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CHAPTER 10 – STRATEGIZING, STRUCTURING, AND
LEARNING AROUND THE WORLD
CHAPTER OUTLINE
1.
OPENING CASE: Samsung’s Global Strategy Group
a. Founded in 1938, Samsung group is South Korea’s leading conglomerate
1) It has 270,000 employees in 470 units in 67 countries, with $227 billion in
annual revenues
2) Its flagship company is Samsung Electronics Corporation
(a) With $136 billion in revenues in 2010, it is the largest electronics firm in
the world
3) Other major Samsung companies include Samsung Life Insurance, Samsung
C&T Corporation and Samsung Heavy Industries
b. Even during the Great Recession, Samsung’s performance was impressive
c. The secret of its success
1) To compete outside Korea, Samsung needs to attract non-Korean talents
(a) This was not possible due to its traditional rigid hierarchical structure and
language barrier
(b) In response, the group in 1997 set up the Global Strategy Group
(i) Members of the group are non-Korean MBA graduates from top
Western business schools who have worked for leading
multinationals
(ii) They are required to spend two years in Seoul and study basic
Korean
(iii) The mission is to: “develop a pool of global managers, enhance
Samsung’s business performance, and globalize Samsung.”
(c) Global Strategy teams work on internal strategy projects for different
Samsung companies
(i) Each team has a project leader , one or two global strategists and a
project coordinator- a Korean who acts as a liaison agent
(d) Each project lasts three months and may involve overseas travel
(e) 400 projects have been completed in 15 years
(f) These projects help global strategists form informal ties and expose them
to the organizational culture
(g) After two years, they would “graduate” and be assigned to Samsung
subsidiaries
(h) The Global Strategy Group has a success rate of nearly 65%
(i) Of the 208 non-Korean MBAs who joined the group since its
inception, 135 were still with Samsung as of 2011
(ii) The successful ones have taken pains to fit into Korean culture
(i) Experts conclude that non-Korean members of the Global Strategy Group
have globalized Samsung’s corporate DNA
2. MULTINATIONAL STRATEGIES AND STRUCTURES
a. Pressures for Cost Reductions and Local Responsiveness
1) MNEs confront two sets of pressures: cost reduction and local responsiveness
2) The integration-responsiveness framework allows managers to deal with the
pressures for both global integration and local responsiveness
(a) Cost pressures influence global integration
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(b) Local responsiveness forces MNEs to adapt locally
3) Unique to international competition are the pressures for local responsiveness
4) Distribution channels also vary internationally
5) Host country demands and expectations add to the pressures for local
responsiveness
6) Being locally responsive certainly makes local customers and governments
happy, these actions unfortunately increase costs
7) The movement to globalize offerings can be traced to a 1983 article written by
Theodore Levitt: “The Globalization of Markets.”
8) Levitt’s idea has been the intellectual force propelling many MNEs to globally
integrate their offerings while minimizing local adaptation
b. Four Strategic Choices for MNEs: (1) home replication, (2) multidomestic, (3)
global, and (4) transnational
1) The home replication strategy, by definition, emphasizes the international
replication of home country–based competencies such as production scales,
distribution efficiencies, and brand power
(a) It often lacks local responsiveness as it focuses on the home country
(b) In an international market may end up alienating foreign customers
2) Localization (multidomestic) strategy is an extension of the home replication
strategy
(a) A multidomestic strategy focuses on a number of foreign
countries/regions, each of which is regarded as a stand-alone “domestic”
market worthy of significant attention and adaptation
(b) A multidomestic strategy is effective when there are clear differences
among national and regional markets and low pressures for cost
reductions
(c) It has high costs due to duplication of efforts in multiple countries
3) A global standardization strategy is the opposite of the multidomestic strategy
(a) It is the development and distribution of standardized products worldwide
in order to reap the maximum benefits from low-cost advantages
(b) MNEs may designate centers of excellence or subsidiaries explicitly
recognized as a source of important capabilities, with the intention that
these capabilities be leveraged by and/or disseminated to other
subsidiaries
(c) It obviously sacrifices local responsiveness
4) A transnational strategy aims to capture “the best of both worlds” by
endeavoring to be both cost efficient and locally responsive
(a) MNEs promote global learning and diffusion of innovations in multiple
ways
(b) Innovations flow from the home country to host countries and vice-versa
and also flow among subsidiaries in multiple host countries
(c) It is organizationally complex and difficult to implement
c. Four Organizational Structures
1) An international division structure is typically set up when firms initially expand
abroad, often engaging in a home replication strategy
(a) Although this structure is intuitively appealing, it often leads to two
problems:
(i) Foreign subsidiary managers are not given sufficient voice relative
to the heads of domestic divisions
(ii) The international division activities are not coordinated with the rest
of the firm, which focuses on domestic activities
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2) A geographic area structure, which organizes the MNE according to different
countries and regions, is the most appropriate structure for a multidomestic
strategy
(a) A geographic area can be a country or a region led by a country (or
regional) manager
(b) Managers carry a lot of weight in this structure
(c) Paradoxically, both the strengths and weaknesses of this structure lie in
its local responsiveness which can be both a virtue and a bane as it
encourages the fragmentation of MNEs into fiefdoms
3) A global product division structure, which is the opposite of the geographic area
structure, supports the global strategy
(a) Each product division as a stand-alone entity with full worldwide—as
opposed to domestic—responsibilities for its activities
(b) Many MNEs have phased out the geographical area structure in favor of
the global product division structure
(c) Local responsiveness suffers
4) A global matrix structure is often used to alleviate the disadvantages associated
with both geographic area and global product division structures, especially for
MNEs adopting a transnational strategy
(a) The global matrix structure’s hallmark is sharing and coordinating
responsibilities between product divisions and geographic areas to be
both cost efficient and locally responsive
(b) This structure often has difficulty as front-line managers must report to
two bosses: a country manager and a product division manager
(c) Disadvantage – this structure may add layers of management, slow down
decision speed, and increase costs
(d) Many MNEs have tried to build a “flexible” matrix structure
d. The Reciprocal Relationship Between Multinational Strategies and Structures
1) Three key ideas stand out:
(a) Strategy drives structure: a misfit, such as combining a global strategy
with a geographic area structure, may have grave performance
consequences
(b) The relationship is two-way. To the extent that certain strategies facilitate
certain structures, a given structure also supports a particular strategy
(c) Strategies and structures are not static. It is often necessary to change
strategy, structure, or both
3. A COMPREHENSIVE MODEL
STRUCTURE AND LEARNING
OF
MULTINATIONAL
STRATEGY,
a. Industry-Based Considerations
1) Why are MNEs structured differently?
(a) The different nature of industries
(i) Industrial-products firms value technological knowledge that is not
location-specific
(ii) Consumer-goods industries, on the other hand, require deep
knowledge about consumer tastes that is location-specific
(b) The Porter five forces are again helpful in understanding MNE structure
(i) Competitors focus on learning and innovation
(ii) Factors that shape MNE strategy, structure, and learning
 Entry barriers
 Bargaining power of suppliers and buyers
 Threat of substitute products
b. Resource-Based Considerations
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1) The actual value of innovation is important
2) Rarity is important
3) Imitability is also important. It is obviously a lot harder—if not impossible—to
imitate an intangible philosophy or mentality than to imitate a tangible structure
4) The last hurdle is organization, namely, how MNEs are organized, both
formally and informally, around the world
(a) Organizational culture is the collective programming of the mind that
distinguishes members of one organization from another
c. Institution-Based Considerations
1) Formal and Informal External Institutions govern external and internal
relationships
(a) Formal institutions
(i) Externally, MNEs are subject to the formal institutional frameworks
erected by various home- and host-country governments
(ii) Host-country governments often encourage, or coerce MNEs into
undertaking certain activities
(b) Informal institutions
(i) MNEs confront a series of informal institutions governing their
relationships with home countries
(ii) Strategists weigh the informal, backlash against activities which
result in domestic job losses
2) Formal and Informal Internal Institutions
(a) Formal organizational charts do not necessarily reveal the informal rules
of the game, such as organizational norms, values, and networks
(b) To hire the position of the head of a subsidiary, MNEs, in the absence of
formal regulations, essentially have three choices: (1) a home-country
national as the head of a subsidiary (2) a host-country national, or (3) a
third country national
4. WORLDWIDE
LEARNING,
MANAGEMENT
INNOVATION,
AND
KNOWLEDGE
a. Knowledge management can be defined as the structures, processes, and systems
that actively develop, leverage, and transfer knowledge. Some argue that knowledge
management is the defining feature of MNEs
1) Knowledge management not only depends on IT, but also on informal social
relationships within the MNE
(a) Two types of knowledge:
(i) Explicit knowledge is codifiable (that is, it can be written down and
transferred without losing much of its richness)
(ii) Tacit knowledge, on the other hand, is noncodifiable and its
acquisition and transfer require hands-on practice
b. Knowledge Management in Four Types of MNEs
1) Home replication strategy: The role of subsidiaries is to adapt and leverage
parent company competencies
2) Localization strategy: Interdependence is low. Knowledge management centers
on local markets
3) Global standardization strategy: The interdependence is increased and uses
“centers of excellence”
4) Transnational strategy – High interdependence and bi-directional flows of
knowledge
c. Globalizing Research and Development
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1) R&D emerged as an important function to be internationalized and is often
known as innovation-seeking investment
2) The intensification of competition for innovation drives the globalization of
R&D
3) One way to access such a high technology and research-rich cluster is to be
there through FDI
4) R&D work performed by different locations and teams around the world
virtually guarantees persistent heterogeneity in the solutions the teams generate
d. Problems and Solutions in Knowledge Management
1) For large firms, there are 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.
2) In knowledge retention, there is the problem of employee turnover, which may
lead to knowledge leakage
3) Global virtual teams, which do not meet face to face, may have communication
and relationship barriers
4) The “not invented here” syndrome causes some managers to resist accepting
ideas from other units and recipients may have absorptive capacity
5) 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
6) MNEs often must rely on a great deal of informal integrating mechanisms
7) Some try to develop informal social capital
8) Overall, the micro, informal interpersonal relationships among managers of
various units may create a micro-macro link
5. DEBATES AND EXTENSIONS
a. One Multinational versus Many National Companies
1) We often treat each MNE as one firm
2) In reality, every MNE is essentially a group of national companies (subsidiaries)
registered in various countries
3) A generation ago, such firms were labeled “multi-national companies” with a
hyphen
4) The debate focuses on globalization and its undermining of the nation-state
system
5) The parent company cannot be held responsible for the misdemeanours of the
subsidiary
6) Another key issue deals with taxation
b. Corporate Controls versus Subsidiary Initiatives
1) Arguments in favor of centralization:
(a) Capability to facilitate corporate-wide coordination
(b) Consistency in decision-making
(c) Sufficient power for corporate-level managers to initiate necessary
actions
2) Arguments against centralization and in favor of decentralization:
(a) Decentralization reduces corporate-level managers’ overload of
responsibilities and improves decision quality
(b) Better motivates subsidiary-level managers and employees through
empowerment
(c) Permits greater speed, flexibility, and innovation
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3) Some subsidiaries may actively pursue their own, subsidiary-level strategies and
agendas thus contributing to entrepreneurship but it is hard to distinguish
between subsidiary initiative and empire building
c. Customer-Focused Dimensions versus Integration, Responsiveness, and Learning
1) Three primary customer-focused dimensions
(a) Global account structure to supply customers across various countries
(b) An industry sector structure is common for professional service firms
(c) Solutions-based structure is often used
2) Customer-focused dimensions cut across all three existing mainstream
dimensions, integrating on a global basis, responding to customers in single and
multiple markets, and learning how to meet customers’ needs and wants
3) One recommendation is to simplify both product and geographic scope to add
the customer-focused dimensions
6. THE SAVVY STRATEGIST
a. To manage effectively, four implications emerge
1) Understand the nature and evolution of your industry in order to come up with
the right strategy-structure configurations
2) Managers need to actively develop learning and innovation capabilities to
leverage multinational presence
3) Mastering the external rules of the game governing MNEs and home/host
country environments becomes a must
4) Managers need to understand and be prepared to change the internal rules of the
game governing MNE management
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CHAPTER TEN - LECTURE NOTES AND TEACHING TIPS
SUMMARY OF THE OPENING CASE: Samsung’s Global Strategy Group
The opening case provides us insights into Samsung group’s transformation from a leading
conglomerate in South Korea to one of the biggest corporations in the world. Samsung’s
specially designed Global Strategy Group was instrumental in this metamorphosis.
Teaching Tip: Ask students to look at an example of a multinational from an emerging
economy and find out what strategies they adopted to cater to an international market. Can
they identify any similarities between them and Samsung? Alternatively, you could ask
students to come up with innovative strategies like Samsung did.
MULTINATIONAL STRATEGIES AND STRUCTURES
This section first introduces the integration–responsiveness framework centered on the
pressures for cost reductions and local responsiveness. We then outline the four strategic
choices and the four corresponding organizational structures. Finally, within an MNE context,
this section revisits the reciprocal relationship between strategies and structures.
Pressures for Cost Reductions and Local Responsiveness
MNEs primarily confront two sets of pressures: those for cost reductions and those for local
responsiveness. Pressures for cost reductions are almost universal, especially for firms
competing on cost leadership.
Unique to international competition are the pressures for local responsiveness, which are
reflected in different (1) consumer preferences, (2) distribution channels, and (3) host country
demands.
Consumer preferences vary tremendously around the world. For example, beef-based
hamburgers brought by the likes of McDonald’s obviously would find no customers in India,
a land where cows are sacred.
Teaching Tip: Ask students what McDonald’s could substitute for beef in their Indian
locations. Since Hindus do not eat beef, and Moslems do not eat pork, McDonald’s had to
find something to make both groups happy. McDonald’s could substitute mutton-based
products for beef in their Indian restaurants, and the substitute products are very popular.
There is talk about goat meat being introduced as goats are now being raised more
aggressively around the world. Both Hindus and Moslems eat mutton and goat; most major
creeds in the world would not object to either of these pastoral animals. This is an interesting
contrast with Nestlé, which is phasing out its multidomestic strategy to achieve scale
economies and other efficiencies
Four Strategic Choices
Based on the integration–responsiveness framework, Figure 10.1 uses the two dimensions of
the pressures for cost reductions and local responsiveness to plot the four possible strategic
choices for MNEs: (1) home replication, (2) localization (multidomestic), (3) global
standardization, and (4) transnational.
A home replication strategy, by definition, emphasizes the international replication of home
country–based competencies such as production scales, distribution efficiencies, and brand
power. In manufacturing, this is usually manifested in an export strategy. In services, this can
often be done through licensing and franchising. This strategy is relatively easy to implement
and usually the first one adopted when firms venture abroad. On the disadvantage side, this
strategy suffers from a lack of local responsiveness. By default, the home replication strategy
focuses on the home country, which makes sense when the majority of a firm’s customers are
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domestic. However, when the firm aspires to broaden its international scope to reach more
foreign customers, failing to be mindful of foreign customers’ needs and wants may result in
their alienation.
A localization (multidomestic) strategy is an extension of the home replication strategy. The
multidomestic strategy focuses on a number of foreign countries/regions, each of which is
regarded as a stand-alone “domestic” market worthy of significant attention and adaptation.
This strategy, which sacrifices global efficiencies, is effective when there are clear differences
among national and regional markets and low pressures for cost reductions. In terms of
disadvantages, the multidomestic strategy has to shoulder high costs because firms duplicate
their efforts in multiple countries
A global standardization strategy is the opposite of the multidomestic strategy. Its hallmark is
developing and distributing standardized products and services worldwide to reap the
maximum benefits from low-cost advantages. While both the home replication and global
strategies minimize local responsiveness, a crucial difference is that an MNE pursuing a
global strategy is not limited to basing its major operations at home. In a number of countries,
the MNE may designate centers of excellence, which are defined as subsidiaries explicitly
recognized as a source of important capabilities, with the intention that these capabilities be
leveraged by and/or disseminated to other subsidiaries. For example, Hewlett Packard’s (HP)
Singapore subsidiary has a worldwide mandate to develop, produce, and market all of HP’s
handheld products.
Centers of excellence are often given a worldwide mandate, namely, the charter to be
responsible for one MNE function throughout the world. HP’s Singapore subsidiary, for
instance, has a worldwide mandate to develop, produce, and market all of HP’s handheld
products. However, as noted earlier, in numerous industries, ranging from automobiles to
consumer products, a “one-size-fits-all” global strategy may be inappropriate. Consequently,
arguments that all industries are becoming global and all firms need to pursue a global
strategy are potentially misleading.
A transnational strategy aims to capture “the best of both worlds” by endeavoring to be both
cost efficient and locally responsive. Citroën not only designs cars in France, but also in
China. On a worldwide basis, it intends to produce and market luxury cars such as the
Metropolis designed in Shanghai. In addition to cost efficiency and local responsiveness, a
third hallmark of this strategy is global learning and diffusing innovations.
Taking these two points together, MNEs that engage in a transnational strategy promote
global learning and innovation diffusion in multiple ways. Innovations not only flow from the
home country to host countries (which is the traditional flow), but also flow from host
countries to the home country and flow among subsidiaries in multiple host countries.
Connecting these geographically dispersed operations creates a flow of knowledge about
market conditions and internal capabilities.
On the disadvantage side, a transnational strategy is organizationally complex and difficult to
implement. The increased knowledge sharing and coordination may slow down decisionmaking speed. Simultaneously trying to achieve cost efficiencies, local responsiveness, and
global learning places contradictory demands on MNEs.
Overall, MNEs essentially have four strategic choices when competing internationally. Given
the various pros and cons, however, no optimal strategy emerges. The popular idea that “a
global strategy is the best” can be misleading. Advocates of a transnational strategy need to
recognize the significant organizational challenges associated with it.
Four Organizational Structures
Four organizational structures are appropriate for the four strategic choices outlined
previously: (1) international division structure, (2) geographical area structure, (3) global
product division structure, and (4) global matrix structure.
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International division structure is typically set up when firms initially expand abroad, often
engaging in a home replication strategy.
Although this structure is intuitively appealing, it often leads to two problems. First, foreign
subsidiary managers, whose input is channeled through the international division, are not
given sufficient voice relative to the heads of domestic divisions. Second, by design, the
international division serves as a “silo” whose activities are not coordinated with the rest of
the firm, because the rest of the firm focuses on domestic activities.
A geographic area structure, which organizes the MNE according to different countries and
regions, is the most appropriate structure for a multidomestic strategy.
A geographic area can be a country or a region that is led by a country manager or regional
manager alone, containing its own set of value creation activities (such as R&D, production,
and marketing).
A global product division structure, which is the opposite of the geographic area structure,
supports the global strategy. This structure treats each product division as a stand-alone entity
with full worldwide—as opposed to domestic—responsibilities for its activities. This
structure helps firms focus on pressures for cost efficiencies because it allows for
consolidation on a worldwide (or at least regional) basis and reduces inefficient duplication in
multiple countries. For example, Unilever reduced the number of its soap-producing factories
in Europe from ten to two after adopting this structure.
A global matrix structure is often used to alleviate the disadvantages associated with both
geographic area and global product division structures, especially for MNEs adopting a
transnational strategy. Shown in Figure 10.5, its hallmark is sharing and coordinating
responsibilities between product divisions and geographic areas to be both cost efficient and
locally responsive. In this hypothetical example, the manager in charge of Japan reports to
Product Division 1 and Asia (area) Division, both of which have equal decision-making
power. In theory, the global matrix structure supports the goals of the transnational strategy.
However, in practice, this structure often has difficulty delivering. The reason is simple:
While managers (such as the Japan manager) usually find enough headaches dealing with one
boss, they do not appreciate having to deal with two bosses, who are often in conflict (!).
Taken together, the matrix structure, despite its merits, may add layers of management, slow
down decision speed, and increase costs while not showing significant performance
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improvement. No conclusive evidence supports the superiority of the matrix structure. Having
experimented with the matrix structure, a number of MNEs, such as the highly visible SwissSwedish engineering conglomerate ABB (Asea Brown Boveri), have now moved back to the
simpler and easier-to-manage global product structure.
Overall, the positioning of the four structures is not random. They evolve from the relatively
simple international division through either geographic area or global product division
structures and may finally reach the more complex global matrix stage. These paths represent
the possible evolutionary trajectories of MNEs, which may grow from having a limited
international presence to being sophisticated global players.
The Reciprocal Relationship Between Multinational Strategies and Structures
The reciprocal relationship between strategies and structures, discussed earlier, can be vividly
portrayed within MNEs. Three key ideas stand out:
1. The fit between strategies and structures is crucial. A misfit, such as combining a
global strategy with a geographic area structure, may have grave performance
consequences.
2. The relationship is two-way. To the extent that certain strategies facilitate certain
structures, a given structure also supports a particular strategy.
3. Strategies and structures are not static. The constant changes in industry conditions,
firm capabilities, and institutional environments often require strategies, structures, or
both to change.
A COMPREHENSIVE MODEL OF MULTINATIONAL STRATEGY, STRUCTURE,
AND LEARNING
A comprehensive model of multinational structure, learning, and innovation, which, as before,
draws on the three leading perspectives on strategy (see Figure 10.6)
Industry-Based Considerations
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Why are MNEs structured differently? For example, industrial-products firms (such as
semiconductor makers) tend to adopt global product divisions, whereas consumer-goods
companies (such as cosmetics producers) often rely on geographic area divisions. Industrialproducts firms typically emphasize technological innovations, while consumer-goods
companies place premiums on learning consumer trends and generating repackaged and
recombined products as marketing innovations.
Industrial-products firms value technological and engineering knowledge, which is not
location-specific (such as how to most efficiently make semiconductor chips). Consumergoods industries, on the other hand, must develop intimate knowledge about consumer tastes,
which are location-specific.
The Porter five forces again help explain the issue at hand. Within a given industry, as
competitors increasingly match each other in cost efficiencies and local responsiveness, their
rivalry naturally focuses on learning and innovation. The height of entry barriers also shapes
MNE structure, learning, and innovation. Why do many MNEs phase out the multidomestic
strategy and geographic area division structure by consolidating production in a small number
of world-scale facilities? One underlying motivation is that smaller, suboptimal-scale
production facilities scattered in a variety of countries do not effectively deter potential
entrants.
Bargaining power of suppliers and buyers also has a bearing on MNE structure, learning, and
innovation. When buyer firms move internationally, they increasingly demand that suppliers
provide integrated offerings—that is, buyer firms want to purchase the same supplies at the
same price and quality in every country in which they operate. Components suppliers are thus
encouraged to internationalize.
The threat of substitute products has a relatively small impact on MNE structure, but has a
direct bearing on learning and innovation. R&D often generates innovative substitutes that
can be competitive in lower end (and developing) markets and change competition in those
markets.
Teaching Tip: A well-known Harvard Business Review article by C.K. Prahalad and Allen
Hammond, “Serving the World’s Poor, Profitably” (September 2002, pp. 4–11), examines the
strategic logic and benefits to firms (and consumers) of producing lower end and smaller
versions of a product that can be purchased by customers (or villages) in the poorer parts of
the world. Sometimes these are potential low-end substitute products for established, higher
end products. The students can be asked if they can think of a product that is currently out of
reach for most poor consumers (either in their country or a remote developing one) that firms
could modify to produce a smaller, cheaper version.
Resource-Based Considerations
First, the question of value must be confronted when making structural changes.
Second is the value of innovation—the vast majority of innovations simply fail to reach the
market and five to nine out of ten new products which do reach the market end up being
financial failures. Profitable innovators need plenty of good ideas, but also a lot of
complementary assets (such as appropriate organizational structures and marketing muscles)
as well as complementary technologies (sometimes via alliance partners) to create valuable
innovation.
Rarity is also important. When all competitors are moving toward a global strategy, this
strategy, in itself, cannot be a source of differentiation. Off the shelf technology does not
confer differentiation as it can be acquired too easily. Even when capabilities are valuable and
rare, they have to pass a third hurdle, namely, imitability. Formal structures are easier to
observe and imitate than informal structures. This is one of the reasons why the informal,
flexible matrix is in vogue now. The last hurdle is organization—namely, how MNEs are
organized, both formally and informally, around the world. One elusive but important concept
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is organizational culture which is the collective programming of the mind that distinguishes
members of one organization from another.
As discussed previously, if MNEs are able to derive the organizational benefits of the matrix
structure without being burdened by a formal matrix structure (that is, building an informal,
flexible, invisible matrix), they are likely to outperform rivals.
Institution-Based Considerations
Formal and Informal External Institutions
Externally, MNEs are subject to the formal institutional frameworks erected by various homeand host-country governments. For instance, to protect domestic employment, home-country
governments may manipulate tax rules to encourage MNEs to invest at home.
Host-country governments, on the other hand, often attract, encourage, or coerce MNEs into
undertaking activities that they may otherwise abdicate. Advanced manufacturing, on the
other hand, moves up the value chain, generates better jobs, provides more technology
spillovers, and leads to better reputations.
Therefore, host-country governments (such as those in China, Hungary, and Singapore) often
use a combination of “carrots” (such as tax incentives, matching grants, and free
infrastructure upgrades) and “sticks” (such as threats to block market access domestically) to
attract MNE investments in advanced manufacturing.
In addition to formal institutions, MNEs also confront a series of informal institutions
governing their relationships with home- and host-country environments. In the United States,
despite heated presidential election debates, few laws actually ban US MNEs from
aggressively setting up overseas structures. Reciprocity norms may be important in foreign
investment. For example, if one country’s suppliers are involved with Airbus, airlines based
in that country are more likely to buy Airbus aircraft.
Formal and Informal Internal Institutions
The internal rules of the game determine how MNEs are governed. Formally, the
organizational charts specify the primary scope of responsibilities of various parties.
However, the formal organizational charts do not reveal the informal rules of the game, such
as organizational norms, values, and networks. The nationality of the head of foreign
subsidiaries is such an example.
MNEs from different countries have different norms when making these appointments. Most
Japanese MNEs seem to follow an informal rule: Heads of foreign subsidiaries, at least
initially, need to be Japanese nationals. In comparison, European MNEs are more likely to
appoint host- and third-country nationals to lead subsidiaries. As a group, US MNEs’
practices seem to be between the Japanese and European practices. The Japanese propensity
to appoint home-country nationals is conducive for their preferred, global strategy, which
values globally coordinated and controlled actions. European comfort in appointing host- and
third-country nationals is indicative of European MNEs’ (traditional) preference for a
multidomestic strategy.
Nationality of top executives at the highest level (such as chairman, CEO, and board
members) seems to follow another informal rule: They are (almost always) home-country
nationals.
Some critics even argue that this “glass ceiling” reflects “corporate imperialism.”
Consequently, some leading MNEs have appointed non–homecountry nationals to top posts.
WORLDWIDE LEARNING, INNOVATION, AND KNOWLEDGE MANAGEMENT
Knowledge Management in Four Types of MNEs
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In MNEs pursuing a home replication strategy, such interdependence is moderate and the role
of subsidiaries is largely to adapt and leverage parent company competencies. Thus,
knowledge of new products, processes, and technologies is mostly developed at the center and
flown to subsidiaries, representing the traditional one-way flow.
In multidomestic MNEs, the interdependence is low. Knowledge management centers on
developing knowledge that can best tackle local markets.
In MNEs pursuing a global strategy, the interdependence is increased. Knowledge is
developed and retained at the center and a few “centers of excellence.” Consequently, the
knowledge and people flow extensively from headquarters and these centers to other
subsidiaries.
Globalizing Research and Development
While virtually all MNE functions need to better manage and extend their knowledge, R&D
represents an especially crucial arena for knowledge management. Relative to production and
marketing, only more recently has R&D emerged as an important function to be
internationalized—often known as innovation-seeking investment .
The theory of agglomeration or clusters of high caliber, innovative firms within a country or
region can be used by firms in making FDI decisions. For foreign firms, an effective way to
access a cluster not present in their home markets is to locate there through FDI, as Shiseido
did in France.
From a resource-based standpoint, a fundamental basis for competitive advantage is
innovation-based firm heterogeneity (being different). Decentralized R&D performed by
different locations and teams around the world virtually guarantees that there will be
persistent heterogeneity in the solutions generated.i GSK, for example, has aggressively spun
off R&D units, because it realizes that adding more researchers in centralized R&D units does
not necessarily enhance global learning and innovation.
Teaching Tip: Students can be asked about some of the better-known strong clusters of firms
in several industries such as mobile phones (the Nordic countries and South Korea),
filmmaking (Hollywood), biotechnology (New England region of the US), shoes (Italy),
software (Silicon Valley and Bangalore, India) and many others. How do they think that a
smaller firm from outside those areas could benefit from FDI into such a “cluster?” How
about firms that cannot afford FDI? How can they still take advantage of a cluster?
Problems and Solutions in Knowledge Management
Institutionally, how MNEs employ formal and informal rules of the game has a significant
bearing on the success or failure of global R&D.
Many MNEs prefer to invent everything internally. However, for large firms, there are
actually diminishing returns for R&D. Consequently, a new model—open innovation—is
emerging. This model relies on more collaborative research, among various internal units,
with external firms (through R&D contracts, alliances, and outsourcing, and with university
labs. Evidence shows that firms that skillfully share research (including publishing results in
the public domain) outperform those that fail to do so.
In knowledge retention, the usual problems of employee turnover are compounded when the
employees are key R&D personnel, whose departure will lead to knowledge leakage. Some
managers (and employees) believe that “knowledge is power” and will monopolize certain
useful knowledge and not share it with others or codify it.
Even when certain subsidiaries are willing to share knowledge, inappropriate transmission
channels may still torpedo effective knowledge sharing. Given the advancement in IT, it is
tempting to establish global virtual teams, which do not meet face to face, to transfer
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knowledge. Unfortunately, such teams often have to confront tremendous communication and
relationship barriers, ranging from language and cultural differences to less-than-perfect
communication technology
Finally, recipient subsidiaries may present two pathologies that block successful knowledge
inflows. First, the NIH syndrome causes some managers to resist accepting ideas from other
units. Second, recipient subsidiaries’ absorptive capacity—the ability to recognize the value
of new information, assimilate it, and apply it—may be limited, as some firms opening up
subsidiaries in Eastern Europe in the 1990s learned.
To combat these problems, corporate headquarters can manipulate the formal rules of the
game, such as (1) tying bonuses with measurable knowledge outflows and inflows, (2) using
high-powered, corporate- or business-unit-based incentives (as opposed to individual- and
single-subsidiary-based incentives), and (3) investing in codifying tacit knowledge.
Facilitating management and R&D personnel networks among various subsidiaries through
joint teamwork, training, and conferences and promoting strong organizational (that is, MNEspecific) cultures and shared values and norms for cooperation among subsidiaries can also
help.
Teaching Tip: Many university professors generate knowledge about teaching (particularly
useful cases, exercises, simulations and methods of teaching) that would be very useful to
other professors, instructors, and the teaching development unit in their universities. Yet they
often refuse—or, more diplomatically, fail—to share that knowledge, even with a single other
colleague, let alone codify it for all to use. What are the barriers to an organization such as a
university in getting such information out of a professor’s office and circulated more widely?
The instructor may note that Harvard Business School insists that its faculty make lecture
notes and related teaching materials available to all in the Business School. This material will
actually become part of a Harvard Business School professor’s tenure and promotion
application and impact his or her career.
Thus, knowledge management is best facilitated by informal social capital, which refers to the
informal benefits individuals and organizations derive from their social structures and
networks. Because of social capital, individuals are more likely to go out of their way to help
friends and acquaintances. Consequently, managers of the China subsidiary are more likely to
provide managers of the Chile subsidiary with needed knowledge if they know each other and
have some social relationship or the micro-macro link.
DEBATES AND EXTENSIONS
One Multinational versus Many National Companies
We often treat each MNE as one firm. However, from an institution-based view, one can
argue that a multinational enterprise may be a total fiction that does not exist. In other words,
every so-called MNE is essentially a bunch of national companies (subsidiaries) registered in
various countries. A generation ago, such firms were often labeled “multi-national
companies” with a hyphen. Although some pundits argue that globalization is undermining
the power of national governments, little evidence suggests that the modern nation-state
system is retreating.
This debate is not just academic hair-splitting fighting over a hyphen. It is very relevant and
stakes are high. One case in point concerns taxation. Google Ireland is not a branch of the USbased Google Corporation. Google Ireland is a separate, legally independent corporation
registered in Ireland. Another case in point is brought by Indian firm Satyam’s scandal.
Satyam was listed on the New York Stock Exchange (NYSE), and PricewaterhouseCooper
(PwC) endorsed Satyam’s books even through $1 billion cash did not exist at all. While such
sloppy auditing was done by PwC India, some Satyam shareholders sued PwC International
Limited headquartered in New York. But PwC International spokesman argued in interviews
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that “there is no such a thing as a global firm because we are a membership organization.”
That is to say: PwC India, registered in India, is a legally independent firm whose conduct has
nothing to do with other nationally registered firms such as PwC International or PwC Hong
Kong.
Corporate Controls versus Subsidiary Initiatives
One of the leading debates on how to manage large firms is the centralization versus
decentralization debate.
Arguments in favor of centralization include (1) capability to facilitate corporate-wide
coordination, (2) consistency in decision-making and (3) sufficient power for corporate-level
managers to initiate necessary changes.
Counterarguments suggest that decentralization (1) reduces corporate-level managers’
overload of responsibilities and improves decision quality, (2) better motivates subsidiarylevel managers and employees through empowerment, and (3) permits greater speed,
flexibility, and innovation.
In an MNE setting, key is central controls versus subsidiary initiatives. Subsidiaries are not
necessarily at the receiving end of commands from headquarters. For example, when
headquarters requires that certain practices (such as quality circles) be adopted, some
subsidiaries may be in full compliance, others may pay lip service to them, and still others
may refuse to adopt citing local differences.
Some subsidiaries may also pursue their own, subsidiary-level strategies and agendas. These
activities are known as subsidiary initiatives and are defined as the proactive and deliberate
pursuit of opportunities. Advocates argue that such initiatives may inject a much-needed spirit
of entrepreneurship throughout the larger bureaucratic MNE.
Counterarguments can be made that from the corporate headquarters’ perspective, it is hard to
distinguish between subsidiary initiative and empire-building. Subsidiary managers are often
host-country nationals who would naturally prefer to strengthen their subsidiary. These
tendencies, although natural and legitimate, are not necessarily consistent with the MNE’s
corporate-wide goals.
Customer-Focused Dimensions versus Integration, Responsiveness, and Learning
Many MNEs have added new dimensions that make their structure more complex. Often, new,
customer-focused dimensions of structure are placed on top of an existing structure, resulting
in a four- or five-dimension matrix.
There are three primary customer-focused dimensions. The first is a global account structure
to supply customers (often other MNEs) in a coordinated and consistent way across various
countries. The emphasis is to give large customers dedicated support teams that report
exclusively to a global account executive. Most original equipment manufacturers (OEMs)—
namely, contract manufacturers that produce goods that do not carrying their own brands
(such as the makers of Nike shoes and Microsoft’s Xbox)—use this structure.
A solutions-based structure is often used. For example, IBM would sell whatever combination
of hardware, software, and services that customers prefer, whether that means selling IBM
products or selling rivals’ offerings.
What then is the solution when confronted with the value-added potential of adding customerfocused dimensions and their associated complexity, bureaucracy, and cost? One
recommendation is to simplify both product and geographic scope as ABB did by downsizing
and downscoping to a mere two global product divisions, power technology and automation.
THE SAVVY STRATEGIST
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Strategists should consider four implications. First, they should understand the nature and
evolution of their 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 and
be prepared to change the internal rules of the game governing MNE management.
POSSIBLE ANSWERS TO CRITICAL DISCUSSION QUESTIONS
1. In this age of globalization, some gurus argue that all industries are becoming global and
that all firms need to adopt a global strategy. Do you agree? Why or why not?
Many will probably argue that this is too broad a statement. The multidomestic strategy
seems to be more appropriate for many consumer-related products such as fast food or
health and beauty aids. Firms need to do not just market research, but sometimes
considerable R&D for the different countries, and for some products, a limited R&D
localization effort is quite feasible. For example, in North America, there is much R&D in
health and beauty aid firms for safe tanning products. In East Asia, the same firms are
researching (often local mixtures) of safe skin-whitening products. In Hong Kong and
southern China, primetime television is currently filled with commercials about skin
whitening. Almost never will you see a product that promotes tanning or the ability to
stay in the sun longer. McDonald’s conducted local research in India on beef substitutes
for its burgers, finally settling on one vegetarian preparation and its very popular (in
South Asia) lamb burgers. Other industries that have a standard product that will largely
be unaffected by local taste, such as Intel’s microprocessors and new communication
chipsets, as well as the need to guard that intellectual property carefully, are likely to
encourage the continuation of a global strategy
2. From time to time, a manager may be faced with the need to change the internal rules of
the game within his/her MNE. What skills and capabilities may be useful in achieving this?
Mangers have to confront two sets of the rules of the game: formal and informal rules
govern internal relationships. Formal internal rules focus on how the MNE is governed
and reflecs its strategic choices. The informal internal rules are often taken for granted
and deeply embedded in administrative heritages, which makes them difficult to change.
In order to develop the capabilities to change the internal rules of the game, a manager
needs to actively develop learning and innovation capabilities to encourage current
employees to interrogate their positions in the organization. Incentives must be offered to
employees who come with innovative solutions to problems. They must also be
encouraged to experiment and find newer ways of approaching tasks.
Some insights into changing the rules can also be gained from the Samsung success story.
3. If you were a CEO or a business unit head, under what conditions would you consider
moving your headquarters overseas?
Over time the best possible location for a HQ may change as changes occur in
government policies, markets, cost and availability of resources, technology, and
competition. As such changes occur; it may be wise to determine whether there may be a
better location for a business unit or corporate HQ.
TOPICS FOR EXPANDED PROJECTS
1. You are the head of the best-performing subsidiary in an MNE. Because bonus is tied to
subsidiary performance, your bonus is the highest among managers of all subsidiaries.
Now corporate headquarters is organizing managers from other subsidiaries to visit and
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learn from your subsidiary. You worry that if your subsidiary is no longer the star unit
when other subsidiaries’ performance catches up, your bonus will go down. What are you
going to do? State your answer in a one-page paper
The compensation system is a problem. As a higher level manager, it is possible to negotiate
this directly with your boss and the head of human resources. You may be able to negotiate a
one-time bonus for helping out, coupled with a modified plan where you would get paid based
on overall corporate performance. Alternatively (or in addition, depending on how generous
they are and willing to listen), the managers should try to set up a series of internal
consulting events, with requisite fees, for training the other subsidiaries and following up to
be sure they can implement the same changes. The fees would go to your budget, and you
would have some leeway in spending that money to improve your competitive situation.
Several major MNEs have “consulting” departments that do quite a bit of internal consulting
with various departments and divisions within the firm, on topics ranging from information
technology, to setting up compensation and reward systems consistent with something like the
Balanced Scorecard, for example.
2. You are a corporate R&D manager at Boeing and are thinking about transferring some
R&D work to China, India, and Russia, where the work performed by a $70,000 US
engineer reportedly can be done by an engineer in one of these countries for less than
$7,000. However, US engineers at Boeing have staged protests against such moves. US
politicians are similarly vocal concerning job losses and national security hazards. What
are you going to do?
You must show your boss, the engineers and the politicians (the latter most likely through
your boss) that 1) the work is mostly additional or new work that is not getting done now, or
getting done very slowly, 2) this new work would not cost any jobs, except perhaps for a bit of
natural attrition; for the most part US engineers would be shifted to other, higher-level or
longer term projects, 3) this will make Boeing more efficient in terms of specific new product
development, which will help the firm to get more business and hire more engineers, and 4)
that the work is not classified, sensitive, and/or defense-related. IBM had to perform the latter
two of these tasks, particularly number 4, upon its sale of the PC division to Lenovo in China.
Some US politicians were naturally concerned that IBM was letting key microcomputing
technology out to a (business) competitor and a rival in state-to-state relations. It was
incumbent upon IBM to show that the PC technology being sold was mostly off-the-shelf, and
Lenovo would not be learning any major new technologies and techniques that could be
viewed as potentially harmful to US firms and national interests.
3. Working in pairs or small groups, research and review a high-profile case of an MNE
moving its headquarters out of your country and the media and political outcry
surrounding this move (see Strategy in Action 10.1). Determine whether you are for or
against the firm’s move, and present your research in a short paper or visual presentation.
Answers might vary. There are drawbacks to the country losing a HQ and benefits to both the
country gaining the HQ as well as the company. The drawback to the losing country are good
paying jobs with the company and the risk of losing other well paid professionals (lawyers,
accountants, etc.) that deal with the company, but that loss is the gain to the country where
the HQ moves. The benefits to the company include a clear statement to all that the company
is global (not just local), it may improve its efficiency, and the very threat of the move may
enhance its bargaining power with the original government on issues of taxation and
regulation.
CLOSING CASE: A Subsidiary Initiative at Bayer MaterialScience North America
OVERVIEW
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Bayer Group is a $50 billion chemical and health care giant based in Germany. Its three main
product divisions are Bayer MaterialScience (BMS), Beyer CropScience, and Bayer
HealthCare. In this matrix organization, each of these product divisions has country/regional
subsidiaries in major markets. The CEO for Bayer MaterialScience North America between
2004 and 2011 was Greg Babe. The company did fairly well under his leadership in both
2005 and 2006. But in 2007, BMS made a radical decision: to dismantle BMS NA—in other
words, to shut down the North America regional headquarters in Pittsburgh. The reason cited
was for cost competitiveness and also the regional structure was seen as too bloated.
Babe asked for time to arrive at another solution. They came up the usual idea of cost cutting.
The norm was usually to shave off a certain percentage of the overhead. Babe and his team
realized that cost structure should be dictated by how they grew the business and not by an
arbitrary target. With that insight, they looked at the overall picture from a strategic growth
lens rather than a tactical cost reduction lens. They set two specific goals: (1) to grow at 1% to
2% above GDP and (2) to save 25% on selling, general, and administrative (SG&A) costs. To
deliver that, Babe needed to completely reshape his unit but also needed additional investment
of $70 million.
In late 2007, when Babe presented to BMS’s global leadership team, everyone expected him
to come up with a cost-cutting exercise. Instead, he presented a subsidiary growth initiative.
BMS’s global leadership team challenged key concepts of the proposal, many of which
deviated from Bayer’s global norms. Babe rebutted every argument and promised to turn
BMS NA into a growth machine. His proposal paid off and BMS invested $70 million in
BMS NA.
When BMS suffered eight consecutive quarters of declining sales starting in 2008; it was
BMA NA which delivered or rather over delivered—only $60 million of the $70 million
allotted for growth was spent. By 2010, BMS NA’s sales turned around and enjoyed doubledigit quarterly growth (2010 sales went up to $2.7 billion from the bottom of $2.1 billion in
2009). What was more valuable was that some of the reorganized processes (such as
outsourcing transportation), so foreign at the time to BMS, now became implemented by
BMS around the world.
BMS took considerable risk in backing its regional subsidiary’s initiative but in the end it
reaped enormous profits.
POSSIBLE ANSWERS TO CASE DISCUSSION QUESTIONS
1. While Bayer has a matrix structure, it has maintained some flavor of a geographic area
structure. What are the advantages and disadvantages of a geographic area structure as
seen in this case?
The geographical area structure is used when managers locate different divisions in each of
the world regions where the organization operates and pursue a multi-domestic strategy. The
advantages are numerous. Interactions between representatives of the different business
functions are much more personal- they work side by side with the members of various
departments. This ensures that the company quickly adapts to new changes and brings
everyone one board with new strategic initiatives.. Hiring local management empowers
companies because they are headed by leaders who are familiar with the local business
environment, culture and legal apparatuses. So local managers are able to strategize fully
understanding exactly what drives purchase behavior and what the financial requirements of
the region are.
The disadvantages could be the duplication of resources and capabilities. There could also be
conflicts between the subsidiary and the main company
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Babe’s strategy to save the company was conjoined effort and his knowledge of local
conditions helped him come up with a feasible solution.
2. What are the advantages and disadvantages of a matrix structure as seen in this case?
The matrix structure is an organizational structure that is used to alleviate the disadvantages
associated with geographic area and global product division structures. It groups people and
resources by function and product. It results in a complex network of boss-subordinate
reporting relationships. It is a very flexible structure and can respond quickly to the needs for
change.
The advantages of a matrix structure are numerous. There is an efficient use of resources.
Frequent communication between members from various departments can lead to a
participative decision-making process. Motivation levels are high because of members’
participation in decision-making. It has its disadvantages too. Conflicts and power struggles
can occur when there is an overlap between authority and responsibility. Competition over
scare resources can also contribute to conflicts. Emphasis on consensus can delay decisionmaking. Reporting to two bosses can contribute to further ambiguity and conflict.
3. While there is a successful case of subsidiary initiative, from a corporate or division
headquarters’ standpoint, it is often difficult to ascertain whether the subsidiary is making
good-faith efforts acting in the best interest of the MNE or the subsidiary managers such
as Babe are primarily promoting their own self-interest, such as protecting their own jobs.
How can headquarters differentiate good-faith efforts from more opportunistic
maneuvers?
Student answers might vary. It is probably difficult for a multinational to figure out the
motivations of CEO’s of subsidiary organization. In the context of the above case, it was a
gamble taken by BMS when they accepted Babe’s proposal. They would have lost $70 million
if Babe had failed to deliver its promise.
On the other hand, Babe and his team came up with this innovative proposal to increase
productivity because of self-interest. BMS wanted to dismantle BMS NA. They would have it
translated in massive layoffs. This is what prompted Babe to find a solution to this problem.
It is probably difficult for any multinational to differentiate between good faith and
opportunistic maneuvers. The only way of finding out is putting it to the test. This might be
costly if the maneuver fails.
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