Four Basic Management Strategies Companies Use to Compete Internationally
As Information Age rushes in to influence virtually all sectors in society, businesses worldwide had embraced globalisation and committed themselves to various changes in their organisation. Thus, it is not difficult for them to realize that the competition of multinational enterprises (MNEs) does not merely compose of getting high profits and satisfying customers, but also the strategies they employ to get ahead of the leading pack.
Several terms compose the spectrum of international business activity, which can be identified depending on the nature and extent of a business’ involvement in international markets and the degree of co-ordination and integration of geographically dispersed operations. This is why it is important to delineate the distinction of each term because strategies and management issues could be different in an organisation depending on the breadth of its international presence. According to Stonehouse et al. (2004), they termed international business as simply implication that an “organisation is operating in more than one country or, to put this another way, organisations from different countries are trading across their national boundaries”. This means that it is a generic term. However, a business that is multinational is the “one conducting international business and operating in several countries”. In addition, Bartlett and Ghoshal (1989) suggested the term implies some decentralisation of strategy and management decision making to overseas subsidiaries, with little co-ordination of activities and subsidiaries across national boundaries. In other words, subsidiaries operating in different countries are allowed considerable autonomy in terms of their strategies, which are largely determined by local conditions. On the contrary, a global business is the “one conducting its activities in a large range of countries across the world with a single strategy that is highly co-ordinated and integrated throughout the world”. The company strategy of a global business is could be differentiated from its central functions and subsidiaries have little autonomy in their operations. Finally, the term transnational business describes “the situation when an organisation conducts its activities across national boundaries, with varying degrees of co-ordination, integration and local differentiation of strategy and operations, depending on market and business conditions” (p. 3).
In the business perspective, globalisation could be deemed as one of two things: the expansion of trade and investment across borders and increased linkages so that a company’s or a country’s economic actions affect and are affected by economic, political, social, and cultural events in other societies. The world witnessed numerous expansions in the 19th century but not much linkage, so the current globalization, which is just getting started, is truly a new thing (Makhija 1997, p. 680). The arena now is catalysed by “improvements in technology, communications, and transportation; by liberalization of national trade policies since World War II; by a stabilization of inflation rates at low levels (stable, low inflation reduces uncertainties and allows for global risk assessments and risk-taking by companies); by privatization, as governments sell off business assets, often to foreigners; and by deregulation in many countries that have encouraged market-based efficiencies”. The impacts of globalization are many, but it is likely focused on competition. In industries in the United States, United Kingdom and elsewhere, entry and exit “rates have increased, labour markets have heated up, more new products are being developed and introduced than ever before, and the market for ownership (mergers and acquisitions) is vibrant” (Sullivan, 2002, p. 12-13).
Internationalising competitive strategies necessarily encompasses government as well as private firms affecting competition and efficiency in markets. The private sector is not the only influence on the competitive process and therefore should not be the sole target of these strategies. In this regard, Bartlett and Ghoshal (1989) identified four basic management strategies to enter and compete in the international arena. These are international strategy, a multidomestic strategy, a global strategy, and a transnational strategy.
1. International Strategy
Businesses that conduct an international strategy are attempting to advance using their value by transferring valuable skills and products to foreign markets where indigenous competitors lack those skills and products. Porter and Fuller (1986) viewed strategic alliances such as “coalitions” are essential in bolstering a firm’s international strategy. They asserted that two key dimensions of international strategy are “configuration” and “coordination” of a firm’s activities. The former means where and in how many countries the activities are located while the latter refers to how the activities located in different countries relate. Moreover, they argued that coalitions are a means of performing one or more activities in combination with another firm instead of running them alone. “The choice of coalition implies that it is perceived as a less costly or more effective way to configure than alternatives of, on the one hand, developing the skills to perform the activity in-house or, on the other hand, of merger to gain the capability to perform the activity or by products or skills in arm’s length transaction” (p. 321).
When a firm adopts an international strategy, they tend to centralise on product development functions in their original location (for example, in research & development). More likely, these companies tend to establish production and marketing functions in each major country in which they do business. The limits that an international firm sets could mean a disadvantage of having higher operating costs, because it usually do not adheres on outsourcing the major operations. Although firms could take steps in undertaking some local customization of product offerings and marketing strategies, these efforts could be limited. In most international firms, the head office retains tight control over marketing and product strategy. Examples of firms adopting an international strategy are Toys “R” Us, McDonald’s, IBM, Kellogg, Procter & Gamble, Wal-Mart, and Microsoft.
2. Multidomestic Strategy
The most prominent feature of a multidomestic strategy is that it places emphasis on local responsiveness. Armed with a multidomestic strategy, this requires the firm’s transfer of knowledge to its subsidiaries. Then, each subsidiary runs its operations autonomously because each country presents unique market characteristics. In other words, the firm’s international strategy is a “country-centred strategy” based on the circumstances in that country. In pursuing multidomestic strategy, a firm can and should manage its international business activities like a portfolio. That is, each country is considered a profit centre. In marketing, multidomestic strategy requires independently run subsidiaries in each country to determine their own strategies concerning production and marketing. However, a firm that adopts a multidomestic strategy could experience worse scenarios of having high cost structure, poor job of leveraging core competencies, high pressure for local responsiveness and low pressure for cost reduction (Burke, 2007).
Examples of firms adopting a multidomestic strategy are Ford and General Motors. n the 1960s, GM’s and Ford’s worldwide operations functioned on a multidomestic basis, with their foreign subsidiaries being self-standing and self-contained units which conformed to local production practices, consumer tastes, and other host country needs or major government demands. This strategy applied in major vehicle markets or markets with a huge potential for growth, where market imperfections prompted Ford and other auto makers to open manufacturing operations. In these countries auto makers had to adapt the basic industry rules of production and competition to local conditions and negotiate them with local actors, including government, labour, suppliers, vehicle assemblers, and even consumers. Not surprisingly, Ford’s multidomestic strategy was also regionally differentiated, which meant that the company strategy was distinct in different geographic areas. For multinational enterprises seeking to expand overseas, government policy has traditionally been one of the most important sources of market imperfections. In Ford, foreign operations performed similar roles to the company’s U.S. branches. Therefore, Ford’s multidomestic strategy meant that the subsidiaries were not part of an integrated transnational production system, i.e. the exchange of products or services between those subsidiaries or even with the parent company was kept to a minimum. The transfer of technology, design, and financial resources from the parent company to most subsidiaries was the only kind of exchange within the network of business units (Studer-Noguez, 2002, p. 24-25).
3. Global Strategy
Companies that choose to venture using a global strategy should be focused more on elevating its profitability levels by undergoing the cost reductions that come from “experience curve effects and location economies”. This means that should undertake a low-cost strategy, where the production, marketing, and R;D activities are concentrated in a few favourable locations (Burke, 2007). In this sense, a global strategy can capture competitive advantages for the firm by integrating its activities on a worldwide basis. In global strategy implementation, the headquarters play a dominant and central role to provide standardised policies and coordination. Of course, a global strategy does not totally ignore a country’s specific needs, but it tries to establish a balance between worldwide standardization, coordination, and local responsiveness. Although this strategy has more advantages than the previous two (international and multidomestic), it still do not emphasise into customising the firm’s product offerings and its marketing (Stonehouse et al. 2004, p. 4).
Examples of companies adopting a global strategy are Intel, Texas Instruments, and Motorola. It is also important to take note that the conditions in global strategy are not appropriate to use in many consumer goods markets, where demands for local responsiveness remain high (for example, the processed food market). This is because strict global strategy often overlooks such differences in consumer tastes and behaviours in various countries.
4. Transnational Strategy
A business that is interested in venturing in transnational strategy should be able to “plan to exploit experienced-based cost and location economies, transfer core competencies within the firm and pay attention to local responsiveness”. This is because Bartlett and Ghoshal (1989) maintained that the flow of skills and product offerings could not stay in just one area and it should scatter from home firm to foreign subsidiary, as in the case of firms pursuing an international strategy. Rather, the flow should also be from foreign subsidiary to home country, and from foreign subsidiary to foreign subsidiary—a process they refer to as global learning. Thus, among the four strategies, this seems to have most well-rounded criteria in obtaining a competitive advantage for a certain firm.
The disadvantages for a business adopting a transnational strategy are that it should respond to high pressures for local responsiveness and they should be able to provide significant opportunities for leveraging valuable skills within a multinational’s global network of operations. In some ways, firms that pursue a transnational strategy are trying to simultaneously achieve cost and differentiation advantages. Usually, transnational firms have no single national headquarters but instead have many regional headquarters and perhaps a world headquarters. In a transnational strategy in Europe would like to expand into Asian markets and knows that it must develop a transnational strategy and a supportive systems structure.
An example of a firm that adopted the transnational strategy is Nestlé, the world’s largest food company, headquartered in Switzerland. Managers of transnational business often have to tackle challenges like identifying and exploiting “cross-border synergies and to balance local demands with the global vision for the corporation”. This is the reason why building an effective transnational organization requires a lot of effort in creating a strong corporate culture that values global diversity across cultures and markets (ABPM.org, 2007).
Multidomestic vs. Global Strategy
· Low cost strategy
· Exploit experience curve effects
· Low demand for local responsiveness
· Lack of local responsiveness
· Does not customize product
· Strong pressure for cost reduction
· Overcentralization could affect firm’s effectiveness.
· Integrated competitive actions could sacrifice revenues, profits, or competitive positions in individual countries
· Achieves maximum local responsiveness
· Product customization and able to improve both product and program quality
· Customize product offerings and marketing in accordance with local responsiveness
· High cost strategy
· Inability to realize location economies
· Failure to exploit experience curve effects
· Failure to transfer core competencies to foreign markets
· Overcentralization could affect firm’s effectiveness.
Businesses operating in global industries like electronics or automobiles are recommended to pursue global business strategy instead of multidomestic strategy. A global strategy will be able to maximise competitive advantages for the firm by integrating its activities on a worldwide basis. In global strategy implementation, the headquarters play a dominant and central role to provide standardized policies and coordination. Of course, a global strategy does not totally ignore a country’s specific needs, but it tries to establish a balance between worldwide standardization, coordination, and local responsiveness. However, for businesses engaged in food products or services, a multidomestic strategy will be more appropriate because these sectors adhere much to the cultural side of trade. Cultural differences often lead to special consumer preferences. Tradition, cultural values, and religious beliefs often influence consumer behavior. Typical examples of such religious values can be observed in Judaism and Islam, which prohibit eating pork, and Hinduism, which considers cows sacred (and therefore bans eating beef). Similarly, the buying behaviours of extended families and nuclear families present essential differences. To unite the benefits of both global and multidomestic strategies, the transnational strategy probably corresponds to the benefits of global and multidomestic companies. International firms employing this mode must be careful that as they strive for worldwide efficiencies, they should equally pay attention to local market conditions that might require some adaptations in the products and services that the company offers (Young ; Nie, 1996, p. 161).
In Australia, Ansell is one company that has adopted a global strategy. Ansell is engaged in the design, supply and marketing of healthcare barrier protection products and services. It is one of the leaders in the natural latex and synthetic polymer glove and condom markets. The company operates in Americas, Europe and Asia Pacific. It is headquarters located in Richmond, Australia (Ansell Website, 2007). An advantage of using a global strategy is that Ansell is able to utilise broad resources to search internationally for value enhancing acquisitions and other opportunities such as alliances and technology joint ventures. However, with a global strategy, one weakness seen is that they could not customise their products easily for localised markets. This is why they could learn a multidomestic strategy to function differently in each country because preferences of their clients vary in different countries and every country must grant its own approval on the products they offer.
Among the four strategies discussed, the transnational strategy is the most favourable because it encompasses all the benefits of multidomestic and global strategies. However, it is very difficult to attain and maintain because of the high pressures on localisation and the strong corporate culture it requires takes time to attain. Moreover, interdependence–collaborative information-sharing, problem-solving, and resource-sharing–is required in global environments so that scale-efficient operations may be integrated, marketing knowledge exchanged, and financial resources used to cross-subsidize markets (Young & Nie, 1996, p. 162).
In such case, the global strategy can be a more viable substitute to a transnational strategy. A less strict global strategy can still undertake some multidomestic function so that it can respond better to pressures on localisation of their products and services. In this regard, the benefits of each strategy are not exclusive to each other and any company can customise what fits them best and their operations may have elements of both. For example, its production may be global, while its marketing is multidomestic. A good strategy should work for a company insofar as it could leverage the capabilities of both the firm’s home country and the foreign countries where it operates.
Bartlett, C. and Ghoshal, S. 1989. Managing Across Borders: The Transnational Solution, Boston, MA: Harvard Business School Press.
Ansell Limited Company Review. Retrieved May 24, 2007, from Ansell Website: http://www.ansell.com/company/index.shtml.
Burke, I. 2007. Chapter 11. Strategy of International Business (Powerpoint Presentation). Retrieved May 24, 2007, from University of New Mexico Website: http://mgtclass.mgt.unm.edu/FIT/Burke/Strategy%20of%20International%20Business%20%20CH%2011.ppt.
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