Management Challenges in the Global Enterprise - Principles of Management

We have just seen that there are clear advantages to going global, and an increasing number of firms are doing just that. However, managing a global enterprise represents a significant challenge. When a firm goes global, it encounters a whole set of decisions that managers in purely domestic enterprises do not face. These decision include

  1. whether to treat the world as a single market or customize the firm’s products to reflect differences across nations;
  2. the best mode for entering a foreign market;
  3. where to locate different business activities; and
  4. how best to manage subsidiaries. Here we look at each issue in turn.

GLOBAL STANDARDIZATION OR LOCAL CUSTOMIZATION

One of the most important decisions managers face is whether to treat the world as a single market or customize products for different nations. When a firm treats the world market as a single entity, selling the same basic product around the globe, we say that it is pursuing a global standardizationstrategy . 38 Alternatively, when an enterprise varies some aspect of its products or marketing messages to take country or regional differences into account, we say that it is pursuing a local customization strategy .

The global standardization strategy enables a firm to realize substantial scale economies by mass-producing a standardized output and using the same marketing strategy worldwide. However, such a strategy ignores local differences in consumer tastes and preferences, local business systems and culture, and so on. If such differences are profound, the firm may do better with a local customization strategy, even though that may mean fewer scale economies and higher costs. Choosing between these strategic postures is not easy, and firms often seek a balance between standardization and customization.

For an example of balance between global standardization and local customization, consider MTV Networks. MTV has been expanding outside its North American base since 1987 when it opened MTV Europe. Despite its domestic success, MTV’s global expansion got off to a weak start. In 1987 it piped a single feed across Europe composed almost entirely of American programming with English-speaking veejays. Naively, the network’s U.S. managersthought Europeans would flock to the American programming.

But although viewers in Europe shared a common interest in a handful of global superstars, their tastes turned out to be surprisingly local. What was popular in Germany might not be popular in Great Britain. Many staples of the American music scene left Europeans cold. MTV suffered as a result. Soon local copycat stations were springing up in Europe to focus on the music scene in individual countries. They took viewers and advertisers away from MTV. As explained by Tom Freston, chairman of MTV Networks, “We were going for the most shallow layer of what united viewers and brought them together. It didn’t go over too well.”

In 1995 MTV changed its strategy and offered regional feeds in Europe (there are now eight). The network adopted the same localization strategy elsewhere in the world. For example, in Asia it has an English–Hindi channel for India, separate feeds for China and Taiwan, a Japanese feed for Japan, and so on. All the feeds have the same familiar frenetic look and feel of MTV in the United States, but much of the programming is now local.

In Italy MTV Kitchencombines cooking with a music countdown. Erotica airs in Brazil and features a panel of youngsters discussing sex. The Indian channel produces 21 homegrown shows hosted by local veejays who speak “Hinglish,” a city-bred breed of Hindi and English. Hit shows include MTVCricket in Control, appropriate for a land where cricket is a national obsession; MTV Housefull,which hones in on Hindi film stars (India has the biggest film industry outside Hollywood); and MTV Bakra , modeled after Candid Camera . The localization push has reaped big benefits for MTV, capturing viewers back from local imitators

ENTRY MODE

There are five main modes for entering a foreign market: exporting, licensing, franchising, entering a joint venture with a local enterprise, and setting up a wholly owned subsidiary. 40Exporting involves producing a good at home and then shipping it to another country. Licensing involves an enterprise licensing a foreign firm to produce its product in a country or region in return for royalty fees on any sales that the licensee makes.

Franchising is similar to licensing, but here what is licensed to the foreign enterprise is not the right to produce a physical good, but the right to offer a service in a particular format. Franchising is popular among fast-food enterprises (like McDonald’s and KFC) as well as international hotel chains. Joint ventures are agreements between a firm and its foreign partner to establish a new enterprise, the joint venture, in which they each take an equity stake. Whollyowned subsidiaries are foreign subsidiaries that are 100 percent owned by the firm.

The choice between these different entry modes is complex, and a full discussion is beyond the scope here. A few brief points can be made, however. First, exporting is a good strategy when the firm can mass-produce at a single location, thereby realizing economies of scale and lowering its costs. In this regard, exporting is consistent with a global standardization strategy. But many firms have found advantages to producing in local markets. Basing production in a country or region can facilitate local customization (because products are designed and built closer to where customers are), and it may be more politically acceptable to produce locally.

For example, Toyota has set up production facilities in all its major markets—Japan, North America, and Europe. These facilities produce products that are customized to local requirements. Thus Toyota’s European operation makes small cars designed for European customers and not sold in the United States. Similarly, Toyota products sold in America, such as the Toyota Tundra truck, are not made or sold in Europe. Toyota also established production facilities in America and Europe to reduce the threat that high levels of exports from Japan might result in the imposition of trade barriers.

Second, licensing is not often used, primarily because it gives the firm little ongoing involvement in a foreign market beyond the current licensing contract. In addition, many firms are reluctant to license products that incorporate valuable technology because they fear that ultimately the licensee might develop its own version of the technology and no longer need to license from the firm. To forestall this possibility, many firms enter using other modes.

Third, joint ventures are favored when a local partner can bring valuable expertise to the partnership, such as local market knowledge. In addition, in some countries a joint venture may be more acceptable to the government than a wholly owned subsidiary. This was certainly the case in China for a while, and many early Western entrants into the Chinese market began with joint ventures. The problem with joint ventures, however, is that disputes betweenpartners over strategy and investments can lead to their failure.

Fourth, although wholly owned subsidiaries involve the highest up-front cost (the firm must bear all costs of opening a foreign market), this entry mode gives the firm maximum control over the future direction of the subsidiary. Moreover, the firm captures all profits from the venture, as opposed to having to share them with a joint venture partner or taking only a share of them in the form of royalty payments from a licensee. Thus many managers prefer to enter foreign markets through a wholly owned joint venture.

Even when a product is manufactured elsewhere and exported to a country, they might still establish a wholly owned subsidiary to market, sell, and distribute the product in that country.

LOCATING ACTIVITIES

Another key decision is where to locate the various activities of the enterprise. As we have seen, there are advantages to dispersing the activities of an enterprise to locations around the globe where they can be performed most efficiently. Making the right choice involves two steps. First, managers have to break the operations of the firm into discrete steps or activities— such as product design, purchasing, production, marketing, sales, service and customer care, and so on.

Second, each activity has to be located in the best place given a consideration of factors such as country differences in labor costs and infrastructure, transportation costs, tariff barriers, likely currency exchange rates, and strategic orientation. Managers need to evaluate the cost of performing an activity at a given location and how much value can be added to a product at a certain location—which is not easy.

Moreover, the attractiveness of key locations changes over time. Ten years ago, for example, few American software firms outsourced software testing and debugging activities toIndian companies. Now such a move is commonplace. Similarly, as discussed in the introduction, only in the last few years have American accounting firms started to outsource the work associated with compiling individual tax returns to accountants located in India.

The attractiveness of locations varies over time as local economies advance (or decline), labor costs change, infrastructure is added, and exchange rates shift. For example, if the value of the Chinese currency rises against the U.S. dollar, over time China will become less attractive as a location for performing labor-intensive activities (such as textile manufacturing), and manufacturing will migrate to other parts of the globe.

MANAGING PEOPLE IN THE MULTINATIONAL FIRM

Managing people in a multinational firm represents one of the most difficult tasks facing managers. Consider the mature multinational enterprise with activities in several different nations. Managers have to decide how best to staff foreign operations—and specifically whether senior managers should be nationals of the foreign (or host) country where operations are based or come from the home country of the enterprise.

If a firm uses home country personnel or expatriates as they are commonly known, it must prepare them for the foreign posts and make sure that their eventual return to the home country is well managed. Research evidence suggests that this is not easy. Between 16 and 40 percent of all American employees sent abroad to developed nations return from their assignments early, and almost 70 percent of employees sent to developing nations return home early.

The inability of a spouse to adjust, the inability of the manager to adjust, or other family problems are major reasons for the failure of expatriates to succeed in foreign posts. One study found that 60 percent of expatriate failures occur due to these three reasons. Another study found that the most common reason for assignment failure is lack of partner (spouse) satisfaction, which was listed by 27 percent of respondents.

The inability of expatriate managers to adjust to foreign posts seems to be caused by a lack of cultural skills on the part of the managers being transferred. According to one human resources management consulting firm, this is because the expatriate selection process at many firms is fundamentally flawed. “Expatriate assignments rarely fail because the person cannot accommodate to the technical demands of the job.

Typically, the expatriate selections are made by line managers based on technical competence. They fail because of family and personal issues and lack of cultural skills that haven’t been part of the selection process.” Expatriate failure such as this is expensive for the firm, but it can be reduced through theimplementation of proper policies for selecting, training, managing, and repatriatingexpatriates.

In addition, managers have to decide how to vary the compensation structure from nation to nation to reflect different local norms. They also have to think hard about how cultural differences will impact management practices in a nation. What works in a firm’s home country may not in a foreign nation. For illustration, one researcher reported the case of a U.S. manager who introduced participative decision making while working in an Indian subsidiary.

The manager subsequently received a negative evaluation from host country managers because in India strong social stratification means managers are seen as experts who should not have to ask subordinates for help. The local employees apparently viewed the U.S. manager’s attempt at participatory management as an indication that he was incompetent and did not know his job.

Managers also have to decide what staffing and management development programs to put in place to make the best use of their human capital. Nowadays many multinational firms are gravitating toward a geocentric staffing policy, that seeks the best people for key jobs throughout the organization, regardless of nationality. This can be compared to an ethnocentric staffing policy, in which all key management positions are staffed by home country nationals, and a polycentric staffing policy, where key management positions in a subsidiary are staffed by host country nationals.

An ethnocentric approach relies on expatriate managers to run foreign operations. This may ensure a common organization culture, but an ethnocentric approach limits advancement opportunities for host country nationals. This can lead to resentment, lower productivity, and increased turnover among that group. Resentment can be greater still if, as often occurs, expatriate managers are paid significantly more than home country nationals.

An ethnocentric policy can also lead to cultural myopia—a failure to understand that host country cultural differences require different approaches to marketing and management. Moreover, the adaptation of expatriate managers can take a long time, during which they may make major mistakes. For example, expatriate managers may fail to appreciate how product attributes, distribution strategy, communication strategy, and pricing strategy should be adapted to host country conditions. The result may be costly blunders. They may also make decisions that are unethical because they do not understand the culture in which they are managing.

In one highly publicized case in the United States, Mitsubishi Motors was sued by the federal Equal Employment Opportunity Commission for tolerating extensive and systematic sexual harassment in a plant in Illinois. The plant’s top managers, all Japanese expatriates, denied the charges. The Japanese managers may have failed to realize that behavior that would be viewed as acceptable in Japan was not acceptable in the United States. 49Finally, as we have seen, many expatriate managers return home early, which is expensive for the firm.

In many respects a polycentric approach is a response to the shortcomings of an ethnocentric approach. One advantage of adopting a polycentric approach is that the firm is less likely to suffer from cultural myopia. Host country managers are unlikely to make the mistakes arising from cultural misunderstandings to which expatriate managers are vulnerable. A second advantage is that a polycentric approach may be less expensive to implement, reducing the costs of value creation, given how costly expatriate managers can be to maintain.

However, a polycentric approach also has its drawbacks. Host country nationals have limited opportunities to gain experience outside their own countries and thus cannot progress beyond senior positions in their own subsidiaries. As in the case of an ethnocentric policy, this may cause resentment. Perhaps the major drawback with a polycentric approach, however, is the gap that can form between host country and parent country managers.

Language barriers, national loyalties, and a range of cultural differences may isolate the corporate headquarters staff from the various foreign subsidiaries. The lack of management transfers from home to host countries, and vice versa, can exacerbate this isolation and lead to a lack of integration between corporate headquarters and foreign subsidiaries.

A geocentric staffing policy is thought to overcome the limitations of both ethnocentric and polycentric approaches.Under a geocentric policy, not only do managers move from home country to host nation; they also move between host nations and from host nation to the home nation, where they may ultimately take on senior management positions. Managers have to decide how best to select, train, develop, and compensate a cohort of qualified managers, irrespective of their national origin.

Such a policy lets a firm make the best use of its human resources, promoting the best people to key jobs throughout the organization, regardless of nationality. In addition, the multinational composition of the management team that results from geocentric staffing tends to reduce cultural myopia and to enhance adaptation to local conditions. For all of these reasons, many of the leading multinationals in America have adopted a geocentric approach.


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