Global Business Strategy Capabilities- Valutrics
Much international business strategy is conducted regionally, rather than on national or global levels. Recent research suggests there are only a handful of truly global firms (i.e., firms with a balanced distribution of sales and assets worldwide). One study, looking at the Fortune Global 500, identified only nine truly ‘global’ firms (i.e., firms having at least 20 per cent of their sales in each of three key regions of the world, namely Asia, the European Union and North America). These nine firms were, in descending order of total sales: IBM, Sony, Philips, Nokia, Intel, Canon, Coca-Cola, Flextronics and LVMH. A few other multinational enterprises (MNEs) were close – such as Bayer, Alstom, Sun Microsystems, 3M and Eastman Kodak – but the vast majority of firms had a strong home region orientation, though many senior managers, as well as company directors and owners, wanted their firms to achieve a more balanced distribution of sales. A balanced geographical distribution of sales would signal worldwide customer acceptance of the firm’s products and services.
The observed dominance of the home region in sales has important implications for strategy. When engaging in strategic decision making, senior management committees of geographically diversified firms focus first on the geographic area that represents more than 50 per cent of sales. The ‘50%+’ geographic area is usually the main source of the firm’s cash flows, the locus of most assets and employees and the cash cow allowing expansion into other geographic areas. Any senior executive at the corporate level, accountable to a varied set of stakeholders, will devote prime attention to the business or set of businesses that represent the majority of sales. This observation reflects simple managerial effectiveness. A lack of focus on the firm’s largest markets would imply a governance problem, with top management committees paying insufficient attention to what really matters, and paying excessive attention to ‘pet projects’ in ‘pet destinations’, at least if such pet projects embody a limited proven growth potential.
In the above context of largely home region-oriented sales (the precise definition of what constitutes the home region is obviously firm-specific), senior MNE managers then often adopt a regional, rather than a national, approach to international strategy, particularly if the firm wants to expand into another key region of the world. When Asian or North American firms contemplate expansion to Europe, the main concern in boardrooms and top management committees is increasingly ‘How do we crack the EU market?’ rather than ‘How do we penetrate Germany?’ When European firms venture outside of Europe, the key question is systematically ‘How do we crack the Asian markets, and where should we set up a regional office (or regional offices) for this geographic area?’
Only in the North American context it is correct that Asian and European MNEs still think primarily about the national US market rather than about the NAFTA region, because of the relative size of the US market.
The observation that most large MNEs have more than 50 per cent of their sales in their home region is likely to remain relevant in the future. Especially in the EU and North America, but increasingly in Asia, intra-regional distance is decreasing, driven by a reduction of trade and investment barriers, and other attempts towards institutional convergence. Thus, further sales expansion within the home region will often continue to be easier than equivalent sales growth elsewhere in the world.
The message for senior multinational enterprise (MNE) managers is simply not to overestimate the non-location-bound nature of their company’s FSAs, and to be very selective in their international expansion programmes. These managers must determine the correct geographical reach of their extant bundles of FSAs, as well as the requirements for investing in additional strengths when entering foreign environments. Too much adaptation will lead to excessive costs. Too much focus on scale and scope will prevent access to location advantages in host environments.
Too much focus on exploiting national differences will lead to vulnerable supply chains and severe coordination problems.
A continued strong focus on selling in a carefully selected geographic space, in accordance with the firm’s limited resource base, may therefore be a wise path of action for the present majority of MNEs. This majority lacks the required levels of internationally transferable FSAs to reproduce globally whatever past success has been achieved in a restricted geographic area.
The new international expansion
The MNE’s history, the environmental context within which it developed and the resulting firm-level routines all play a key role in determining what constitutes desirable strategy for the future: no one formula can guarantee success. The increasing diversity of the MNE population provides ample evidence of this. While many MNEs continue to originate in the most highly developed economies and base their competitiveness on traditional FSAs such as advanced technology, an increasing number now come from emerging economies such as China, Russia and India. In many cases these firms are reaching out to exploit the strengths they have developed based on the location advantages of their home countries, whereas in the past MNEs from Europe, Japan or North America might have reached inside these countries to access those same location advantages.
Chinese companies have reached out to undertake large-scale investments in politically volatile environments, so as to secure the supply of raw materials. Chinese MNEs are taking advantage of their governmental owners’ ability to influence these foreign environments through aid and diplomacy, as well as their insulation from the type of protests that might deter Western firms. Russian firms have begun developing themselves international, strategic asset seeking links that will bring in much needed technology, taking advantage of their leaders’/owners’ domestic political connections and resultant ability to navigate through domestic – and former Soviet Union-related – waters many non-Russian investors may fear to enter. Indian ICT entrepreneurs have cast off the role of passive recipients of outsourcing/offshoring contracts, and have established operations in America’s high-tech centres, thereby developing their own direct customer linkages to improve service and capture a larger slice of the economic pie for themselves. While ICT technologies such as the Internet may have increased the scope for developing long-distance, arm’s-length relationships, the international expansion of MNEs from emerging economies show the continuing need for feet on the ground and face-to-face contact.
For many firms in emerging economies it is not proprietary R&D outcomes or brand names that count the most, but rather the personalities, skill sets and drive of their entrepreneurs, senior managers and owners. These individuals give emerging economy firms the ability to succeed abroad in direct competition with long-established MNEs from Europe, Japan and North America. Perhaps in time they will develop the more traditional types of advantages (in the way that Korean firms, for example, have emerged with brand names and technology that are now well-known around the world).
Developed-economy MNEs will need to carefully identify and nurture their own FSAs, if they are to avoid being displaced by the newcomers now nipping at their heels. The new forms of outsourcing/offshoring, going far beyond conventional cost-reduction purposes, are one expression of novel resource recombination by established MNEs.
Radical innovation and internal coherence
Sustained international success will also require that senior MNE managers resolve the ongoing tension between the desire to take advantage of the vast array of opportunities offered in today’s international marketplace, and the need to retain an appropriate level of control over the firm’s geographically dispersed operations. Economic and political changes in the last two decades have raised hundreds of millions of people from subsistence and isolation to the point where their energy and creativity can begin to be harnessed for the advancement of material and social conditions around the world. On the one hand, there are good reasons for the firm to give its overseas operations the scope to engage creatively in unanticipated resource recombination to take advantage of these new opportunities. On the other hand, there are good reasons for the firm to craft and deploy routines to manage ‘distance’ and the ‘liability of foreignness’. Striking this balance is a key challenge, and unfortunately senior managers cannot simply adhere to a single guideline given the diversity and rapidly shifting nature of individual parent–subsidiary relationships.
Final decisions on what to do and what not to do, what to internalize and what not, may need to be taken centrally, but subsidiary managers can and must be allowed to play a vital role in ensuring these decisions fully reflect locally available knowledge. This can best be accomplished through the promotion of process characteristics such as respect and procedural justice for subsidiary managers: these individuals should not be viewed primarily as a source of bounded reliability (or as an ‘agency problem’), but rather as a critical resource for effective and efficient international business strategy development and execution. The fast-growing and highly profitable MNEs of the present and future will be those that are flexible enough to constantly reevaluate and adjust this delicate balance between the dual need for both entrepreneurial freedom and internal coherence. MNE’s innovation process performance (and, more fundamentally, its resource recombination capability) must be looked at in its entirety, meaning from the initial appearance of creative ideas to the profitable delivery of new products to customers.4Here, senior managers should be careful not to place too much faith in the ‘periphery’, neglecting the businesses that are now providing the cash flows needed for future expansion, and experimenting on a grand scale with new governance models. Most large MNEs work with a mix of product and geographic divisions in a multidivisional governance system, with individual divisions usually responsible for the bulk of resource recombination activities. There are solid reasons for this, namely the needs for:
· specialization in decision making by corporate headquarters and the divisions
· selectivity in inter-divisional interactions
· standardized, quantitative monitoring and incentive systems
· specific roles for corporate headquarters and the divisions in general innovation strategy
· careful and informed management of the tensions that may arise between incremental and breakthrough innovations.
The recombination capabilities
Almost every significant challenge facing the world today, such as human over population, shortages of natural resources and climate change, requires us to reconcile global necessities and pressures with action taken at the local or individual level. Local and individual actions, which often lead to imperfect outcomes, create the need for scapegoats. As visible and strong evidence of the growing international interdependence among countries, the large MNE unwittingly and often undeservedly plays this scapegoat role, and thus becomes the subject of unjustified criticism and fear.
Yet MNEs may actually offer society an array of governance models for addressing difficult global–local trade-offs, and might also perform a direct and constructive role in the resolution of the underlying problems. Large, inter nationally successful MNEs represent the only governance mechanisms specifically designed both to facilitate resource recombination across product and geographic space simultaneously, and to reconcile international and local pressures and priorities, thereby increasing world economic welfare.6MNE governance models could therefore, subject to necessary qualification, serve as best practices for the future, public institutions of international and global governance that will become increasingly important, as pressure mounts from the type of problems described by the ‘tragedy of the commons’. MNE managers often do play a direct role in improving, not only economic efficiency, but also intercultural understanding, social justice and environmental sustainability around the world. The principal reason they play this positive role is that when MNEs and their managers enter a foreign country, especially outside their home region, they are usually in a position of vulnerability, in spite of their non-location-bound FSAs. MNEs and their managers have five main types of vulnerability:
· to breakthrough, resource recombination efforts from existing or new international rivals
· to the problems posed by running dispersed internal affiliate networks
· to the actors providing complementary resources in a wide array of international cooperative business arrangements
· to the decisions of sovereign governments, and a multitude of other stakeholders, including host country customers and employees
· to the scrutiny of the international media and internationally operating pressure groups.
The persistent vulnerability and contestable position of even the world’s largest MNEs and their senior managers paradoxically guarantee that these firms make and will make positive contributions to improving human conditions globally. Vulnerability engenders humility, and humility creates openness to new ideas and new approaches; such humility can, in short, significantly encourage the firm’s resource recombination efforts. Vulnerability-driven resource recombination invariably leads to change inside the MNE. This change may be resisted by the corporate immune system, but the internal dynamic of the process is usually to identify and respect the values that people in host environments treasure most. The change process thus ensures that some core values from the host environment are preserved, and possibly even spread internationally. These values include accountability to stakeholders viewed relevant in the host environment.
Thus senior MNE managers, especially those with extensive expatriate experience, function – perhaps unexpectedly – as agents of change in an imperfectly governed world. Often, they are willing to engage in a constructive dialogue with a multitude of stakeholders, including external pressure groups. Therefore, they can contribute immensely to the improvement of general, societal conditions while simultaneously pursuing their firms’ interests. The possibility that MNEs can create a win-win situation for themselves and the host nation should not be underestimated.
As the twenty-first century advances, the capability of resource recombination will become increasingly important. In this environment of low macro-economic growth, MNEs can meet the capital markets’ expectations of double-digit levels of revenue and earnings growth only by continuously recombining resources across product and geographic space. In other words, MNEs must move continuously to new, fast-growing businesses that are related to their extant resource base. At present, few MNEs in the world have mastered the General Electric-type ability to reinvent themselves as a matter of routine. In the past, General Electric might not always have brought good things to life,8but it certainly provides an exceptional example of a truly superior resource recombination capability. General Electric has developed routines – FSAs, in fact – for firm-level recombination and reinvention. By contrast, in most traditional MNEs, routines and recombination capabilities unfortunately operate to some extent as opposites, with the former being instrumental to efficient usage of existing resources and the latter conducive to effective transformation of these resources into new strengths.
The need for firm-level routines to reinvent the MNE organization at regular intervals is the great challenge facing tomorrow’s generation of senior MNE managers: such reinvention routines imply continuous reflection on which existing activities to shed (or de-internalize) and which new activities to add (or internalize). Importantly, a strong resource recombination capability held by MNEs is also the key precondition for survival of the present market system: only if established firms, most of these being MNEs, can recombine resources effectively and efficiently can low macro-economic growth rates on a global scale be reconciled with high growth in revenues and earnings of individual firms, as expected by capital markets.
However, continuous resource recombination and the related innovation processes usually create losing parties (for example, the economic actors operating in the activities that are de-internalized and left behind by the MNE, as well as the groups dependent on such activities in specific locations). We are already witnessing today how senior MNE management is increasingly pressured by society to respect social justice objectives. One perspective that is gaining momentum across the planet is that employees should enjoy the same treatment as equity capital. Senior MNE managers consider it legitimate to shed economic activities in order to secure the firm’s long-term survival, profitability and growth, thereby showing appropriate accountability towards holders of equity capital. Arguably, these managers should demonstrate the same accountability towards their employees, who – just like capital owners dedicate equity capital – have dedicated themselves to the firm for prolonged periods of time.
Just as senior managers must avoid capital destruction, they must also avoid the destruction of the lives of the very individuals who have put forward their best efforts to serve the firm’s goals. The most effective way to protect employees is usually to ensure their mobility – to foster their ability to move easily to other jobs in the economy. In practice, this implies continuous investment in training, retooling and new skills development.