, hard-to-control “ fiefdoms ” SIA 10.1: Nestle Geographic Area Structure

Brendan Boyle 2007 Global Product Division Structure at (EADS) – Global Strategy Figure 10.4 Source: Adapted from (accessed June 30, 2004). EADS is headquartered in Munich, Germany and Paris, France.

Brendan Boyle 2007  Global Product Division Structure –Treat each product division as a stand-alone entity with full worldwide (as opposed to domestic) responsibilities for its activities. –Improve cost efficiencies in allowing for consolidation on a worldwide (or regional) basis.  Problems: –It is the opposite of the geographic area structure: Little local responsiveness. –No sharing of information, little cooperation between different product divisions, costly to maintain, duplicated functions, difficult to organize communication Global Product Division Structure

Brendan Boyle 2007 Global Matrix Structure – Transitional Strategy Figure 10.5

Brendan Boyle 2007  Global Matrix –Is often used to alleviate the disadvantages associated with both geographic area and global product division structures.  Problems –In practice, it is often difficult to deliver –Add layers of management, slow down decision speed, and increase costs while not showing significant performance improvement. Global Matrix Structure

Brendan Boyle 2007 Evolution of Organizational Structures  The Stopford and Wells model (Figure 10.1):  Organizational structures typically evolve from the simple international division through either geographic area or global product division structures.  Firms may finally reach the global matrix stage as they grow from having limited international presence to being sophisticated global players.  Not all MNEs experience all these structural stages.  The evolution is not necessarily in one direction

Brendan Boyle 2007 The International Structural Stages Model Global Matrix (“Grid”) Area Division Worldwide Product Division International Division Alternate Paths of Development Foreign Product Diversity Foreign Sales as a Percentage of Total Sales

Brendan Boyle 2007 Integration of global operations is among the most important issues facing Multinational Enterprises. - Coordination - Control Global integration

Brendan Boyle 2007 Coordination Coordination provides linkages between different task units within an organization.  Coordination helps the Multinational Enterprise deal with breadth and diversity.  Mechanisms include: centralization/decentralization, formalization, planning, output control, targets, and behavioral controls.  Organizations also use informal mechanisms for coordination which include informal relationships, informal communication, and culture.

Brendan Boyle 2007 Organization Culture A “Strong” Culture: –Not always good –Sometimes beneficial, sometimes not Think of the requirements of the different strategy choices –Context is important Adaptive cultures. Culture does not necessarily translate across borders What are the potential difficulties? Write down some of the potential difficulties in the transfer of organizational culture across borders Culture Transnational Multidomestic Global Home Replication Strong Weak

Brendan Boyle 2007 Control Control is the intervention in operations to maintain quality through feed-forward, concurrent, or feedback oriented information.  MNEs use output, bureaucratic, cultural, and many other mechanisms to provide information that helps the firm maintain progress toward its goals while realizing desired outcomes.  Creating a vision of shared direction and market orientation in lieu of more formal controls has the greater sustained effect, costs less, and is more acceptable to people associated with the firm.

Brendan Boyle 2007 Performance ambiguity Key to understanding the relationship between international strategy, control systems and incentive systems –Caused due to high degree of interdependence between subunits within the organization Multi-dom/Replication Output/Bureaucratic Global/Transnational Cultural Control Systems A function of the interdependence among subunits.

Brendan Boyle 2007 Strategy, interdependence and ambiguity –Level of performance ambiguity depends on number of subunits, level of integration & joint decision making –Ascending order of ambiguity in firms Transnational companies (highest Global companies Home -Rep companies Multi domestic corporations High Low

Brendan Boyle 2007 The case of Unilever  1940s: begin actively recruiting local managers of their subsidiaries  1950s: To offset the danger of over-decentralization, the HO sends 300/400 managers to international training colleague; group 25/30 trainees recruited for similar managerial positions; facilitate their communication/exchange at later stage  1980s: Place managers in head-office department or cross-posting them between companies to establish unity, build a common sense of purpose, and understanding of different national cultures;

Brendan Boyle 2007 Implications for Strategists:  Why do firms differ in their structures and global operations? –A short answer is that their different strategies fundamentally drive these activities.  How do MNEs behave? –The structural arrangements that MNEs put in place both help them accomplish certain strategies and constrain them from pursuing other strategies — unless they unleash strategic changes, structural changes, or both.

Brendan Boyle 2007 Implications for Strategists  What determines the scope of a firm?  The international scope is significantly determined by the particular strategies chosen.  What determines its international success?  A value-adding fit between strategies and structures of the firm, marketplace demands, and customer preferences. “ Think global, act local ” or “ Think local, act global ”

Brendan Boyle 2007 Principle Learning Objectives – revisited Have you developed an understanding of the Integration- Responsiveness Framework and the conflicting pressures MNCs face for cost reduction and local responsiveness? Have you developed an understanding of the four basic IB strategies - Global, Home Replication, Transnational and Multi-Domestic Strategy? Have you developed an understanding of the implications of these strategy choices for organizational structure and coordination and control of a MNC? Have you developed an understanding of the implications of all of the above for international business strategy and practice?