business

INTERNATIONAL BUSINESS Types of Strategy While designing strategy to conduct business activities in a foreign environment, managers consider various factors like growth opportunities, cost reductions, and diversification within a context of satisfying the competing demands of global integration and local responsiveness. And managers take a variety of perspectives to guide how they decide to run their operations to hit their goals and deal with this challenge. Generally, managers of MNEs choose from four basic strategies to guide how they will enter and compete in the international environment: a) International Strategy; b) Multi-domestic Strategy; c) Global Strategy; & d) Transnational Strategy. Following figure will make it clear to identify general conditions that shape the decision of when to use which type of strategy within the context of the integration-responsiveness grid.

Figure The Integration

Grid

Pressure for Global Integration

Responsiveness

Global Views the world as a single market; High Tightly controls global operations from headquarters to preserve focus on standardization.

International Use existing core Low competencies to exploit opportunities in foreign markets.

Low

Transnational Flexible value chain enables local responsiveness; Complex coordination mechanisms enable global integration.

Multi-domestic Foreign subsidiaries operate autonomous units to customize products and process to local markets’ needs.

High

Pressure for National Responsiveness

1

INTERNATIONAL BUSINESS

1) International Strategy Companies adopt the international strategy when they aim to leverage their core competencies by expanding opportunistically into foreign markets. The international model relies on local subsidiaries in each country to administer business as instructed by headquarters. Ultimately, it is the source of new products, processes and ideas for its overseas operations and ultimate control resides with managers at headquarters who reason they best know the basis and potential extensions of the company’s core competencies. Pros and Cons: Firms that peruse an international strategy a) create value by transferring core competencies and unique products to those foreign markets, where rivals are unable to develop, run, or sustain them; b) facilitate the transfer of skills, expertise and products from the parent company to its subsidiaries; c) hinder identifying and responding to local conditions as the liability of the international strategy is that headquarters’ control; & d) allow limited local customization. Examples: McDonalds, Google, Yahoo!, Sheraton, Hilton International, Wal-Mart, Microsoft etc. are some notable example of the international firms which follow international strategy. 2) Multi Domestic Strategy A multi domestic industry, sometimes called a locally responsive company, follows a strategy that allows each of its foreign-country operations to act fairly independently. That is the Company’s subsidiaries in their responsive local markets have the authority to design, make, and market products that directly respond to local customers’ preferences. Pros and Cons: Firms which apply multi domestic strategy a) design a value chain that gives each country’s operations the direction to respond to its local culture legal-political, and economic environments, effectively; b) have other benefits such as -

minimized political risk given the local standing of the company;

-

reduced exchange rate risk given the low need to repatriate funds;

-

greater prestige given its national prominence; etc.

c) make great sense in the face of high need for local responsiveness and low need to reduce costs via global integration; 2

INTERNATIONAL BUSINESS d) customize their products, marketing & service programs to local conditions; e) lead to widespread duplication of management, design, production, & marketing activities; & f) require huge investment as each local subsidiary must build the necessary value chain operations to meet local needs. Examples: Johnson & Johnson, Procter & Gamble etc. are well known firms that use this strategy. 3) Global Strategies The company adopting a global strategy chooses to respond directly to maximize integration. This decision spurs a company to make and market a standardized product, such as razor blades, or service, such as package delivery, for a specific global market segment. The global strategy pushes companies to a) think in terms of creating products for a world market; b) manufacturing them on a global scale in a few highly efficient plants;& c) marketing them through a few, focused distribution channels. It focuses on increasing profitability by reaping cost reductions from configuring value activities to achieve available production and location economies. Pros and Cons: Operationally, MNEs that adopt a global strategy aim to become the low-cost player in their industry. Failing to do so can lead to a weak competitive position against the firm that does. Thus, R&D, production, and marketing are concentrated in the most favorable locations which need not to be in the same country. The cost sensitivity rule gives firms no autonomy to customize their products or systems to local conditions. Different product design a) requires different materials; b) production runs become shorter; c) marketing programs must be adjusted; & d) new distribution systems have to built. This strategy is best suited for those industries that put strong pressures on efficient operations and where local responsiveness needs either non-existent or can be neutralized by offering a high quality product for a lower price than a local substitute. Examples: Wireless firms- Qualcomm & Texas instruments; Credit card industry- American Express.

3

INTERNATIONAL BUSINESS 4) Transnational Strategy The transnational strategy is arguably the most direct response to the growing globalization of business. It holds that today’s environment of interconnected consumers, industries and markets requires that an MNE find ways to configure a value chain that exploits location economies, co-ordinate value activities to leverage core competencies effectively and ensure that the value chain deals directly with pressures for local responsiveness. The MNE applying a transnational strategy differentiates capabilities and contributions from country to country, finding ways to learn systematically from its various environments and then ultimately integrating diffusing this knowledge throughout its global operations. Thus, it endorses an integrated framework of technology, financial resources, creative ideas, and people. Pros and Cons: The first-order conditions of the transnational strategy combine characteristics of the multinational and global strategies. However, it has a unique aspect that theoretically distinguishes it from the other strategy types. Specifically, the transnational strategy champions the cause of interactive ‘global learning’ by which an MNE a) develops valuable skills in any of its worldwide operations; b) uses them to improve its core competencies; & c) then diffuses these innovations throughout its global operation. Thus the transnational strategy champions a flow from the idea generator to idea adopters though a) it is difficult to built; b) poses serious challenges (especially in coordinating value activities); c) is prone to shortfalls Examples: General Electrics is the leading example of following transnational strategy. To conclude we can say whatever strategy will be depends on several factors ranging from local culture and environment to global trade practices and ensures profitability.

4