450 words

Chapter 8

Global Strategy and Organization

Opening Case: IKEA’s Global Strategy

How does a company like IKEA manage its operations across 35 nations, 240 stores, 100,000 employees, 20 franchises, and 2,000 suppliers? The Swedish retailer IKEA’s philosophy is to offer Scandinavian design quality furniture at low prices. 90 percent of the product line is standardized around the world to keep the operating costs low, though a few items are sourced locally to address the specific local needs. To generate economies of scale, the product development, purchasing, and warehousing are consolidated at its headquarters in Sweden. A third of the products are made in Asia, and two thirds in Europe. IKEA target segment is families with limited income and limited living space – including college students – who cares little about status and views foreign products positively. Each IKEA store relies on the centrally developed catalogue, which conforms to IKEA’s cosmopolitan style. More than 175 million fee copies of the catalogue are distributed worldwide in more than 27 languages.

IKEA has an informal corporate culture, with few titles. IKEA even holds an ‘anti-bureaucratic week” annually, when managers wear sales clerks’ uniforms and run purchase orders. That allows managers to be in close touch with the employees, customers, and suppliers. The stores maintain direct contact with IKEA headquarters in Sweden 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

Strategy in the international context helps managers to formulate a strong international vision, allocate scarce resources on a worldwide basis, participate in major markets, implement global partnerships, engage in competitive moves in response to global rivals, and configure value adding activities on a global scale. According to Bartlett and Ghoshal, an MNE strategy must simultaneously achieve three objectives –efficiency, flexibility, and learning. Efficiency refers to achieving cost leadership. Flexibility refers to developing responsiveness to the diversity and volatility of different country environments. Learning refers to the ability to learn from international exposure and leverage learning on a worldwide basis. For instance, P&G’s research center in Japan developed a different kind of detergent, because Japanese customers wash their clothes in colder water than in the US or Europe.

Often, MNEs find it challenging to achieve all three objectives. Historically, 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

The three objectives of efficiency, flexibility, and learning may be mapped on two dimensions: global integration and local responsiveness. Global integration refers to the coordination of the MNE’s value chain activities across nations to achieve worldwide efficiency, synergy, and cross-fertilization. It helps achieve the efficiency and global learning objectives. The focus of global integration is on convergent customer needs, competitive environments, functional imperatives, and operating systems across nations. The strategic decisions are made on a global basis, to avoid the costs of adapting to local situations.

Local responsiveness refers to the flexibility towards country-specific situations, needs, and opportunities. The focus is on adaptation, accommodation, and adjustment to country-specific customer needs, competitive environment, functional imperatives, technological capabilities, and operating systems. The strategic decisions are made on a local basis, instead of using global controls that may inhibit entrepreneurial flexibility and cultural responsiveness.

George Yip (2003) identifies four drivers of globalization and of global integration:

1) Market Drivers: Consumer lifestyles around the world are converging, due to the spread of global and regional media, push to develop global and regional advertising, establishment of global brands, organizations operating as global customers, and rising percentage of people in the middle class in different nations.

2) Cost Drivers: Opportunities for achieving cost-effectiveness through global coordination are increasing, due to the rise of emerging markets with low cost productive capability, accelerating need for funding and quickly recovering the cost of technological innovations, revolution in information and communication technologies, revolution in international travel and transportation systems, and the emergence of global financial markets.

3) Competitive Drivers: Need for a coordinated response to competitors is increasing, because of the rise of global value chains in different industries, the rise of emerging market MNEs, the rise of equity and non-equity based international collaborations and FDI, the rise of web-based “born global” MNEs, and the rise of MNEs having coordinated global strategies.

4) Government Drivers: Governments around the world 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.

The drivers of global integration influence four dimensions of MNE strategy:

1) Market participation: Global integration encourages stronger participation in larger markets, and in markets where needs are similar to those around the world.

2) Functional strategies: Global integration encourages standardized or similar functional strategies across nations. Thus, in marketing, there is standardization or similarity across nations in product/ service, promotion, pricing, channels of distribution, and positioning. Similarly, sourcing, human resources, information technology, machinery, manufacturing systems, and methods are same or similar across nations.

3) Value-chain configuration: Global integration encourages situating each value adding activity in a nation that has strongest comparative advantage in that activity.

4) Competitive strategy: Global integration encourages competitive moves in individual markets as part of a global competitive strategy.

Alongside, each driver of globalization is also experiencing a drive for localization. Differences in cultures, infrastructure, economic systems, technological bases, societies, political and legal systems, and other environmental conditions, require the MNEs to localize, and in turn also influence the four dimensions of MNE strategy. Even within the larger markets, the MNEs are being called upon to serve less served populations, such as the Bottom of the Pyramids, whose needs may be distinct. They also have to monitor and coordinate with more local competitors who may have stronger linkages with the underserved market segments. 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 Emerging from the Integration- Responsiveness Framework

Depending on the drive for global integration and local responsiveness, four distinct strategies are identifiable for the internationalizing firms.

1) Home replication strategy (also referred to as international strategy): When the drive for global integration and the drive for local responsiveness are both low, the MNEs often pursue home replication strategy. This is common among the MNEs who are early in the internationalization process. They view international business as secondary to their domestic business and as an opportunity to generate incremental revenues and to extend product life cycle for the products designed with domestic customers in mind. They expect little knowledge flows from foreign operations.

2) Multi-local strategy (also referred to as multi-domestic strategy): When the drive for global integration is low, but the drive for local responsiveness is high, the MNEs often pursue multi-local strategy. They emphasize differences among national markets, and delegate considerable autonomy for local decision-making to each country manager. Products, business practices, and functional strategies are adapted to each nation, and vary across nations. In extreme cases, each nation may have its own complete value chain. The headquarters exercises only limited control or coordination, and puts only limited effort for cross-country knowledge sharing. The multi-local strategy may result in proliferation of products and services, duplication of resources and activities, loss of economies of scale and efficiency, and individual country subsidiaries diverging from the corporate interests.

3) Global strategy: When the drive for global integration is high, but the drive for local responsiveness is low, the MNEs often pursue global strategy. They emphasize central control and coordination, and grant worldwide responsibilities or mandates to various product or business managers. Various upstream functions, such as R&D, information technology, and manufacturing, are centralized in the Headquarters or in the centers of excellence around the world. Emphasis is on achieving worldwide efficiency and on cross-national learning and cross-fertilization of the knowledge base. The global strategy requires strong communication from the headquarters to the subsidiaries in various nations. Local managers have limited autonomy over local operations. To address local needs, the focus is on adapting the worldwide products, policies, and strategies, rather than developing new local approaches. For instance, in IKEA’s case, 90% of the product line is similar worldwide. Similarly, Dell adapts language of the keyboard and software to different nations. And, Coca Cola slightly adapts its ingredients to local taste, such as less sugar in Coke in China.

4) Transnational strategy: When the drive for global integration and the drive for local responsiveness are both high, the MNEs often pursue transnational strategy. They seek to standardize across nations where feasible, and adapt to local conditions where appropriate. As in the global strategy, they organize some value chain activities on a global scale, based on the regional comparative advantages and global centers of excellence. They coordinate some competitive moves on an integrated global scale. They standardize some functional strategies, e.g. some core products or positioning. They emphasize global knowledge sharing and learning, and some shared global corporate culture norms. And, as in the multi-local strategy, they may 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.

Transnational strategy is often complemented with a regional approach. The MNEs create regional headquarters, such as in Asia, Europe, and Americas. Each region may develop a distinct pan-region strategy with varying degrees of autonomy to the individual nations. Alongside, worldwide product or functional leads coordinate across regions.

Transnational strategy may also involve shared responsibility of subsidiaries and headquarters. The headquarters is responsible for capital planning, global profitability and learning, and transfer pricing. It also takes a lead in developing the broad corporate strategy, basic research and development, global product development and sourcing, and development of global managers. The subsidiaries are responsible for sales, marketing, local market research, human resource management, and compliance with local laws and regulations. They also take a lead in local procurement, local product development, and technical support and customer service. To encourage positive, open-minded, collaborative relationships with local subsidiaries, the MNEs strive to:

a) Encourage local managers to identify with broad, corporate objectives, through acculturation, teamwork, and incentive systems

b) Rotate employees within the corporate network to develop multiple perspectives.

c) Encourage local managers to interact and share experiences with each other through regional and global meetings and conferences

Organizational Arrangements for the Various MNE Strategies

There are four typical organizational structures for the internationalizing firms, corresponding to the four strategies: Export department/ International division for the home replication strategy, Geographic Area Division for the multi-local strategy, Global Product or Function Division for the global strategy, and Worldwide Matrix for the transnational strategy.

1) Export Department or International Division: Manufacturing firms usually enter foreign markets through exports. They usually establish a separate export department to oversee international logistics, marketing and sales, and any special requirements for other functions, such as labeling language in manufacturing. As the firm begins other modes of global participation, such as licensing and small-scale FDI, a separate International Division may be created to oversee international operations and maintain relationships with foreign suppliers, channel partners, customers, collaborators, and governments. The decision to create an International Division signals the corporate commitment to a higher priority on international marketplace and greater resource allocation. The international division is staffed with international experts who help develop new international business opportunities and offer training and support for foreign operations. However, the domestic marketplace logic may continue to drive the core strategies, and there may be limited knowledge sharing from the international division to the domestic operations.

2) Geographic Area Division: The firms that rely on the differentiation business strategy, based on branding and/or R&D, tend to organize into Geographical Area Divisions. This is common among industries with long product life cycles, as in pharmaceutical, food, automotive, cosmetic, and beverage. For instance, Nestle organizes its operations into a South America division, North America division, Europe division, Asia division, and Africa division. Within each region, the subsidiaries communicate well with each other; but across regions, the communications occurs through regional heads.

3) Global Product or Functional Division: The firms that rely on the cost leadership or state-of-the-art technology focus strategy tend to organize into Global Product divisions. Each product division operates as a centralized profit center with substantial autonomy, and has responsibility for producing and marketing a specific group of products, worldwide. Each product division coordinates globally to achieve greater economies of scale and to leverage product knowledge and technology across borders. All major functions, such as R&D, manufacturing, and marketing, are situated within each product division, and are duplicated across different divisions.

The firms that require high level of functional expertise instead organize into Global Functional Divisions. For instance, oil and mining firm are often organized around exploration, drilling, transportation, and storing functions. Similarly, cruise ship lines may be organized around cruise shipbuilding and passenger cruise operations functions. Functional divisions, however, face challenges in managing diversity across nations or across products.

4) Worldwide Matrix: Through this structure, the firms seek to blend the geographical area, 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. For instance, a factory manager in China may report primarily to the China country head, if the issues related with local government are very critical, and secondarily to the worldwide operations head. A marketing manager in Japan may report primarily to the worldwide product head if the product coordination is important, and secondarily to Japan country head.

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. Consider the case of Unilever and Proctor & Gamble (P&G). Unilever has two headquarters: one in UK and the other in the Holland, and that has over $50 billion of sales in food, beverage, cleaning, and personal care products. Like most other European companies, Unilever historically pursued a multi-local strategy and adopted a Geographic Area division that was focused on local responsiveness and flexibility objective. In the late 1990s, Unilever was buying more than 30 different types of vanilla for its ice cream in Europe. On the other hand, P&G, like most other American companies, historically pursued a global strategy and adopted a Global Product division that was 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.

As other American MNEs, such as Wal-Mart, also internationalized, Unilever faced growing pressures to become more efficient and integrate globally. In early 2000s, Unilever decided to divest hundreds of businesses, cut 55,000 jobs, close 145 factories, and discontinue 1,200 of its 1,600 brands. It took away the decentralized power of the local managers to vary packaging, formulation or advertising of its global brands, such as Dove soap. Instead, it involved those managers as part of the global teams for developing new products that cut across major national markets. The country managers still retained significant power in other areas, such as human resources and pricing. Thus, it evolved a transnational strategy using a more balanced matrix structure. At the same time, P&G has faced growing pressures to become more locally responsive and flexible, in order to compete with the European rivals such as the Unilever.

Building the Transnational Firm

In addition to strategy and structure, a transnational firm also needs to cultivate three additional attributes: transnational leadership, transnational organizational culture, and transnational organizational processes.

1) Transnational Leadership: Transnational leaders

a. Promote global mindset, i.e. openness to and awareness of diversity of cultures.

b. Articulate global strategic vision, i.e. lay out the future of the MNE and how it will get there.

c. Show willingness to commit resources to achieve the global strategic vision and international goals. The international operations are more complex and require greater time and effort to succeed – therefore unrelenting leadership commitment is essential.

d. Are willing to invest in human assets that is capable of operating globally, and in local communities they serve worldwide.

2) Transnational Organizational Culture: Transnational organizational culture are characterized by

a. Global competence and cross-cultural skills: For instance, an emphasis on R&D has helped Canon become a world leader in digital cameras, copiers, printers, and flat-screen TVs.

b. Global exchange and communication between the Headquarters and the subsidiaries, and among different subsidiaries.

c. Sustainable business orientation, to serve the planet, the people, and the prosperity of the nations and of the organization.

d. Value – Practice alignment: Transnational organizational cultures align their global and local practices with the locally as well as globally endorsed values, such as by emphasizing gender empowerment, future orientation, performance orientation, and effective interpersonal communication and teamwork.

3) Transnational Organizational Processes: Transnational organizational processes are characterized by

a. Global teams: Transnational organizational processes mobilize people of different expertise and nations into teams who work virtually or otherwise for solving problems and pursuing global mandates

b. Global information systems, i.e. enabling various nations to share and learn from each other in the transnational network.

c. Global talent pools, i.e. promote global careers and talent development.

d. Global knowledge bases: The MNEs appreciate and recognize the unique knowledge bases of different regions, and are committed to protecting, developing, exploiting, and sharing them for the benefit of the involved constituencies.