value insights

Global Integration and Local Responsiveness Strategies- Valutrics

Industries in which competition takes place on a country-by-country basis are known as multi-domestic industries. In such industries, each country tends to have a unique set of competitors.
Companies in the food and beverage, consumer products, and clothing and fashion industries may often resort to a country by-country approach to marketing to specific needs and tastes, laws, and regulations.
By contrast, industries such as aerospace, automobiles, telecommunications, metals, computers, chemicals, and industrial equipment are examples of global industries, in which competition is on a regional or worldwide scale.

Formulating and implementing strategy is more critical for global industries than multi-domestic industries. Most global industries are characterized by the existence of a handful of major players that compete head-on in multiple markets.

Global integration refers to the coordination of the firm’s value-chain activities across countries to achieve worldwide efficiency, synergy, and cross-fertilization in order to take maximum advantage of similarities between countries. The flexibility objective is also called local responsiveness. Local responsiveness refers to meeting the specific needs of buyers in individual countries.

The discussion about the pressures on the firm to achieve the dual objectives of global integration and local responsiveness has become known as the integration-responsiveness (IR) framework to help managers better understand the trade-offs between global integration and local responsiveness.
In companies that are locally responsive, managers adjust the firm‘s practices to suit distinctive conditions in each market. They adapt to customer needs, the competitive environment, and the local distribution structure. Thus, Wal-Mart store managers in Mexico adjust store hours, employee training, compensation, the merchandise mix, and promotional tools to suit conditions in Mexico. Firms in multi-domestic industries such as food, retailing, and book publishing tend to be locally responsive because language and cultural differences strongly influence buyer behavior in these industries
In contrast, global integration seeks economic efficiency on a worldwide
scale, promoting learning and cross-fertilization within the global network and
reducing redundancy. Headquarters personnel justify global integration by citing
converging demand patterns, spread of global brands, diffusion of uniform
technology, availability of pan-regional media, and the need to monitor
competitors on a global basis. Thus, designing numerous variations of the same
basic product for individual markets will only add to overall costs and should
be avoided. Firms in global industries such as aircraft manufacturing, credit
cards, and pharmaceuticals are more likely to emphasize global integration.

Pressures for Local Responsiveness
There are various factors that compel the firm to become locally responsive in the
countries where it conducts business. These factors are:
• Unique natural endowments available to the firm. Each country has national
endowments that the foreign firm should access.
• Diversity of local customer needs. Businesses, such as clothing and food,
require significant adaptation to local customer needs.
• Differences in distribution channels. These vary considerably from market to
market and may increase the need for local responsiveness. For example,
small retailers in Japan understand local customs and needs, so locally
responsive MNEs use them to distribute products in that country.
• Local competition. When competing against numerous local rivals, centrally
controlled MNEs will have difficulty gaining market share with
global products that are not adapted to local needs.
• Cultural differences. Cultural characteristics influence consumer buying
decisions. The influence of cultural differences may vary considerably,
depending on the type of product. For those products where cultural
differences are important, such as clothing and furniture, local managers
require considerable freedom from headquarters to adapt their product
and marketing practices.
• Host government requirements and regulations. When governments impose
trade barriers or complex business regulations, they can halt or reverse
the competitive threat of foreign firms. The MNE may establish a local
subsidiary with substantial decision-making authority to minimize the
effects of protectionism.

Pressures for Global Integration
Another set of factors compels the firm to coordinate its activities across countries
in an attempt to build efficient operations. These are:
• Economies of scale. Concentrating manufacturing in a few select
locations where the firm can profit from economies of mass production
motivates global integration. Also, the smaller the number of
manufacturing and R&D locations, the easier it is for the firm to control
quality and cost.
• Capitalize on converging consumer trends and universal needs. Standardization
is appropriate for products with widespread acceptance and whose
features, quality, and cost are similar worldwide. Examples include computer
chips and electronic components. Companies such as Nike, Dell, ING, and
Coca-Cola offer products that appeal to consumers everywhere.
• Uniform service to global customers. Services are easiest to standardize when
firms can centralize their creation and delivery. Multinational enterprises
with operations in numerous countries particularly value service inputs
that are consistent worldwide.
• Global sourcing of raw materials, components, energy, and labor. Firms face an
ongoing pressure to procure high-quality input goods in a cost-efficient
manner. Sourcing of inputs from large-scale, centralized suppliers provides
benefits from economies of scale and more consistent performance
outcomes. Sourcing from a few well-integrated suppliers is more efficient
than sourcing from numerous loosely connected distributors.
• Global competitors. Competitors that operate in multiple markets
threaten firms with purely domestic operations. Global coordination is necessary to monitor and respond to competitive threats in foreign and
domestic markets.
• Availability of media that reaches consumers in multiple markets. The avail-
ability of cost-effective communications and promotion makes it possible
for firms to cater to global market segments that cross different
countries. For example, firms now take advantage of the Internet and
cross-national television to simultaneously advertise their offerings in
numerous countries.

The integration-responsiveness framework presents four distinct strategies for internationalizing firms.

Internationalizing firms pursue one or a combination of four major types of strategies. In general, multi-domestic industries favor home replication and multi-domestic strategies,
while global industries favor global and transnational strategies.

Home replication strategy
With a home replication strategy (sometimes called export strategy or interna-
tional strategy), the firm views international business as separate from, and sec-
ondary to, its domestic business. Early in its internationalization process, such a
firm may view international business as an opportunity to generate incremental
sales for domestic product lines. Typically, products are designed with domestic
customers in mind, and international business is sought as a way of extending the
product life cycle and replicating its home-market success.

Multi-domestic strategy
A second approach is multidomestic strategy (sometimes called multilocal
strategy), whereby an internationalizing firm delegates considerable autonomy to
each country manager, allowing him or her to operate independently and pursue
local responsiveness. With this strategy, managers recognize and emphasize
differences between national markets. As a result, the internationalizing firm allows subsidiaries to vary product and management practices by country. Country managers
tend to be highly independent entrepreneurs, often nationals of the host
country.They function independently and have little incentive to share knowledge
and experience with managers in other countries. Products and services are
carefully adapted to suit the unique needs of each country.
Nevertheless, multi-domestic strategy has some disadvantages. The firm’s foreign
subsidiary managers tend to develop strategic vision, culture, and processes
that differ substantially from those of headquarters. They have little incentive to
share knowledge and experience with managers in the firm’s other country markets,
which leads to duplication of activities and reduced economies of scale. Limited
information sharing also reduces the possibility of developing a knowledge-
based competitive advantage.
These disadvantages may eventually lead management to abandon multidomestic
strategy in favor of a third approach.

Global strategy
With this strategy, headquarters seeks substantial control over its country operations in an effort to minimize redundancy
and achieve maximum efficiency, learning, and integration worldwide. In the
extreme case, global strategy asks why not make “the same thing, the same way, every-
where?” In this way, global strategy emphasizes greater central coordination and
control than multidomestic strategy, with various product or business managers having
worldwide responsibility. Activities such as R&D and manufacturing are centralized at
headquarters, and management tends to view the world as one large marketplace.
Global strategy offers many advantages: It provides management with a
greater capability to respond to worldwide opportunities, increases opportunities
for cross-national learning and cross-fertilization of the firm’s knowledge base
among all the subsidiaries, and creates economies of scale, which results in lower
operational costs. Global strategy can also improve the quality of products and
processes—primarily by simplifying manufacturing and other processes. High-
quality products promote global brand recognition and give rise to consumer
preference and efficient international marketing programs.
The ability of firms to pursue global strategy has been facilitated by many
factors, including the converging needs and tastes of consumers around the world,
the growing acceptance of global brands, the increasing diffusion of uniform
technology (especially in industrial markets), the integrating effects of the Internet and
e-commerce, the integration of markets through economic blocs and financial
globalization, and the spread of international collaborative ventures.

Transnational strategy
A final alternative is transnational strategy, a coordinated approach to interna-
tionalization in which the firm strives to be more responsive to local needs while
retaining sufficient central control of operations to ensure efficiency and learning.
Transnational strategy combines the major advantages of multi-domestic and global
strategies while minimizing their disadvantages. Transnational strategy implies a
flexible approach: standardize where feasible; adapt where appropriate. In practice,
managers implement transnational strategy by:
• Exploiting scale economies by sourcing from a reduced set of global
suppliers and concentrating the production of offerings in relatively few
locations where competitive advantage can be maximized
• Organizing production, marketing, and other value-chain activities on a global scale
• Optimizing local responsiveness and flexibility
• Facilitating global learning and knowledge transfer
• Coordinating competitive moves— that is, how the firm deals with its
competitors, on a global, integrated basis
Transnational strategy requires planning, resource allocation, and uniform
policies on a global basis. Firms standardize products as much as possible while
adapting them as needed to ensure ample sales in individual markets.

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