1. Multinational Strategy and Structure13
chapter
Multinational Strategy and Structure
From Ch 12. handout given in class

2. Pressures for cost Reduction and Local Responsiveness
MULTINATIONAL STRATEGY AND STRUCTURE
A firm’s strategy can be defined as the actions that managers take to attain the goals of the firm.
Firms that compete in the global marketplace typically face two types of competitive pressures:
Cost Reduction
Local responsiveness
These pressures place conflicting demands on the Multinational Enterprises (MNEs).

3. Pressures for Cost Reduction and Local Responsiveness
A proper integration-responsiveness framework allows managers to deal with the pressures for both global integration and local responsiveness.
Cost pressures Vs. Local adaptation
In an international environment, MNEs have not only to worry about competing with other companies, but they also have a lot of pressure for local responsiveness. They have to react to different consumer preferences and host country demands

4. The Strategy and Structure of MNEs
Pressures for Cost Reductions
Pressures for cost reductions are greatest:
in industries producing commodity type products that fill universal needs (needs that exist when the tastes and preferences of consumers in different nations are similar if not identical) where price is the main competitive weapon
when major competitors are based in low cost locations
where there is persistent excess capacity
where consumers are powerful and face low switching costs

5. The Strategy and Structure of MNEs
Firms facing pressures for cost reductions:
must try to lower the costs of value creation by mass-producing a standard product at the optimal locations worldwide

6. The Strategy and Structure of MNEs
Pressures for Local Responsiveness
Pressures for local responsiveness arise from:
differences in consumer tastes and preferences
differences in traditional practices and infrastructure
differences in distribution channels
host government demands

7. The Strategy and Structure of MNEs
Pressures for cost reductions and pressures to be locally responsive

8. The Strategy and Structure of MNEs
Theodore Levitt in his article "The Globalization of Markets'“ argued that worldwide consumer tastes are converging. (Levitt pointed to sales of Coke Classic, Levi Strauss jeans, and Sony color televisions, all of which were successful worldwide).
Levitt's idea has often been the intellectual force propelling many MNEs to globally integrate their products while minimizing local adaptation.
Unfortunately for many MNEs Levitt’s ideas are not always applicable.

9. The Strategy and Structure of MNEs
Strategic Fit
For a firm to attain superior performance and earn a high return on capital, its strategy must make sense given market conditions.
(There must be sufficient demand to support that strategic choice and organization must adapt to continuous change)

10. The Strategy and Structure of MNEs
Location Economies
Firms can benefit by basing each value creation activity at that location where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity
Firms that pursue such as strategy can realize location economies (the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be)

11. The Strategy of International Business
Locating a value creation activity in the optimal location for that activity can have one of two effects:
It can lower the costs of value creation and help the firm to achieve a low cost position
It can enable a firm to differentiate its product offering from the offerings of competitors
(Remember, companies must evaluate the risk before entering into a foreign market)

12. The Strategy of International Business
CHOOSING A STRATEGY
Firms use four basic strategies to compete in the international environment:
Home replication or International (or export)
Localization
Global standardization
Transnational
Internet Extra: Cadbury Schweppes has changed its strategy over the years to respond to shifting market and competitive conditions. Go to the company’s web site { to further explore this and to see real examples of the different strategic approaches outlined in this chapter.
Click on Investor Centre, then on Our Business and Values. From this point, you can explore why the company is in its various products lines and what it expects to achieve (click on Origins and Portfolio Development), where the company is today, and why (click on The Business Today), the company’s structure and organization (click on structure and organization), and where the company wants to go in the future (click on 2007 goals and priorities).

13. The Strategy and Structure of MNEs
Home replication or International (or export) strategy
A home replication or international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization (P&G)
When there are low cost pressures and low pressures for local responsiveness, an international strategy is appropriate

14. The Strategy of International Business
Localization (multidomestic) Strategy
A 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

15. The Strategy of International Business
Global Standardization Strategy
A global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies
The strategic goal is to pursue a low-cost strategy on a global scale
This strategy makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal

16. The Strategy and Structure of MNEs
Transnational Strategy
A transnational strategy tries to simultaneously:
achieve low costs through location economies, economies of scale, and learning effects
differentiate the product offering across geographic markets to account for local differences
foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations
A transnational strategy makes sense when cost pressures are intense, and simultaneously, so are pressures for local responsiveness.

17. The Strategy and Structure of MNEs

18. The Strategy and Structure of MNEs
Four Organizational Structures appropriated for each strategic choice:
International division
Geographic area
Global product division
Global matrix

19. The Strategy and Structure of MNEs
The international division structure is typically used when firms initially expand abroad, often engaging in a home replication strategy.
Common issues:
Foreign subsidiary managers are not given sufficient voice relative to home managers.
The international division activities are not coordinated with the rest of the firm.

20. The Strategy of International Business
2. The Geographic area structure, organizes the multinational enterprises according to different geographic areas, which they largely stand alone; this structure is most appropriated for a localization strategy.
Common issues:
Country and regional managers in the international division structure carry a great deal of responsibility and autonomy.
High levels of local
responsiveness

21. The Strategy of International Business
3. In the Global product division structure, each product division is treated as a stand-alone entity with full worldwide responsibilities, this structure supports the global standardization strategy.
Common issues:
Highly responsible to pressures for cost-efficiencies (reduces inefficient duplication in multiple countries)
Local responsiveness suffers under this structure

22. The Strategy and Structure of MNEs
4. The Global matrix structure, is best used with a transnational strategy, it alleviates the disadvantages associated with both geographic area and global product division structures. It coordinates responsibilities between product divisions and geographic areas in order to be both cost efficient and locally responsive. (see exhibit 12.6)
Common issues:
Difficult to deliver, It may
add layers of management
(more than one boss).
Slow decision speed and
increase costs.

23. The Strategy and Structure of MNEs
STRATEGIC ALLIANCES
Strategic alliances refer to cooperative agreements between potential or actual competitors

24. The Strategy and Structure of MNEs
The Advantages of Strategic Alliances
Strategic alliances:
facilitate entry into a foreign market
allow firms to share the fixed costs (and associated risks) of developing new products or processes
bring together complementary skills and assets that neither partner could easily develop on its own
Management Focus: Cisco and Fujitsu
Summary
This feature examines Cisco Systems’ joint venture with Fujitsu. Cisco, the world’s largest manufacturer of Internet routers, entered the alliance in 2004 in an effort to jointly develop the next generation of high end routers for sales in Japan. Cisco believes that the Japanese market will be important, and wants to expand its presence there. Fujitsu wanted the routers so that it can offer end-to-end communications solutions to its customers. Discussion of the feature can begin with the following questions.
Suggested Discussion Questions
1. What did Cisco hope to gain by forming an alliance with Fujitsu? What risks are involved for Cisco with this alliance? How can Cisco limit those risks?
2. What did Fujitsu bring to the alliance? Why was it important for Cisco to have a Japanese presence? What were the advantages of the alliance for Fujitsu?
3. What does the alliance between Cisco and Fujitsu mean to other competitors in the router market?

25. The Strategy and Structure of MNEs
The Disadvantages of Strategic Alliances
Strategic alliances can give competitors low-cost routes to new technology and markets, but unless a firm is careful, it can give away more than it receives
Management Focus: Cisco and Fujitsu
Summary
This feature examines Cisco Systems’ joint venture with Fujitsu. Cisco, the world’s largest manufacturer of Internet routers, entered the alliance in 2004 in an effort to jointly develop the next generation of high end routers for sales in Japan. Cisco believes that the Japanese market will be important, and wants to expand its presence there. Fujitsu wanted the routers so that it can offer end-to-end communications solutions to its customers. Discussion of the feature can begin with the following questions.
Suggested Discussion Questions
1. What did Cisco hope to gain by forming an alliance with Fujitsu? What risks are involved for Cisco with this alliance? How can Cisco limit those risks?
2. What did Fujitsu bring to the alliance? Why was it important for Cisco to have a Japanese presence? What were the advantages of the alliance for Fujitsu?
3. What does the alliance between Cisco and Fujitsu mean to other competitors in the router market?