COURSE: GLOBAL BUSINESS MANAGEMENT MGT610

DR. DIMITRIS STAVROULAKISPROFESSOR OF HUMAN RESOURCE MANAGEMENTDEPT OF ACCOUNTINGTEI OF PIRAEUS

Unit 5: MNC Mentalities and Responses to Internationalization

Training Material:-Textbook (181-192, 374-382). -Chapter 1 from: Bartlett, C.A. & P.W. Beamish (2010): Transnational Management. Singapore: McGraw-Hill.-Video: “Hard Rock Café: Global Strategy” (6.14 min).

Think global, act local

The original phrase "Think Global, Act Local" first appeared in the book "The Evolution of Cities" (1905) by Scots Planner and was later applied by the social activist Patrick Geddes.

Strategic moves are integrated and coordinated worldwide, aiming at building a global brand name.

Global thinking and local response utilizes a common strategic approach (low-cost, differentiation, focus), but allows country-to-country customization to fit local market conditions.

Marketing and distribution are adapted to fit local customs and cultures

Glocalization: Think global, act local

« The term Glocal and the process of Glocalization are formed by telescoping global and local to make a blend». The Oxford Dictionary of New Words, 1991

Glocalization : The interpenetration of global and local, resulting in unique outcomes in different geographic areas. George Ritzer

Refers to the development and selling of products or services intended for the global market, but adapted to suit local culture and behavior.

«Only truly global companies can achieve ‘global localisation’ that is, be as much of an insider as a local company but still accomplish the benefits of world- scale operations». Kenichi Ohmae

Patterns of Internationalization

Figure 1.7Figure 1.7

Bartlett & Ghoshal*: 4 mentalities

• International• Multinational/Multi-domestic• Global • Transnational

Bartlett & Ghoshal indicate that there exists no ideal mentality. A company may operate with anyone, depending on its strategic position & culture, localization pressures etc.

In fact, historically some MNCs (Toyota, Unilever) have steered through most or all of these mentalities.

International Mentality The company’s overseas operations are viewed by the HQ as

distant outposts whose main role is to support parent company. Subs are viewed as “appendices”, operating under the same regulations in diverse cultural domains.

Many local issues are treated at the local level, but product development, branding, technology & knowledge are transferred to the sub from the parent company (Bartlett & Beamish, 2010: 11-12).

Target countries are selected mostly according to their cultural proximity to the home market.

Key managers of Subs come from the parent country and are selected mostly upon their international experience and language efficiency.

Of inferior effectiveness compared to the rest mentalities. No longer efficient when strong competitors appear. By then, International MNCs have to improve their cost structure by shifting to global strategy.

Has been followed in the past mostly by US MNCs (Kraft, Pfizer, P&G, GE). GE is famous (notorious ?) for insisting to fully assimilate its acquisitions within the company culture and for imposing always Americans on top. Despite a streak of acquisitions in Europe, CEO Immelt was obliged to admit in as speech at HBS that “I think that we stink in Europe today” (Ghemawat, 2007).

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Worldwide “International” Strategy

Coordinated Federation - Many key assets, responsibilities and decisions localized except core product design & brand

Administrative Control - Centralized HQ control, formal planning and control, tight HQ-Sub linkage

International Mentality - Management sees overseas operations as appendages to the domestic operation

UK Chile

IndiaJapan

USA

HK

Mexico

From: Bartlett and Ghoshal, Managing across borders, 1989

Multinational/Multi-domestic Mentality Differences between national markets are addressed. The

corporation modifies its strategies, products, processes etc in order to adapt to local contexts.

Company strategy is composed of the multiple, nationally-oriented strategies of subs. Multi-domestic mentality is indicated when economies of scale are not important, while coordination costs between HQ and subs are high.

Subs at the local level may become highly independent, assimilated to local companies of their host country. Sometimes they act on their own interests rather than conforming to the MNC strategy.

Multinational mentality is based more on marketing than on manufacturing efficiency. Factories at the local level are built more in order to overcome trade barriers, to establish a presence near strategic resources, to improve marketing and to exploit political relations, than to increase efficiency of production. Products of the same company made in and addressed to third-world countries are sometimes inferior to those produced in developed countries (Bartlett & Beamish, 2010: 11-12).

Multinational/Multi-domestic Mentality (cont) Autonomy of subs may come out of control. For example, in the

80s Unilever retained 17 country subs in Europe and it took more than 4 years to oblige them to introduce a single new detergent for Europe (Peng, 2010: 296).

Operation of independent subs is costly due to the duplication of activities in many countries. Therefore, this strategy is more appropriate in industries where pressures for cost reductions are not significant (Peng, 2010: 296).

Followed mostly by European MNCs (ICI, Nestle, Unilever). Fiat has followed this approach by establishing loosely controlled manufacturing units in Yugoslavia, Spain, Poland etc. MTV in Western Europe only retains more than 8 channels in different languages.

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Multi-Domestic MNCMulti-Domestic MNC

Decentralized Federation - Most key assets, responsibilities and decisions localized

Personal Control - Informal HQ-Sub relationship, simple financial controls

Multidomestic Mentality - Management sees overseas operations as portfolio of independent businesses

UK Chile

IndiaJapan

USA

HK

Mexico

From: Bartlett and Ghoshal, Managing across borders, 1989

Global Mentality

In order to retain value of their brand name, companies create uniform products for the whole world market and produce them in few highly efficient plants, often at the corporate center. Global MNCs avoid costly country adaptation activities. Through strong marketing support they attempt to reap maximum benefits through economies of scale and scope.

Global strategy means that the whole world, not individual national markets, is viewed as a unit of analysis. The underlying assumption is that preferences of consumers become more and more uniform. Therefore, a consistent marketing strategy dictates that consumers be supplied with standardized products of superior quality over the national varieties.

Already in 1983 professor Levitt had declared that the future belongs to companies that make and sell “the same thing, the same way, everywhere”*.

The global approach requires central coordination and control. Manufacturing, R&D, and strategic decisions mostly take place at the HQ (Bartlett & Beamish, 2010: 12-13).

Global Mentality (cont) Followed mostly by Japanese MNCs (Canon, Komatsu,

Matsushita). Before attacking fully the global market, Toyota used to follow this approach. For decades, its sales came almost exclusively from direct exports. The precious Toyota Production System (TPS) till recently was carefully nurtured within the Japanese domain. Semiconductors.

Samsung has created a most efficient distribution system, but production and R&D are firmly located in Korea.

This strategy is indicated when cost minimization is of cardinal importance. Apparently it is inappropriate when market dictates local responsiveness.

Many host governments have imposed restrictions to MNCs (localist countervailing forces), often demanding dissemination of knowledge and technology - China.

Volatility in currency markets (Asian crisis & Russian debt at the end of 20th century, as well as the ongoing crisis in the Eurozone) has occasionally obliged MNCs to review their global strategy.

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Global MNCGlobal MNC

UK Chile

IndiaJapan

USA

Centralized Hub - Most strategic assets, resources, responsibilities and decisions are centralized

Operational Control - Tight HQ control of decisions, resources, information

Global Mentality - Management sees overseas operations asdelivery pipelines to a unified global market

HK

Mexico

From: Bartlett and Ghoshal, Managing across borders, 1989

Approaches of Multi-domestic strategy and Global strategy

Effective Global Strategy

Transnational Mentality Transnational mentality recognizes the importance of flexible and

responsive country-level operations (hence the term national in the title). The international dimension, upon the condition that competitive effectiveness is maintained, is also emphasized through the prefix trans.

Key activities and resources are neither centralized nor entirely decentralized as in the multinational mentality. Instead, they are dispersed but organized in order to achieve at the same time efficiency and flexibility. Dispersed resources are integrated into an interdependent network of worldwide operations.

For example, a MNC may consider essential to establish factories for labor-intensive products in low-wage countries (Vietnam, Mexico, Guatemala).

On the other hand, call centers are likely to be located in low-cost countries. If you call American Express, Sprint, Citibank, or IBM it is likely your call will be answered in India.

Powerful marketing & sales divisions are likely to be founded in populous countries of high buying potential (Brazil, China, India). In order to compete Komatsu, Caterpillar was obliged to establish production units near its most important customers. Production was customized so as to comply with the host countries’ complex legislation and safety codes.

Transnational Mentality (cont) R&D activities are apt to be concentrated in highly developed

regions (Silicon Valley, Tokyo, Baden-Wurttemberg). Sony relocated to London in order to improve access to financial

services. HSBC has been called “the world’s local bank” for its ability to

respond to the needs of account holders in diverse nations. The strategy of exploiting differences between developed and

peripheral markets has been called arbitrage by Prof. Ghemawat.

Transnational companies may trade-off activities at will. For example, Dell opted to have its final assembly of computers located in the USA (unlike most of its competitors and despite higher labor costs) because its experienced technicians have a better control of operations (Cullen, 2010: 42).

Many MNCs follow a hybrid of transnational strategy, by creating more or less autonomous hubs in target countries. Hubs are standalone units purported to serve a whole region both with global products and locally adapted ones. E.g. Toyota in the 90s started creating hubs, first in the USA, with outstanding results.

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TransnationaTransnationall MNCMNC

UK Chile

IndiaJapan

USA

Networked Organization - Distributed, specialized resources and capabilities

Interdependent Units - Large flows of components, products, resources, people, and information

Transnational Mentality - Complex process of coordination and cooperation in an environment of shared decision making

HK

Mexico

From: Bartlett and Ghoshal, Managing across borders, 1989

The structure of Philips

Effective Transnationalization

o Barbie is 55 years oldo Sold in 130 countrieso National adaptations:

• Physical features• Costumes• Activity sets

o Standardized physique:• Scaled to 6’2”, 110 lbs.

McDonald’s Transnational Menu

US Brazil Canada India Germany

Big Mac French Fries Coca-Cola McNuggets McAloo Tikki McRib McBier McLobster McCalebresa PitaMac McFarmer

.

2020thth century century

Machine Bureaucracy• Integrated• Uniform

21st century21st century

Networked Organization• Disaggregated• Specialized

Expanding the Boundaries of Business

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Worldwide Corporate-Level Strategy

Need for Local ResponsivenessNeed for Local Responsiveness

Need

for

Glo

bal In

teg

rati

on

Need

for

Glo

bal In

teg

rati

on

LowLow

HighHigh

LowLow HighHigh

GlobalGlobalstrategystrategy

TransnationalTransnationalstrategystrategy

MultidomesticMultidomesticstrategystrategy

Scale, efficiency, coordination

Customization

InternationalInternationalstrategystrategy

INTERNATIONAL MULTINATIONAL GLOBAL TRANSNATIONAL

PROS

*Simple organization *Unbarred one-way communication flow *Facilitation of control *Exploitation of local economies

*Leverage of headquarters advantages

*Development of executives at the local level *Fast response to local market demands  *Full exploitation of local markets

*Indicated in strong cultural domains

*Exploitation of know-how

*Facilitation of control

*Effective global planning

*Addresses a single global market throughsuperior products

*Commitment to global objectives

*Worldwide utilization of resources

*Internal transfer ofinnovation and best practices

*Customized products for specific markets, global for others

CONS

*Insufficient feedback from subsidiaries*Few oppts for global learning*Ineffective international planning*Slow response to local developments *”Low-caliber” subsidiaries *Inferior compared to the rest mentalities

*Lack of cohesion and coordination of subs

*Growth, R&D and knowledge limited at the local level

*Failure to exploit experience at the local level

*Lack of local responsiveness *Few oppts for global learning

*Loss of market share if consumers shift tolocal products *Vulnerability to local crises

*Implementation & control problems, org. complexity

*Risky trade-offs between costs & local responsiveness

*Excessive expenses & time spent on communication and decision-making

Internationalization indicators

.

32

Pressures for Global Integration & Local Responsiveness

High

HighLowLow

Global Integration

Local Responsiveness Pressures

Localization Pressures due to Country Differences in - consumer tastes/preferences- infrastructure/practices- distribution channels- host government needs

Ball bearings,wheat

Cosmetics, food,household goods

Cost ReductionPressures

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International presence of selected MNCs

1

32

52

59

65

96

37,031

29,378

1,540

8,279

2,165

917

Cell phones

Automobiles

Audioequipment

Computers,electronics

Online auctions

Pizza

Finland

Germany

Japan

U.S.

U.S.

U.S.

Nokia

Audi

Clarion

Apple

eBay

Papa John’s

Sales in

domestic market Percent

Total sales$ Millions Products

DomesticmarketCompany

Sales in foreign

markets Percent

99

68

48

41

35

4

35

Sub Roles in the MNC.

S:

High

Low

Low High

Str

ate

gic

im

port

an

ce o

f th

e local

mark

et

Resource base of the sub

•Black Hole •Strategic Leader

•Implementer •Contributor

Subs Roles in the MNC Black Hole: A rather weak unit in terms of specialized resources,

but located in a strategically important market. Used by the MNC to maintain presence in a key market in order to keep abreast of new innovations or strategic moves by competitors. However, it reflects an undesirable competitive position. In the long run, the MNC may commit more resources , or may engage in acquisitions or strategic alliances in order to access complementary resources.

Implementer: Concern subs with weak specialized resources, located in markets of lesser importance. However, they may become part of the MNC’s overall success, because they may generate a steady stream of cash flow, and may help build a competitive advantage by contributing to company-wide scale and scope economies.

Strategic Leader: The sub is of strategic importance, hence a vital source of innovations and good practices that are spread throughout the company. Aids HQ to identify strategic trends and to develop core competencies.

Contributor: A highly competent sub, located in a less important market. This type of sub has typically developed new FSAs, often as the result of a competent host country management. Its specialized resource base might benefit other units in the MNC if HQ recognizes its potential.