Implications

Pressures for local responsiveness imply that it may not be possible for a firm to realize the full benefits from experience curve and location economies. For example, it may not be possible to serve the global marketplace from a single low-cost location, producing a globally standardized product and marketing it worldwide to achieve experience curve cost economies. The need to customize the product to local conditions may work against such a strategy. Automobile firms, for example, have found that Japanese, American, and European consumers demand different kinds of cars, and this necessitates producing products that are customized for local markets. In response, firms such as Honda, Ford, and Toyota are establishing top to bottom design and production facilities in each of these regions so they can better serve local demands. While such customization brings benefits, it also limits a firm's ability to realize significant experience curve economies and location economies.

In addition, pressures for local responsiveness imply that it may not be possible to transfer the skills and products associated with a firm's core competencies whole sale from one nation to another. Concessions often have to be made to local conditions. Despite being depicted as "poster boy" for the proliferation of standardized global products, even McDonald's has customized its product (i.e., its menu) to account for national differences in tastes and preferences (see the Management Focus for details).

Strategic Choice

Firms use four basic strategies to compete in the international environment: an international strategy, a multidomestic strategy, a global strategy, and a transnational strategy.¹⁹ Each strategy has its advantages and disadvantages. The appropriateness of each strategy varies with the extent of pressures for cost reductions and local responsiveness.

Figure 12.4 illustrates when each of these strategies is most appropriate. In this section we describe each strategy, identify when it is appropriate, and discuss its pros and cons.

International Strategy

Firms that pursue an international strategy try to create value by transferring valuable skills and products to foreign markets where indigenous competitors lack those skills and products. Most international firms have created value by transferring differentiated product offerings developed at home to new markets overseas. They tend to centralize product development functions at home (e.g., R&D). However, they also tend to establish manufacturing and marketing functions in each major country in which they do business. But while they may undertake some local customization of products and marketing strategy, this tends to be limited. Ultimately, in most international firms, the head office retains tight control over marketing and product strategy.

Figure 12.4

Four Basic Strategies

International firms include the likes of Toys "R" Us, McDonald's, IBM, Kellogg, Procter & Gamble, Wal-Mart, and Microsoft. Microsoft develops the core architecture underlying its products at its Redmond campus in Washington state and also writes the bulk of the computer code there. However, the company allows national subsidiaries to develop their own marketing and distribution strategies and to customize aspects of the product to account for such basic local differences as language and alphabet. Procter & Gamble, which is profiled in the accompanying Management Focus, has traditionally had production facilities in all its major markets outside the United States, including Britain, Germany, and Japan. These facilities, however, manufactured differentiated products that had been developed by the US parent firm and were often marketed using the marketing message developed in the United States. Historically, local responsiveness at P&G has been limited.

An international strategy makes sense if a firm has a valuable core competence that indigenous competitors in foreign markets lack, and if the firm faces relatively weak pressures for local responsiveness and cost reductions (as in the case of Microsoft). In such circumstances, an international strategy can be very profitable. However, when pressures for local responsiveness are high, firms pursuing this strategy lose out to firms that place a greater emphasis on customizing the product offering and market strategy to local conditions. Due to the duplication of manufacturing facilities, firms that pursue an international strategy tend to suffer from high operating costs. This makes the strategy inappropriate in manufacturing industries where cost pressures are high.