10 Chapter 10 chapter Strategizing Structuring and Learning

10 Chapter 10 chapter Strategizing, Structuring, and Learning Around the World Global Strategy Global Mike W. Peng Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Outline • Multinational strategies and structures • A comprehensive model of multinational strategy, structure, and learning • Worldwide learning, innovation, and knowledge management • Debates and extensions • The savvy strategist Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Multinational Strategies and Structures • Pressures for cost reductions and local responsiveness • Four strategic choices for MNEs (1) home replication, (2) localization, (3) global standardization, and (4) transnational Home replication strategy emphasizes the international replication of home country-based competencies Localization (multidomestic) strategy is an extension of the home replication strategy, focusing on a number of foreign countries/regions, each regarded as a stand-alone local market worthy of significant attention and adaptation Global standardization strategy is the opposite of the localization strategy Transnational strategy aims to capture “the best of both worlds” by Copyright © 2014 Cengage Learning. Rights Reserved. endeavoring to be both cost. All efficient and locally. May responsive not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Multinational Strategies and Structures: The Integration–Responsiveness Framework Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 10. 1

Four Strategic Choices for Multinational Enterprises Home replication Multidomestic ADVANTAGES DISADVANTAGES § Leverages home country-based advantages § Lack of local responsiveness § Relatively easy to implement § May result in foreign customer alienation § Maximizes local responsiveness § High costs due to duplication of efforts in multiple countries § Too much local autonomy Global § Leverages low-cost advantages § Lack of local responsiveness § Too much centralized control Transnational § Cost-efficient while being locally responsive § Organizationally complex § Engages in global learning and diffusion of innovations § Difficult to implement Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 10. 1

Multinational Strategies and Structures: Four Organizational Structures • Four organizational structures that are appropriate for the four strategic choices: International division Geographical area Global product division Global matrix Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

International Division Structure at Starbucks Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 10. 2

Multinational Strategies and Structures: Organizational Structures (cont’d) • International Division Typically set up when firms initially expand abroad, often when engaging in a home replication strategy • Problems: Foreign subsidiary managers in the international division are not given sufficient voice relative to the heads of domestic divisions The “silo” effect: International division activities are not coordinated with the rest of the firm, which focuses on domestic activities Firms often phase out this structure after their initial overseas Copyright © 2014 Cengage Learning. expansion All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Geographic Area Structure at Avon Products Avon North America Avon Latin America Avon Asia Pacific Avon Western Europe Middle East Africa Copyright © 2014 Cengage Learning. All Rights Reserved. May not be Source: Adapted from avoncompany. com. Headquartered in New York, Avon Products, Inc. is the scanned, copied“Avon or ladies” duplicated, or company behind numerous around the world. posted to a publicly accessible website, in whole or in part. Avon Central & Eastern Europe Figure 10. 3

Multinational Strategies and Structures: Organizational Structures (cont’d) • Geographic Area Structure Organizes the MNE according to different geographic areas (countries and regions) Is the most appropriate for a localization strategy Its ability to facilitate local responsiveness is both a strength and a weakness • Problems: While being locally responsive can be a virtue, it may Copyright © 2014 Cengage the Learning. also encourage fragmentation of the MNE into All Rights Reserved. May not be hard-to-control “fiefdoms” highly autonomous, scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Global Product Division Structure at European Aeronautic Defense and Space Company (EADS) Copyright ©www. eads. com. 2014 Cengage Rights Source: Adapted from Headquartered in. Learning. Munich, Germany, All and Paris, France, Reserved. EADS is the largest commercial aircraft maker and the largest defense contractor in Europe. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 10. 4

Multinational Strategies and Structures: Organizational Structures • Global Product Division Structure Supports a global strategy in treating each product division as a stand-alone entity with full worldwide—as opposed to domestic —responsibilities for its activities Facilitates attention to pressures for cost efficiencies in allowing for consolidation on a worldwide (or regional) basis and reduction of inefficient duplication in multiple countries • Problems: It is the opposite of the geographic area structure: Little local Copyright © 2014 Cengage Learning. responsiveness All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A Hypothetical Global Matrix Structure Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 10. 5

Multinational Strategies and Structures: Organizational Structures • Global Matrix Is often used to alleviate the disadvantages associated with both geographic area and global product division structures Is intended to support the goals of the transnational strategy—in practice, it is often difficult to deliver • Problems May add layers of management, slow down decision Copyright © 2014 Cengage Learning. speed, and. May increase All Rights Reserved. not be costs while not showing significant performance improvement scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A Comprehensive Model of Multinational Structure, Learning, and Innovation Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 10. 6

Industry-based Considerations • Industry characteristics Industrial products firms: Favor global product divisions Consumer goods firms: Favor geographic areas • Porter’s forces Interfirm rivalry increasingly focuses on learning and innovation Need to heighten entry barriers: Behind some recent moves to phase out multidomestic strategy and to erect world-scale facilities to deter entrants Bargaining power of suppliers and buyers: They also have to internationalize if the focal MNE goes overseas Copyright © 2014 Cengage Learning. All Rights Reserved. May not be MNE R&D often generates competing substitute products scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Resource-based Considerations • Value Does any new structure (such as matrix) really add value? Does innovation really add value? Not always! • Rarity When all rivals adopt a “global strategy, ” it is not rare • Imitability It is easier to imitate formal structure. But how to imitate an elusive, informal matrix which is a “philosophy”? • Organization Copyright © 2014 Cengage Learning. Some MNEs are better able to take advantage of complex All Rights Reserved. May not be such as matrix than others organizational structures scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Institution-based Considerations • Formal and informal external institutions Formal Institutions v Externally, MNEs, are subject to the formal institutional frameworks erected by various home- and host-country governments v Host-country governments often encourage, or coerce MNEs into undertaking certain activities Informal Institutions v Strategists weigh the informal backlash against activities which result in domestic job losses • Formal and informal internal institutions Formal organizational charts do not necessarily reveal the informal rules of the game Copyright © 2014 Cengage Three choices: (1) Learning. a home-country national as the head of a All Rights Reserved. (2) May not be subsidiary, a host-country national, or (3) a third country scanned, copied or duplicated, or national posted to a publicly accessible website, in whole or in part.

Worldwide Learning, Innovation and Knowledge Management: Knowledge Management in MNEs • Knowledge management can be defined as the structures, processes, and systems that actively develop, leverage, and transfer knowledge. • Knowledge management is considered by some writers the defining feature of MNEs Explicit knowledge (e. g. , a driving manual): Captured by IT Tacit knowledge (e. g. , knowledge about how to drive) v Its acquisition and transfer require hands-on experience Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Knowledge Management in Four Types of Multinational Enterprises STRATEGY HOME REPLICATION LOCALIZATION GLOBAL STANDARDIZATION TRANSNATIONAL Interdependence Moderate Low Moderate High Role of foreign subsidiaries Adapting and leveraging parent company competencies Sensing and exploiting local opportunities Implementing parent company initiatives Differentiated contributions by subsidiaries to integrate worldwide operations Development and diffusion of knowledge Knowledge developed at the center and transferred to subsidiaries Knowledge developed and retained within each subsidiary Knowledge mostly developed and retained at the center and key locations Knowledge developed jointly and shared worldwide Flow of knowledge Extensive flow of knowledge and people from headquarters to subsidiaries Limited flow of knowledge and people in both directions (to and from the center) Extensive flow of knowledge and people from the center and key locations to subsidiaries Extensive flow of knowledge and people in multiple directions Sources: Adapted from (1) C. Bartlett & S. Ghoshal, 1989, Managing Across Borders: The Transnational Solution (p. 65), Copyright © 2014 Cengage Learning. All Rights Reserved. Boston: Harvard Business School Press; (2) T. Kostova & K. Roth, 2003, Social capital in multinational corporations and a micro-macro model of its formation (p. 299), Academy of Management Review, 28 (2): 297– 317. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 10. 2

Worldwide Learning, Innovation and Knowledge Management: Globalizing Research and Development • A crucial arena for knowledge management Driven by the intensification of competition for innovation Provides a vehicle for access to, or extract benefits from, a foreign country’s local talents and expertise The resource-based view: A fundamental source for competitive advantage is being different (the assumption of heterogeneity) Decentralized R&D work performed by different locations and teams around the world means that there will be persistent heterogeneity (differences) Copyright © 2014 Cengage Learning. in the solutions generated v All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Problems in Knowledge Management ELEMENTS OF KNOWLEDGE MANAGEMENT COMMON PROBLEMS Knowledge acquisition Failure to share and integrate external knowledge Knowledge retention Employee turnover and knowledge leakage Knowledge outflow “How does it help me? ” syndrome and “knowledge is power” mentality Knowledge transmission Inappropriate channels Knowledge inflow “Not invented here” syndrome and absorptive capacity Copyright © 2014 Cengage Learning. All Rights Reserved. Source: Adapted from A. Gupta & V. Govindarajan, 2004, Global Strategy and Organization (p. 109), New York: Wiley. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 10. 3

Problems and Solutions in Knowledge Management • For large firms, there actually diminishing returns for R&D. Consequently, a new model, called “open innovation, ” is emerging. This model relies on more collaborative research among various internal units and with external organizations • In knowledge retention, there is the problem of employee turnover which may lead to knowledge leakage • Global virtual teams, which do not meet face to face, may have communication and relationship barriers Copyright © 2014 Cengagehere” Learning. • The “not invented syndrome causes some All Rights Reserved. May not be managers toduplicated, resist accepting ideas from other units scanned, copied or or posted to a publicly accessible website, in whole or in part.

Problems and Solutions in Knowledge Management • As solutions to combat these problems, corporate headquarters can manipulate the formal rules of the game through individual and organizational incentives as well as investing in tacit knowledge • MNEs often must rely on a great deal of informal integrating mechanisms • Some try to develop informal social capital • Overall, the micro, informal interpersonal relationships among managers of various units may create a micro. Copyright 2014 Cengage Learning. macro© link All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Debates and Extensions • One multinational versus many national companies • Central controls versus subsidiary initiatives Subsidiaries may be in full compliance of commands, pay lip service to commands, or ignore them Some subsidiary-level strategies may contribute to entrepreneurship (or empire building) Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Debates and Extensions • Customer-focused dimensions versus integration, responsiveness, and learning Two primary customer-focused dimensions v Global account structure to supply customers across various countries v Solutions-based structure is often used One recommendation is to simplify both product and geographic scope to add the customer-focused dimensions Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Savvy Strategist • Consider four implications First, understand the evolution of your industry in order to come up with the right strategy-structure configurations Second, managers need to actively develop learning and innovation capabilities to leverage multinational presence Third, mastering the external rules of the game governing MNEs and home/host country environments becomes a must Finally, managers need to understand be prepared to change the internal rules of the game governing MNE management Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.