International Business:
Global Strategies and MNEs
Lecture 11
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Agenda
PART 1: Building Global Strategy
 What is global strategy?
 Why undertake a global strategy? Benefits and
challenges
 How to do global strategy?
PART 2: Organizing Multinational Enterprises
 Global integration vs. local responsiveness
 Four strategies to manage the trade-off
 Four organizational structures
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PART 1: Building Global Strategy
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What is Global Strategy?
• Global strategies: “Strategies that take advantage of operations
spread across the world”
• Diversity of the global economy: Challenges and opportunities
for MNEs.
• Global strategies: Exploiting the diversity of global markets,
making the best use of whatever each location has to offer.
• The implementation of global strategies usually requires acquiring
complementary business units and resources.
Why global strategy? Competitive advantages
Strategic advantages of global firms:
1. Global scale advantages: Reduces costs in production, product
development and marketing
2. Global sourcing: Provides access to a wider range of inputs
3. Global knowledge management: Enhances innovation
4. Global operation: Allows better services for global customers
5. Risk diversification: Reduces the corporate risk profile
Global scale
• A basic advantage of MNEs is simply their size.
• Advantages of size are known as economies of scale.
• Advantages of sharing R&D across the world.
Global sourcing
• Global sourcing: MNEs can access resources in various
locations, thus they can source each input wherever the best
quality or lowest price is available.
• Moreover, access specific raw materials available in certain
specific locations.
• Example: Danisco (Opening case in Ch14) set up a specialized
plant to processes specific types of algae only available in
southern Chile.
Global knowledge management
• Building R&D centres in strategic locations: tap into clusters
of innovation and talent around the world.
• Example: Software businesses in Silicon Valley, California; and
biotechnology firms cluster around Cambridge, UK.
 Four major benefits:
 Avoid inconsistency of standards in disconnected R&D activity.
 Enhance creativity and idea generations.
 Exploitation of comparative advantages in different locations.
 Provide interactions with customers in different places.
Global operation
• Global operation: better serve clients that are operating at multiple
locations.
• Such global clients, also known as global key accounts, may source
their inputs internationally.
• Firms with a global distribution and production network have a distinct
advantage in serving such global clients.
Risk diversification
• Risk diversification: Reduction of the risk profile of a company
by investing in different countries.
• It is rare that a recession hits every country at the same time.
• With global sales, firms can shift the focus of their activities to
locations that are doing relatively well.
• In consequence, their global sales are less volatile than sales
generated in a single market.
Challenges of internationalisation: CAGE framework
• Distance matters! “… companies must explicitly and thoroughly
account for it (distance) when they make decisions about global
expansion.” (Ghemawat, 2001: 3)
•
•
•
•
Cultural Distance
Administrative Distance
Geographic Distance
Economic Distance
 The types of distance influence different firms in different ways
(e.g. cultural distance matters more for consumer good or media
company than steel or a cement business)
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CAGE framework in detail
Source: Ghemawat, 2001. Distance Still
Matters. Harvard Business Review: 5
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Global Business Models
• How can globally operating firms best realize the potential
benefits of globalization?
Aggregation strategies
• Aggregation strategies focus on synergies between operations in
different locations by integrating them.
• This strategy may involve sharing of resources and integration of
processes (not purely about standardization).
• Aggregation strategies are designed both to exploit economies of
scale and to foster innovation and knowledge management.
• Activities may be located close to local resources and customers.
Manufacturing Boeing 787
Sharing
resources
and
integrating
process with
global supply
chain,
leading to
exploit
economies of
scale
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Adaptation strategies
• Adaptation strategies aim to deliver locally adapted products in
each market.
• That is, to serve consumers on their local terms despite their
different needs, preferences and purchasing power.
• Four levels of adaption:
–
–
–
–
Focus on minimum adaption
Externalise costs of adaption
Increase flexibility of product through basic design
Organise innovation process
Example: https://www.youtube.com/watch?v=U48nmKPJclA
Adaptation strategies
Arbitrage strategies
• Arbitrage strategies: Exploit different prices in different
markets.
 Common examples:
 Labour arbitrage allows exploiting low-cost labour or specialist
human capital.
 Natural resource arbitrage exploits variation in geology and
climate to trade energy resources, minerals, and agriculture
products.
 Capital arbitrage: Overseas listing to access capital at lower
costs.
Hong Kong Stock Exchange and Chinese firms
• Chinese equity market is composed of a domestic (also known as
China A-shares) and an offshore market.
• Chinese firms have been approved to list their stocks on Hong Kong
Stock Exchange by the government 25 years ago, also known as HShares.
• Many Chinese firms participate in H-shares to exploit international
equity market for further capital resource
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AAA strategies as a whole?
• The AAA strategies are not mutually exclusive, as many MNEs
combine aspects of two or even all three strategies.
• However, trying to realize all three strategies at the same time
may well overstretch organizational capabilities.
• The “right strategy” is a business model that best fits the specific
firm and its global competitive environment.
PART 2: Organising Multinational
Enterprises
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Organising MNEs: Key questions
• How can multinational enterprises (MNEs) organise their
operations to be successful both locally and internationally?
• How can they make sure that people within the organization work
together constructively?
• How can they foster the exchange of knowledge and improve the
odds for better innovation?
 We can look at a trade-off framework between global
integration and local responsiveness
Case of the Big Four
Integration-responsiveness framework
 Two conflicting pressures: global integration versus local
responsiveness.
– Global integration pressure: higher standardization across the world to
best achieve the economy of scale.
– Local responsiveness pressure: different consumer preferences and
institutions in different host countries.
 Locally responsive: Satisfy local customers and other
stakeholders, but increase costs of global integration because they
reduce the potential for economies of scale.
 Example: McDonalds in different countries with various tastes.
 Integration-responsiveness: 2 × 2 matrix with four strategies:
 (1) home replication, (2) localization, (3) global standards and (4)
transnational strategy.
Home replication strategy
• Also known as ‘international’ strategy
• Replication of home country-based competencies
• Resemble the home operation in the belief that this is the best
way to transfer competences of the firm.
 This strategy is relatively easy to implement and may be used
by firms venturing abroad for the first time.
 A disadvantage: suffer from a lack of local responsiveness.
 Insufficient mindfulness of foreign customers’ demands may
result in their alienation (e.g., Xiaomi in India, Nortel in SK).
International Division Structure
Localisation (multidomestic) strategy
• Localisation strategy: each country or region as a stand-alone
‘local’ market worthy of significant attention and adaptation.
 Advantages:
 Effective when there are clear differences between national and
regional markets and few pressures for global economies of scale.
 Disadvantages:
 High costs due to duplication of efforts in multiple countries.
 Potentially too much local autonomy, higher coordination costs
(e.g., Unilever’s 17 subsidiaries in Europe in the 1980s).
Geographic Area Structure
The Home Depot and Geographic area structure
• The Home Depot Inc. is the
largest American organisation
focusing on home
improvement industry
• Operating in the US, Canada,
and Mexico
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Global standards strategy
• The opposite of the localization strategy
• Sometimes referred to as ‘global strategy’
• Hallmark: Development and distribution of standardized products
worldwide to reap the maximum benefits from economies of scale
and shared product development.
• Disadvantages: Sacrifices local responsiveness.
• Effective only in industries where pressures for cost reduction are
paramount and pressures for local responsiveness are weaker.
Global Product Division Structure
Samsung Electronics and
Global Standards Strategy
•
•
•
•
Samsung Electronics is a Korean multinational
electronic firm
Accounting for majority of the group’s revenue
Operating in 79 countries
Major manufacturer of electronic components,
mobile phones, home appliances, PCs etc.
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Transnational strategy
• Aim to capture the best balance of cost-efficient and locally
responsive.
• Hallmark: global learning and diffusion of innovations.
• Based on the diffusion of innovations from the home country to
various host countries. (Assumption: the home country is the best
location for generating innovations)
 Challenges:
• First, there is no guarantee that the home country will generate the
highest quality innovations.
• Second, for many large MNEs, their subsidiaries have acquired a variety
of innovation capabilities, some of which may have the potential for
wider applications elsewhere.
Global Matrix Structure
A summary of four strategies: Pros & Cons
Takeaway
PART 1: Building Global Strategy
 What is global strategy?
 Why doing global strategy? Five benefits and CAGE
 How to do global strategy? AAA typology
PART 2: Organizing Multinational Enterprises
 Global integration vs. local responsiveness
 Four strategies, with corresponding organizational
structures
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