Production and Logistics Management in Multinational Enterprises

Value-Creation Activities of the Enterprise

The field of international business is large and growing. The multinational enterprise (MNE) is the leading actor on the stage of international business. Multinational enterprises today account for the greater part of international transactions. To be classified as an MNE a company must operate in six or more foreign nations.

The fundamental purpose of any business is to make a profit. A company makes a profit if the price it can charge for its output is greater than its costs of producing that output. To do this, a company must produce a product that is valued by consumers. Thus we say that businesses engage in the activity of value creation.

The price consumers are prepared to pay for a product indicates the value of the product to consumers.

Companies can increase their profits in two ways:

1) by adding value to a product so consumers are willing to pay more for it. A company adds value to a product when it improves the product's quality, provides a service for consumers, or customizes the product to consumer needs in such a way that consumers will pay more for it; that is, when the company differentiates the product from that offered by competitors.

2) by lowering the costs of value creation (i.e., the costs of production). Companies lower the costs of value creation when they find ways to perform value creation more efficiently.

Thus there are two basic strategies for improving a company's profitability - a differentiation strategy and a low-cost strategy.

It is useful to think of the company as a value chain composed of a series of distinct value-creation activities including production, marketing, materials management, R&D, human resources, information systems, and the company infrastructure. We can categorize these value-creation activities as primary activities and support activities.

Primary activities of a company involve creating the product, marketing and delivering the product to the buyers, and providing support and after-sale service to the buyers of the product. Here we consider activities involved in the physical creation of the product as production and those involved in marketing, delivery,' and after-sale service as marketing. Efficient production can reduce the costs of creating value (e.g.. by realizing scale economies) and can add value by increasing product quality (e.g., by reducing the number of defective products). Efficient marketing also can help the company to reduce its costs of creating value (e.g., by generating the volume sales necessary to realize scale economies) and can add value by helping the company customize its product to consumer needs and differentiate its product from competitors' products.

Support activities provide the inputs for the primary activities. The materials management function controls the transmission of physical materials through the value chain - from procurement through production and into distribution. An effective materials management function can monitor the quality of inputs into the production process. This results in improved quality of the company's outputs, which adds value.

The R&D function develops new product and process technologies. Technological developments can reduce production costs and can result in the creation of more useful and more attractive products. Thus R&D can affect primary production and marketing activities and, through them, value creation.

An effective human resource function ensures that the company has an optimal mix of people to perform its primary production and marketing activities, that the staffing requirements of the support activities are met and that employees are well trained for their tasks and compensated accordingly.

The information systems function makes certain that management has the information it needs to maximize the efficiency of its value chain and to exploit information-based competitive advantages in the market place.

Company infrastructure - consisting of such factors as organizational structure, general management, planning, finance, and legal and government affairs - embraces all other activities of the company and establishes the context for them. An efficient infrastructure thus helps both to create value and reduce the costs of creating value.

Business Strategy for a Multinational Enterprise

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

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

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

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

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

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

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

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

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

International Market Segmentation and Product Positioning.

Marketing functions are often summarized as "the 4Ps": product, price, promotion, and place (distribution). The functions involved in international marketing are often complicated by environmental differences in the countries served by the MNE. The marketing functions include 1 identification of the needs of potential and actual customers (the function of marketing research), 2) the design of products and/or services to fill these needs (product planning with emphasis on the balance between standardization and differentiation), 3) the pricing and promotion of the offering (including advertising and personal selling), 4) the selection and coordination of channels of distribution, and the provision of follow-

up services. The two cornerstones of international marketing strategy are market segmentation and foreign product positioning.

Market segmentation. International market segmentation is used to adapt to customer heterogeneity both between nations and within countries. When we compare a single-country market and a multi-country market we usually face considerable heterogeneity among the buyers across and within countries.

Demographics (such as age, number of children, marital status, gender), socioeconomics (such as income, social class), and geographical location serve together as strong criteria for segmentation in many countries. The chosen segmentation variables and the consequent division of the total market into subgroups should satisfy the following criteria.

First, the segments should be "measurable". It is necessary to measure the size and purchasing power of each segment.

Second, the segments should be accessible. That is, the identified subgroups should be reachable in terms of both communication and physical distribution. The infrastructure of the country determines whether this requirement can be met.

Third, the target should be substantial. It makes little sense to target a segment with few members or very low potential. The potential sales volume in a segment needs to be substantial enough.

Once the segments have been identified in the host-country market, the targeting strategies available to the marketer involve a "no-target" approach (usually only in the initial stages of involvement), a "concentrated" approach where only one or two segments are targeted, or a "differential" approach where most of the uncovered segments are adapted. In the international arena, the concentrated approach is often the most profitable one, since it allows a focused attempt to sell in a relatively homogeneous subset of the market.

Foreign Product Positioning. To target a specific segment, the international marketer needs to be skillful at developing the marketing mix. This task is referred to as foreign product positioning.

The concept of foreign positioning is based on the idea that products consist of bundles of attributes that generate benefits to the buyer and user. In the product space a product is graphically represented as a point defined by its attribute scores. Other products are represented by other points. If the points are close, the products tend to have similar attributes and are substitutes, i.e. they compete heavily. The farther away a point is from another (i.e. their attributes differ considerably), the less the direct competition is. The location of a product's point in this product space is its positioning.

The international marketer needs to be skillful at determining the exact segment of the population that is likely to buy a product, and then developing a marketing campaign to enhance the product's image to fit that particular segment. The most characteristic feature of foreign product positioning is that the country of origin of a product is identified with.the label on the product, equivalent to a branding of the product. Sellers have the option either to make such branding the cornerstone of their marketing campaign as in the case with world-known brands that carry positive stereotypes (Nissan cars, L'Oreal cosmetics, Coca-Cola soft drinks),or,

conversely, to attempt to avoid the label to hide the country of origin as in the case of less-known producers from the countries, evoking negative stereotypes.

Another characteristic feature of foreign product positioning is balancing (he desire for standardization against the need for adaptation of the product to the specific needs of the foreign market. Successful application of the concept of foreign product positioning ensures that the MNE would use its firm-specific advantages to sell its product to a well-defined target market, where the direct competition from domestic and foreign competitors is minimized.

Marketing Mix: Product and Pricing Decisions

In international marketing the generation of an optimal marketing mix (the 4Ps of marketing: product, pricing, promotion, and place) flows logically from the international segmentation and positioning strategies decided upon by the management of the MNE. In developing of the appropriate marketing mix most companies follow standard procedures, but decisions relevant to each particular factor taken separately are the subject to local adaptation.

Product decisions represent the most complex decisions in the marketing mix as they involve several activities including design, standardization, or adaptation to local markets, the development of a line of related products,and management of the product through its life cycle.

It is generally recognized that products follow a life cycle: introduction, growth, maturity, and decline. Thus sales and, consequently profits, are the lowest when the products are in the introductory stage and the highest when they reach the stage of maturity. In the international context it is common for a product to be in the mature stage of the life cycle in one country and in the introductory stage in another.

The speed at which products are introduced in different country markets has considerably grown recently. At one time products were first introduced in high-income markets such as the United States, Europe and Japan, and only later introduced in middle- and low-income countries. The reduction of tariff and non-tariff barriers to trade, rapidly rising income in lower income countries, and the formation of free-trade zones have condensed the product life cycle. Since the early 1980s the launch of many new products has been occurring almost simultaneously around the world.

In this new environment international marketers should develop a careful coordinated marketing program, starting small entry with a single offering to a chosen market segment and then gradually spreading to additional market segments through product-line additions. This strategy is known as "product -line stretching".

The second of the 4Ps of the marketing mix is pricing. There are several common pricing strategies and issues relevant to international marketers in making pricing decisions.

Pricing is known for its complicated legal aspects. In most countries there is antitrust legislation to protect competition. However, such phenomena as price cartels and dumping effectively diminish price as a competitive instrument.

To avoid dumping and make price cost-justified a pricing system based on cost allocations has been developed - a so-called cost-plus pricing. The MNE sets a

price at a level where costs are covered. It also allows a certain added figure (a plus) for reasonable profit margins.

When products are exported, costs tend to increase. The reality of greater transport distances, tariff charges, customs duties, and the necessary product adaptation makes it natural that a price escalation occurs. From the competitive viewpoint this is price disadvantage, since the MNE's products become more expensive in the foreign markets. However, the MNE has sufficient firm-specific advantages to offset this price disadvantage.

Experience-curve pricing is based on the fact that a fall in unit cost occurs as output increases. This pricing strategy is adopted by the companies entering the foreign market in the maturity stage. The fact that the product is in the maturity stage means that the MNE has already developed skills in its manufacturing, has increased the output and thus has lowered unit costs for the product.

One standard pricing practice which emerges from the application of the product life cycle concept distinguishes between high "skimming" pricing and low "penetration" pricing. In the introductory stage of the product life cycle, customers often care little about price and are more concerned with other attributes of the product. Therefore, a high price can be used to skim the cream off the top of the market.

Alternatively, the introductory price might be set low and a larger number of potential customers are attracted. A low introductory offering generates high sales and market shares. By maintaining this low price, the market is penetrated more quickly and the growth stage of the product life cycle is reached earlier.

Marketing Mix: Promotional and Distribution Decisions

The promotional decisions facing the international marketer can generally be subdivided into mass communication (advertising) and interpersonal communication (personal selling and sales management). Multinational enterprises use both of these methods.

Mass communication messages are traditionally broadcast to the people at large, who are the ultimate consumers in terms of marketing. Advertising is directed at generating demand from ultimate consumers. This is known as a "pull" strategy.

Advertising management is usually divided into three problem areas. The first is how much to spend to stimulate demand (the budgeting problem), and the second is which media to direct the firm's message (the media-selection problem). The third problem concerns what the message is and how it should be formulated.

One common approach to advertising budgeting is to spend a certain percentage of last year's sales. The sales generated will pay for future spending. Many multinational companies with standardized promotional messages cut advertising budget by providing local subsidiaries with various advertising materials.

The problem of media selection depends on the degree to which the selected target market can be reached by a chosen media source. In general, the media selection is country specific and must be performed with the help of local advertising agencies. Several large advertising agencies in high-income countries service their multinational clients and promote their firm-specific advantages. Such agencies combine the latest marketing techniques with deep knowledge of the

tools necessary to be successful in the local markets. These agencies can provide market research on demand conditions and market segments in the host country.

The most important and interesting question in overseas advertising relates to the message. What should be said? How should it be said? By whom should it be said? These are choices that require familiarity with the local market Brand and company names that are well known throughout the world markets speak for themselves (Coca-Cola, Sony, or Honda). In the case of slogans some adaptation to local country markets is necessary. The spokesperson chosen for a product also requires a careful adaptation to local environment since he or she need to be known to the local people.

Personal selling problems are country specific and product specific. The firm's salespersons should all have some knowledge of a host country's people, their language and culture. The importance of salespeople is an integral part of the firm's "push" strategy. The best salespersons for a firm are host-country natives. Such sales objectives as to provide after-sale service, spare parts for the product sold, or to generate new orders from existing customers, etc. can be achieved by standardized and repetitive calls by a native salesperson.

International distribution decisions fall into two categories. These are those decisions which concern the physical handling of the product (the physical transportation or physical distribution decisions) and those decisions which have to do with managing the product through the channel of distribution from the producer to the ultimate buyer (the channel management decisions).

The physical distribution refers to loading/unloading, shipment, warehousing, delivery, etc. and is considered to be the cornerstone of international trade. Nevertheless, it is the channel management decisions that are most important for international marketing. Entering the foreign market and developing trade relations with the firms performing the physical handling of the product leads to the question of channel management. The MNE must ensure a reliable distribution channel from production to the ultimate buyers. There are several approaches to this. They include intensive personal preparation, visits to potential distributors in the host country, training programs for local channel representatives, direct investment in a local sales office.

Smaller companies and larger companies in smaller markets usually work with independent distributors responsible for organizing and implementing the marketing of the product in the host country. Many large MNEs open their own sales subsidiaries (branches or offices). Such a sales subsidiary heeds to be staffed with host-country nationals in addition to expatriates. The most common arrangement is for top management of the subsidiary to consist of home-country expatriates and all channel activities to be handled by local people. The main role of the expatriate is often to transmit headquarters directives to the domestic staff who directly contact with the local buyers. The major tasks of the sales subsidiary include organizing the promotional campaigns and the provision of support to sales representatives. The basis for efficient performance of the sales subsidiary is the consistency of supplies from the home country.

Production and Logistics Management in Multinational Enterprises

International production is the essence of a multinational enterprise. An MNE produces at home as well as abroad through establishment of foreign subsidiaries. It is commonly agreed that the MNE is a firm with manufacturing subsidiaries in six or more foreign nations. The advantage of the MNEs lies in the product variety and adaptability since they can use information from their subsidiaries to learn about changes in the markets of host nations and thereby adapt their products to service host-nation variety in tastes.

Business cycles, competition, product substitution, and government-induced changes in tariffs cause the fluctuation of demand over time. The MNE, through its internal market, must smooth production and avoid the periodic conditions of under- and overcapacity. To allow the coordination of the movements and storage of inputs and outputs the firm must apply efficient logistics. The aim of logistics activities is to ensure that supplies are secured and demand for the final product is satisfied. Logistics activities include order processing, shipment of output, forecasting, purchasing, and production scheduling. The functions necessary to support these activities are transportation, storage, packaging, materials handling, and site location. The three major types of MNEs treat the process of production and logistics smoothing differently.

Ethnocentric. For the ethnocentric MNE, production smoothing is actually demand smoothing. The MNE will carefully select its markets and promotional methods so that demand will not exceed its capacity. When demand declines in one market, it will reduce production as quickly as possible, but it does so at the risk of losing customers in future periods. Logistics for the ethnocentric MNE is confined to exporting in the most cost- and time-efficient manner. The basic modes available for transportation are air, sea, rail, and road freight. While considering which of the modes to choose the MNE must evaluate such costs as holding extra inventory for a freight forwarder, packaging, paperwork, freight costs, customs fees, storage and delivery fees, repackaging, and others, all involving two or more nations with different bureaucratic, economic, and commercial systems.

Polycentrie. The polycentrie MNE will try to use small-capacity production facilities and carry larger inventories and/or use overtime production to meet periods of increased demand. The polycentrie MNE can also rely upon subcontracting production if demand exceeds its capacity. As the polycentrie MNE usually serves the host nation's market only there is a tendency to neglect logistics.

That's why the MNE's foreign subsidiaries are often slow to respond to new product launches by competitors as well as to excess demand or production stock-outs.

Geocentric The geocentric MNE manufactures the same product in a variety of nations and can efficiently shift capacity and output on a global basis. Such MNE can specialize production into four types of facilities: low unit cost, seasonal, stockpile, and flexible plants.

The low unit cost plant is intended to produce at full capacity. When foreign markets experience excess demand or oversupply, the lower unit costs are expected to compensate for the added logistics (movements and storage of inputs and outputs) and inventory costs (raw materials, semi-finished and finished goods). In situations where a product 's demand is seasonal and variations in demand can be forecasted accurately, a seasonal plant is put into operation. A stockpile plant may complement a low unit cost plant or operate independently. Flexible plants are designed to shift production quickly into new or existing products. They are not mass production oriented. With flexible plants the MNE can react rapidly to the introduction of new products by competitors or unexpected changes in demand.

The geocentric MNE will have a separate logistics department which coordinates all activities between a multitude of foreign subsidiaries' markets, production locations, and input sources. Computers and an experienced staff are required for the efficient operation of a logistics department.

Organizational Structure of a Multinational Enterprise

There are several organizational structures that a non-MNE can use: organization by function (i.e. production, marketing, finance, etc.), by product line (hand soaps, shampoos, etc.), by division (foods, health care, etc.), or in a few cases by a matrix. For an MNE the central problem lies in where to locate the firm's international activities within each functional area (e.g., international finance within the finance functionЈby products or by geographical area.

One of the prime responsibilities of the HRM function is to evaluate the organizational structure of the MNE and how it functions in relation to the firm's strategy and external environment. The MNE must choose how its organization can be most effectively subdivided: by function, by product line, or by area (region/ country).

In a functional organizational structure the major functional areas are typically production (often including R&D), finance, human resources, and marketing

International division (see fig. 1) within an MNE is headed by the general manager, who has the same level of authority as a general manager of the major product-line divisions of the firm. Foreign subsidiaries are organized by region and report to the international division. The general managers in the regions control the activities of their functional units (marketing, production, finance). The major advantage of trie international division is that it provides the base for the international operations of the MNE. This enables the firm to balance the interests of the subsidiaries to the benefit of the company as a whole. Knowledge of the international aspects of the firm's business is concentrated in a separate, centralized division.

An international division is often appropriate for a firm which is just starting international operations, since it allows the centralization of the firm's international expertise in one place. An international division is also often used by firms whose international operations are not closely linked with the domestic operations in the home country, such as banks and hotels.

An ethnocentric firm may view the world as one market for its product and organize by product line. The MNE is organized into world product groups, such as for product division 1 (see fig.2). Within each product division activities are centralized, but there is little connection between the world product groups. Therefore, in any host nation the MNE appears to be decentralized.

The product division structure works best when there are diverse product lines, many end users, and a requirement for high-technological expertise. Scale economies and experience curve effects can be realized while high shipping costs, tariffs and other costs are reduced. Most important, organization by product line enables the MNE to compete on a global basis, as the product division

The matrix structure for the MNE combines responsibilities for both product lines and regions. The matrix organization of the MNE is extremely difficult to operate, as it requires sensitive and well-trained middle managers, who assume responsibility for both products and nations. Essentially they have two bosses, as indicated in fig.4. In this figure, matrix manager 1 may be the product-line boss and matrix manager A - the regional boss. The middle manager has to work out how to resolve the often conflicting demands of product lines and nations.

managers can respond quickly to the actions of their competitors.

A polycentrie MNE is organized by area that is by geographical region (see

The senior manager of Region A runs that region in a decentralized manner as an independent profit centre. The regional manager controls the product lines of the operating companies in that region. Product-line managers control functional units such as marketing, production and finance. Again, there is little integration of the worldwide operations, yet the MNE is responsive to the needs of the host nations.

A polycentrie structure works best when theMNE has many mature, standardized product lines. The focus is upon marketing and'servicing'the host nations by autonomous regional managers who can determine the best delivery system for the product lines of the MNE. The major advantage of organizing by area is the ability to differentiate markets and obtain an optimal marketing mix. Regional subsidiaries operate as separate profit centers.

A geocentric firm integrates its worldwide operations and, being world-oriented, attempts to serve the stakeholders in each nation. The usual method of doing this is bv a matrix structure

The matrix structure has some benefits of decentralization, as the managers are aware of regional needs and know the product lines. The main advantage of the matrix organization is its greater attention to markets, competition and environmental aspects. Because of the complexity, only MNEs with adequate financial resources can use it.

The ultimate choice for any MNE is between centralization and decentralization of its functional areas. Organization by product line, region, or matrix must also meet special requirements of each functional area. The successful MNEs have organizational structures which resolve the competing demands of functional divisions, product lines, and regions.

The choice facing the MNE in its staffing strategy is relatively easy. It can hire host-country nationals, and train them to be specialists in the functional or production area (polycentric staffing), or it can use home-country people who can operate in a global context (ethnocentric staffing). The geocentric approach implies that the best person for the job is chosen, regardless of nationality.

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