Key Issues Influencing Localization Commerce Essay
The speed at which international business takes place has increased substantially and international managers need to react more quickly to economic, strategic and organizational imperatives than in the past as it is more costly to make mistakes today. The cost of reversing a decision due to the speed of international business makes making such mistakes extremely costly as while firms fix problems, competitors surge ahead. Standardization of MNCs is usually defined as standardization of subsidiaries towards following in line with HQ practices. Successful chains such as Mc Donalds have standardized products and management practices across the world and at the same time allowing for a local adaptation to the practices to suit local needs. Most MNCs commonly localize their marketing, promotion and distribution practices even though they have a global advertising strategy. Integration/responsiveness debate cannot be resolved by declaring one position more important that the other (Bartlett & Goshal). To be truly successful in the globalized world, MNC are required to balance between the two.
Multinational companies must decide whether to manage their subsidiaries based on local culture or to make them all in line with the global standardization and decide which route is more effective and efficient for them. MNC’s have considerable advantages compared to local based companies as they have previous experience from home countries and managerial knowledge and spread best practices around the world (Martin & Beaumont, 1998). Host countries however pose several new factors that managers must consider to counterbalance the effect of standardization (Quintanilla and Ferner, 2003).
Changes in the strategic orientation of MNCs as reflected in increased levels of interdependencies between organizational (sub-) units will thus rely on IHRM to help achieve this balance.
HR management is considered to be the most sensitive to local context (Gooderham et al. 1999). Pressures to adopt global strategies require higher level of global intergration of key HRM –processes. Many MNC’s have moved towards more deeply integrating these HRM practices but face resistance due to local culture, legislation and tradition (Lindohlm et al. 1999). Different approaches to HRM in MNC’s are closely related to international strategies of the firm (Downling et a. 1999; Scullion 1999). For example, companies with an ethnocentric approach grant little power to their foreign subsidiaries and key positions are fulfilled with PNC nationals, i.e expatriates. For example, Aeon’s key staff in Malaysia are fulfilled by Japanese expatriates. On the other hand companies with polycentric approaches allow major decisions to be made by local employees and key positions are held by local staff. This leads to more localized solutions in the HRM. Regiocentric and geocentric approaches are similar where key positions and solutions are decided by staff of the same region or location. The key issue is the extent to which MNCs should take their global integration (standardization) versus local responsiveness. International management is complicated due to the dimensions involved and the difficult issues of strategy formulation and implementation. Multinational managers however need to identify the opportunities hidden in the complexities of such international situations. This paper will be divided into two parts, the first examines the key issues that influence the degree of localization. Secondly, the paper examines global strategies towards increasing global standardization of HRM while balancing localization so as not to compromise local responsiveness. In both parts, the paper will go examine the role HRM plays towards achieving standardization and localization. Thirdly, it will examine situations of when best to move towards localization rather than standardization and vice versa.
2.0 Key issues influencing localization
Distinct local culture and motivation for local employees may not be similar to that of the home country making it difficult to apply similar incentives and expect the same outcome. Hofstede described national culture as the ‘collective mental programming’ which distinguishes one nation from another. The issue is how much influence cultural differences would bring to the workplace. Different approaches towards collectivism and individualistic cultures, according to Hofstede’s will create a number of negotiation points for managers to consider. Some cultures are individualistic where working as an individual is more appreciates whereas some are collectivist. Human resource management has aspects that are legally and culturally determined by the host country but is still responsible for the strategy and implementation plan (Stone, 2008). It therefore must determine what sort of strategy would work in the host country. For example, in Hong Kong as a measure of reducing staff turnover, HRM offered a $1000 increment towards a dental plan, as a result the company’s turnover reduced by 4% (Medland, 2004). While such a proposition may not work across other countries, it indicates that managers need to be aware of the different motivations in different countries and why pay and work conditions should not be standardized in MNCs. Research needs to be done to identify motivations similar to the dental work scheme in Hong Kong.
There are three different perspectives for understanding diversity: the cultural perspective, the institutional perspective and the network perspective (Evans et al. 2002). In the cultural perspective, individuals are cultured through a socialization process where they instill values and beliefs with which he uses to interpret the world also known as “mental programming” (Hofstede 1985). It is therefore inappropriate to take management practices developed in one culture and apply them on another and expect the same results (Hofstede, 1985). Cultural differences need to be taken into account, as some of these practices may not be well received in the new subsidiary. Members of that subsidiary may view these kind of practices as unusual and it may not be well received and lead to unexpected consequences hindering a subsidiary’s performance. From the cultural perspective extensive global standardization of HRM-practices, will not be an easy fit between organizational practices and the local culture. However, the cultural perspective does not take into account the ability of people from different cultures adapting to foreign practices (Evans et al. 2002).
The institutional perspective takes a broader view of the national context where it identifies that the key to understanding business in a foreign country lies in the correlations between financial, education, legal, economic, and political systems (Evans et al. 2002). The extents to which MNCs are able to implement their global standards are closely tied to the nature of these institutions. For example, the relative strength or weakness of these institutions in exerting influence on the ability of an MNC to import its own approaches to HRM. This is often the case when MNCs try to put expatriates in key positions leaving local staff in the more menial positions. Often these institutions will exert influence and move towards forcing MNCs to train or employ staff to fill such positions.
The network perspective indicates that MNCs are not only influenced by the social norms and cultures of their home country but also by industry standards (Evans et al. 2002). This influences the amount of standardization able to be implemented by MNCs or forces them to provide such standardization.
The cultural and institutional perspective help identify the localization needs within the HRM-function; the network perspective identifies the role of interorganizational networks in defining the nature of industries and organizational practices. Key reasons for a localization approach within HRM include issues such as being responsive to the local authorities and institutions. Keeping up with public opinion by providing benefits to the local populace such as job opportunities and providing a higher level of organizational commitment among locals are also prime reasons for localization of HRM practices (Evans et al 2002). However, there are often problems with this as finding suitable candidates with the necessary skills may prove difficult. For example in China, a major problem is the lack of suitable candidates given a shortage of finding mid-level and top-level leadership.
3.0 Global strategies toward increasing global standardization
A major issue that international managers face is forces that require both local responsiveness and global integration of subsidiaries with the overall structure of an MNE. MNEs must find ways to combine their firm-specific capabilities with local knowledge to create the best value proposition to suit the local culture and its needs. Some subsidiaries have created a layer where they have been isolated from the overall structure of an MNE that it is unlikely to cooperate and share knowledge with other units of the MNE. This is particularly the case where subsidiaries have competed with each other for resources from headquarters which promote inter-unit rivalry (Fairclough and Boussebaa, 2010). MNes need to make use of the strengths of its internal network set up across its subsidiaries. Managers have to incentivize compatibility among internal agents and incentivize coordination between its internal agents. The challenge for international managers is to foster a sense of coopetition between these subsidiaries and designing control structure to implement to foster this relationship. If designed incorrectly, these structures have the potential to create a conflict of interest in the subsidiary, causing it to focus its resources to its own benefit rather than that of its parent company (Clark and Geppert, 2010). To create value, parties or units cannot act in isolation. They have to recognize their interdependence (LAdo, Boyd & Hanlon, 1997). Within a multinational enterprise, inter unit coopetition occurs where cooperation and competition occur simultaneously as subsidiaries are enticed or enforced to collaborate but encounter conflicts arising from competing for the limited resources offered by the parent. Even within the same parent umbrella, subsidiaries rarely share similar interest in all aspects as a result of rivalrous pressures from heightened local responsiveness and national adaptation particularly for MNEs emphasizing on multidomestic strategies. Therefore, managers need to create a flow of the sharing of knowledge and cooperation so that subsidiaries can leverage on the distinct core competencies of other subsidiaries.
Interest in a standardization approach has been increasing due to the globalization. Global integration has become more popular and is becoming a necessity in a number of markets to stay competitive where decentralized strategies were more popular previously (Evans et al. 2002). Using a global strategy approach has several drawbacks; the main weakness is the weakness in the firm’s ability to respond to the changes in the market (Evans et al. 2002). Creating harmony between global strategy and national response is inevitable (Hammerly, 1992). There has to be balance between standardization versus the localization as fully localizing a subsidiary does not make full use of the core competencies and skills that an MNC should leverage on to separate itself from the local competition. A critical method of doing so is to determine what belongs to the core of the organization and what does not. This will enable firms to integrate global activities appropriately and also adapt local activities efficiently. This core should be replicated throughout the firm’s subsidiaries worldwide. Global standardization does not mean the synchronizing all areas of a firms business, but may be limited to a certain product, function or value chain segment. Therefore, while adopting a global strategy, MNCs still have the option of changing particular areas within the operations so that they do not disrupt the culture of the organization while still being able to keep their core competencies. Giving power to the subsidiary also helps the MNC keep the standardization of the key sectors of the business while allowing subsidiaries to make decisions that need local adaptation. For example, looking at KFC in China, it can be observed that the power to make changes by the subsidiary has allowed them to take a considerable lead in comparison with its competitors. They allowed an adaptation to the market for its menu to better suit the local tastes, however they maintained the core elements of the business which is the supply chain and the business model.
The development of international HRM can be divided into a four-phase organizational life cycle (Adler and Ghadar, XXXX).The central idea is that firms should find the best fit between their environment, strategy and human resource policies. The following summarizes some of the suggested links between the phases of internationalization and HRM.
Foreign markets served by exporting unchanged products. No real international HRM
Products developed to fit local needs. Expatriates fill general management and important posts in subsidiaries. Locals occupy roles which need understanding of local conditions.
Worldwide coordination used to achieve economies of scale. Selection focuses on best person for international management roles. Aim is to develop a management corps who shares organizational values to help achieve integration. Management development is the spearhead of
High quality at minimal cost through global integration and local responsiveness
This analysis shows the flow of how an MNE develops its understanding of international HRM, the focus of HRM shifts from the management of expatriates to the development of international management. This highlights the role in which HRM plays in developing individuals within the company so they build up a bank of knowledge from exposing these individuals to trips to overseas subsidiaries (Kamoche, 1997). This indicates the role of HRM in developing individuals so that they are able to experience different work cultures and be able to adapt. Having experienced these work cultures of different subsidiaries prepares the expatriates for culture shock and being able to work in different work cultures. This allows them to better facilitate standardization as they would understand the practices that would be best accepted in that particular culture after being exposed to it.
4.0 Levels of standardization vs localization
In order to be globally competitive, MNCs must make the decision of when to best make changes to the subsidiaries in terms of the level of standardization and localization. The following points will discuss the issue. Companies must ensure that they focus on the core competencies and replicate these core competencies across its subsidiaries as they are key to separating themselves from their competitors. Without this unique trait, there will be little to differentiate themselves from their competitors and may be detrimental to the success of the company. In this highly competitive market, it allows competitors the opportunity to gain market share. Therefore, when core competencies are being considered, MNCs need to use standardization. This makes full use of the very core strengths that identify a company as a leader within an industry. However, the term core competencies should be used selectively and consider that not everything within a company should not be considered a core competencies. Whenever core competencies are not involved and when subsidiaries have a need to adapt to specific local cultures or institutional circumstances in order to be successful in the particular field, then MNCs should consider allowing firms to conduct localization.
There are several schools of thought that propose several strategies towards the degree to which MNCs should standardize or localize. Some alternatives are provided to balance between the extremes of fully localizing the company or standardizing it. (1) The adaptation strategy where a basic strategy is is adapted to meet market forces and needs but never to the degree of a localized strategy. This means that the marketing mix is only changed to a certain extent and adjusted to the local situation when needed (Hovell & Walters, 1972) (2) Sub global strategy where clustering foreign markets into groups which are more or less similar and standardizing them according to region (Hovell & Walters). (3) Worldwide segmentation strategy where customer segments exist worldwide and can be offered a standardized product (Fatt, 1967) An example of this would be Coca Cola and Apple’s worldwide segment. (4) Combination and mixed strategies where global companies can offer both worldwide strategies and local strategies to benefit from both (Hovell & Walters, 1972). Another opinion posed by Quelch & Hoff is that firms are able to standardize global strategy up to a certain degree and upon which they adapt marketing strategies to suit local differences (Quelch & Hoff, 1986). This is more visible when viewed from a marketing strategies basic components of the 6p’s: product, price, place, promotion, power and people (Kotler, 1986). Each marketing component can have its own standardization and at the same time still be tailored to suit local needs. For example, in terms of price, having a standardized product across all subsidiaries but altering price to suit the local markets price points is a common practice within MNCs such as P&G. Companies like Unilever, Nestle, Proctor and Gamble follow a mixed approach. They have standardized offerings in terms of their brands, but they blend and adapt their 4Ps to suit the needs of the local culture. Their offerings are generally standardized but the implementation strategy “local” (http://nptel.iitm.ac.in/courses/110105029/pdf%20sahany/module%207l-36.pdf).
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