IBS Lecture Note 10:

Multinational Strategies,

Structures, and Learning

 Outline

•Multinational strategies and structures

• A comprehensive model of multinational
strategy, structure, and learning
• Worldwide learning, innovation, and knowledge
management
 Multinational Strategies and Structures
• Pressures for cost reductions and local responsiveness
• Four strategic choices for MNEs (1) home replication, (2)
localization, (3) global standardization, and (4) transnational
 Home replication strategy emphasizes the international replication of
home country-based competencies
 Localization (multidomestic) strategy is an extension of the home
replication strategy, focusing on a number of foreign countries/regions,
each regarded as a stand-alone local market worthy of significant
attention and adaptation
 Global standardization strategy is the opposite of the localization strategy
 Transnational strategy aims to capture “the best of both worlds” by
endeavoring to be both cost efficient and locally responsive
 Multinational Strategies and Structures:
The Integration–Responsiveness Framework

Figure 10.1
 Four Strategic Choices for Multinational Enterprises

ADVANTAGES DISADVANTAGES
Home replication  Leverages home country-based advantages  Lack of local responsiveness

 Relatively easy to implement  May result in foreign customer alienation

Multidomestic  Maximizes local responsiveness  High costs due to duplication of efforts in
multiple countries
 Too much local autonomy

Global  Leverages low-cost advantages  Lack of local responsiveness

 Too much centralized control
Transnational  Cost-efficient while being locally responsive  Organizationally complex

 Engages in global learning and diffusion  Difficult to implement

of innovations

Table 10.1
 Multinational Strategies and Structures:
Four Organizational Structures

• Four organizational structures that are

appropriate for the four strategic choices:
 International division
 Geographical area
 Global product division
 Global matrix
International Division Structure at Starbucks

Figure 10.2
 Multinational Strategies and Structures:
Organizational Structures (cont’d)

• International Division
 Typically set up when firms initially expand abroad, often when
engaging in a home replication strategy
• Problems:
 Foreign subsidiary managers in the international division are not
given sufficient voice relative to the heads of domestic divisions
 The “silo” effect: International division activities are not
coordinated with the rest of the firm, which focuses on domestic
activities
 Firms often phase out this structure after their initial overseas
expansion
 Geographic Area Structure at Avon Products

Figure 10.3

Avon
Avon
Avon Avon Avon Western Europe
Central & Eastern
North America Latin America Asia Pacific Middle East
Europe
Africa
 Multinational Strategies and Structures:
Organizational Structures (cont’d)

• Geographic Area Structure

 Organizes the MNE according to different geographic
areas (countries and regions)
 Is the most appropriate for a localization strategy
 Its ability to facilitate local responsiveness is both a
strength and a weakness
• Problems:
 While being locally responsive can be a virtue, it may
also encourage the fragmentation of the MNE into
highly autonomous, hard-to-control “fiefdoms”
 Global Product Division Structure at
European Aeronautic Defense and Space Company
(EADS)

Figure 10.4

Source: Adapted from www.eads.com. Headquartered in Munich, Germany, and Paris, France,
EADS is the largest commercial aircraft maker and the largest defense contractor in Europe.
 Multinational Strategies and Structures:
Organizational Structures
• Global Product Division Structure
 Supports a global strategy in treating each product division as a
stand-alone entity with full worldwide—as opposed to domestic
—responsibilities for its activities
 Facilitates attention to pressures for cost efficiencies in allowing
for consolidation on a worldwide (or regional) basis and
reduction of inefficient duplication in multiple countries

• Problems:
 It is the opposite of the geographic area structure: Little local
responsiveness
A Hypothetical Global Matrix Structure

Figure 10.5
 Multinational Strategies and Structures:
Organizational Structures
• Global Matrix
 Is often used to alleviate the disadvantages
associated with both geographic area and global
product division structures
 Is intended to support the goals of the transnational
strategy—in practice, it is often difficult to deliver
• Problems
 May add layers of management, slow down decision
speed, and increase costs while not showing
significant performance improvement
A Comprehensive Model of
Multinational Structure,
Learning, and Innovation

Figure 10.6
 Industry-based Considerations
• Industry characteristics
 Industrial products firms: Favor global product divisions
 Consumer goods firms: Favor geographic areas

• Porter’s forces
 Interfirm rivalry increasingly focuses on learning and innovation
 Need to heighten entry barriers: Behind some recent moves to
phase out multidomestic strategy and to erect world-scale
facilities to deter entrants
 Bargaining power of suppliers and buyers: They also have to
internationalize if the focal MNE goes overseas
 MNE R&D often generates competing substitute products
 Resource-based Considerations
• Value
 Does any new structure (such as matrix) really add value?
 Does innovation really add value? Not always!
• Rarity
 When all rivals adopt a “global strategy,” it is not rare
• Imitability
 It is easier to imitate formal structure. But how to imitate an
elusive, informal matrix which is a “philosophy”?
• Organization
 Some MNEs are better able to take advantage of complex
organizational structures such as matrix than others
 Institution-based Considerations
• Formal and informal external institutions
 Formal Institutions
 Externally, MNEs, are subject to the formal institutional frameworks erected by
various home- and host-country governments
 Host-country governments often encourage, or coerce MNEs into undertaking certain
activities
 Informal Institutions
 Strategists weigh the informal backlash against activities which result in domestic job
losses

• Formal and informal internal institutions

 Formal organizational charts do not necessarily reveal the informal rules of the
game
 Three choices: (1) a home-country national as the head of a subsidiary, (2) a
host-country national, or (3) a third country national
 Worldwide Learning, Innovation
and Knowledge Management:
Knowledge Management in MNEs
• Knowledge management can be defined as the
structures, processes, and systems that actively
develop, leverage, and transfer knowledge.
• Knowledge management is considered by some writers
the defining feature of MNEs
 Explicit knowledge (e.g., a driving manual): Captured by IT
 Tacit knowledge (e.g., knowledge about how to drive)
 Its acquisition and transfer require hands-on experience
 Knowledge Management in Four Types
of Multinational Enterprises
GLOBAL
STRATEGY HOME REPLICATION LOCALIZATION STANDARDIZATION TRANSNATIONAL
Interdependence Moderate Low Moderate High
Role of foreign Adapting and leveraging Sensing and exploiting Implementing parent Differentiated contributions
subsidiaries parent company local opportunities company initiatives by subsidiaries to
competencies integrate worldwide
operations

Development and Knowledge developed Knowledge developed Knowledge mostly Knowledge developed
diffusion of at the center and and retained within developed and retained jointly and shared
knowledge transferred to each subsidiary at the center and key worldwide
subsidiaries locations

Flow of Extensive flow of Limited flow of Extensive flow of Extensive flow of

knowledge knowledge and knowledge and people knowledge and people knowledge and people in
people from in both directions (to and from the center and key multiple directions
headquarters to from the center) locations to subsidiaries
subsidiaries

Sources: Adapted from (1) C. Bartlett & S. Ghoshal, 1989, Managing Across Borders: The Transnational Solution (p. 65),
Boston: Harvard Business School Press; (2) T. Kostova & K. Roth, 2003, Social capital in multinational corporations and
a micro-macro model of its formation (p. 299), Academy of Management Review, 28 (2): 297–317.

Table 10.2
 Worldwide Learning, Innovation
and Knowledge Management:
Globalizing Research and Development

• A crucial arena for knowledge management

 Driven by the intensification of competition for innovation
 Provides a vehicle for access to, or extract benefits from, a
foreign country’s local talents and expertise
 The resource-based view: A fundamental source for competitive
advantage is being different (the assumption of heterogeneity)
 Decentralized R&D work performed by different locations and
teams around the world means that there will be persistent
heterogeneity (differences) in the solutions generated
 Problems in Knowledge Management

ELEMENTS OF KNOWLEDGE MANAGEMENT COMMON PROBLEMS Table 10.3

Knowledge acquisition Failure to share and integrate external knowledge

Knowledge retention Employee turnover and knowledge leakage
Knowledge outflow “How does it help me?” syndrome and “knowledge is power”
mentality
Knowledge transmission Inappropriate channels
Knowledge inflow “Not invented here” syndrome and absorptive capacity

Source: Adapted from A. Gupta & V. Govindarajan, 2004, Global Strategy and Organization (p. 109), New York: Wiley.
 Problems and Solutions in
Knowledge Management
• 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
• In knowledge retention, there is the problem of employee
turnover which may lead to knowledge leakage
• Global virtual teams, which do not meet face to face, may
have communication and relationship barriers
• The “not invented here” syndrome causes some
managers to resist accepting ideas from other units
 Problems and Solutions in
Knowledge Management
• As solutions to combat these problems, corporate
headquarters can manipulate the formal rules of the
game through individual and organizational incentives as
well as investing in tacit knowledge
• MNEs often must rely on a great deal of informal
integrating mechanisms
• Some try to develop informal social capital
• Overall, the micro, informal interpersonal relationships
among managers of various units may create a micro-
macro link
 Christian Dior - Privatization by Groupe
Arnault; Simplifying Structures (4/28/2017)

• Groupe Arnault, Christian Dior SE, and LVMH Moet

Hennessy Louis Vuitton, announced a two-fold strategic
project with the objective being the simplification of the
structure of the group.

 Public offer by Groupe Arnault for CDI in the form of a mixed

offer consisting of EUR 172 in cash and 0.192 Hermes
International shares for each CDI share.
 Acquisition of Christian Dior Couture from CDI by LVMH for an
enterprise value of € 6.5 Bn.
Arnault Family Group Expands (4/30/2017):
LVMH Buys Christian Dior Couture for €12bn
 Debates and Extensions

• One multinational versus many national companies

• Central controls versus subsidiary initiatives

 Subsidiaries may be in full compliance of commands, pay lip
service to commands, or ignore them
 Some subsidiary-level strategies may contribute to
entrepreneurship (or empire building)
 Debates and Extensions
• Customer-focused dimensions versus integration,
responsiveness, and learning
 Two primary customer-focused dimensions
 Global account structure to supply customers across various
countries
 Solutions-based structure is often used
 One recommendation is to simplify both product and geographic
scope to add the customer-focused dimensions