Building Competitive Advantage

Challenge 2

How do firms build and sustain competitive advantage in

international markets?
Learning Objectives

1. Identify the competing forces on internationalizing firms

2. Understand the fit between strategy, structure and

processes

3. Apply the Integration-Responsiveness Framework

4. Understand the challenges of coordination and control

within the MNE
What Is Strategy?
A planned set of actions that managers take to make best
use of the firm’s resources and core competences, to gain
a competitive advantage
• When developing strategies, managers examine the
firm’s strengths and weaknesses, and the opportunities
and challenges facing the firm.
• They then decide which customers to target, what
product lines to offer, how best to contend with
competitors, and how generally to configure and
coordinate the firm’s activities around the world.
International Strategy
• Strategy carried out in two or more countries.
• Managers develop international strategies to:
– allocate scarce resources and configure value-adding
activities on a worldwide scale
– participate in major markets
– implement valuable partnerships abroad
– engage in competitive moves
in response to foreign rivals.
Three Strategic Objectives

• Efficiency – Lower the cost of the firm’s operations and

activities on a global scale.
• Flexibility – The agility to manage diverse country-
specific risks and opportunities by tapping resources in
individual countries and exploiting local opportunities.
• Learning – Develop the firm’s products, technologies,
capabilities, and skills by internalizing knowledge gained
from international ventures.
• Often, even successful firms excel at only one or two of
these objectives.
Essentials of Successful Global Firms
Visionary Leadership
A quality of senior management that provides superior strategic
guidance for managing efficiency, flexibility, and learning.
• International mindset and cosmopolitan values. Openness to,
and awareness of, diversity across cultures.
• Willingness to commit resources. Financial, human, and other
resources.
• Strategic vision. Articulating what the firm wants to be in the
future and how it will get there.
• Willingness to invest in human assets. Emphasizing the use of
foreign nationals, promoting multi-country careers, and training
to develop international managers highly capable of
functioning in diverse environments.
Examples of Visionary Leaders
• Paul Polman, CEO of Unilever, set the firm on a path for
sustainable and socially responsible growth.
• Polman has positioned Unilever in products that support health
and hygiene, including safe drinking water worldwide, and
cutting manufacturing waste and greenhouse gas emissions.
• He is working to improve the lives of more than 500,000 small
farmers and distributors in Unilever’s supply chain.
• Such initiatives position Unilever for growth in emerging
markets, while reducing the firm’s environmental footprint and
ensuring safe and fair work environments.
Organizational Culture
The pattern of shared values, behavioral norms, systems,
policies, and procedures that employees learn and adopt
• Employees acquire the culture as the correct way to
perceive, think, feel, and behave in relation to new
problems and opportunities that confront the firm.
• Usually derives from the influence of founders and
visionary leaders or some unique history of the firm.
• Management should seek to build a global organizational
culture, key to the development and execution of
successful international strategy.
Firms with a Global Organizational
Culture:
• Value and promote a global perspective in all major
initiatives.
• Value international competence and cross-cultural skills
among their employees.
• Adopt a single corporate language for business
communication.
• Promote interdependency between headquarters and
subsidiaries.
• Subscribe to appropriate ethical standards.
Organizational Processes
Managerial routines, behaviors, and mechanisms that allow
the firm to function as intended
• Typical processes include mechanisms for collecting
information, ensuring quality control in manufacturing,
and maintaining effective payment systems.
• Samsung acquired competitive
advantage by emphasizing
countless superior processes.
Samsung digitizes all key
documents and uses intranets
and the Internet to automate
activities and cut operating costs.
Important Organizational Processes
for Achieving International Coordination

• Global team: An internationally distributed group of

employees charged with a specific problem-solving or
best practice mandate that affects the entire firm.
• Global information systems: Global I T infrastructure,
together with tools like intranets and electronic data
interchange, provide virtual interconnectedness within the
international firm.
• Because the processes of the international firm may
operate across numerous countries, they must function
especially well.
Multi-Domestic Industry
An industry in which competition takes place on a country-
by-country basis.
• Firms that specialize in such industries as processed
food, consumer products, fashion, retailing, and
publishing usually cater to specific conditions in each
country where they do business.
• In such industries, the firm must adapt its offerings to suit
the language, culture, laws, income level, and other
specific characteristics of each country.
• Each country tends to have a unique set of competitors.
Global Industry
An industry in which competition is on a regional or
worldwide scale
• Firms that specialize in such industries as aerospace,
cars, computers, chemicals, and industrial equipment,
typically cater to customers on a regional or global scale.
For example, Subaru markets similar cars worldwide.
• In such industries, customer needs vary little from country
to country. Firms sell relatively standardized offerings
across entire regions or throughout the world.
• The industry usually has only a handful of the same
competitors that compete regionally or worldwide.
Global Integration
• Coordination of the firm’s value-chain activities across
multiple countries to achieve worldwide efficiency,
synergy, and cross-fertilization, to take advantage of
similarities between countries.
• Firms that emphasize global integration:
– Make and sell standardized products and services to
capitalize on converging customer needs and tastes.
– Compete on a regional or worldwide basis.
– Minimize operating costs by centralizing value chain
activities and emphasizing scale economies.
Local Responsiveness
Meeting the specific needs of buyers in individual countries
• Local responsiveness requires the firm to adapt to
customer needs and the competitive environment.
• Local managers are free to adjust offerings, marketing,
and practices to suit conditions in individual markets.
• When operating
internationally, firms try
to strike the right balance
between global integration
and local responsiveness.
Integration-Responsiveness Framework
• Summarizes the balance that firms seek to achieve
between two basic strategic needs:
– To integrate value chain activities globally, and
– to create products and practices responsive to local
market needs.
• The main goal of firms that emphasize global integration
is to maximize the efficiency of their value chain activities,
on a worldwide scale.
• The main goal of firms that emphasize local
responsiveness is to maximize sales and market share
by being highly responsive to local needs.
The Integration-Responsiveness
Framework
Pressures for Global Integration (1 of 2)
• Seek cost reduction thru economies of scale.
Concentrating manufacturing in a few advantageous
locations achieves economies of mass production.
• Capitalize on converging consumer trends and
universal needs. Companies like Nike, Dell, ING, and
Coca-Cola offer products that appeal to customers
everywhere.
• Provide uniform service to global customers.
Services are easiest to standardize when firms centralize
their creation and delivery.
Pressures for Global Integration (2 of 2)
• Conduct global sourcing of raw materials,
components, energy, and labor. Sourcing of inputs
from large-scale, centralized suppliers provides
economies of scale and consistent performance.
• Monitor and respond to global competitors. Globally
coordinating the firm’s response to competitive threats is
more efficient and effective.
• Take advantage of global media. Firms leverage the
Internet, cross-national TV, and other global media to
advertise in many countries simultaneously.
Pressures for Local Responsiveness (1 of 2)
• Leverage natural endowments available to the firm.
Each country has specific national resources and other
endowments that the foreign firm should access.
• Cater to local customer needs. Businesses in
multidomestic industries should adapt products, services,
and marketing to suit local customer needs.
• Accommodate differences in distribution channels.
For example, Japan’s distribution system for consumer
goods is characterized mainly by small retailers.
Pressures for Local Responsiveness (2 of 2)
• Respond to local competition. To out-compete local
rivals, successful firms devise offerings and practices that
best meet local demand.
• Adjust to cultural differences. For those products
where cultural differences are important, the firm should
adapt the product and marketing, especially which local
competitors are numerous.
• Meet host government requirements and
regulations. The firm must always comply
with local legal and regulatory requirements,
which can vary substantially from country to
country.
Four Strategies Emerging from
the Integration Responsiveness Framework (1 of 8)

• Home replication strategy.

• Multi-domestic strategy.
• Global strategy.
• Transnational strategy.
Four Strategies Emerging from
the Integration Responsiveness Framework (2 of 8)
Home Replication Strategy (3 of 8)
• The firm views international business as separate
from, and secondary to, its domestic business.
Expansion abroad is an opportunity to generate
incremental sales for domestic product lines.
• Products are designed for domestic customers, and
international business is pursued mainly to extend the life
of domestic products and replicating home market
success.
• Management holds little interest in foreign markets and
expects little knowledge to flow from foreign operations.
Multidomestic Strategy (4 of 8)
• The firm develops subsidiaries or affiliates in each of its
foreign markets, and appoints local managers to operate
independently and be locally responsive.
• Products and services are adapted to suit the needs and
wants of buyers in each country.
• Because headquarters acknowledges differences
between national markets, subsidiaries are allowed to
vary product and practices by country.
• Country managers are often nationals of the host country,
and generally don’t share knowledge and experience with
managers in other countries.
Global Strategy (5 of 8)
• Headquarters seeks substantial control over all country
operations in order to minimize redundancy, and achieve
maximum efficiency, learning, and integration worldwide.
• Global strategy asks “why not make the same thing, the same
way, everywhere?” Products, marketing, and company
practices are relatively standardized.
• R & D, manufacturing, marketing and other activities tend to be
concentrated at headquarters, where they can be centrally
coordinated and controlled.
• Management views the world as
one large marketplace.
Transnational Strategy (6 of 8)
• A coordinated approach to internationalization in which
the firm strives to be more responsive to local needs
while retaining sufficient central control of operations to
ensure efficiency and learning.
• The firm seeks to combine the major advantages of
multidomestic and global strategies, while minimizing
their disadvantages.
• It’s a flexible approach: standardize where feasible; adapt
where appropriate.
• But, most firms find implementing transnational strategy
very challenging.
Transnational Strategy requires the firm
to: (7 of 8)

• Exploit scale economies by sourcing from a reduced set

of global suppliers and concentrating production in
relatively few locations where competitive advantages
can be maximized.
• Organize production, marketing, and other value-chain
activities on a global scale.
• Optimize local responsiveness and flexibility.
• Facilitate global learning and knowledge transfer.
• Coordinate global competitive moves – that is, deal with
competitors on a global, integrated basis.
How IKEA Strives for Transnational
Strategy (8 of 8)

• Some 90% of the product line is identical across more

than two dozen countries. IKEA modifies some furniture
offerings to suit tastes in individual countries.
• An overall, standardized marketing plan is centrally
developed at the firm’s headquarters in Sweden; but is
implemented with local adjustments.
• Management decentralizes some decision-making to
local stores, such as product displays and language to
use in advertising.
Organizational Structure
The reporting relationships inside the firm, “the boxes and lines”
that specify the linkages among people, functions, and
processes, allowing the firm to carry out its operations.
• In large MNEs, these linkages are extensive and include the
firm's subsidiaries, affiliates, suppliers, and other partners
worldwide.
• A fundamental issue: How much
decision-making should the firm
retain at headquarters and how
much it should delegate to foreign
subsidiaries and affiliates. It is the
choice between centralization and
decentralization.
 The Most Experienced Global Firms:
• Encourage local managers to identify with broad objectives of
the firm.
• Visit subsidiaries periodically to instill corporate values and
priorities.
• Rotate employees within the corporate network, to promote
development of a global perspective.
• Encourage country managers to interact and share experiences
with each other through regional and global meetings.
• Provide incentives and penalties to
promote compliance with headquarters’
goals.
How Value Chain Activities are Shared in
the Typical, Global MNE
Alternative Organizational Arrangements
• Export Department
• International Division
• Geographic Area Structure
• Product Structure
• Functional Structure
• Global Matrix Structure
Export Department (1 of 2)
A unit within the firm charged with managing the firm’s
export operations
• Most closely associated with home replication strategy.
• The firm’s resource commitment is small. Export
activities are unified under one department, providing
efficiencies in selling, distribution, and shipping.
• But headquarters has minimal control over foreign
operations, with strong potential to rely too much on
intermediaries, and few opportunities to learn about
foreign markets.
Export Department, Example (2 of 2)
International Division (1 of 2)
• All international activities are centralized within
one division in the firm, separate from domestic units
• Associated with increased focus on international business
• Concentrates international expertise, with greater coordination
and management of international operations.
• However, can result in fierce competition between domestic
and international units for company resources, with limited
knowledge sharing among the foreign units and with head-
quarters. Can result in little coordination between the division
and other divisions in the firm.
International Division, Example (2 of 2)
Geographic Area Structure (1 of 2)
• Management and control are decentralized to individual
geographic regions, whose managers are responsible for
operations within their region
• Often used by firms that market relatively standardized
products across entire regions or groups of countries.
• Results in greater responsiveness to customer needs and
wants in each market, providing a good balance between
global integration and local adaptation.
• However, managers’ orientation is more regional than
global, which affects development and management of
products. Global economies of scale may suffer.
Geographic Area Structure, Example (1 of 2)
Product Structure (1 of 2)
• Management of international operations is organized by
major product line
• Each product division is responsible for producing and
marketing a specific group of products worldwide.
• The firm develops expertise with specific products on a
global basis, ensuring scale economies and knowledge
sharing among units worldwide for a given product line.
• However, can result in duplicating the firm’s support
functions in each product division. There is also potential
for excessive focus on products and too little on
developing the firm’s markets.
Product Structure, Example (2 of 2)
Functional Structure (1 of 2)
• Management of international operations is organized by
functional activity
• For example, oil companies tend to organize their
worldwide operations along two major functional lines –
production and marketing of petroleum products.
• The approach implies a small central staff that provides
strong central control and coordination, with a focused
global strategy and concentrated functional expertise.
• However, coordination becomes unwieldy when the firm
has many product lines, and the approach may not
respond well to specific buyer needs in individual
markets.
Functional Structure, Example (2 of 2)
Global Matrix Structure (1 of 2)
• Blends the geographic area, product, and functional
structures to leverage the benefits of a purely global
strategy while the firm remains responsive to local needs.
• Leverages the benefits of global strategy and
responsiveness to local needs, simultaneously.
• Emphasizes interorganizational learning and
knowledge sharing among the firm’s units worldwide.
• However, the dual reporting chain of command means
employees may receive contradictory instructions from
multiple managers, which can lead to conflicts.
• Managing many subsidiaries or products, or operations in
many foreign markets, is complex.
Global Matrix Structure, Example (2 of 2)
 47

Fit between Strategy & Structure

• Successful firms that operate across borders seek to
create and sustain a fit between their strategies and
their structures. These in turn adjust to changes in the
international business environment.