Learning outcomes

 After reading this chapter, you should be able to:

 Identify and describe levels of global strategy.
 Identify and describe subsidiaries’ strategic roles.
 Discuss the advantages and disadvantages of the different subsidiary roles.
 Design an appropriate strategy for a subsidiary of a multinational firm.
 Identify and discuss the generic strategies.

Opening case study Dell in China—will the direct

sales model crack in China?
Michael Dell founded Dell in 1984 when he was a freshman at the University of
Texas, Austin. Dell’s business model is based on the belief that firms that sell directly
to consumers are better placed to understand and respond to consumers needs than
conventional firms that sell indirectly through reseller channels. The direct selling
model enabled Dell to bypass the traditional middleman and sell custom-built
computers to its consumers at a competitive price. In the 1980s, Dell offered its
customers a number of reassurances to overcome the psychological barriers of not
buying from a well-known retail outlet. Reassurances included risk-free return and
next-day at-home product assistance. Dell was the first computer firm to send
technical staff to homes to service their computers. By dealing directly with
customers’ requests, Dell’s was able to forecast demand for personal computer (PC)
parts and as a result was able to reduce inventory costs and overheads.

Today Dell is a leading global brand. It consistently features in the list of the most-
admired companies in the US. In 2009, Dell shipped more than one PC every
second in the US, or about 140,000 per day. Although Dell’s sales declined slightly in
the early 2010s as consumers turned to smartphones and tablets such as Apple’s
iPad and iPhone, Dell managed to sustain its competitive position in the PC market.
Dell boasts that every Fortune 100 company does business with it, and it has been
the leading PC supplier to small and medium-sized businesses in the United States
for over a decade.

The direct selling model became the ‘soul of Dell’. Michael Dell describes the model
as ‘the backbone’ of Dell and ‘the greatest tool in its growth’. The model is based on
five beliefs (see Exhibit A).

Exhibit A The five beliefs of Dell’s direct sales model

Most efficient path to the customer: We believe that the most efficient path to the
customer is through a direct relationship, with no intermediaries to add confusion and
cost. We are organized around groups of customers with similar needs. This allows
our teams to understand the specific needs of specific customers—without customer
needs being ‘translated’ by inefficient resellers and middlemen.
Single point of accountability: We recognize that technology can be complex, so we
work to keep things easy for our customers. We make Dell the single point of
accountability so that resources necessary to meet customer needs can be easily
marshaled in support of complex challenges. Our customers tell us they want
streamlined and fast access to the right resources; the direct relationship provides
just that.
Build-to-order: We provide customers exactly what they want in their computer
systems through easy custom configuration and ordering. Build-to-order means that
we don’t maintain months of aging and expensive inventory. As a result, we typically
provide our customers with the best pricing and latest technology for features they
really want.
Low-cost leader: We focus resources on what matters to our customers. With a
highly efficient supply chain and manufacturing organization, a concentration on
standards-based technology developed collaboratively with our industry partners,
and a dedication to reducing costs through business process improvements, we
consistently provide our customers with superior value.
Standards-based technology: We believe that standards-based technology is key to
providing our customers with relevant, high-value products and services. Focusing
on standards gives customers the benefit of extensive research and development
from Dell and an entire industry—not from just a single company. Unlike proprietary
technologies, those based on standards give customers flexibility and choice.
Source: Dell website at www.dell.com.
Although Dell experimented with indirect distribution channels during the early
1990s, it reverted to its direct selling model in 1994. In 1996, Dell started selling its
computer through the Internet via its popular website dell.com. The latter venture
targeted individual consumers who were able to post their specific requirements and
request specific add-on parts and software. The Internet enabled Dell to enhance its
build-to-order system. Once an order was received from a customer via an email or
by phone, Dell would assemble the PC according to the stated specifications at very
short notice using sophisticated logistic structure.
Dell quickly gained confidence in its business model and started its international
venture in 1987. Its initial venture was in the UK market; it then expanded into
Ireland, Germany, and then Canada. By p. 212↵the early 1990s, Dell had become
the sixth-largest desktop PC maker and seventh-largest notebook PC maker
operating in a large number of European countries including Italy, Sweden, Poland,
the Czech Republic, Finland, and Norway. Although a number of experts were
skeptical about the suitability of Dell’s direct selling model outside the US, the model
proved a success in Europe. To serve its international customers, Dell developed a
global distribution network spanning the United States, Europe, and Asia.
Regardless of location, Dell strives to assemble the product within six hours of
receiving the order and requests that its suppliers deliver the item within 90 minutes.
To be able to do so, Dell’s suppliers set up their warehouse close to its assembling
factories.
Dell ventured into China in 1995. The Chinese PC market experienced significant
growth in the late 1990s and Dell needed to have a strong foothold there to establish
itself as world leader. When Dell entered the Chinese market, early movers such as
Compaq, IBM, and Legend were the market leaders in the Chinese PC market. They
depended on Chinese resellers to sell their products. Initially, Dell imported PCs
assembled in its factories in Malaysia and sold them through Chinese distribution
channels. However, in order to use its direct selling model, Dell had to manufacture
its PCs in China. In 1998, Dell started manufacturing PCs in the Xiamen region; it is
close to Taiwan, where most of Dell’s suppliers were located, and close enough to
China’s major cities such as Beijing and Shanghai.

Dell encountered a number of challenges in the Chinese market. A PC was too

expensive for the average Chinese buyer, for whom the price of a PC was equal to
three months’ salary. The average Chinese buyer would have to save for a year or
more to purchase a PC, and would involve friends and p. 213↵family members in the
purchasing decision; this would include visiting a retail shop to learn about the
machine before they buy it. Furthermore, Dell received only a small number of
Chinese orders via the Internet because of low Internet usage and the perceived risk
of financial transactions over the Internet. A number of analysts suggested that Dell’s
direct selling model was not suitable for the individual PC market because people in
China prefer to purchase from retail shops and ‘prefer to pay cash and see products
before they buy’. The Financial Times reported that ‘the strongest evidence that
Dell’s model is not yet matched to the China market is the appearance of numerous
unofficial “agents” who buy its computers and sell them for a profit’.
Aware of the challenges of penetrating the individual consumer market, historically
Dell has focused on institutional, corporate, and urban customers. As a result, in
2010 corporate clients made up more than 60% of Dell’s sales in China. However,
the Chinese PC market has witnessed a radical shift over the last few years. The
urban market is saturated and the corporate market is becoming more competitive
as competitors have copied Dell’s business model. The market for average individual
consumers in Chinese townships and small cities, however, has witnessed
significant growth. Despite warnings from experts and local managers about the
need for varied selling approaches, Dell management at the headquarters has stuck
to its direct selling model. Michael Dell commented: ‘go back and look at the reaction
to Dell’s entry into any market. What you will see is conventional wisdom that the
direct-sale model won’t work. The fact is, no one sells more computer systems than
us.’

So far Dell has not been able to successfully penetrate remote markets using its
direct sales approach. Lonovo and Founder, Dell’s main competitors in China, have
been capturing the individual consumer market using their varied distribution
approach. In 2006, Lonovo captured more than 35% of the Chinese desktop market
share. Dell’s share was just over 8%. Indeed, a number of Dell’s executives in China
left the company in the late 2000s to join Dell’s major competitors such as Lonovo.
Observers attributed the flux of Dell’s executives to their frustrations with Dell’s
headquarters in the United States sticking to the direct selling model and their refusal
to use indirect selling to break into the growing semi-urban and rural market. Dell
was put under severe pressure to change its golden rule, ‘never sell indirectly’. As a
result, Dell reviewed its built-to-order and zero-presence-in-stores sales strategy in
the late 2000s. Dell’s concluded that its ‘direct sales’ strategy was a ‘revolution’ but
not a ‘religion’. This signaled a willingness to explore alternative options. By the early
2010s, Dell’s products had started appearing in thousands of stores throughout
China. Will the dual strategy break the business model that underpinned its success
so far?

Sources: Dell website at www.dell.com; N. Chowdhury, ‘Dell Cracks China’, Fortune (21
June 1999), p. 121; AEIBS, ‘A decade of adventure of Dell in China’ (2006); A.
Farhoumand, ‘Dell, selling directly, globally’, Asia Case Research Centre (2007); G.
Fairclough and J. Spencer, ‘Dell’s PC in China marks developing market push’, Asian
Wall Street Journal (22 November 2005); B. Collen, ‘Dell debuts new web site to
enhance online sales and service’, Twice, 21(22) (2006): 16; ‘Dell’s China
ambition’, http://www.bjreview.com.cn/business/txt/2009-04/05/content_189618.htm; Dell
company facts from http://content.dell.com/us/en/corp/d/corp-comm/Company-
Facts.aspx.

7.1 Introduction
The primary focus of the preceding chapters has been on 1) the broader business
environment in which multinational firms compete, 2) mechanisms through which
multinational firms identify, build, and exploit their capabilities to compete
successfully in the global market, and 3) a discussion of the different modes of entry
into international markets. In this chapter our focus shifts to the management of the
relationship between the headquarters and the different subsidiaries and the role of
subsidiaries in the pursuit of the multinational firm’s global goals and objectives
(Yeung 2000; Phene and Almeida 2008). A subsidiary is ‘any p. 214↵operational unit
controlled by the MNC [multinational company] and situated outside the home
country’ (Birkinshaw et al. 1998: 224).
The opening case study highlights some of the key issues that we will discuss in this
chapter. Dell was able to compete successfully in many Western markets through its
direct sales model using its sophisticated supply chain system. Initially, Dell’s
subsidiary in China treated the Chinese market much like other Western markets—
closely following the global strategy set by Dell’s headquarters in the United States.
But the managers of Dell’s subsidiary in China soon realized that Dell’s global
approach of competing in the market place is not as efficient in China as it is in
Western markets. Dell in China found it very hard to compete with local players such
as Lenovo and other multinational firms selling directly to consumers. Dell’s
managers in China faced the challenge of adapting Dell’s business model to the
Chinese business environment. In responding to local pressures for adaptation, Dell
managers in China had to deal with a variety of complex domestic challenges such
as purchasing decisions, a lack of direct selling experts, and perceived risks over
purchasing goods via the Internet. As a result, Dell’s managers faced difficult choices
as they considered whether to continue with a business model that had proved
successful in other countries or to develop a new business model suitable to the
Chinese business environment.

7.2 Key challenges for subsidiaries

As discussed in Chapter 1, subsidiaries of multinational firms have to balance
pressures for adaptation to local needs and for exploitation of local opportunities with
pressures for global integration. The experience of Dell in China shows that
subsidiaries of multinational firms may sometimes have to forsake the global strategy
set by the headquarters in order to fit local environments.
In addition to balancing pressures for local needs and global integration, subsidiaries
of multinational firms are increasingly playing a prominent role in developing valuable
knowledge for the whole multinational firm (Ambos et al. 2006; Monteiro et al.
2008; Yang et al. 2008; Yamao et al. 2009; Najafi-Tavani et al. 2013). A number of
multinational firms are becoming learning networks with their foreign subsidiaries
playing a valuable role in generating and diffusing new knowledge throughout the
multinational firm network. The parent multinational may benefit from knowledge
transferred from subsidiaries by introducing new products or processes or by
improving existing products and services; by saving cost through transfer of best
practices from subsidiaries; by more efficient decision-making processes as a result
of advice obtained from subsidiary managers; or from innovation through
combination and cross-pollination of ideas originating from subsidiaries (Hansen and
Nohria 2004).
Knowledge flow from subsidiaries back to the headquarters is often referred to as
reverse knowledge transfer. Reverse knowledge transfer refers to the parent
multinational’s use of knowledge developed by its subsidiaries. For instance,
multinationals in emerging markets often establish subsidiaries in developed
countries in order to actively seek opportunities to acquire local knowledge. The role
of the subsidiary is to tap into advanced local knowledge and transfer it back to the
headquarters. There are examples where the subsidiary has made a valuable
contribution to the whole global firm. For example, McDonald’s popular p. 215↵Filet-
O-Fish burger was introduced by a franchisee located in Cincinnati and adopted by
Macdonald’s globally. Another example is BP, which during the late 2000s
transformed its subsidiaries in over 100 countries from stand-alone fiefdoms to a
network of collaborative subsidiaries, contributing to and learning from each other.
The ability of a subsidiary to adapt to local pressures and to be a source of valuable
knowledge is linked to the degree of autonomy the subsidiary has. Evidence
suggests that a high level of authority and autonomy is a prerequisite for a
subsidiary’s ability to develop new knowledge. This is because tight control by the
parent firm leaves little room for the subsidiary to explore, access, develop, and
diffuse new knowledge. The opening case study of this chapter shows how Dell’s
initial control over its subsidiaries restricted its subsidiary in China from
experimenting with new approaches that, if proved successful, could be exported to
the headquarters and other subsidiaries facing similar challenges. This chapter
discusses the different roles subsidiaries play and the degree of autonomy
subsidiaries should have. The chapter also discusses the mechanisms through
which subsidiaries transfer knowledge to the parent firm and other subsidiaries.

7.3 Global strategy levels

Before we discuss the different roles of subsidiaries and how subsidiaries develop
and transfer knowledge throughout the multinational firm network, we need to
discuss the different levels of strategy within a multinational firm. In multinational
firms, strategies are initiated at two distinct levels. There is a strategy for the
multinational firm and all its subsidiaries which is called headquarters- or corporate-
level strategy. In addition, there is a strategy for each subsidiary which we refer to as
subsidiary-level strategy (see Exhibit 7.1). We will use the terms ‘headquarters-level
strategy’ and ‘corporate-level strategy’ interchangeably. At both corporate level and
subsidiary level multinational firms have to deal with specific management functions
such as finance, human resources, marketing, and operations.
Corporate-level strategy deals with the question of what business or businesses to
compete in, and the overall game plan of the multinational firm. In other words, the
corporate-level strategy revolves around defining the businesses in which the
multinational firm wishes to compete, acquiring its different subsidiaries, and
allocating resources to them. The headquarters-level strategy will be discussed
in Chapter 8.
p. 216↵In contrast, subsidiary-level strategy refers to the game plan of each
subsidiary. It is concerned with the question of how a subsidiary positions itself
among local and international rivals to achieve its strategic goals (Dess et al. 1995:
374). Subsidiary-level strategy must also be integrated with the corporate-level
strategy. Toward this end, the subsidiary-level strategy must principally be crafted so
that it is congruent with the overall corporate-level strategy and at the same time
addresses specific strategic issues facing the subsidiary in its particular industry
and/or geographical location. This chapter focuses on the subsidiary-level strategy.
Key concept
In multinational firms, strategies are initiated at the corporate/headquarters level and
the subsidiary level. Corporate-level strategy deals with the question
of what business or businesses to compete in and the overall game plan of the
multinational firm. Subsidiary-level strategy refers to the game plan of each
subsidiary and is concerned with the question of how a subsidiary positions itself
among local and international rivals to achieve its strategic goals. Each of the two
levels of strategy has an important and distinct role to play in achieving and
sustaining competitive advantage.

7.4 Strategic role of subsidiaries

We broadly define the strategic role of subsidiaries as the significance of the
subsidiaries’ contribution to the overall global success of the multinational firm. The
strategic role of subsidiaries in multinational firms varies from simply meeting the
challenges of implementing the global headquarters-level strategy to taking the lead
in developing a specific strategy for the subsidiary. Some subsidiaries may be given
the authority to make strategic and operating decisions autonomously, whereas
others may be passive implementers of headquarters-developed strategy (O’Donnell
and Blumentritt 1999: 194; O’Donnell 2000). Birkinshaw and Pedersen (2001) noted
that ‘for some people the term subsidiary strategy is an oxymoron’, because of the
predominant assumption that the subsidiary should be little more than an instrument
of the multinational firm. For others, subsidiary strategy is about strengthening the
multinational firm’s competitive advantage by taking advantages of country-specific
resources and capabilities in various markets (Rugman and Verbeke 2001, 2003).
The degree to which subsidiaries are actively involved in the formulation and
implementation of corporate strategy, and the degree to which they are creators or
passive users of knowledge within the multinational firm, varies from one
multinational firm to another, and sometimes from one subsidiary to another within
the same multinational firm. For instance, IKEA’s subsidiaries generally play little role
in shaping the headquarters’ strategy and, in particular, the range of products offered
(see the opening case study in Chapter 1). Nonetheless, in its quest to adapt its
products to the Indian market, IKEA’s Indian subsidiary was given wide autonomy
over the product range to be sold in the Indian market, and a whole new collection of
products was launched based on its extensive research into the Indian market.
Indeed, the True Blue range of products developed in India to serve the Indian
market is now made available at selected IKEA stores in several other countries.
p. 217↵There are three key drivers for a subsidiary’s autonomy. First, corporate-level
managers should give the authority to subsidiaries to make strategic decisions when
the subsidiary faces conditions of high environmental uncertainty. When subsidiaries
face local uncertainties in their business environment which require quick
intervention, headquarters-level managers should give subsidiaries the authority and
power to make strategic and operational decisions to deal with these uncertainties
(Vereecke and Van Dierdonck 2002). For instance, when a multinational firm is faced
with a boycott or threat of a boycott in a country or region, like Nestlé in China (see
the closing case study in this chapter), subsidiaries should be given the authority and
resources necessary for them to respond to events in a timely fashion in order to
withstand the threat.
Second, corporate-level managers should give authority to subsidiaries when the
subsidiary production technologies are non-routine and require complex and specific
knowledge located at the subsidiary level. Corporate-level managers should keep
interference in the strategy of the subsidiary to the minimum because they are not
well equipped to respond adequately to the local exigencies facing these
subsidiaries. This is all the more so when the subsidiary is performing better than the
home market. For example, KFC China is given broad authority to develop Chinese-
specific products in response to local tastes and eating behaviour. The subsidiary
performs exceptionally well and is often labeled ‘the world’s most successful fast-
food brand’ (Businessweek 2013). In contrast, KFC’s home market in the United
States is fast eroding and described as ‘among the worst—a tale of eroded market
share, bankruptcies, and franchisee lawsuits—even as chicken consumption has
grown’ (Businessweek 2013). This gives KFC China managers more reasons to ask
for a larger mandate to manage KFC’s domestic operations.
A third major factor determining the degree to which subsidiaries set their own
strategy is how much the multinational firm needs to adapt its overall strategy to local
conditions. For instance, Unilever, a European manufacturer of food and household
products, is under more pressure to sell different ranges of food products that meet
local legal requirements compared with global McDonald’s, which is generally under
little pressure to adapt its core products to local tastes and traditions. Although under
the ‘Path to Growth’ and ‘One Unilever’ initiatives, launched in 1999 and 2004
respectively, Unilever significantly reduced the number of its international brands to a
couple of hundred down from over a thousand, subsidiaries retained their ability to
respond to local markets’ needs by, for instance, retaining their well-established local
logos and local ingredients (Gospel and Sako 2010).
At one extreme are multinational firms which use a standardized strategy worldwide
with little or no modification. Apple uses this strategy. An iPhone is produced,
packaged, and sold in the same way everywhere in the world. At the other extreme
are multinational firms that give absolute power to subsidiaries to tailor their
strategies to their local business environments. However, in practice it is not a case
of adopting an entirely standardized strategy or an entirely localized strategy, but a
matter of degree.

The subsidiaries of global firms such as Dell, IKEA, or KFC have relatively little
autonomy. However, Dell was forced to give more autonomy to its Chinese
subsidiary in order to adapt to local conditions, just as KFC and IKEA were forced to
give more autonomy to their subsidiaries in China and in India. Dell or IKEA do not
have to give up their ‘standardized strategy’ across the world. These firms need to
give more autonomy to only one or several of their subsidiaries.

7.5 Types of subsidiary-level strategy

Subsidiaries typically fall into two broad categories varying from passive supporter
and implementer of the headquarters-level strategy to subsidiaries with high levels of
autonomy. It must be pointed out that it is not a question of either/or, but rather a
question of the extent to which the multinational firm is pursuing the first or the
second type of strategy. Below we discuss the two types of subsidiary-level strategy.

7.5.1 Support and implementation

Under the support and implementation approach, multinational firms have a
dominant corporate-level strategy, and the role of the subsidiary is to implement the
corporate-level strategy. The centre in this case controls most of the multinational
firm’s activities and makes most strategic decisions. In brief, a dominant corporate-
level strategy occurs when a subsidiary produces a component or a product under
assignment from the parent for the multinational firm as a whole. Since the
subsidiary is simply making an ‘assigned’ product, very little strategizing is required
at the subsidiary level (Crookell 1986; Vereecke and Van Dierdonck 2002).
This is an appropriate strategy in industries where consumers worldwide have
roughly the same preference, such as in electronic products, a variety of consumer
goods such as paper, and industrial goods such as cement. In these industries, firms
should avoid the pressure and temptation to produce significantly different products
for different geographical markets. By following the standardization strategy, the
multinational firm takes advantage of economies of scale, which can help it achieve
and sustain the role of the low-cost player in its industry. As discussed in Chapter 1,
extreme customization is an expensive strategy, and often the returns do not justify
the high cost. Instead, firms are advised to produce variations on the basic products.
This will obviously increase design, production, and marketing costs, but will have
the advantage of greater acceptability by customers in different geographical
locations and therefore higher returns.
The support and implementation role is also appropriate when little strategizing is
needed at the subsidiary level in cases where, for example, subsidiaries in different
countries face similar competitive environments and use standard processes. The
role of subsidiary managers in this case is devoted primarily to improving the
efficiency of their existing operations. The success of the subsidiary, therefore,
requires an internal focus, specifically on achieving operating efficiencies.
Another critical role of subsidiaries is localization of products. Under the support and
implementation role, the subsidiary is involved more in localization than in
adaptation. ‘Localization’ refers to ‘the changes required for a product or service to
function in a new country’. ‘Adaptation’ refers to changes that ‘are made to customer
tastes or preferences’ (Johansson 2004: 392). A subsidiary localizes its products by,
for example, making adjustments to its electrical equipment to make it compatible
with local technical requirements such as electrical voltage or by introducing some
superficial changes such as small add-on features. For example, Caterpillar products
are standardized across markets. Caterpillar makes only minor modifications to its
bulldozers and front-end loaders to meet regulatory and specific operating
requirements. A multinational firm adapts its products to local preferences when,
for p. 219↵example, it uses different materials and/or ingredients, or produces
shapes that are popular in a particular country. Subsidiaries pursuing a support and
implementation role are involved more in localization than in adaptation.
Scholars (Nohria and Ghoshal 1994; Vereecke and Van Dierdonck 2002; Lin and
Hsieh 2010) have over the years identified the factors under which the support and
implementation role is more likely. Generally, the support and implementation role is
best suited for those industries where the degree of local competitive intensity is low
and where markets are similar. This is because typically weak competition lowers the
pressure for local adaptation and pushes the subsidiary to play a support and
implementation role. Also, the more similar the local markets are, the less the need
for local responsiveness, and as a result the more likely that subsidiaries play a
support and implementation role.
One must point out that a support and implementation role should not be taken to
mean total centralized authority at the parent or corporate level, where the parent
acts as the sole command and control. Some strategic elements of global corporate
strategy are—and, according to many, should be—dispersed across multiple
subsidiaries. Multinational firms adjust the level of delegation to the subsidiary level
by weighing the trade-off between the advantages and the disadvantages of the
support and implementation approach.

Advantages of the support and implementation role strategy

A support and implementation approach, like most strategic business alternatives,
involves trade-offs. The benefits of pursuing a support and implementation strategy
must be weighed against possible drawbacks.

Most multinational firms would prefer to have a single standard corporate strategy if
their products and services are accepted around the world. A single standard
corporate strategy gives multinational firms a significant cost advantage over local
rivals. Subsidiary managers in this case would not need to redesign their products to
suit different customer needs and expectations or to develop a new strategy to
compete in their local markets.

Further, from the corporate-level perspective, a sense of unity among its

subsidiaries, a willingness to act as part of a single global strategy, is a strategic
resource of enormous value, often more valuable than giving subsidiaries the
flexibility to design their own strategy with little reference to the global corporate
strategy. Having a global corporate strategy means that strategic disagreements and
rivalries between subsidiaries are resolved within the context of the global strategy,
and once a decision on the global direction of a firm has been reached, it will be
followed by all subsidiaries.

Key advantages of the support and implementation role strategy include the
following:

•
A standard global design strategy with a common standard design for the entire
market eliminates the sources of additional costs through economies of scale. As
explained in Chapter 1, the cost of production tends to decline as the firm gains
experience with a particular production process.
•
A standard global design strategy creates a cost advantage through faster
organizational learning. This is because a global design strategy eliminates
complexity by focusing on a smaller set of homogeneous tasks, and leads the firm to
a faster path of learning through familiarity and repetition.
•
Standard global design strategy can enhance efficiency for the multinational firm by
producing fewer product varieties in longer production runs in different national
plants.
•
When subsidiaries focus on implementing and supporting the corporate-level
strategy, they are likely to gain strengths in pursuing operational efficiencies.

Disadvantages of the support and implementation role

strategy
The support and implementation strategy has several disadvantages. They include
the following:

•
The strategy is not suitable in industries or regions where customers are increasingly
more demanding and less willing to accept standard global products and
compromise their specific needs and wants. The strategy may cause the
multinational firm to overlook or underestimate important differences in customer
preferences in the markets in which it operates. As a result, competitors may step in
and serve unmet local needs.
•
The strategy is not adequate when subsidiaries face conditions of high
environmental uncertainty, or when they use non-routine production technologies
that require complex and specific knowledge located at the subsidiary.
•
The strategy builds a one-sided relationship between the headquarters and the
subsidiary and may potentially give the impression that the parent company lacks
respect for, and confidence in, the subsidiary managers’ ability to manage.

7.5.2 Autonomous subsidiaries

There are two types of autonomous subsidiaries: the mini-replica, which is a small-
scale replica of the parent firm, and the global mandate, which focuses on a single
product or process. Below we discuss the two types in detail.

Mini-replica role
Mini-replica subsidiaries operate as small-scale replicas of their parent firms (Young
et al. 1988; Beugelsdijk et al. 2009). In a truly mini-replica role, the subsidiaries are
able not only to select their own strategies in the matters allocated to them but also
to define their own goals with little interference from the corporate headquarters.
In this approach, while subsidiaries have the authority to design their own subsidiary-
level strategy unconstrained by corporate dictates, they must do so within
recognized boundaries set by the corporate parent. Typically, the subsidiary utilizes
the core competencies of the parent firm, or processes that the parent firm does
exceptionally well, as its main competitive weapon in its local market. However, the
subsidiary is free to customize its products, services, and marketing campaigns to
best meet the needs of its local market (Belderbos 2002). MTV’s post-1995 strategy
is a good illustration of this approach. MTV’s early internationalization strategy was
based on a standard global strategy. The network managers in the US were
surprised when customers outside the US did not flock to MTV to listen to the North
American staples of music. In 1995, MTV changed its strategy in Europe and started
customizing its p. 221↵feeds within individual markets. It started its customization
strategy in Europe by adopting its programming according to what was popular in
each European country. The network replicated its local customization strategy with
its affiliates around the world. MTV’s affiliates now include separate feeds in English
and Hindi for India, Japanese for Japan, Mandarin for China, and Bahasa for
Indonesia, among others. Each MTV subsidiary acts as a mini-replica subsidiary,
producing programmes that match its customers’ tastes and music choice.
The key challenge of a mini-replica role is how to decentralize the strategy-making
process to the subsidiary level without breaking the ‘umbilical cord’ between the
corporate parent and the subsidiaries. MTV does this by maintaining the network
feel: a dynamic broadcasting environment, ‘cool’ young presenters, and continuous
references to the MTV brand throughout its network of affiliates. Also, a significant
proportion of the global music played is still decided from MTV’s headquarters in the
United States and shared with affiliates around the world.

The mini-replica approach is particularly effective when the need for local adaptation
is high, and when there are significant local differences between customers’ needs.
Mini-replica subsidiaries often replicate the full range of activities of the value chain.

Global product mandate

Global or world product mandates are defined as the full development, production,
and marketing of a product line in a subsidiary of a multinational firm (Rugman
1986; O’Donnell and Blumentritt 1999). A global or world product mandate gives the
subsidiary global responsibility for a single product line, including development,
manufacturing, marketing, and exporting (Crookell 1986; Harzing and Noorderhaven
2006). Usually, subsidiaries are granted a global product mandate when they
develop specialized resources that are unique and/or superior to those available
elsewhere within the multinational firm (Birkinshaw et al. 1998: 224)For example, a
significant number of multinational firms have set up research and development
affiliates in India to develop and export products for their global market (Krishna et al.
2012).
The global product mandate grants subsidiaries the power and authority to
undertake high value-added activities in the subsidiary, as well as providing
subsidiary management with the opportunity to develop and grow the mandate over
time (Birkinshaw 1995; Bouquet and Birkinshaw 2008). In other words, under the
global product mandate, the subsidiary acts more like an equal partner of the
corporate parent than a subordinate entity. It can also expect a much higher level of
operational autonomy under the world mandate arrangement than under dominant
corporate-level strategy.
Multinational firms grant subsidiaries a global product mandate when tariffs to
operate in certain countries are prohibitively high, or when firms wanting to sell
products in particular markets have to make them locally. A study by Belderbos
(2002) revealed that a significant number of Japanese multinational firms granted
their subsidiaries serving the local Dutch market an exclusive mandate to serve the
rest of Europe, and for a minority of subsidiaries a mandate to produce and distribute
their products globally. Japanese multinational firms chose the Netherlands because
of its sophisticated domestic market, full integration into the European Union’s
market, language ability of Dutch employees, and excellent infrastructure making it
an attractive gateway to Europe and the rest of the world (Belderbos 2002).

Because the global product mandate gives the subsidiary the power and
responsibility to act beyond its market, the subsidiary has to have an externally
oriented strategy in that it must continually search for untapped or emerging market
opportunities for its products and services. The subsidiary should have relatively
great freedom to enter and leave markets in a timely fashion.
The global product mandate has several implications for the multinational firm. First,
under the global product mandate, functions such as R&D, production, marketing,
and strategic management will be located at subsidiary level (Rugman 1986).
Second, because subsidiaries with a global product mandate may have unique
control of certain products within the multinational firm, they are both integrated
within the corporate firm, because they export finished goods to other subsidiaries,
and autonomous, because they have a high degree of independence over strategic
product-related decisions.

Advantages and disadvantages of the mini-replica and global

mandate strategies
When implemented properly, the mini-replica and global mandate strategies have
several important advantages:

•
The first and most obvious advantage is that the more power subsidiaries have, the
more opportunity they have to develop a strategy that fits their unique business
environment.
•
The autonomous subsidiary approach often leads to better decisions at the
subsidiary level, since managers at subsidiary levels are likely to have a clearer view
of the business environment in which they operate.
•
In a highly dynamic business environment when the strategy has to be constantly
reviewed, autonomous approaches speed up decision-making. Often valuable time
is lost when subsidiary managers must wait for decisions to arrive from the corporate
headquarters.
•
The autonomous subsidiary approach leads to subsidiaries accepting responsibility
and being accountable for their strategies and actions.
The autonomous subsidiary approach, and in particular the mini-replica approach,
also has a number of drawbacks. The main disadvantages are:

•
There are costs associated with moving key activities away from the corporate
centre. In particular, the mini-replica strategy increases production costs by reducing
capacity utilization. Because subsidiaries produce products and services tailored to
their specific markets, cooperation between subsidiaries is minimal.
•
Multinational firms following a mini-replica strategy may produce too many product
varieties in sub-optimally small production runs.
•
The mini-replica strategy raises the cost of operations because it is more expensive
to hold an inventory of multiple items with each item requiring a minimum level of
safety stock. If local designs are substantially different from each other, such a
strategy requires entirely different production processes for different designs, which
leads to a higher investment and subsequent higher cost of operation.
•
The mini-replica strategy involves promoting multiple products for different segments
of the market. It involves a higher level of investment in advertising and marketing
management.
•
The autonomous subsidiary approach requires increased efforts in market planning
and coordination for marketing multiple products for multiple segments of the market,
as compared to a global product for all segments of the market.
•
In several industries, continued global convergence of customer preferences means
that multinational firms can no longer maintain their high cost mini-replica structure.

7.6 Global generic strategies

The two key strategic issues that need to be addressed by subsidiary-level as well
as headquarters-level managers are how subsidiaries compete in the local market
and how they create value for the multinational firm as a whole are. Subsidiaries
need strategies that help them outperform their rivals in local markets. Michael
Porter proposed two basic strategies that a subsidiary can use to create value for
customers and thereby achieve a competitive advantage in its local market.
According to Porter (1985: 3):
Competitive advantage grows out of value a firm is able to create for its buyers that
exceeds the firm’s cost of creating it. Value is what buyers are willing to pay, and
superior value stems from offering lower prices than competitors for equivalent
benefits or providing unique benefits that more than offset a higher price. There are
two basic types of competitive advantage: cost leadership and differentiation.
The two basic types of competitive strategy mentioned by Porter are known as
‘generic’ strategies, because they can be employed in any type of business in any
industry. They can be employed at either corporate level or subsidiary level, or at
both levels in a coordinated fashion. In a multinational firm which has many
subsidiaries with diverse strategies, they are of the greatest importance at the
subsidiary level.

The subsidiary of the multinational firm, or the corporate level when the multinational
firm has a single standardized strategy, first has to decide what it wants to
accomplish with the particular product or service it offers. The multinational firm and
its subsidiaries must decide whether to offer their product to a broad segment of the
market or to target a niche market. Ford, for example, produces cars that appeal to,
and can be afforded by, a large segment of the population. In contrast, Ferrari
produces cars with unique features mainly for young customers with high disposable
income. The competitive scope of Ford’s products is much larger than the
competitive scope of Ferrari’s products. Like Ford, Dell targets a broad segment of
the market.

Second, in order to outperform its rivals in the chosen target market, the subsidiary
must decide its strategic positioning in terms of perceived value by customers. The
subsidiary of the multinational firm may decide to appeal to price-sensitive customers
(e.g. the strategy of Dell or Ford) or to those who are willing to pay a higher price for
better quality (the strategy of Apple or Ferrari).

Therefore, a firm’s relative position within an industry is determined by its choice

of competitive advantage, i.e. cost or differentiation, and its choice of competitive
scope, i.e. broad p. 224↵target or narrow target. Based on these two distinctions,
Michael Porter has distinguished four generic strategies that firms can pursue: cost
leadership, differentiation, focused low cost, and focused differentiation (see Exhibit
7.2). These are discussed in the following sections.
Both internal and external factors determine the choice of competitive strategies at
the subsidiary level. Externally, the choice of the competitive strategy is determined
by conditions in the subsidiary’s competitive market, such as rivalry intensity, and by
host country resources and infrastructure. For example, Western car manufacturers
operating in China during the 1980s and early 1990s were forced to follow a low-cost
strategy by the low level of disposable income, lack of skills, and lack of modern
industrial infrastructure. Because of a shortage of skilled workers and a lack of firms
able to supply high-quality parts, they were not able to produce high-quality cars.
Even if they had been able to import high-quality cars, Chinese customers would not
have been able to afford them. Internally, the choice of the subsidiary’s competitive
strategy is shaped by the role of the subsidiary as set at the corporate level, and by
the distinctive resources and capabilities of the subsidiaries that can be deployed
overseas (Gupta and Govindarajan 2004) (see Chapter 4 for internal firm analysis).

Key concept
A firm’s relative position within an industry is given by its choice of competitive
advantage, i.e. cost leadership or differentiation, and of competitive scope, i.e. broad
target or narrow target. Based on these two distinctions, Michael Porter has
distinguished four generic strategies that firms can pursue: cost leadership,
differentiation, focused low cost, and focused differentiation.

7.6.1 Cost leadership strategy

Subsidiaries pursuing a cost leadership strategy appeal to price-sensitive customers.
The strategy involves setting out to become the lowest-cost producer relative to local
or other foreign rivals in the same market.

The subsidiary’s goal in pursuing a cost leadership strategy is to outperform

competitors in its market by producing goods and services at a lower cost. As a
result, even when all competitors in the market charge the same price for their
products, the cost leader makes higher profits because its costs are lower.
Furthermore, if price wars develop and competition increases, then it is most likely
that high-cost companies will be driven out of the industry before the cost leader.
This strategy requires the subsidiary to be fully and continually devoted to cutting
costs throughout the value chain. Porter (1985) noted that ‘Cost leadership requires
aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions
from experience, tight cost and overhead control, avoidance of marginal customer
accounts, and cost minimization in areas like R&D, service, sales force, advertising,
and so on’ (p. 35). Thus, subsidiaries following a cost leadership strategy must
vigorously pursue cost minimization activities by tightly controlling overhead costs
and by minimizing costs in activities such as R&D, marketing and advertising, and
process innovation. The cost leadership strategy also requires achieving cost
advantages in ways that are hard for competitors to copy or match. Dell’s strategy of
assembling and distributing standard computers through an efficiently managed
global supply chain helps it create a low-cost position relative to its rivals.
Multinational firms and subsidiaries must be careful when pursuing a cost leadership
strategy. The subsidiary must reduce cost without compromising product features
and services that buyers consider essential. Compromising essential product
features in the quest to minimize cost may lead to poor-quality products rather than
value-for-money products. Ryanair is a case in point here. In its quest to remain the
cheapest airline in Europe, Ryanair introduced several innovative cost-cutting
initiatives, but a number of its innovations were questionable (see Exhibit 7.3).
Exhibit 7.3 Successful cost leadership strategy at
Ryanair: no frills, no toilet, no seats!
Since its foundation in 1985, the airline Ryanair has followed a very successful cost
leadership strategy. By 2010, Ryanair offered more than 1,100 flight routes across
twenty-six countries, connecting 155 destinations. With 7,000 staff and 73.5 million
passengers per year, Ryanair generated annual revenues of about €3 billion.

Unlike other airlines, Ryanair eliminated cost at every step: among other measures,
it focused on secondary airports with lower airport charges, it eliminated free
services to passengers (e.g. no free food), it paid lower salaries to its staff, it entered
into contracts with third parties in order to reduce passenger and aircraft handling
costs, it eliminated payments to travel agents by selling only directly through a
website, and it lowered the cost of buying and maintaining aircraft by relying on one
type of aircraft (the Boeing 737).

However, sometimes cost-cutting zeal goes a step too far and can backfire badly.
Ryanair reported in 2009 that its onboard toilets would become coin-operated,
forcing passengers to pay £1 or €1 per visit. The plan was retracted and may never
materialize after it attracted negative media attention and became a popular joke.
The plan to charge for toilet use was to be introduced with another plan to remove
seats and introduce standing room on its aircraft. The plan was to remove toilets as
well as a row of seats from the back of the plane and leave one coin-operated toilet
at the front of the plane. This would free space for standing room and hence more
passengers.

The plan to introduce standing room was put on hold pending the go-ahead from the
European Aviation Safety Agency (EASA), which is highly unlikely. Ryanair’s plan
would require EASA to rewrite its rules which state that ‘a seat (or berth for a non-
ambulant person) must be provided for each occupant who has reached his or her
second birthday.’ Analysts believe that Ryanair went a step too far, but there is also
a widespread belief that the two plans were no more than a highly cost-effective
publicity campaign by Rynair to highlight how far it is willing to go to cut costs in
order to remain the cost leader.
Source: Various newspapers; Ryanair website at http://www.ryanair.co.uk.
Cost leadership is appropriate when the industry’s product is perceived by buyers to
be much the same from one producer to another; when the marketplace is
dominated by cut-throat price competition, with highly price-sensitive buyers; when
there are few ways to achieve product differentiation that have much value to buyers;
and when switching costs for buyers are low. Examples of cost leadership strategy
include retail multinational firms such as K-Mart, Walmart, and Tesco and fast food
chains such as McDonald’s, Burger King, and KFC.

However, multinational cost leaders must proceed with caution in emerging and
developing economies, where market segmentation can be very challenging
(see Section 3.2.3 in Chapter 3). Positioning a product as good value for money may
backfire in countries where only a small part of the population can afford to buy
it. Cayla and Penalozo’s (2012) study of Western multinational firms’ positioning
strategies in India reveals that firms need to reinvent their identities to be effective in
low-income countries. Given that most fast food franchises such as McDonald’s,
KFC, and Pizza Hut are relatively expensive in low-income countries, they tend to
focus in their promotions on the in-store experience and position themselves as
‘quality’ restaurants rather than cheap fast food outlets. Similarly, in many low- and
middle-income countries IKEA has a superior image, is perceived as a high-end
product, and attracts affluent clientele because of its Swedish origins, which gives its
customers in these markets the reassurance of high-quality products.
Generally, multinational firms from countries that are perceived as having high
product quality and prestige may need to reinvent their identity in emerging and
developing markets (Baack and Boggs 2008). This is partly because of their relative
cost position vis-à-vis local competitors and partly because consumers often have
stereotypes about products and their countries of origin. Therefore, subsidiaries of
multinational firms pursuing cost leadership strategies in these countries should
adopt a flexible approach advocating both the affordability and the high prestige of
their products.

The cost leadership strategy and the subsidiary—

headquarters relationship
Subsidiaries pursuing a cost leadership strategy produce a large volume of fairly
standardized products that appeal to large price-sensitive segments of the market.
They are often internally focused, and their main concern is cost reduction. The
multinational firm achieves cost leadership through efficiency, which can be obtained
through various economies in the production and distribution process.

The parent and other subsidiaries assist the subsidiary to achieve its cost leadership
strategy by supporting activities that lead to cost reduction, such as scale economy
in sourcing p. 227↵and cost-effective management skills (see Exhibit 7.4). For
example, by sourcing globally, the parent company is able to obtain scale economy
in purchasing. The high volume of raw materials or parts purchased by the parent
allows the subsidiary to take advantage of volume discounts. Further, the parent is
better positioned to scan the international market for the least expensive raw
materials or parts. The parent can also shift labour-intensive operations from
subsidiaries in countries where labour cost is high to countries where it is low. The
subsidiary can also benefit from sharing knowledge and value chain functions with
other subsidiaries. For example, a subsidiary located in a country where certain skills
for carrying out a specific process are abundant and inexpensive performs the
process for all subsidiaries. Further, when a single global brand name is used
worldwide, the subsidiary makes savings in advertising costs and sales efforts. This
support enables the subsidiary to produce and market its product at a lower cost,
and thereby to gain a competitive advantage.

Key concept
A cost leadership strategy involves setting out to become the lowest-cost producer
relative to the firm’s rivals.

7.6.2 Differentiation strategy

A subsidiary employing a differentiation strategy seeks to be unique in its industry
along some dimensions that are perceived widely as unique and valued by
customers. While differentiation typically involves higher costs, the uniqueness
associated with its products allows the subsidiary to compensate by appealing to a
broad cross-section of the market willing to pay premium prices. Apple, for example,
produces products that are unique and valued by its customers. While Dell put a
strong emphasis on price, Apple’s primary emphasis is on ‘non-price’ attributes such
as design and style, for which Apple’s customers are happy to pay a premium. p.
228↵Similarly, while a subsidiary pursuing a low-cost strategy such as Volkswagen’s
Skoda may produce a car that is safe, reliable, and durable, Volkswagen’s Audi
subsidiary follows a differentiation strategy and produces cars with extra-quality
features such as expensive leather seats, expensive wood in the dashboard, and so
on.
In contrast to the cost leadership strategy, subsidiaries pursuing a differentiation
strategy must focus on continuously investing in and developing features that
differentiate their products in ways that customers perceive as unique and valuable.

When a multinational firm pursues differentiation, it seeks to distinguish itself along

as many dimensions as possible. These dimensions can include prestige and brand
image (e.g. luxury brands such as Christian Dior and most five-star hotels),
innovation (Nokia mobile phones and Apple electronic products), physical
characteristics of the product such as quality or reliability (BMW cars and DHL
express mail services), customer service (the retail chain John Lewis and the mail
order and retail company L. L. Bean), or distribution network (Caterpillar earthmoving
machinery and the electronic components/computer products distributor Avnet). For
example, in addition to providing high quality and reliability in its products, Rolex, the
Swiss-based watch manufacturer, has created a global network of specialists who
alone are qualified to guarantee to Rolex owners the authenticity of their watch and
the dependability of the features that ensure its longevity in order to safeguard its
reputation.

Uniqueness may also relate to the psychological need of customers, such as status
or prestige. For example, high-quality cars such as Ferrari and quality watches such
as Rolex are not just reliable and technologically sophisticated products, they also
appeal to customers’ prestige needs. The development of a distinctive competence,
such as Federal Express with its fast and reliable service, is also a base for
uniqueness.

A differentiation strategy is more challenging for subsidiaries of multinational firms

from emerging and developing countries than for those from advanced countries. As
multinational firms from emerging and developing countries climb up the quality
ladder and seek to follow a differentiation strategy, their subsidiaries will face serious
challenges such as negative home country reputation. Manufacturers in some
emerging countries such as China and Poland have gained a reputation for inferior
quality after years of negative media reports detailing shoddy and sometimes
dangerous products. Some multinational firms from emerging markets overcome this
barrier by acquiring a well-known Western brand. When Lenovo, a Chinese personal
computer (PC) manufacturer known for its low costs, wanted to expand into the
global marketplace and compete on equal footing with major competitors such as
Dell, it acquired IBM’s PC business in 2005. To strenghen its global image, Lenovo
moved its global headquarters from Beijing to New York and appointed Stephen
Ward, from the IBM PC division, as its CEO. Currently, it has headquarters in Beijing
as well as in Morrisville, North Carolina, in the United States. By the early 2010s
Lenovo had become a key global player in the industry, producing a range of
products from PCs and smartphones to electronic storage devices and servers, and
becoming the world’s second-largest firm by unit sales of personal computers.

Differentiation strategy and the subsidiary—headquarters

relationship
Subsidiaries pursuing a differentiation strategy require strong support from the
parent and other subsidiaries in terms of sharing technology, process innovation,
and product p. 229↵development and marketing (see Exhibit 7.4). The quality of the
product produced by the subsidiary is likely to be thoroughly tested by the parent.
Because differentiation requires constant innovation in order to produce unique
products suited to local customers’ demand preferences, subsidiaries must share
knowledge, processes, and technologies with one another. That is, subsidiaries
following a differentiation strategy are likely to depend more on support from the
parent and continued resource sharing within the corporate group than subsidiaries
following a cost leadership strategy. Note that while in both cost leadership and
differentiation strategies the subsidiary requires the support of the parent and other
subsidiaries, the type of support the subsidiary needs is different. Subsidiaries
following a cost leadership strategy require support that helps them lower cost. In
contrast, subsidiaries pursuing a differentiation strategy need support that helps
them acquire capabilities necessary for producing differentiated products.

Key concept
A subsidiary employing a differentiation strategy seeks to be unique in its industry
along some dimensions that are perceived widely as unique and valued by
customers.

7.6.3 Focused low-cost strategy

A subsidiary following a focused low-cost strategy puts emphasis on a niche market
segmented by geographical region, income level, and/or product specialization. A
focused low-cost strategy is a market niche strategy concentrating on a narrow,
specific, and recognizable customer segment and competing with low prices, a
strategy that requires the subsidiary to be the cost leader in its niche. This strategy
works well when the firm is able to lower cost significantly to a well-defined customer
segment.

Examples of firms employing a focused low-cost strategy include youth and

backpacker hostels, which provide cheap accommodation for students and
backpackers looking for a place to stay, or low-cost retailers such as charity shops in
the UK (e.g. Oxfam) that offer second-hand products at a discount to price-sensitive
shoppers.

Key concept
A subsidiary following a focused low-cost strategy selects a narrow, specific, and
recognizable segment whose requirement is less costly to satisfy compared to the
rest of the market, and tailors its strategy to serve customers in this segment.

Focused low-cost strategy and the subsidiary–headquarters

relationship
Because subsidiaries following a focused low-cost strategy concentrate on a small
segment of the market and offer specific products, using well-defined technology and
processes, they need only a small degree of support from the corporate parent
(see Exhibit 7.4). Further, the link with other subsidiaries may also be weak because
subsidiaries following a focused p. 230↵low-cost strategy tend to focus on their local
market, which may be served differently from one country to another.

7.6.4 Focused differentiation strategy

A second market niche strategy is focused differentiation strategy. The subsidiary
here concentrates on a narrow customer segment and competes through
differentiating features. For example, the Burj Al Arab hotel in Dubai—a 7-star hotel
widely considered to be the world’s most luxurious hotel—promises the ultimate
personal service.

To be successful, the subsidiary must be able to offer its target market something
they value highly and which is better suited than other firms’ products to their specific
and unique requirements. Further, the strategy must have a strong brand, and the
subsidiary must have a thorough understanding of its targeted market’s unique
tastes and preferences and the ability to offer products with world-class attributes.

Examples of focus differentiation include high-fashion clothing boutiques in Paris and

Milan, and sports car manufacturers such as Ferrari, or makers of prestigious cars
such as Rolls-Royce. Customers buying from such companies are willing to pay a
high premium for the finest products and services.

Focused differentiation strategy and the subsidiary–

headquarters relationship
In contrast to focused low-cost strategy, subsidiaries following a focused
differentiation strategy need strong support from the parent and peer subsidiaries
(see Exhibit 7.4). Producing products with world-class features requires specific
resources and competencies that develop from cooperating and sharing information
with the parent and other subsidiaries. Also, it is imperative that the parent assist
subsidiaries to acquire the necessary resources and competencies in order for them
to produce and/or offer products that consistently conform to the highest standards.
Although the costs associated with the extensive sharing of information and
coordination between the parent and subsidiaries and within subsidiaries can be
quite high, customers are willing to pay a high premium for the product.
Key concept
A subsidiary following a focused differentiation strategy concentrates on a narrow
customer segment and competes through differentiating features.

7.6.5 Integrated strategy or ‘stuck in the middle’

Multinational firms sometimes adopt a hybrid strategy—also known as integrated
strategy—balancing the emphasis on cost reduction against an emphasis on
differentiation. The hybrid or integration strategy seeks to provide customers with the
best cost–value combination. This strategy has a dual strategic emphasis, appealing
to value-conscious customers who are sensitive to both price and value. For
example, Korean multinational firms in the automobile p. 231↵and electronic
industries have been successful in developing and implementing integration
strategies. As a result, they have been able to provide high-quality products at a very
competitive price.
Several writers have criticized such a hybrid strategy. Michael Porter and several
other writers, while accepting that each generic strategy has pitfalls and that there
are different risks inherent in each strategy, argue that a hybrid strategy leads to
mediocrity. Porter argues that the two basic generic strategies—cost leadership and
differentiation—are incompatible and fundamentally contradictory, requiring different
sets of resources and competencies and appealing to different customers; that any
firm attempting to combine them would eventually end up ‘stuck in the middle’; and
that, as a result, such a firm will be out-performed by competitors who choose to
excel in one of the basic strategies. Michael Porter (1985: 12) noted:
if a firm is to attain a competitive advantage, it must make a choice about the type of
competitive advantage it seeks to attain and the scope within which it will attain it.
Being ‘all things to all people’ is a recipe for strategic mediocrity and below-average
performance, because it often means that a firm has no competitive advantage at all.

7.6.6 Criticisms of generic strategies

Several writers have challenged Porter’s typology and questioned his claims about
the exclusivity of the generic strategies. They argued that, contrary to what Porter
advocates, sustainable competitive advantage rests on the successful combination
of cost leadership and differentiation strategies (Deephouse 1999). One of the key
reasons for adopting an integrated strategy is the turbulent global business
environment, which requires multinational firms to adopt flexible combinations of
strategies. For instance, Shanghai Volkswagen initially concentrated on a cost
leadership strategy and produced cars to be used as taxis in the Shanghai area.
Through its operations in China, Shanghai Volkswagen gained a strong market
position in its market as well as valuable knowledge of the Chinese car market.
Although Shanghai Volkswagen captured leadership in its particular segment,
management realized that concentration on a single strategy involved higher-than-
normal risks. New competitors started invading Shanghai Volkswagen’s segment by
imitating its strategy. There were signs that customers were starting to switch to
competitors. As a result, Shanghai Volkswagen expanded its segment, and now
follows a multi-segment strategy by pursuing low cost and differentiation strategies
simultaneously.
To multinational firms such as Volkswagen, a hybrid strategy combining elements of
cost leadership and differentiation is not only possible but is the most successful
strategy for them to pursue. The hybrid strategy deals with the many inherent
disadvantages of cost leadership and differentiation strategies. When properly
employed in the right target market, it is likely to lead to higher performance than a
pure cost leadership or differentiation strategy.

Nonetheless, Porter’s generic strategies make a valuable contribution by

emphasizing that firms need to make strategic choices between types of strategy.
For instance, when Volkswagen decided to increasingly differentiate its products in
China, its costs invariably increased due to extra features offered in its cars.
Therefore, firms need to weigh up the benefits of p. 232↵spending more money on
more differentiated products as opposed to cutting costs in order to offer customers
a low-cost product.

7.7 Summary
In multinational firms, strategies are initiated at two distinct levels. Strategies for the
whole multinational firm are formulated at the headquarters level and called
‘headquarters-level’ or ‘corporate-level’ strategies. Corporate-level strategy is
discussed in Chapter 8. Strategies for each subsidiary are formulated at the
subsidiary level, and are termed ‘subsidiary-level strategies’. Corporate-level
strategy deals with the question of what business or businesses to compete in, and
the overall game plan of the multinational firm. Subsidiary-level strategy is concerned
with the question of how a subsidiary positions itself among local and international
rivals to achieve its strategic goals, and deals with the integration of subsidiary-level
strategy with corporate-level strategy.
As far as the relationship between headquarters and subsidiaries is concerned, we
have identified two broad types of subsidiary-level strategy: support and
implementation, and autonomous subsidiaries. Each strategy has advantages and
pitfalls. The role of managers is to weigh the advantages against the disadvantages
of each strategy before selecting the most appropriate strategy for their organization.

Multinational firms cannot, and should not, target all customers in a particular market
or country. They can target a specific segment, large or small, using one of four
strategies called generic strategies—cost leadership, differentiation, focused low
cost, and focused differentiation. The subsidiary can also combine, or integrate, cost
leadership strategy and differentiation strategy, although the integrated strategy is
challenging and carries several risks. However, if implemented properly and
successfully, such integrated strategy enables the subsidiary to enjoy superior
performance and to enhance its competitive position.

Discussion questions
1.Briefly describe the two levels of global strategy.
2.Identify and briefly describe the roles of subsidiary-level managers.
3.Explain the different types of subsidiary-level strategy, and discuss some of the
pitfalls associated with each type.
4.Briefly describe the four generic strategies—cost leadership, differentiation,
focused low cost, and focused differentiation—and discuss the pitfalls associated
with each of these generic strategies.
5.Explain the relationship between the four generic strategies and the headquarters–
subsidiary relationship.
6.Can subsidiaries—and multinational firms as a whole—combine generic strategies
of cost leadership and differentiation? Put forward arguments for and against.
7.Chose a multinational firm and identify the different roles played by its subsidiaries.
Closing case study Management of the melamine
contamination crisis by Nestlé China

In 2009 Nestlé’s subsidiary in China teamed up with the China Nutrition

Society to launch its Healthy Kids Programme. The aim of the programme was
to improve the nutrition, health, and wellness of school children aged 6–12
years old by raising their awareness about the importance of nutrition and
healthy physical activities. The programme has had widespread media
coverage and Nestlé’s subsidiary in China received significant positive
publicity as a result of it. The new positive image of Nestlé China is a far cry
from what had been happening to Nestlé China in the previous years.

In 2008 it looked like there was no end to constant bad news for China’s food
industry in general and Nestlé China in particular. The bad news started in
2008 with reports of nearly 300,000 children fallen ill, thousands of children
stricken with kidney problems, and four dying in China after consuming milk
products. The contamination was caused by companies adding melamine—
used to make plastics—to milk. This initial news was followed by revelations
that the contaminated milk was widely used in the production of chocolate,
yogurt, and several other processed food products.

The bad news continued. In October 2008, supermarkets in Hong Kong took
Chinese eggs off the shelves when tests revealed high level of melamine in
eggs originating from Hubei province. The p. 234↵fear that the contamination
had spread beyond China was soon confirmed when the Indonesian
government ordered the destruction of over 2,000 boxes of Snickers and M&M
chocolates made with Chinese diary products. This was followed by
Taiwanese authorities reporting that Nestlé’s infant formula and powdered
milk were contaminated with melamine and therefore were banned in Taiwan.
Not surprisingly, the global media reported widely on the issue and the
melamine scare spread worldwide. Analysts pointed the finger at the
inadequate, and often totally absent, government monitoring of food safety in
China which allows unscrupulous ‘entrepreneurs’ to put public health at risk.
Two perpetrators were found guilty and sentenced to death, and a number of
individuals were sentenced to lengthy terms of imprisonment. Subsidiaries of
multinational firms also took a big share of the blame. It was argued that the
inadequate monitoring was an added reason for multinational firms to keep a
close eye on every activity of their supply chain production.

The melamine scare forced multinational firms in China to take radical actions.
In order to ensure the safety of its products, Walmart announced on 22
October 2008 a major overhaul of its Chinese supply chain and soon
thereafter pulled certain brands of Chinese eggs off the shelves in China.

Nestlé took the most radical action to deal with the problem in an attempt to
restore customer confidence. On 31 October 2008, Nestlé announced that it
was opening a world class R&D centre in Beijing that cost in the region of $10
million. The centre was equipped with advanced testing equipment that could
detect contaminations such as melamine. Nestlé feared that its $1 billion
investment in China over two decades was at risk and had to make such a big
investment to protect one of its key markets. Nestlé mobilized its public
relations machine and went on the offensive to reassure customers and
governments. Their actions included recalling already-sold contaminated milk
powder and sending 20 specialists from its headquarters in Switzerland to its
plants in China to carry out testing for known dangerous substances such as
melamine.

The research centre and Nestlé’s PR machine not only saved Nestlé China
but improved its market position. The melamine scare did not go away, and
there was concern among Chinese customers that the contamination was
more widespread. However, while Nestlé China was able to reassure its
customers that its products were safe from contamination by using its powerful
public relations machine, often referring to the research centre which was
reported to detect ‘trace amounts of residues and undesirable compounds like
melamine or veterinary drugs or natural toxins’, and through well-publicized
safety measures, local rivals did not have such a powerful PR machine to
reassure customers, nor did they have world-class facilities comparable to
those of Nestlé to test their products.

By 2009, Nestlé’s sales were on the up again. The melamine contamination

has helped Nestlé China to take market share from its rivals. As put by Patrice
Bula, Chairman and CEO of Nestlé China, ‘[as a result of the crisis] we have
gained market share, all our businesses, our branding is stronger and we had
greater market recognition’. Shaun Rein, a Shanghai-based market research
expert, reported that Nestlé’s market share increase is ‘partly because
everybody’s fleeing the domestic producers’.
By the early 2010s, Nestlé in China stood for food safety and high quality and
was much more trusted than its local rivals. As a result, Nestlé and other
reputable foreign infant food manufacturers, such as Danone, started charging
an ‘excessive’ premium on many of their products. According to local media
reports, foreign firms have increased their prices by about 30 percent since
2008. This significant hike in prices since the melamine crisis prompted an
investigation in 2013 by China’s National Development and Reform
Commission of price misconduct involving infant nutrition products sold by
multinational firms in China. As a result of the probe, Nestlé and other
multinational firms pledged to make a significant cut in the price of their
products. By so doing, they made these products more affordable to a larger
segment of the population.

p. 235↵Sources: F. Balfour, ‘Wal-Mart pulls tainted eggs from shelves in

China’, Businessweek (30 October 2008); D. Roberts, ‘Nestlé combats China
food scandals’, Businessweek (31 October 2008); China Daily, ‘Nestlé China
apologizes for unsafe iodine infant milk powder’ (6 June 2005); Bloomberg,
‘Nestlé China growth may double after evading scandal’ (7 September
2009), www.bloomberg.com/apps/news; BBC News, ‘Chinese milk scam duo
face death’ (2009); Wall Street Journal, ‘Nestlé cuts baby-formula prices in
China’ (3 July 2013); P. Waldmeir, ‘Nestlé “co-operating” with China probe into
baby milk prices’, Financial Times (FT.com) (2 July 2013).

Discussion questions
1. Discuss Nestlé China’s management of the melamine crisis.
2. Discuss Nestlé China’s positioning strategy after the melamine crisis.