Watching a business mature over the years is like watching a baby grow into an adult. Both slowly morph with the passing of time, evolving into something hardly resembling what they once were. As the business portfolio expands into new markets which operate in foreign countries, strategies and strategic planning models must continue to adapt with the increasingly complex business organization. Organizations operating globally face a unique set of challenges in formulating consistent strategies that work in local markets while supporting global goals. This article looks at factors driving structure and strategy in multinational organizations.
Global Economy / Global Strategies
Sometimes it only takes a single acquisition or the influence of a large customer to pull a nationally-focused business into the realm of global competitors. In other cases that evolution may be more elusive and take decades of effort to achieve. Whether by design or by chance, many businesses eventually cross national borders. Business expansion comes at the price of growth and not surprisingly can leads to market entrance in countries outside the home country. Emerging economies like China, Brazil, India, Indonesia, Mexico, Russia and Turkey will contribute approximately 45% of global GDP growth in the coming decade. Businesses will follow opportunity and expand into these markets in order to maintain growth, especially in mature product categories.
Being a Multinational Changes Things
Regardless of how it happens, being a multinational organization changes things. Once companies have the economic power to venture into emerging markets in foreign lands, they face new dilemmas and challenges related to organizing the business structure and adjusting corporate strategy to accommodate a global business model. Companies new to the multinational status can no longer rely upon a singular strategic approach and expect it to work well across far-flung business operations.
Multinational strategies are shaped by the trade-off between opportunity and risk. Three broad environmental factors determine that trade-off. The first is the prevailing political economy, including the policies of both host and home governments, and the international legal framework. The second is the market and resources of the host country. The third factor is competition from local firms. The impact of these factors on corporate strategies was explored during three eras in the modern history of globalization from the nineteenth century until the present day in the research paper “Multinational Strategies and Developing Countries in Historical Perspective” by Geoffrey Jones, Harvard Business School. The paper indicates that performance of specific multinationals depended on the extent to which their internal capabilities enabled them to respond to these external opportunities and threats. 1
Given these factors, one challenge multinational companies face is recognizing the need to “localize” strategies. Once that recognition has set in, the next challenge is then determining how best to accomplish localization.
Strategy localization is needed in order to allow the business to respond appropriately to geographic-based opportunities and threats. Corporations should expect cultural heuristics to differ from country to country. Likewise, markets operate differently across the world, and there is no “one size fits all” approach to successfully conquering them. Competitor threats must be addressed with locally adapted strategies to be effective, thus the competitive analysis involved with strategic planning is a requirement to successfully navigate the terrain of the region’s business ecosystem. Marketing and sales tactics are only part of geographic differentiation, although they are certainly not insignificant in terms of importance. There are also unique supply-chain considerations to factor into local strategies. Resource costs, including labor, vary widely across countries. It doesn’t stop there. Legal systems, labor laws and distribution systems also impact local strategy. For this reason, operational considerations related to pricing, production and distribution also cannot be ignored with a cookie cutter corporate strategy that is imposed across countries / geographies.
None of this means that the foreign-based division can go rogue and operate business practices that run counter to the strategic goals of the parent. What it does indicate, however, is that parent company’s corporate strategy must be operationalized to fit localities.
Setting-up The Best Organizational Structure:
There are many multinational models that have evolved over the years as companies adapt to new opportunities in emerging markets. Below is a list of five common models, along with pros and cons of each:
1. The most common multinational organization structure is the subsidiary model, where business subsidiaries are formed with other considerations in mind beyond simple geography. Subsidiaries are self-contained units with their own operations, finance and human resource functions. This model has the advantage of allowing the foreign subsidiary a large degree of autonomy in responding appropriately to local competitive conditions with locally responsive strategies. The major disadvantage of this model however is the lack of a cohesive overall global corporate strategy that serves to unify the company’s approach to countering global competitive pressures and enjoying greater economies of scale.
2. Not surprisingly, the geography-based organizational model is organized into business divisions that are based solely on geographical area. Usually, in this model, each geography is self-contained with its own functional units for sales, finance, operations and human resources under the regional division’s responsibility. The division has responsibility for all the products and services sold within its region, maintaining its own Profit & Loss control. While this structure does allow the company to evaluate the geographical markets that are most profitable and showing positive growth, the model is prone to many issues including: communication problems with other parts of the company, conflicts arising over corporate controls and duplication of costs (e.g. numerous regional initiatives occurring instead of one corporate led global program).
3. A product alignment model ignores geographic boundaries and focuses the organization’s structure purely on product / service portfolios. In this model, product divisions are setup to have responsibility for the production, marketing, finance and the overall strategy of that particular product on a global basis. The advantage offered by this model is the attention paid to product performance. The major disadvantage of this structure is the lack of integral networks that may lead to overall higher costs as initiatives are duplicated and economies of scale are not leveraged.
4. Another multinational organization structure commonly found is the function model. As the name indicates, in this structure functions such as sales, marketing, finance, operations and human resources determine the organization of the multinational company. For example, all the company’s product service personnel globally would work under the product service unit. The advantage of using this structure is that there is greater specialization within units and more standardization of processes across the global organization. The disadvantages include the lack of inter-unit communication and networking that contributes to more silos and rigidity within the organization.
5. The matrix model is an overlap between the functional and divisional structures and groups employees by both function and product. This structure can combine the best of both separate structures. A matrix organization frequently uses teams of employees to accomplish work, in order to take advantage of the strengths, as well as make up for the weaknesses, of functional and decentralized forms. The advantage of this structure is that there is more cross-functional communication that facilitates creative thinking and innovation. This model still allows decisions to be localized, a clear benefit. A disadvantage to the matrix model is that there can more confusion and politics involved because of the dual lines of command. Evolved matrix models place an emphasis on horizontal communication and shared services such as Information Technology (e.g. leveraging a common ERP platform) across the organization.
Meshing Together Structure and Strategy
Approaches to strategy and planning in multinationals requires more effort due to more complex organizational structures and market specific factors global companies face. Corporate strategy must be “localized” to allow the business to respond appropriately to geographic-based opportunities and threats. Likewise, strategy development must include the involvement of the company’s foreign business leaders to help the strategy be adapted correctly to local needs. Exactly how this is done is dependent upon the type of structure the company has decided best suits the organization (e.g. matrix, product, geography, etc.).
1 – Multinational Strategies and Developing Countries in Historical Perspective, Geoffrey Jones, Harvard Business School