Chapter 12 Outline

Strategic Choice

Firms use four basic strategies to compete in the international environment: an international strategy, a multidomestic strategy, a global strategy, and a transnational strategy.¹⁹ Each strategy has its advantages and disadvantages. The appropriateness of each strategy varies with the extent of pressures for cost reductions and local responsiveness.

Figure 12.4 illustrates when each of these strategies is most appropriate. In this section we describe each strategy, identify when it is appropriate, and discuss its pros and cons.

International Strategy

Firms that pursue an international strategy try to create value by transferring valuable skills and products to foreign markets where indigenous competitors lack those skills and products. Most international firms have created value by transferring differentiated product offerings developed at home to new markets overseas. They tend to centralize product development functions at home (e.g., R&D). However, they also tend to establish manufacturing and marketing functions in each major country in which they do business. But while they may undertake some local customization of products and marketing strategy, this tends to be limited. Ultimately, in most international firms, the head office retains tight control over marketing and product strategy.

Figure 12.4

Four Basic Strategies

International firms include the likes of Toys "R" Us, McDonald's, IBM, Kellogg, Procter & Gamble, Wal-Mart, and Microsoft. Microsoft develops the core architecture underlying its products at its Redmond campus in Washington state and also writes the bulk of the computer code there. However, the company allows national subsidiaries to develop their own marketing and distribution strategies and to customize aspects of the product to account for such basic local differences as language and alphabet. Procter & Gamble, which is profiled in the accompanying Management Focus, has traditionally had production facilities in all its major markets outside the United States, including Britain, Germany, and Japan. These facilities, however, manufactured differentiated products that had been developed by the US parent firm and were often marketed using the marketing message developed in the United States. Historically, local responsiveness at P&G has been limited.

An international strategy makes sense if a firm has a valuable core competence that indigenous competitors in foreign markets lack, and if the firm faces relatively weak pressures for local responsiveness and cost reductions (as in the case of Microsoft). In such circumstances, an international strategy can be very profitable. However, when pressures for local responsiveness are high, firms pursuing this strategy lose out to firms that place a greater emphasis on customizing the product offering and market strategy to local conditions. Due to the duplication of manufacturing facilities, firms that pursue an international strategy tend to suffer from high operating costs. This makes the strategy inappropriate in manufacturing industries where cost pressures are high.

Multidomestic Strategy

Firms pursuing a multidomestic strategy orient themselves toward achieving maximum local responsiveness. Multidomestic firms extensively customize both their product offering and their marketing strategy to match different national conditions. They also tend to establish a complete set of value creation activities--including production, marketing, and R&D--in each major national market in which they do business. As a consequence, they generally fail to realize value from experience curve effects and location economies. Accordingly, many multidomestic firms have a high cost structure. They also tend to do a poor job of leveraging core competencies within the firm. General Motors, profiled in the opening case, is a good example of a company that has historically functioned as a multidomestic corporation, particularly with regard to its extensive European operations, which are largely self-contained entities.

A multidomestic strategy makes most sense when there are high pressures for local responsiveness and low pressures for cost reductions. The high-cost structure associated with the duplication of production facilities makes this strategy inappropriate in industries where cost pressures are intense (which is the case in the automobile industry, a fact that explains GM's current attempts to change its strategic orientation). Another weakness associated with this strategy is that many multidomestic firms have developed into decentralized federations in which each national subsidiary functions in a largely autonomous manner. This was exemplified by the failure of Philips NV to establish its V2000 format as the standard in the VCR industry during the late 1970s. Philips' US subsidiary refused to adopt the V2000 format; instead, it bought VHS-format VCRs produced by Matsushita and put its own label on them!

Global Strategy

Firms that pursue a global strategy focus on increasing profitability by reaping the cost reductions that come from experience curve effects and location economies. They are pursuing a low-cost strategy. The production, marketing, and R&D activities of firms pursuing a global strategy are concentrated in a few favorable locations. Global firms tend not to customize their product offering and marketing strategy to local conditions because customization raises costs (it involves shorter production runs and the duplication of functions). Instead, global firms prefer to market a standardized product worldwide so they can reap the maximum benefits from the economies of scale that underlie the experience curve. They also tend to use their cost advantage to support aggressive pricing in world markets.

This strategy makes most sense where there are strong pressures for cost reductions and where demands for local responsiveness are minimal. Increasingly, these conditions prevail in many industrial goods industries. For example, global standards have emerged in the semiconductor industry. Accordingly, firms such as Intel, Texas Instruments, and Motorola all pursue a global strategy. However, as we noted earlier, these conditions are not found in many consumer goods markets, where demands for local responsiveness remain high (e.g., audio players, automobiles, processed food products). The strategy is inappropriate when demands for local responsiveness are high.

Transnational Strategy

Christopher Bartlett and Sumantra Ghoshal have argued that in today's environment, competitive conditions are so intense that to survive in the global marketplace, firms must exploit experience-based cost economies and location economies, they must transfer core competencies within the firm, and they must do all this while paying attention to pressures for local responsiveness.²⁰ They note that in the modern multinational enterprise, core competencies do not reside just in the home country. They can develop in any of the firm's worldwide operations. Thus, they maintain that the flow of skills and product offerings should not be all one way, 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 (for examples of such knowledge flows, see the opening case on General Motors and the Management Focus on McDonald's). Bartlett and Ghoshal refer to the strategy pursued by firms that are trying to achieve all these objectives simultaneously as a transnational strategy.

A transnational strategy makes sense when a firm faces high pressures for cost reductions and high pressures for local responsiveness. Firms that pursue a transnational strategy are trying to simultaneously achieve low-cost and differentiation advantages. As attractive as this sounds, the strategy is not an easy one to pursue. Pressures for local responsiveness and cost reductions place conflicting demands on a firm. Being locally responsive raises costs, which makes cost reductions difficult to achieve. How can a firm effectively pursue a transnational strategy?

Some clues can be derived from Caterpillar Inc. In the late 1970s, the need to compete with low-cost competitors such as Komatsu and Hitachi of Japan forced Caterpillar to look for greater cost economies. At the same time, national variations in construction practices and government regulations meant that Caterpillar had to remain responsive to local demands. As illustrated in Figure 12.5, Caterpillar was confronted with significant pressures for cost reductions and for local responsiveness.

To deal with cost pressures, Caterpillar redesigned its products to use many identical components and invested in a few large-scale component manufacturing facilities, sited at favorable locations, to fill global demand and realize scale economics. The firm augmented the centralized manufacturing of components with assembly plants in each of its major global markets. At these plants, Caterpillar added local product features, tailoring the finished product to local needs. By pursuing this strategy, Caterpillar realized many of the benefits of global manufacturing while responding to pressures for local responsiveness by differentiating its product among national markets.²¹ Caterpillar started to pursue this strategy in 1979 and by 1997 had doubled output per employee, significantly reducing its overall cost structure. Meanwhile, Komatsu and Hitachi, which are still wedded to a Japan-centric global strategy, have seen their cost advantages evaporate and have been steadily losing market share to Caterpillar. (General Motors is trying to pursue a similar strategy with its development of common global platforms for some of its vehicles; see the opening case for details.)

Figure 12.5

Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar

For another example consider Unilever. Once a classic multidomestic firm, Unilever has had to shift toward more of a transnational strategy. A rise in low-cost competition, which increased cost pressures, has forced Unilever to look for ways of rationalizing its detergents business. During the 1980s, Unilever had 17 different and largely self-contained detergents operations in Europe alone. The duplication in assets and marketing was enormous. Also, because Unilever was so fragmented it could take as long as four years for the firm to introduce a new product across Europe. Now Unilever is trying to weld its European operation into a single entity, with detergents being manufactured in a handful of cost-efficient plants, and standard packaging and advertising being used across Europe. According to company estimates, the result could be an annual cost saving of over $200 million. At the same time, however, due to national differences in distribution channels and brand awareness, Unilever recognizes that it must still remain locally responsive, even while it tries to realize economies from consolidating production and marketing at the optimal locations.²²

Bartlett and Ghoshal admit that building an organization that can support a transnational strategic posture is complex and difficult. Simultaneously trying to achieve cost efficiencies, global learning, and local responsiveness places contradictory demands on an organization. Chapter 13 discusses how a firm can deal with the dilemmas posed by such difficult organizational issues. Firms that attempt to pursue a transnational strategy can become bogged down in an organizational morass that only leads to inefficiencies.

Bartlett and Ghoshal may be overstating the case for the transnational strategy when they present it as the only viable strategy. While no one doubts that in some industries the firm that can adopt a transnational strategy will have a competitive advantage, but in other industries, global, multidomestic, and international strategies remain viable. In the semiconductor industry, for example, pressures for local customization are minimal and competition is purely a cost game, in which case a global strategy, not a transnational strategy, is optimal. This is the case in many industrial goods markets where the product serves universal needs. But the argument can be made that to compete in certain consumer goods markets, such as the automobile and consumer electronics industry, a firm has to try to adopt a transnational strategy.

Summary

The advantages and disadvantages of each of the four strategies discussed above are summarized in Figure 12.6. While a transnational strategy appears to offer the most advantages, implementing a transnational strategy raises difficult organizational

Strategy	Advantages	Disadvantages
Global	Exploit experience curve effects Exploit location economies	Lack of local responsiveness
International	Transfer distinctive competencies to foreign markets	Lack of local responsiveness Inability to realize location economies Failure to exploit experience curve effects
Multidomestic	Customize product offerings and marketing in accordance with local responsiveness	Inability to realize location economies Failure to exploit experience curve effects Failure to transfer distinctive competencies to foreign markets
Transnational	Exploit experience curve effects Exploit location economies Customize product offerings and marketing in accordance with local responsiveness Reap benefits of global learning	Difficult to implement due to organizational problems

Figure 12.6

The Advantages and Disadvantages of the Four Strategies

issues. As shown in Figure 12.3, the appropriateness of each strategy depends on the relative strength of pressures for cost reductions and pressures for local responsiveness.