Integration-Responsiveness Framework & Transnational Strategy in Global Expansion- Part 2

This article is the final part of the two-part series on my research and analysis experience with the Integration/Responsiveness framework and the Transnational Strategy in the international business management landscape. The XBdi’s business strategy now is to finding ways to expand into other geographic markets globally to take advantage of market opportunities. With my extensive research and market study regarding the viability of different strategies, I have identified the best option that would help the company’s rapid global expansion goals. One of the expansion goals is to build a knowledge and competency base related to the local market needs including identifying the institutional voids and the opportunity it offers to build and improve custom services in the long run. Creating talent and cultivating the culture of innovation are top concerns for the company among other political, economic risks and government regulations.

Further, XBdi want its subsidiary units integrated into the overall corporate structure and each of these units to become a source of specialized units thus eliminating redundancies between subsidiary units. The company was also looking to form strategic alliances with business partners in other emerging economies to capitalize on their knowledge of the institutional context and competition. The tremendous growth of certain economies in Asia and the opening of China to western business have created more opportunities for firms to establish overseas office. Additionally, the emerging market offers testing ground for innovation as well.

Business strategies are multifaceted, encompassing decisions as to which markets to compete in, how to position the company in each market, and which capabilities to develop and leverage. In addition, the strategic priorities can shift as companies attempt to respond to competitor initiatives or to seize new market opportunities. As a result, strategy seldom offers clear distinction for development of stable information technology infrastructure and business process capabilities that are critical components of integration between different business units. However, while formulating the best strategy for XBdi to implement on a global scale, it is important to define an operating model similar to defining the organization type (e.g. international, multi-domestic, global and transnational) for the company. In my research, I found that the choice of operating model is the preliminary step in building a foundation for execution which enables rapid implementation of a range of strategic initiatives.

The four general types of operating models are :

1. Coordination Model (low standardization, high integration)

2. Diversification Model (low standardization, low integration)

3. Replication Model (high standardization, low integration)

4. Unification Model (high standardization, high integration)

Four Operating Models

Source: Enterprise Architecture as Strategy – Creating A Foundation For Business Execution By Jeanne W. Ross, Peter Weil, David C. Robertson

Companies adopt an operating model at an enterprise level may adopt different operating models at the division or business unit level. The questions identified below helps me design and architect the operating model for each of XBdi business units.

1. To what extent is the successful completion of one business unit’s transactions dependent on the availability, accuracy and timeliness of other business unit’s data?

2. To what extent does the company benefit by having business units run their operations in the same way?

Using the above four general types of operating model framework and the questions cited above helps me design the right operating model for each of XBdi’s business unit. A detailed design of each business unit’s operating model demands a separate analysis on its own which is beyond the scope of this article. Further, it is important to weigh each operating models pros and cons against the choice of Integration Responsiveness (IR) Framework strategy before we can settle on a particular operating model for a business unit.

strategic business Objectives

International business success largely depends on firm’s goals to achieve efficiency, knowledge leverage and local responsiveness. However, addressing all three areas is difficult to achieve.

In looking at Integration Responsiveness (IR) Framework and its four distinct business strategies, transnational strategy seems compelling and offers maximum flexibility although it is difficult to implement. However, it is a well coordinated approach to internationalization in which the firm strives to be more responsive to local customer needs while retaining sufficient control of operations to ensure efficiency and learning.

The four strategies emerging from Integration Responsiveness Framework are:

1. International Strategy (also known as Home Replication Strategy)

2. Multi-Domestic Strategy

3. Global Strategy

4. Transnational Strategy

Depending on the type of the strategy, a company’s assets and capabilities are either centralized or decentralized, knowledge is developed and diffused in either one direction or in many, and the importance of the overseas office to the home office varies.

Prior to analyzing transnational strategy, I also wanted to look at other strategies cited above and weigh each of its pros and cons against the company’s business model and its vision. The International Strategy seems very appealing to me since it allows XBdi to view its subsidiary business units as secondary to its primary domestic business.

XBdi’s services are originally developed with domestic customers in mind and because of the nature of its service offerings and the consulting opportunity around its services, the international opportunity can be considered as an extension of its service offerings to generate additional revenue. However, very soon, I have realized that this strategy is myopic about the big picture and does not impinge on the kind of competitive positioning the company would like to have in other geographic markets especially in the emerging markets like China, India and Indonesia. Furthermore, this strategy will put more pressure on the management in the home country by navigating the flow of skills and knowledge from home office to offices in other countries.

XBdi’s on-demand cloud based services and the associated consulting practices are being largely utilized outside the country of origin than ever before as globalization brings about greater convergence in terms of consumer tastes and preferences. Conversely, an opposite force of divergence at work where the company has to adapt corporate and business strategies, marketing and sales channels customized to local domestic markets. The international strategy severely limits the company’s home office to respond to the pressures of local needs of the host country where its offshore units will be located.

In looking at the underlying strengths of Multi-Domestic strategy, it presents a complete opposite view of international strategy allowing company subsidiaries to develop and exploit local opportunities, expects them to create a local knowledge and competency base, and decentralizes significant decision-making to the subsidiary units. Since the decision-making authority is pushed down to the local subsidiary unit level, and each business unit is allowed to customize service offerings to specific needs, this strategy alleviates the home office management challenges in responding to the local needs of the market. However, this strategy presents some challenges that outweigh its benefits.

In Part 1 of this article, I mentioned about the various push factors identified for global integration and one of such key factors is centralization and coordination of diverse activities between the home office and the subsidiary business units in other countries. Since the XBdi’s source of knowledge and competencies is its foreign offices, the Multi-Domestic strategy deprives the firm of the learning benefits related to the coordinated transfer of information, best practices and people across subsidiaries because of its autonomous nature of decision-making authority within the subsidiary business units. Furthermore, the managers from the subsidiary business units have little or no incentive to share knowledge and experience with those in other countries leading to duplication of activities, proliferation of products and services to meet local needs, reduced economies of scale and generally higher costs of international operations than other strategies. The limited information sharing cripples the company from taking advantage of arbitrage benefits related to the use of resources in one part of the world to serve a demand in another region.

In looking at Global Strategy, it can provide a great degree of control and coordination between XBdi headquarters in USA and its subsidiary business units in other countries. Further, this strategy allows for minimum redundancy, create economies of scale with lower costs, global brand recognition that give rise to customer preference and efficient international marketing programs and achieve maximum efficiency, learning and integration worldwide. Based on analyzing service industries, it is found that they typically have a flat experience curve and lower economies of scale. However, I want XBdi to achieve economies of scale through knowledge sharing among subsidiary offices, which enables the cost of developing the knowledge over a larger base.

In weighing Global Strategy’s strengths and XBdi’s goals, the former presents some limitations on a few different things such as it limits XBdi’s ability to take advantage of the diversity of the local customer needs, constrains its ability to leverage the alternative distribution channels that understand the local custom and needs. Furthermore, it places difficulty on the company to gain market share with its consultative services if they are not adapted to local needs. For every strategic direction and operational needs, its home office in US must maintain ongoing communication between its headquarters and subsidiary units and among subsidiaries. This places a huge responsibility on the company’s limited resources at the headquarters to drive the firm move forward. Additionally, I suspect that the global strategy framework will severely hamper company efforts to operate with maximum efficiency, flexibility, learning and integration with other subsidiary business units. The aforementioned begs for a hybrid strategy that has the benefits of both multi-domestic and global strategy.

The transnational strategy expects overseas subsidiary units to develop core competencies and contribute actively to the overall development of firm’s knowledge management capabilities and share it with other international locations. This strategy also uses both centralized and decentralized methods to promote interdependence and specialization of units. One of the significant advantages of this approach is the empowerment of overseas business units to become the powerhouse of specialized innovation. Further, the transnational strategy combines the major strengths of both multi-domestic and global strategies while minimizing their disadvantages. However, achieving this strategy is difficult because it puts conflicting requirements on firms to integrate activities across all units while being very responsive to local market needs.

There are significant organizational challenges lying in front of XBdi management in adopting transnational strategy that can help scale its global operations. Some of the challenges include modifying business processes, knowledge management and organizational structure that can potentially create organizational tension. Another fundamental issue the company will face is how much decision-making responsibility it should retain at headquarters and how much it would delegate to its overseas units and other partner entities. The aforementioned begs for a good balance between centralization and decentralization strategies. Based on my research and analysis, the centralization decisions should be based on upstream and downstream value-chain activities. Further, it also depends on the nature of the product/service the company sells, the nature of competitors operations and the size and strategic importance of foreign operations. The centralized support functions provide efficiency for each business unit and there’s no need to reinvent the wheel for activities and processes that are consistent across business units. At the same time, the centralized support functions must ensure that they remain familiar enough with each business unit to accommodate for differing needs and priorities.

The areas identified that will have redundant business processes among business units in the regions where the company sell its services due to local responsiveness are in Sales and Marketing, Local Market Research, Human Resource Management, Technical Support and Customer Service functions. However, such redundant business processes will give each business unit some consistency where needed, while at the same time, leaving enough flexibility so that individual teams can tailor activities to best align with the business unit’s needs. I think, the closer the company come to the customer in terms of applying the right marketing mix, communication and service adaptation, the more it decentralize its operations. However, the management should be flexible enough to adjust and make changes as deemed fit to work with decentralized structure.

The company’s success in overseas markets depends largely on the localization of its services and processes based on the acquired local knowledge, and not simply reformulating the services at a different price point. So it is important to align its organizational structures with its strategies and goals for specific markets. Further, by virtue of XBdi’s service offerings and the underlying architecture flexibility, it is better equipped to support customizations to the local needs that places it in a favorable position to enter overseas markets. From the infrastructure perspective, its services are leveraging the state of the art Amazon Elastic Cloud computing infrastructure and its high availability and load balancing facilities that can help it run and scale its business services efficiently.

Based on my research and analysis, the organizational structure of subsidiary units often evolve independently with varying degrees of connection to headquarters in the home country. Some of these connections between headquarters and overseas subsidiaries reflect on priorities that may impact the overall firm’s performance. The organizational structure must resolve how the working and reporting relationship between the headquarters and business subsidiaries in international operations. For example, if a sales manager reports to a person who does not care about international sales, then the international venture will fail. So the structure and reporting relationships require careful thinking and planning. My research identifies the following recommendations for an effective collaboration between headquarters and overseas subsidiary business units.

1. Encourage local managers to identify with broad, corporate objectives and help them make their best efforts.

2. Visiting subsidiaries to instill corporate values and priorities.

3. Rotating employees within the corporate network to develop multiple perspectives.

4. Encouraging country managers to interact and share experiences with each other through regional meetings.

5. Cultivate a corporate culture to establish financial incentives and penalties to promote compliance with headquarters goals.

The transnational framework offers a compromise between local autonomy and centralized decision-making. Further, it allows the organization to seek a balance between the pressures of global integration and local responsiveness by adopting a distributed strategy which is a hybrid of centralized and decentralized strategies. Using this model, XBdi’s assets and capabilities will be spread geographically that transcends national borders. As a result, it must adapt to all environmental situations and achieve flexibility by capitalizing on the flow of knowledge management and integrated communication throughout the organization. As a result, the joint innovation by its headquarters and overseas subsidiary units could lead to the development of relatively standardized and yet flexible products and services that are tailored to meet local needs.

However, building a truly transnational firm is an evolutionary process and can take a few years and it involves a lot of obstacles and uncertainties. But the management needs to instill a sense of urgency to drive the organization by refining and implementing organizational processes to achieve the desired results. Success in international markets involves a multidimensional and coherent set of actions including standardizing XBdi’s service, marketing programs where feasible, taking integrated, competitive moves across the country markets, concentrating value-adding activities at strategic locations across the world, and coordinating the value-chain activities to exploit the synergies of multinational operations. When all the dimensions of a global strategy are aligned with external industry globalization forces and internal organizational resources, a superior global performance is guaranteed.

Bibliography

1. Bosch group in India: Transition to a Transnational Organization by ABHOY K OJHA – Indian Institute of Management, Bangalore

2. Frameworks for Global Strategic Analysis By Donald R. Lessard, MIT

3. A new perspective on the Integration – Responsiveness Pressures Confronting Multinational Firms By Sunil Venaik, Indian Institute of Management, Ahmedabad, India and David F. Midgley, INSEAD, France

4. Winning in Emerging Markets – A Road Map For Strategy And Execution By Tarun Khanna and Krishna G. Palepu

5. Enterprise Architecture as Strategy – Creating A Foundation For Business Execution By Jeanne W. Ross, Peter Weil, David C. Robertson

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About Vigil
Information Technology and Management Consultant

2 Responses to Integration-Responsiveness Framework & Transnational Strategy in Global Expansion- Part 2

  1. Very well written , thanks for sharing !

    Like

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