STRATEGY AND STRUCTURE OF MNC

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STRATEGY AND STRUCTURE OF MNC
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Differences between Domestic Multi-National
Firms

• Multiculturalism geographic dispersion
• 2 factors that were considered to be of primary
  importance in differentiating between domestic
  multinational firms
• Multiculturalism (MC) defined as the presence
  of people from two or more cultural backgrounds
  within an organization.
• Geographic dispersion (GD) defined as the
  location of various subunits of the parent firm
  in different countries.
• International business studies have focused on
  the consequences of GD tended to give little
  attention to the consequences of MC whereas most
  comparative management studies reversed the
  emphasis, but both perspectives are equally
  important
• Here in our discussion, MC will occupy only a
  modest role

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Sources of Competitive Advantage Strategic
Objectives

• Strategic Objectives
• Bartlett Ghosal (2000) discuss 3 different
  strategic objectives for MNC
• MNC need to meet the challenges of global
  efficiency
• MNC need to meet the challenges of multinational
  flexibility
• MNC need to meet the challenges of world-wide
  learning

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Strategic Objectives

• Global efficiency
• Can be enhanced both by increasing revenues by
  lowering costs Scope Economies
• Global integration of activities allows firms to
  realize Economies of Scale (EoS) scope hence
  leads to lower cost.
• Firms can also increase their revenues by
  differentiating their products to respond to
  national differences in tastes, industry
  structures, distribution systems government
  regulations National differences

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Strategic Objectives

• 2. Multinational flexibility
• the ability of a company to manage the risks
  exploit the opportunities that arise from the
  diversity volatility of the global environment
• 4 sources of diversity volatility that can
  offer both risks opportunities
• Macro-economic factors, such as wars, interest
  wage rates, exchange rates
• Policy actions of national governments, such as
  expropriation changes in exchange rates
• Responses of competitors in the host market
• Resources, including natural, financial HR

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Strategic Objectives

• 3. Worldwide learning
• Very presence of MNCs in diverse national
  environments creates opportunities for worldwide
  learning
• MNCs are exposed to a wide range of different
  stimuli this allows them to develop the diverse
  resources capabilities that give them the
  ability to innovate exploit these innovations
  worldwide

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Sources of Competitive Advantage Strategic
Objectives

• Linking means ends 4 different strategies for
  MNCs
• Bartlett Ghosal (2000) distinguish 4 different
  strategic approaches that focus on different
  combinations of the sources of competitive
  advantage (the means) strategic objectives (the
  ends)
• Three sources of competitive advantage (MEANS)
• National differences
• Scale economies
• Scope economies
• Three strategic objectives (ENDS)
• Global efficiency
• Multinational flexibility
• Worldwide learning

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Sources of Competitive Advantage Strategic
Objectives
S I M P L E C H A R T
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Four Strategic Approaches

• Multi-domestic Strategy
• International Strategy
• Global Strategy
• Transnational Strategy
• Multi-domestic takes care of regional specifics.
  McDonald's for example do not sell beef
  hamburgers in India because they take care of the
  regional culture and customers. Global applies
  one approach to everyone - like iPod - using ipod
  in Tanzania is the same as using ipod in Sweden

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Four Strategic Approaches

• Multi-domestic Strategy
• Product customized for each market
• Decentralized control local decision making
• Effective when large differences exist between
  countries (like China and Norway)
• Advantages product differentiation, local
  responsiveness, minimized political risk,
  minimized exchange rate risk
• Global Strategy
• Product is the same in all countries
• Centralized control little decision-making
  authority on the local level
• Effective when differences between countries are
  small (like China and Taiwan)
• Advantages cost, coordinated activities, faster
  product development
• A fully multi-local value chain will have every
  function from RD to distribution and service
  performed entirely at the local level in each
  country. At the other extreme, a fully global
  value chain will source each activity in a
  different country

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Four Strategic Approaches
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Four Strategic Approaches

• PHILLIPS is a good example of a company that
  followed a multi-domestic strategy as this
  strategy resulted in
• Innovation from local RD
• Products tailored to individual countries
• Challenges
• High cost due to tailored products
• Innovation from local RD groups resulted in
  products that were RD driven instead of market
  driven

• MATSUSHITA is a good example of a company that
  followed a global strategy and this strategy
  resulted in
• Strong global distribution network
• Company-wide mission statement that was followed
  closely
• Financial control
• Challenges
• Problem of strong yen
• Too much dependency on one product VCR
• Loss of non-Asian employees because of glass
  ceilings

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1. Multi-domestic Strategy

• Companies that follow a MULTI-DOMESTIC STRATEGY
  will give prime importance to one of the MEANS
  national differences to achieve the different
  strategic objectives (ENDS)
• Global efficiency is realized mainly by
  increasing revenues (1a), which these companies
  achieve through differentiating their products
  services to respond to differences in consumers
  tastes preferences govt. regulations (1c)
• Through this responsiveness to national
  differences (2a) they also realize the
  opportunities associated with multinational
  flexibility
• Although Companies following this strategy do
  learn (3) from local differences, most of this
  learning remains within country borders
  subsidiaries identify local needs, but also use
  their own local resources to meet these needs
  (local-for-local innovation)

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2. International Strategy

• Companies that follow an INTERNATIONAL STRATEGY
  focus primarily on one of the ENDS worldwide
  learning use the different MEANS available to
  achieve this end
• However, most Companies following this approach
  limited it primarily to exploitation transfer
  of technologies developed at home to
  less-advanced overseas markets
• Drawback although it is very efficient at
  transferring knowledge across borders, it does
  not do a very good job in achieving either global
  efficiency or flexibility as its ENDS
• Different activities in the value chain typically
  have different optimal locations RD and
  assembly may be better conducted to 2 locations.
  Eg. NIKE which design their shoes in US and
  manufacture in China and Thailand. The
  international strategy fails to take advantage of
  this benefits as it has tendency to concentrate
  most of its activities in one location company
  is too closely identified with a single country
  (currency conversion risk)

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(contd) International Strategy

• This strategy is based on diffusion and
  adaptation of the parent companys knowledge and
  expertise to foreign markets
• Country units are allowed to make some minor
  adaptations to products and ideas coming from the
  head office, but they have far less independence
  and autonomy compared to multi-domestic companies
• For most of its history, Ericsson, a Swedish
  telecommunications firm has followed this
  strategy because its home market (Sweden) was too
  small to support the RD effort necessary in the
  industry, Ericsson built its strategy on its
  ability to transfer and adapt its innovative
  products and process technologies to
  international markets and this helped it to
  compete successfully against NEC, which followed
  a global strategy, and ITT which followed a
  multi-domestic strategy
• Kellogg is also another example of firms
  following such strategy

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3. Global Strategy

• For Companies that follow a GLOBAL STRATEGY,
  meeting the objective of global efficiency takes
  pride of place all means are used to achieve
  this objective
• With regard to the means of national differences,
  however, global Companies focus on exploiting
  differences in factor costs, by locating
  production in low cost countries
• This contrasts with multi-domestic Companies who
  focus on differences in national preferences
• Siebel Systems We have one brand, one image,
  one set of corporate colors, and one set of
  messages, across every place on the planet. An
  organization needs central quality control to
  avoid surprises.
• The concentration centralization of production
  RD activities associated with a global
  strategy limits flexibility leaves companies
  following this strategy vulnerable to political
  currency risks limits their ability to learn
  from foreign markets

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4. Transnational Strategy

• Companies that follow a TRANSNATIONAL STRATEGY
  acknowledge that all of these different
  combinations of means ends have their own
  merits might be very suitable in specific
  industries.
• The firm following this strategy strives to
  optimize the trade off associated with
  efficiency, local adaptation and learning.
• However, they realize that in todays competitive
  environment in many industries it might be
  necessary to achieve all 3 strategic objectives
  at the same time
• And in contrast to companies following a
  multi-domestic strategy, Companies following this
  strategy use all means available to achieve this
  end
• NESTLE We believe that there is not a so-called
  global consumer, at least not when it comes to
  food and beverages as people have local tastes
  based on their unique cultures and traditions a
  good candy bar in Brazil is not the same as a
  good candy bar in China. Therefore, decision
  making needs to be pushed down as low as possible
  in the organization, out close to the markets.
  That said, decentralization has its limits. If
  you are too decentralized you can become too
  complicated and therefore, you need to balance it

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Competitive Strategies Ownership, Location
Internalization Advantages

• Rugman Verbeke distinguish two types of
  ownership specific advantages which they call
  FIRM-SPECIFIC ADVANTAGES (FSAs) namely
  location-bound FSAs non-location-bound FSAs
• Location-bound FSAs
• Depend on their being used in one particular
  location (or set of locations) they cannot
  easily be transferred cannot be used in other
  locations without significant adaptation (Eg.
  firms expertise in dealing with the
  idiosyncrasies of the Japanese distribution
  system because transferring this specific
  expertise to other locations would be useless)
• 2. Non-location-bound FSAs
• Do not depend on their being used in one
  particular location they can used on a global
  scale, because transferring them to other
  locations can be done at low cost without
  substantial adaptation (Eg. proprietary
  technology resulting from RD activities, but
  specific marketing skills managerial
  capabilities can also form non-location-bound
  FSAs)

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Competitive Strategies Ownership, Location
Internalization Advantages

• With regard to location advantages or
  Country-Specific Advantages (CSAs) as Rugman
  Verbeke call them they distinguish two sources
• Home country country-specific advantages (eg., a
  highly skilled technical workforce may be used in
  a static way that is to support current
  firm-specific advantages, however, they can be
  used in a leveraged way, that is to develop new
  firm-specific advantages, for instance a new type
  of technology.)
• Host country country-specific advantages, used in
  a a static way
• A combination of home host country
  country-specific advantages, used in either a
  static or leveraged way

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Competitive Strategies Ownership, Location
Internalization Advantages
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Contd..

• 4 types of competitive strategies distinguished
  by Bartlett Ghosal (1989, 2000) multidomestic,
  global, international, transnational have been
  situated in this figure
• International strategy assumed that FSAs are
  non-location bound, that is 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 cheap
  labour)
• In the case of a multi-domestic strategy
  differences between countries with regard to
  customer preferences, market conditions
  government regulation force companies to develop
  location-bound FSAs these location-bound FSAs
  will often complement the country-specific
  advantages of the countries involved, such as
  local marketing infrastructure or protected
  government markets.

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Contd..

• A global strategy would obviously be based on
  non-location-bound FSAs 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
  non-location-bound FSAs because location-bound
  FSAs would be necessary in countries with a need
  for national responsiveness. Non-location-bound
  FSAs would permit global exploitation. With
  regard to the country-specific advantages, the
  transnational strategy draws on advantages from
  both host home countries.

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Strategy Structure of MNCs

• 4 types of organizational model
• Multi-domestic organizational model
• International organizational model
• Global organizational model
• Transnational organizational model

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Strategy Structure of MNCs
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Integration-Responsiveness (I-R) Framework

• I-R framework for viewing both the strategic
  content the organizational processes that
  defined the operations of the MNC
• The vertical axis represents the level of global
  integration, hence of central coordination by
  HQs
• The horizontal axis represents the extent of
  national responsiveness or differentiation,
  consequently of the desired influence of
  subsidiaries in strategic operational decisions

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Strategy Structure of MNCs
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I-R Framework in Practice
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In Summary 3 Ideal-type of MNCs

• Global Companies
• Operate in industries with rather standardized
  consumer needs that make the realization of
  economies of scale very important
• Prime Eg. are consumer electronics, computer
  automobile industries
• Since price competition is very important, the
  dominant strategic requirement is efficiency,
  these companies therefore integrate rationalize
  their production to produce standardized products
  in a very cost-effective manner
• Subsidiaries in global companies typically
  fulfill a pipeline role for HQs are usually
  dependent on HQs for their sales purchases
  are not expected to respond actively to the local
  mkt demands
• Control exercised by HQs over these subsidiaries
  is rather high
• Most typical of German Japanese MNCs

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In Summary 3 Ideal-type of MNCs

• Multidomestic Companies
• Complete reverse of global companies
• Product or services are differentiated to meet
  differing local demands, policies are
  differentiated to conform to differing govt.al
  mkt demands
• Local demand is determined by cultural, social
  political differences between countries
• Food beverages industry is a classical example
  of a multidomestic type of industry
• Chs. by decentralized loosely coupled org.
  structure where subsidiaries operate relatively
  independently from HQs they buy / sell a very
  low proportion of their input / output from / to
  HQs they are responsive to the local mkt.
  adapt both products mktg to local circumstances
• Control exercised by HQs over these subsidiaries
  is rather low
• Most typical of French British to a lesser
  extent Finnish Swedish MNCs

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In Summary 3 Ideal-type of MNCs

• Transnational Companies
• Combines chs. of both global multidomestic
  companies, in that it tries to respond
  simultaneously to the sometimes conflicting
  strategic needs of global efficiency national
  responsiveness
• Transfer of knowledge is very important for these
  companies
• Expertise is spread throughout the org.,
  subsidiaries can serve as a strategic centre for
  a particular product-mkt combination
• Pharmaceutical industry many MNCs in the food
  industry are moving towards a more transnational
  type of company
• Subsidiaries are more dependent on other
  subsidiaries for their in- outputs than on HQs,
  which confirm the network type of org. structure
  subsidiaries are usually very responsive to the
  local mkt are more likely to have a strategic
  role such as production or RD
• Control exercised is as high as global companies
• American, Dutch Swiss MNCs are typical of this
  configuration

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Perlmutters International States of Mind

• Perlmutter (1969) distinguished 3 states of mind
  of attitudes of international executives
• Ethnocentric (or home-country oriented)
• Polycentric (or host-country oriented)
• Geocentric (or world-oriented)
• Every firm will probably have some degree of all
  three types of HQs orientation, but usually one
  can distinguish a dominant state of mind

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Perlmutters International States of Mind

• Ethnocentric attitude
• Implies that management style, knowledge,
  evaluation criteria managers from the home
  country are thought to be superior to those of
  the host country
• Only parent-country nationals are considered to
  be suitable for top management positions, both at
  HQs in the subsidiaries

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Perlmutters International States of Mind

• Polycentric attitude
• Explicitly recognizes differences between
  countries believes that local nationals are in
  the best position to understand deal with these
  country-specific factors.
• A local manager, however, will never be offered a
  position at HQs, because parent-country nationals
  are considered to be more suitable for these
  positions

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Perlmutters International States of Mind

• Geocentric attitude
• This kind of company draws from a worldwide pool
  of managers.
• Managers can be appointed at HQs or subsidiaries
  regardless of their nationality

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Perlmutters International States of Mind vs.
Bartlett Ghosals Typology

• Global companies will be tend to be characterized
  by an ethnocentric attitude
• Multi-domestic companies by a polycentric
  attitude
• Transnational companies by a geocentric attitude

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Perlmutters International States of Mind
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Transfer of HRM Practices across Borders

• One of the central questions in MNC literature is
  the extent to which subsidiaries adapt their
  practices to local circumstances behave as
  local firms (local isomorphism) versus the extent
  to which their practices resemble those of their
  parent company (internal consistency)
• Since the HR function deals with human resources
  hence is confronted with differences in culture
  local regulations to a larger extent than for
  instance the finance or production function, it
  will tend to be more localized than most other
  functional areas
• However, MNCs do differ in the extent to which
  they transfer their HR practices to their
  overseas subsidiaries.
• Taylor (1996) distinguish 3 orientations that
  reflect the general philosophy underlying the
  MNCs international HRM system
• Adaptive
• Exportive
• Integrative

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Transfer of HRM Practices across Borders

• MNC with adaptive orientation design HRM systems
  for their subsidiaries that are reflective of the
  local environment (high local isomorphism, low
  internal consistency) polycentric orientation
• An exportive orientation leads MNCs to transfer
  their parent company HRM system to their
  subsidiaries (low local isomorphism, high
  internal consistency) ethnocentric approach
• An integrative approach combines internal
  consistency with allowance for some local
  isomorphism attempts to use the best
  practices which can originate from both the
  parent company the subsidiaries geocentric
  approach