Business Strategy for a Multinational Enterprise

Strategy in international business is defined as the formulation of long-term plans to place the MNE in a position where it can survive and prosper relative to its global competitors. A company's strategy refers to the actions managers take to attain the goals of the company. For most businesses a principal goal is to be highly profitable. Markets are now extremely competitive due to the liberalization of the world trade and investment environment. To be profitable in such an environment, a company must pursue a strategy that is often concerned with identifying and taking actions that will lower the costs of value creation and/or will differentiate the company's

product offering through superior design, quality, service, functionality, and the like.

Multinational enterprises use three basic strategies in their operations in the international environment: an ethnocentric strategy, a polycentrie strategy, and a geocentric/global strategy. Each of these strategies has its advantages and disadvantages. The appropriateness of each strategy varies with the extent of pressures for cost reduction and local responsiveness (i.e. customizing the product offering and market strategy to better serve local conditions).

Ethnocentric strategy. MNEs that pursue an ethnocentric strategy try to create value by transferring valuable skills and products to foreign markets where local competitors lack those skills and products. Most ethnocentric enterprises create value by transferring product offerings developed at home to new markets overseas. They tend to centralize product development functions (e.g., R&D) at home. They also tend to establish manufacturing and marketing functiohs in each major country in which they do business. They may undertake some local customization of product offering and marketing strategy, but this tends to be limited. In most ethnocentric companies the head office retains tight control over marketing and product strategy.

An ethnocentric strategy makes sense if a company has a valuable core competence and faces relatively weak pressures for local responsiveness and cost reductions. However, when pressures for local responsiveness are high, companies pursuing this strategy lose to companies that customize the product offering and market strategy to local conditions. Moreover, due to the duplication of manufacturing facilities, companies that pursue an ethnocentric strategy tend to suffer from high operating costs. This makes the strategy inappropriate in those industries where costs pressures are high.

Polycentrie strategy. Enterprises pursuing a polycentrie strategy orient themselves toward achieving maximum local responsiveness. These companies tend to transfer skills and products developed at home to foreign markets. However, unlike ethnocentric enterprises, polycentrie companies extensively customize both their product offering and their marketing strategy to different national conditions. They also have a tendency to establish a complete set of value-creation activities -including production, marketing, and R&D - in each major national market in which they do business.

A polycentrie strategy makes most sense when there are high pressures for local responsiveness and low pressures for cost reduction. Duplication of production facilities makes this strategy inappropriate in industries where cost pressures are intense. Another weakness associated with this strategy is that many polycentrie companies have developed into decentralized federations in which each nation subsidiary functions in a largely autonomous manner. As a result, after a time they lose the ability to transfer the skills and products derived from core competencies to their various national subsidiaries around the world.

Geocentric / Global strategy. Enterprises that pursue a global strategy focus on increasing profitability by reaping the cost reductions that come from experience curve effects (i.e. a fall in a product unit costs as a result of learning and experience developed through the output increase) and location economies (i.e. a fall in a product unit costs as a result of using a proper advantageous location). They are pursuing a low-cost strategy. The production, marketing, and R&D activities of global companies are concentrated in a few favorable locations. Such companies tend not to customize their product offering and marketing strategy to local conditions because customization raises costs. Instead global companies prefer to market a standardized product worldwide so they can reap the maximum benefits from the economies of scale (i.e. cost reductions due to increased volume of production of one product) that underlie the experience curve.

This strategy makes most sense in those cases where there are strong pressures for cost reduction and where demands for local responsiveness are minimal. These conditions prevail in many industrial goods industries (in the semiconductor industry, for example, global standards create enormous demands for standardized global products) but are not found in many consumer goods markets where demands for local responsiveness remain high.