In this lesson, you’re expected to learn about:
– the role of cost and local responsiveness in determining a business strategy
– choosing an international business strategy
– the different types of strategies
Firms that compete in the global marketplace typically face two types of competitive pressure that affect their ability to realize location economies, to leverage products and transfer competencies and skills within the enterprise.
They face pressures for cost reductions and pressures to be locally responsive.
These competitive pressures place conflicting demands on a firm.
– Responding to pressures for cost reductions requires that a firm try to minimize its unit costs.
– Responding to pressures to be locally responsive requires that a firm differentiate its product offering and marketing strategyfrom country to country in an effort to accommodate the diverse demands arising from national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions, and government policies.
Because differentiation across countries can involve significant duplication and a lack of product standardization, it may raise costs.
While some enterprises, such as Firm A in the figure below, face high pressures for cost reductions and low pressures for local responsiveness, and others, such as Firm B, face low pressures for cost reductions and high pressures for local responsiveness, many companies are in the position of Firm C.
They face high pressures for both cost reductions and local responsiveness. Dealing with these conflicting and contradictory pressures is a difficult strategic challenge, primarily because being locally responsive tends to raise costs.
Pressures for Cost Reductions
In competitive global markets, international businesses often face pressures for cost reductions. Responding to pressures for cost reduction requires a firm to try to lower the costs of value creation.
Pressures for cost reduction can be particularly intense in industries producing commodity-type products where meaningful differentiation on non-price factors is difficult and price is the main competitive weapon. This tends to be the case for products that serve universal needs.
Universal needs exist when the tastes and preferences of consumers in different nations are similar if not identical. This is the case for conventional commodity products such as petroleum, steel, sugar etc. It also tends to be the case for many industrial and consumer products, for example, handheld calculators, semiconductor chips, and personal computers.
Pressures For Local Responsiveness
Pressures for local responsiveness arise from national differences in consumer tastes and preferences, infrastructure, accepted business practices, and distribution channels, and from host-government demands.
Responding to pressures to be locally responsive requires a firm to differentiate its products and marketing strategy from country to country to accommodate these factors, all of which tends to raise the firm’s cost structure.
Pressures for local responsiveness imply that it may not be possible for a firm to realize the full benefits from economies of scale, learning effects, and location economies.
It may not be possible to serve the global marketplace from a single low-cost location, producing a globally standardized product, and marketing it worldwide to attain cost reductions. The need to customize the product offering to local conditions may work against the implementation of such a strategy.
For example, automobile firms have found that Japanese, American, and European consumers demand different kinds of cars, and this necessitates producing products that are customized for local markets.
In addition, pressures for local responsiveness imply that it may not be possible to leverage skills and products associated with a firm’s core competencies wholesale from one nation to another. Concessions often have to be made to local conditions.
Despite being depicted as “poster boy” for the proliferation of standardized global products, even McDonald’s has found that it has to customize its product offerings (i.e., its menu) to account for national differences in tastes and preferences.
Four Basic Strategies
How do differences in the strength of pressures for cost reductions versus those for local responsiveness affect a firm’s choice of strategy?
Firms typically choose among four main strategic postures when competing internationally. These can be characterized as follows:
– Global standardization strategy
– Localization strategy
– Transnational strategy
– International strategy
The appropriateness of each strategy varies given the extent of pressures for cost reductions and local responsiveness.
The figure below illustrates the conditions under which each of these strategies is most appropriate.
1) Global Standardization Strategy
Firms that pursue a global standardization strategy focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, and location economies; that is, their strategic goal is to pursue a low-cost strategy on a global scale.
The production, marketing, and R&D activities of firms pursuing this strategy are concentrated in a few favorable locations. Firms pursuing a global standardization strategy try not to customize their product offering and marketing strategy to local conditions because customization involves shorter production runs and the duplication of functions, which tends to raise costs.
When is this strategy useful?
This strategy makes most sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal.
Increasingly, these conditions prevail in many industrial goods industries, whose products often serve universal needs. In the semi-conductor industry, for example, global standards have emerged, creating enormous demands for standardized global products.
However, these conditions are not yet found in many consumer goods markets, where demands for local responsiveness remain high. The strategy is inappropriate when demands for local responsiveness are high.
2) Localization Strategy
A localization strategy focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets.
Localization is most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense.
By customizing the product offering to local demands, the firm increases the value of that product in the local market.
On the downside, because it involves some duplication of functions and smaller production runs, customization limits the ability of the firm to capture the cost reductions associated with mass-producing a standardized product for global consumption.
When is this strategy useful?
The strategy may make sense if the added value associated with local customization supports higher pricing, which enables the firm to recoup its higher costs, or if it leads to substantially greater local demand, enabling the firm to reduce costs through the attainment of some scale economies in the local market.
At the same time, firms still have to keep an eye on costs. Firms pursuing a localization strategy still need to be efficient and, whenever possible, to capture some scale economies from their global reach.
3) Transnational Strategy
We have seen that a global standardization strategy makes most sense when cost pressures are intense, and demands for local responsiveness limited. Conversely, a localization strategy makes most sense when demands for local responsiveness are high, but cost pressures are moderate or low.
What happens, however, when the firm simultaneously faces both strong cost pressures and strong pressures for local responsiveness?How can managers balance the competing and inconsistent demands such divergent pressures place on the firm? According to some researchers, the answer is to pursue what has been called a transnational strategy.
Two of these researchers, Christopher Bartlett and Sumantra Ghoshal, argue that in today’s global environment, competitive conditions are so intense that to survive, firms must do all they can to respond to pressures for cost reductions and local responsiveness.
They must try to realize location economies and experience effects, to leverage products internationally, to transfer core competencies and skills within the company, and to simultaneously pay attention to pressures for local responsiveness.
Implementing a Transnational Strategy
How best to implement a transnational strategy is one of the most complex questions that large multinationals are grappling with today. Few if any enterprises have perfected this strategic approach. But some clues as to the right approach can be derived from a number of companies.
For example, consider the case of Caterpillar. The need to compete with low-cost competitors such as Komatsu of Japan forced Caterpillar to look for greater cost economies.
However, variations in construction practices and government regulations across countries mean that Caterpillar also has to be responsive to local demands. Therefore, Caterpillar confronted significant pressures for cost reductions and for local responsiveness.
Changing a firm’s strategic posture to build an organization capable of supporting a transnational strategy is a complex and challenging task. Some would say it is too complex, because the strategy implementation problems of creating a viable organizational structure and control systems to manage this strategy are immense.
4) International Strategy
Sometimes it is possible to identify multinational firms that find themselves in the fortunate position of being confronted with low cost pressures and low pressures for local responsiveness.
Many of these enterprises have pursued an international strategy, taking products first produced for their domestic market and selling them internationally with only minimal local customization.
The distinguishing feature of many such firms is that they are selling a product that serves universal needs, but they do not face significant competitors, and thus unlike firms pursuing a global standardization strategy, they are not confronted with the need to reduce their cost structure.
Xerox found itself in this position in the 1960s after its invention and commercialization of the photocopier. The technology underlying the photocopier was protected by strong patents, so for several years Xerox did not face competitors – it had a monopoly. The product serves universal needs, and it was highly valued in most developed nations.
Thus, Xerox was able to sell the same basic product the world over, charging a relatively high price for that product. Since Xerox did not face direct competitors, it did not have to deal with strong pressures to minimize its cost structure.
Enterprises pursuing an international strategy have followed a similar developmental pattern as they expanded into foreign markets. They tend to centralize product development functions such as R&D at home.
However, they also tend to establish manufacturing and marketing functions in each major country or geographic region in which they do business. The resulting duplication can raise costs, but this is less of an issue if the firm does not face strong pressures for cost reductions.
Although they may undertake some local customization of product offering and marketing strategy, this tends to be rather limited in scope. Ultimately, in most firms that pursue an international strategy, the head office retains fairly tight control over marketing and product strategy.
Other firms that have pursued this strategy include Procter & Gamble and Microsoft.
The drawback of the international strategy is that over time, competitors inevitably emerge, and if managers do not take proactive steps to reduce their firm’s cost structure, it will be rapidly outflanked by efficient global competitors.
This is exactly what happened to Xerox. Japanese companies such as Canon ultimately invented their way around Xerox’s patents, produced their own photocopiers in very efficient manufacturing plants, priced them below Xerox’s products, and rapidly took global market share from Xerox.