Subsidiary Level Strategy

Global Strategic Development

Objectives Identify and describe the level of Global strategy Identify and describe strategic roles Discuss the advantage and disadvantage of different

subsidiary roles Identify and discuss the generic strategies

Introduction In multinational firms strategies are initiated at

two distinct level: Corporate Level Strategy: Strategy for the

multinational firm and all its subsidiaries. Corporate level strategy fundamentally is concerned with the selection of businesses in which the company should compete and acquisition and allocation of resources to its different subsidiaries.

Subsidiary Level Strategy: Strategy for each subsidiary.

Introduction Subsidiary level strategy refers to the game plan of

each subsidiary means the strategic issues are less about the coordination of operating units and more about developing and sustaining a competitive advantage for the goods and services that are produced. positioning the business against rivals anticipating changes in demand and technologies

and adjusting the strategy to accommodate them Crafting strategy that is congruent with the CLS.

Strategic Role of Subsidiaries Strategic role of subsidiaries varies from passive

implementers of headquarters developed strategy to active developer and implementer of strategy tailored to specific subsidiary.

The degree of interdependence is determined by: Environmental condition: high/ low uncertainty Requirement for complex and special knowledge Needs to adapt to local conditions

Types of Subsidiary Level Strategy Support & Implementation Mini-Replica Role Global Product Mandate

Support & Implementation Characteristics:

Multinational firms have dominant corporate strategy Customers usually have same preference thus firms

could avoid the pressure as well as temptation to produce completely different products for different markets

The minor but critical role of subsidiaries is Localization of production. Subsidiaries are involved more in localization than in adaptation.

Support & Implementation Support & Implementation is appropriate when little

strategizing is needed as subsidiaries are facing similar competitive environment and use standard process.

Support & Implementation does not mean total centralized authority, some strategic element of global corporate strategy are dispersed across multiple subsidiaries.

Support & Implementation

Advantages: Performance level is improved Common standard design eliminates the source

of additional cost through economies of scale Creates cost advantage through faster

organization learning Standard global strategy can enhance efficiency Gain strength in pursuing operational efficiency

Support & Implementation

Disadvantages: the strategy is not suitable High environmental uncertainty Customers are increasingly more demanding Customers are less willing to accept global

products When company implements non-routine

production technology that require complex and specific knowledge located at the subsidiary.

Mini-Replica Role Subsidiaries select their own strategies as well as define

their own goals with little interference from the corporate headquarter.

Key challenge is to decentralize the strategy making process without hampering the global integration between the corporate parent and the subsidiaries.

Mini-Replica Role Characteristics

Suitable for Highly uncertain business environment When company implements non-routine production

technology that requires complex and specific knowledge. Difference in customer tastes Highly diversified headquarter Authoritarian subsidiary heads Allocation of resources- weak subsidiaries are allotted

primary shares Retain their own identity

Advantages: Ability to fit the unique business environment through

tailored strategy. Leads to better decision at the subsidiary level Mini-Replica approach speeds up decision making Mini-Replica approach also causes subsidiaries to accept

responsibility and be accountable for their strategy and action.

Mini-Replica Role

Mini-Replica Role Drawbacks:

Very costly approach as products are designed for specific market

Too many product varieties Cooperation between subsidiaries are minimal Sub optimally small production runs /reduced capacity

utilization Higher level of investment in advertising and marketing Global convergence of customer preferences

Global Product Mandate World/ Global Product Mandate are defined as the full

development, production and marketing of a product line in a subsidiary of a multinational firm.

This approach grants subsidiaries the power and authority to undertake high value added activities.

Thus subsidiaries act more like equal partner of the corporate parent.

Global Product Mandate Key reason:

This approach is granted when tariff to operate in certain countries are very high

This approach is granted when firms have to pursue local production.

Global Product Mandate Key Characteristics:

Global Product Mandate grants subsidiaries the power and responsibility to act beyond its market.

The subsidiaries have external oriented strategy unlike Mini-Replica approach, where each subsidiaries produce multiple products for different segments

Subsidiaries have relatively great freedom to enter an leave markets in a timely fashion

Global Product Mandate Implications:

R&D, production, marketing and strategic management will be located at the subsidiary level

Subsidiaries following global product mandate approach have unique control within the multinational for certain products thus their level of global integration are very high.

Subsidiaries are autonomous as they have high degree of independence over strategic product related decision

Pros and Cons of GBM: GBM is similar to Mini Replica Strategy but with a

mandate to develop, produce and market a specific product.

Global Product Mandate

Global Generic Strategy A firm’s relative position within an industry is given by its

choice of competitive advantage. In order to gain competitive advantage managers need to focus on how value is created.

There are two basic types of Competitive Advantage Cost leadership Differentiation

Michael Porter has distinguished four generic strategies that firms can pursue to create value within their organization.

Global Generic Strategy

Global Generic Strategy These are called generic strategies because they are not firm

or industry dependent, they can be employed in any type of business in any industry.

Cost Leadership The main aim is to become the lowest cost producer

relative to local or other foreign rivals in the same market.

This strategy appeal to price sensitive customers.

There are three main ways to pursue this strategy Achieving a high asset turnover. In service industries, this may

mean for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast. In manufacturing, it will involve production of high volumes of output.

Achieving low direct and indirect operating costs. offering high volumes of standardized products, offering basic no-frills products limiting customization and personalization of service. Production costs are kept low by using fewer

components, using standard components, and limiting the number of models produced to ensure larger production runs.

Overheads are kept low by paying low wages, locating premises in low rent areas, establishing a cost-conscious culture, etc.

Cost Leadership

Control over the supply/procurement chain to ensure low costs.

bulk buying to enjoy quantity discounts, squeezing suppliers on price, instituting competitive bidding for contracts, working with vendors to keep inventories low using

methods such as Just-in-Time purchasing or Vendor-Managed Inventory.

Cost Leadership

Situations: Standardized products Cut throat price competition Price sensitive buyers Less possibilities to achieve product

differentiation Switching cost of buyers are low

Cost Leadership

Differentiation is aimed at the broad market that involves the creation of a product or services that is perceived throughout its industry as unique.

The company or business unit may then charge a premium for its product. This specialty can be associated with design, brand image, technology, features, dealers, network, or customers service.

Differentiation Strategy

Focused Low Cost: it’s a market niche strategy, concentrating on a narrow, specific, and recognizable customer segment and competing with lowest prices, a strategy which requires the subsidiary to be the cost leader in its niche.

Focused Differentiation: it’s a market niche strategy, concentrating on a narrow, specific, and recognizable customer segment and offer its target market something they value highly and which is better suited than other firm’s products to their specific and unique requirements

Focused Strategies

Generic Strategy & Headquarter-Subsidiary Support

Generic Strategies Support from Headquarters

Cost Leadership Strategy

Strong support from HQ to reduce cost Strong cooperation between subsidiaries to share bets

practices to reduce cost

Differentiation Strategy

Very Strong support from HQ to maintain quality and innovation

Very Strong cooperation between subsidiaries to maintain quality and innovation

Focused Cost Leadership

Low support from HQ Very low support from and cooperation between

subsidiaries

Focused Differentiation

Very Strong support from HQ to maintain quality of products and services

Very Strong cooperation between subsidiaries to maintain quality of products and services

Hybrid Strategy/ Integrated strategy Hybrid strategy leads to mediocrity

Stuck in the Middle

Criticism Sustainable competitive advantage rests on the hybrid

strategy. Turbulent global business environment requires firms to

adopt flexible combination of strategies Hybrid strategy deals with may inherent disadvantages

of cost leadership and differentiation strategy.