Global Strategy: an Organizing Framework by Sumantra Ghoshal - Article Example

Journal Article Review Name: Tutor: Course: Date: Article Identification Author Sumantra Ghoshal Title of article Global Strategy: An organizing Framework Title of Journal Strategic Management Journal Year of publication, Publisher 1987, John Wiley & Sons Page numbers 425-440 Key words Global strategy, MNCs, Organizational Framework and competitive advantage Summary The article brings out the concept of global strategy as popular in the field of international management especially to students, researchers and managers of multinational corporations. It then presents a range of issues based on a specific conceptual framework to advance the discourse of global strategy. In the framework, the article provides a foundation to develop literature on creating a map in the field and topical issue. In addition, the article recognizes that the map as being essential in both future research in the area of international management and organizing existing literature. However, the scope of the article is limited to multinational corporation managers and it was specifically written to enable them relate and synthesize different prescriptions and perspectives available for global strategic management. Critical discussion Sumatra Ghoshal (1987) presents three key issues in this article; arguments for and against global strategy, appropriate organizing strategy, and prescription to multinational corporation managers. To start with, on arguments for and against global strategy, the author mentions that several articles have been written in The Economist, Fortune, Harvard Business Review among others have urged multinationals to ‘go international ’ in their strategies. The author further argues that even the academia has engendered a large number of papers and presentations in support of international market entry. These papers appear in Strategic Management Society, Academy of International Business and Academy of Management. The article begins by defining the term global strategies from the perspective of Hamel and Prahad (1985) and Hout, Rudden and Porter (1982). The authors provided the difference between global strategy, global firm and global industry and why the former is appropriate for global industries. A divergent opinion is given by Kogut (1984) and Barlett (1985) who asserted that global strategies are not ‘given’ in any priori sense. They said that some industries may have large economies of scale to make them go global such as aero-engines while others have globalness thrust on them such as Procter and Gamble of the US or Yoshida Kagyo of Japan. Ghoshal agrees that the concept of global strategy is not new as recently thought by some authors. The author points out that Perlmutter (1969) had attempted to distinguish between ethnocentric, polycentric and geocentric approaches while Leontiades (1984) later attempted to integrate and rationalize task flows. The most important contribution here was that of Porter (1984) who introduced the aspect of firm’s competitive advantage through configuration of value chain, national differentiation and global integration. In the article, some authors like Levitt (1983) and Hout, et al. (1982) mention product standardization and exploitation of global economies of scale. However, Hamel and Prahalad (1985) contradict Levitt (1983) by recommending a broad brand portfolio. The article agrees that though there are many suggestions that prescribe global strategic to Multinational Corporation’s (MNCs) managers, it is difficult to reconcile its managerial implications. The article has successfully defined global strategies and brought in the various perspectives of several authors. It attempted to project global strategy as an existing idea that is being used by companies and has been there for a while. Therefore, the article was well argued in terms of suitability of Multinational Corporation’s (MNCs) managers, desire for competitive advantage and practicability of the concept. However, the article failed to explain how rationalization of final products and components will affect values, information, technology and people. This perspective was not taken despite Porter (1984) providing a framework for efficiency of resources such as people, machines, information and technology as a way of configuring its value chain and gaining competitive advantage. Secondly, on appropriate organizing strategy, the author identifies the framework as ‘mapping means and ends’. The arguments for this framework are based on the premise that there is no framework provided so far that can assimilate different prescriptions and perspectives. The article points out that before prescribing an organizing framework, some issues have to be taken into consideration such as corporate objectives and sources of competitive advantage. This organizing framework was chosen based on a number of factors; achieving efficiency in current activities, managing risks associated with the activities and developing internal learning capabilities. The article argues that these factors are the ones responsible for achieving competitive advantage. It further argues that in achieving competitive advantage, firms can exploit input and output markets, benefit from different economies of scale and exploit synergies or economies of scope. Ghoshal then attempts to link the different goals and means by using competitive advantage to learn international business, manage risks and optimize efficiency. The article successfully identified, explained and theorized the organizing framework. This was done through a table with four columns and three rows. The first column listed the strategic objectives while the three adjacent columns listed the sources of competitive advantage. Under sources of competitive advantage were national differences, scale of economies and scope of economies. The article defends this table as practical in various ways. One, it serves as a checklist for mapping overall strategies of a company and those of competitors. Second, it highlights contradictions between the various means and goals. By doing so, the author says that salient strategic dilemmas that could have been omitted are resolved. The article attempted to provide a broader explanation of the organizing framework by showing how strategic goals can achieve efficiency, manage risks and support learning, innovation and adaptation. Under achieving efficiency, the article uses the perspective of Caves (1980) who asserted that firms using their resources and competing in imperfect markets can earn different efficiency rents. The arguments for efficiency is through acquisition of surplus resources, differentiating products, and seeking low cost production factors. To bring out the idea of efficiency rents, several models are described in the articles such as generic strategies of Porter (1980), Portfolio model by Hofer and Schendel (1978), Integration-responsiveness framework by Bartlett (1985), and Overall Strategic Management Frameworks by Hax and Mijluf (1984). The article mentions the organizing framework as important for visualizing cost advantages for visual integration owing to differences in government regulations, distribution systems, industry structures and different tastes. It further argues that benefits of responsiveness and integration can be aggregated to industries, level of individual companies or level of functions in a company. Sumatra Ghoshal gives examples of consumer electronic industry having high integration advantages and low differentiation benefits. On the other hand, an industry like automobile (such as Toyota) exploits global integration advantages through centralization of decision making and production. Fiat exploits benefits of autonomous subsidiaries and national differentiation. However, the article could not explain how a firm gains from economies of scope, or could not provide a firm which has benefited or is currently using scope economies. Arguments for managing risks, the article agrees that there are endemic and company unique risks collapsed into four categories; macroeconomic risks, policy risks, competitive risks, and resource risks. The article explains each risk, impact on the firm and actionable steps to reduce the risks. It also recognizes the changing nature of risks, and provides an example of Nissan with aggressive internationalization strategy. It explains that Japan as home base for local car manufacturers has affected resource development plans of its companies owing to changing competitive positions. The article mentions that such risks force a company to focus on aggressive resource acquisition and reduce its pace on internationalization. The concern of this article is a risk that cannot be diversified hence becomes a concern at strategic level. A case in point is currency risks which can be operating, semi-contractual or contractual risks as provided by Lessard and Lightstone (1983). The article mentions that all the risks above affects cost and revenue streams in terms of locations and structures. It recommends broadening of activity and output distributions to achieve benefits of diversification, giving greater emphasis to opportunism and incrementalism, and formulating overall strategies in general and flexible terms. In addition, the article suggests side-bets to create strategic options and cover contingencies. Though the article was successful in categorizing and explaining risks, it did not differentiate the risks in terms of impact, severity and frequency of occurrence, and how it affects industries. It only mentioned the contribution of Mascarenhas (1982) and Kogut (1985) to creation of strategic options for all the four risks but little was done to properly analyze the four risks. Regarding innovation, adaptation and learning as a factor influencing the organizing framework, the article takes a theoretical look at the internal capabilities of the firm. By advising for more information from Calvet (1981), the article was successful in explaining the reasons of firms going international. The article brings out the reasons as; key competencies and diversity of operational environment. On competencies, firms develop a stock of knowledge to create organizational diversity. Similarly, diversity exposes the firm to multiple stimuli, diverse capabilities and organizational learning. The article defends internal diversity as important in enhancing the probability of firm’s survival, creating joint innovations and exploiting such innovations in multiple locations. It provides a description in Wall Street Journal of 29th April 1985 of Proctor and Gamble who developed a water softening technology for the European market since the mineral content in the continent is twice the level experienced in the US. Surfactant technology is used in Japan to wash clothes because its waters are cold. While still explaining the organizing framework, the article articulates ‘The Means’ as a source of competitive advantage. This section of the article is split into three; national differences, scale economies and scope economies. On national differences, the article uses an excellent managerial overview of Kogut (1985) to explain the differences in tastes and preferences of consumers in different countries. It provides that the success of a firm is in understanding the needs of the national market, and recommends a broader look at their economic and societal factors. The article recognizes that the reality of competitive advantage is in change in factors like availability and cost of capital change, technical manpower and skilled or unskilled labor. Ghoshal also asserts the presence of first order and second order effects of comparative advantages and suggests the uses of low capital costs, corporate ownership structures, low wage rates, and government subsidies. On scale of economies, the article develops on the Macroeconomic theory to advance the position of firms in expansion of scale of benefits. It asserts that higher scale of economies increases scale of benefits and accumulates learning. The article also develops on the value-added chain by Porter (1985) in order to disaggregate economies. It affirms that economies of scale could be higher in component production than assembly. On the scope of economies, the article accepts that it remains vague because it is a new concept. However, it successfully attempts to analyze in form of product and market diversification. It correlates this diversification in the form of shared physical assets, external relations and learning. Since it was a new concept then, the author only attempted to project it in terms of external and internal consistencies. Lastly, on prescriptions of the organizing framework to managers of multinational corporations (MNCs), the article adapts the synergy concept of ‘from parts to the whole’ and discusses the strategic trade-offs. The gives reasons why the framework is good for the managers such as addressing the totality of complex and multi-dimensional phenomenon, manufacturing scale benefits, and scope economies. However, it warns MNCs to fully understand strategic objectives and sources of comparative advantage, to avoid management failures and compromise to current efficiency owing to learning and optimization of risks. Overall contribution of the article The article by Sumatra Ghoshal has been successful in various ways. First, it has argued comprehensively for and against MNCs going global and the suitable framework that can be used to analyze international market entry. Second, it also succeeded in prescribing a suitable organizing framework, and analyzing the various prescriptions and perspectives in firms for comparative advantage when they go abroad. However, the article did not emerge with relevant theory on firm capitalization and maximizing profitability before going abroad as provided by classical economists. It also did not argue well the aspect structuralism in firms as was the case then in the early 1980s. Despite that, the article has contributed to in-depth understanding of international marketing, firms’ comparative advantage and why some companies have succeeded both at home and abroad. This article is recommended for use by managers and academic scholars who would like to further understand international market and product strategies. Reference list Bartlett, CA 1985, Global competition and MNC managers, ICCH Note No. 0-385-287, Harvard Business School, Boston. Calvet, AL 1981, A synthesis of foreign direct investment theories and theories of multinational firm, Journal of International Business Studies. Pp. 43-60. Caves, RE 1980, Industrial organization, corporate strategy and structure, Journal of Economic Literature, XVIII, pp. 64-92. Ghoshal, S 1987, Global Strategy: An organizing Framework, Strategic Management Journal, Vol. 8, no. 5, pp. 425-440. Hamel, G & Prahalad, CK 1985, Do you really have a global strategy?, Harvard Business Review, July-Agust 1985, pp. 139-148. Hax, AC & Majluf, NS 1984, Strategic management: An integrated perspective, Prentice-Hall, Englewood Cliffs, NJ. Hout, T Porter ME & Rudden E 1982, How global companies win out, Harvard Business Review, Sept-Oct 1982, pp. 98-108. Kogut B 1984, Normative observations on the international value-added chain and strategic groups, Journal of International Business Studies, pp. 151-167. Leontiades, J 1984, Market share and corporate strategy in international industries. Journal of Business Strategy, Vol. 5, no. 1, pp. 30-37. Lessard, D & Lightstone, J 1983, The impact of exchange rates on operating profits: new business and financial responses, mimeo, Lightstone-Lessard Associates. Levitt, T 1983, The globalization of markets, Harvard Business Review, pp. 92-102. Mascarenhas, B 1982, Coping with uncertainty in international business, Journal of International Business Studies, pp. 87-98. Perlmutter HV 1969, The tortuous evolution of the multinational corporation, Columbia Journal of World Business. Pp. 9-18. Porter, ME 1980, Competitive advantage, Basic Books, New York. Porter, ME 1984, ‘Competition in global industries: a conceptual framework’, paper presented to the colloquium on competition in global industries, Harvard Business School. Porter, ME 1985, Competitive advantage, Free press, New York. Hofer, CW & Schendel, D 1978, Strategy Formulation: Analytical concepts, West Publishing Co. St. Paul, MN. Read More