Understanding Multidomestic and Global Strategies

By Dan Power

What is a multidomestic industry?

A multidomestic industry is a group of companies providing similar products and/or services to an identifiable set of customers or clients where competition is segmented from country to country. Competition in one country is independent from competition in other countries.

What is a global industry?

A global industry is a group of companies providing similar products and/or services to an identifiable set of customers or clients where competition crosses national borders and occurs on a world-wide basis.

 


 

Global Strategic Management

It is "the process of defining, developing, and administering ... strategy and structure for a worldwide business" (Davidson). Global strategy does not merely involve owning a foreign subsidiary that represents a small proportion (in asset or sales terms) of a firm's operations. Rather it is a business whose strategic position in national markets is fundamentally affected by its overall global position.

Why is Strategic Management important in Global Industries?

·  hard to manage large, global firms without a plan

·  environmental differences in countries

·  interrelationships of global operations

·  provides a means of dealing with the vast amount of information

·  global competition is increasing

·  technology is changing rapidly

·  helps managers manage


Why are some industries multidomestic?

·  customized products are needed in some countries

·  national competitors are common

·  countries have unique distribution channels

·  no or few economies of scale

Local firms have some inherent advantages in the host country over global competitors. These include "first choice in establishing market positions, distribution systems and promotion strategies." Thus to compete successfully with domestic companies, global firms must build their strategies around selected bases of advantage: economic advantages and strategic strengths.

Multi domestic strategy involves products tailored to individual countries

1) Innovation comes from local R&D

2) Decentralisation of decision making with in the organisation

3) Local sourcing

4) Cost disadvantages


Why are some industries global?

·  homogenized product needs across markets

·  customers are global firms

·  high R&D expenditures require more than one market to recover development costs

·  many economies of scale, production, international logistics, marketing

·  Porter lists strategic strengths of product differentiation, proprietary product technology, and production mobility

Some examples of global industries

Energy - extractive, manufacturing, processing, distribution, water and power generation sectors. Major industry sectors are petroleum, natural gas, and oilfields.

Entertainment, Media, and Communications - these industries are converging.

Financial Services - banking, insurance, investment management, real estate and securities.

Technology - life sciences, networking and communications, semiconductor, computers and peripherals, software and diversified technology industries.

Clothing/shoes

Fast Food

Companies such as Sony and Panasonic pursue a global strategy which involves:

1) Competing in all markets

2) Standardizing the product for each market

3) Centralised control

4) Locating value adding activities where they can achieve the greatest competitive advantage

5) Integrating and co-ordinating activities across borders

6) A global strategy is effective when differences between countries are small and competition is global. It

A global strategy has advantages in terms of : economies of scale, lower operating costs, better co-ordination of activities, faster product development

 


What are international strategy options?

·  Export-based strategy with decentralized marketing. Domestic firms can sell their products in foreign countries by contracting with either a domestic exporter or a foreign importer when the potential for high return on sales is apparent, or at least expected. Typically, little product modification is required and both exporters and importers can be found who will either take title to the products (buy them for resale) or broker them (sell them on consignment).

·  Country centered strategies for subsidiaries. A production operation represents a major capital investment. Six arrangements can be used for establishing a foreign production facility. They are minority joint venture, co-owned joint venture, majority joint venture, wholly owned subsidiary, licensing agreements, and agent contracts.

·  GLOBAL STRATEGY -- Centralized structure, global sourcing and a shared global strategy

·  MULTIDOMESTIC STRATEGY -- Decentralized production/distribution structure and multiple, coordinated strategies.

·  Joint ventures. Majority joint ventures are partnerships with local partners who have a minority interest in the facility. U.S. firms typically prefer majority joint ventures over minority joint ventures for obvious reasons.


What is a joint venture?

A shared ownership arrangement where 2 or more companies pool capital, production equipment, patents, or expertise to serve customers in a target market or country.

What is a foreign subsidiary?

A company chartered to operate in a country that is fully or partially owned by a company domiciled in another country.


What is the global market opportunity?

·  Over 90% of the world's population is outside of the U.S.

·  More than 50% of the world's Gross Domestic Product (GDP) is generated in the emerging markets of Africa, Commonwealth of Independent states (CIS), Eastern Europe, Latin America, the Middle East, and Asia

·  Economic growth rates in the emerging markets are 3-10 times greater than what they are in the U.S.

Preliminary Steps in Internationalization

  1. Scan the Global Environment, especially competitors
  2. Target countries and make connections with academic, research and business organizations
  3. Increase the firm's visibility in targeted countries
  4. Undertake cooperative research projects with firms in other countries

check Rondstadt, R. and R. Kramer. "Getting the Most out of Innovation Abroad," Harvard Business Review, March-April 1982, pp. 94-99.


The globalization process

Many firms achieve global status by a process of incrementalism. The typical stages in this process are:

  1. Exporting or use of sales representatives
  2. Foreign sales office
  3. Licensing
  4. Joint ventures
  5. Wholly owned subsidiaries
  6. Multinational or global enterprise

Some critics claim that many U.S. firms have lost the opportunity to establish global strategic positions. Japanese firms, which have much smaller domestic markets, have developed more aggressive international strategies out of necessity. Thus they have been able to overcome the disadvantage of a smaller home market.

The existence of global industries and markets has forced companies to consider competition on a global basis. According to Magaziner and Reich, "Companies that fail to integrate their domestic and international markets and product strategies will be at an increasing disadvantage relative to those that do."


 

Protesting Globalization – Why? Who?

 

Globalization in the context of business strategy has a number of meanings. Globalization is sometimes used to refer to the strategy of providing standard, homogeneous products to all markets on "the globe". Globalization is also used to refer to the phenomenon of large multinational companies that are developing or have developed a cosmopolitan, global culture and that use global sourcing to provide standard products to a vast array of global markets. According to the globalization glossary, the term is also used to refer to the "expansion of global linkages, organization of social life on a global scale, and growth of global consciousness, hence consolidation of world society."

 

Questions for discussion

 

Have U.S. firms lost the opportunity to establish global strategic positions? How would we determine this?

 

Why should companies consider competition on a global basis? Is this the case for all companies?

 

What are three reasons that a firm might consider establishing operations in another country? Improve sales growth and market share, increase profits, diversify risk??

 

What is globalization and why is it occurring? Globalization drivers: 1) changing markets, 2) wage differentials, 3) government policies, 4) competitor actions

 

Globalization and Global Economy

 

The changing business environment, the changes in communication technology, and political changes, encourage and facilitate the emergence of global business, transnational companies and the emergence of common markets around the world.

 

With the emergence of a global economy, the export of business culture and business interests is occurring. Today most large companies are not run in a 'national' way, but are strongly influenced by one management style; a massive export of Anglo-Saxon or Asian business culture, and their respective values is occurring.