Global Strategy: an Organized Framework by Ghoshal - Article Example

JOURNAL ARTICLE REVIEW Name Course Tutor Date Ghoshal, S., 1987. “Global Strategy: An Organized Framework”. Strategic Management Journal, 8 (5), 425-440. This article evaluates the global strategy that is mostly used by managers in multinational corporations as well as amongst students and researchers in the field of international management. The author of the article offers a conceptual framework that looks into the issues that are in line with global strategies. From an outward look the arrangement of the paper does not follow the recommended steps. As a matter of fact the author states one of the objectives of the paper to be; suggesting an organizing framework that will help scholars and managers in formulation of various issues arising from global strategy. The major argument that forms the gist of this article is that, simple categorization alone does not stand a chance of delineating between the corporate level strategies in large multinationals. Ghoshal (1987) then takes the approach of key strategic objectives of the multinational corporations and the tools used to achieve them. Ghoshal (1987) further notes that there are three tenets that basically cover the goals of these multinational corporations. First, the firm must ensure it is efficient in all its operations. Second, the firm must manage all the risks assumed through the operational activities. Lastly, the firm must have a well developed internal learning capability so as to adapt to future changes and be innovative. Ghoshal (1987) points ways in which multinational corporations develop competitive advantage including through the exploitation of the national differences, scale economies and economies of scope (Ghoshal, 1987). Global management’s strategic task is to leverage on all the aforementioned three sources of competitive advantage so as to boost efficiency, learning, and risk all in one basket internationally. Ghoshal (1987) asserts that the success of the global strategies mainly depends on the management of the interactions between these different means and goals; the organizing framework. It is useful when managers and academics have this in mind when discussing global strategy (Ghoshal, 1987). The proposed organizing framework has the advantage of highlighting the differences in means and goals thus making the strategic dilemmas outstanding rather than omitting them. The arsenal of any global strategy is to achieve efficiency as suggested by most strategic management literature (Ghoshal, 1987). In this way a strategy is only important if the action of a given firm affects the operations of the other. When the ratio is maximized the sustainability of the company is ensured (Ghoshal, 1987). The firm thus has to enhance its exchange value of its outputs while seeking low cost factors thus minimizing its inputs’ cost. Additionally, efficiency could be achieved through higher scale economies as well as finding more efficient production processes. Integration responsiveness framework is used to reflect the efficiency perspective. This framework visualizes the cost advantages of global integration of various tasks against the differentiation costs that respond to differences in industry structure, tastes, distribution systems, and government regulation (Ghoshal, 1987). There are many risks a multinational faces that should be managed (Ghoshal, 1987). First off, the MNC faces macroeconomic risks, policy risks, competitive risk and resources risk. The best way to manage risks is to jointly look at them prior to making a strategic decision (Ghoshal, 1987). The risks that cannot be diversified through the external market are of concern at the strategic level. Innovation, learning and adaptation are all contributed by the diversity of the environments in which the MNCs operate (Ghoshal, 1987). The concept of global strategic management is complex; however, managers must combine various insights to build a multidimensional strategy that is vigorous to different explanations as well as assumptions (Ghoshal, 1987). Ghoshal (1987) also appreciates trade-offs in adapting the proposed framework implying that to formulate and implement a given global strategy, multinational corporations have to consider various issues. These issues basically revolve around the strategic objectives and the sources of economies of scale (Ghoshal, 1987). Ghoshal (1987) clarifies that the framework seeks not to replace the analytical tools currently in use but instead incorporates them. Discussion of the Issues in the Journal Article This section will discuss, analyze, evaluate as well as criticize where possible, the two major issues of importance from the range of issues covered by Ghoshal in bringing out the theme of the journal article. These issues of discussion are sources of competitive advantage and strategic objectives. According to Ghoshal (1987) in the article, the strategic objectives of any multinational corporation are achieving efficiency, managing risks and innovation learning and adaptation. On the other hand the sources of competitive advantage include national differences, scope of and scale of economies (Ghoshal, 1987). Strategic Objectives The article is mainly inclined in the tenets of strategic objectives. Ghoshal (1987) argues that to attain efficiency the firms in the imperfect market create some form of efficiency rents through resource utilization. The objective of this strategy is to optimize the efficiency rents. Broadly viewed a firm can be looked at as an input-output system whose overall efficiency rests with the ratio between the values of outputs to the input costs (Ghoshal, 1987). When the ratio is maximized the firms are able to obtain surplus resources thus a secure future. This calls for product differentiation that is meant to enhance the exchange value of the outputs of the firm as well as minimizes costs of inputs through low cost factors (Gilbert & Behnam, 2009). Ghoshal (1987) asserts that MNCs achieve efficiency through higher economies of scale alongside more efficient production processes. Ghoshal (1987) further notes that the integration-responsiveness framework can be used to bring out the efficiency perspective. Ghoshal (1987) goes on to note that the IR framework acts as a lens that visualizes the cost advantages of global integration of tasks against the benefits from differentiation of benefits whose response is different across subsidiaries. Meyer & Estrin (2013) concur with (Ghoshal, 1987) noting that this IR framework makes an assumption that the strategies of MNCs are uniformly adopted and that they are consistent across the subsidiaries. To bring this out Ghoshal uses the example of consumer electronics industry that is characterized by low benefits of differentiation and higher merits of integration compared to the packed food industry where the opposite is very true. The strategy of one firm may be based majorly on the exploitation of advantages of global integration through centralized operations and decision making while another in exploiting the benefits of differentiation at national level (Meyer & Estrin, 2013). The last one results in the creation of subsidiaries exploiting the strong relationships between the local stakeholders thus cushioning themselves from global competition. Research is of greater benefits for integration while sales and good service provision forms the center of differentiation (Gilbert & Behnam, 2009). MNCs are faced with various risks as aforementioned. Some of the risks are ubiquitous to all firms while others firm specific across boundaries of operation. There are four broad risk categories. Ghoshal (1987) states macroeconomic risks as one of them stating that is completely out of control of the firms. These may include devastating events such as natural catastrophes and disasters as well as wars. The other risks in this category include random changes in exchange, wage, and commodity rates (Gilbert & Behnam, 2009). The other risk identified in the article is policy risks that arise from policy stands taken by different national governments and are partially controllable (Ghoshal, 1987). The third one is competitive risks that arise from the peers in the market and their actions. It also encompasses technological risks since one technology adopted by the two firms will make one invalid as time proceeds. Lastly, the firms may also experience resource risks (Meyer & Estrin, 2013). This includes lack of managerial talent as well as technology or capital. The risks are dynamic changing through time (Ghoshal, 1987; Meyer & Estrin, 2013). A firm must understand the risks it has at hand or is almost encountering prior to investing in any given region (Cullen et al, 2014). Cullen et al (2014) concur with Ghoshal (1987) that there must be flexibility in the strategies aimed at minimizing risks so as to ensure their robustness in different scenarios. The last strategic objective of the MNCs is to ensure that there is learning, innovation and adaptation (Ghoshal, 1987). The key asset towards the realization of this objective is diversity of environments where the MNCs operate. Meyer & Estrin (2013) back up Ghoshal (1987) stating that this exposes the firms to varying number of stimuli that allow for the development of a learning opportunity. The internalized diversity enhances learning opportunity thus success, while the initial knowledge stock of the firm backs it up thus organizational diversity (Gilbert & Behnam, 2009). Through diversity of resources the firm is able to institute joint innovations, and exploit them in different locations altogether (Meyer & Estrin, 2013). A good example of this is Proctor and Gamble through their Brussels Research center where they developed water softening technology and the surfactant technology for Europe and Japan due t location differences (Ghoshal, 1987). Ghoshal notes that diversity creates a potential for learning and does not enhance it. There must be systems mechanisms in place by the firm to ensure that learning takes place (Shah et al, 2012). Centralized firms have low learning potentials (Meyer & Estrin, 2013; Ghoshal, 1987)). Additionally, some firms may have all the systems and mechanisms but fail in knowledge transfer because of lack of expertise and knowledge itself in different components of an organization. Knowledge transfer in MNCs is impeded by both centralization and decentralization. While the author has covered this issue very well, he still fails to organize the work effectively. There lacks a general flow of the concept as at one point in time the reader has to refer to the previous pages instead of maybe an appendix. Sources of Competitive Advantage The article proposed three major sources of competitive advantage. The author fails to expound on the concept of competitive advantage prior to expounding on its sources. Competitive advantage is an attribute that enables an organization to outperform its peers in the imperfect competitive market it could be geographic location, resources or entry barriers among others. As per the article national differences is one of the sources of global competitive advantage (Chaston, 2012). Different nations have different activities of the firm (Chaston, 2012). Firms therefore can leverage on location through configuration of their value chain so that the activities are located in areas where there is low cost advantage. This gives birth to comparative advantage based competitive advantage (Ghoshal, 1987). Output markets may also encounter national differences in customer tastes, government regulations and distribution systems calling for different promotional or marketing strategies. Comparative advantage contributes to competitive advantage. However, there must be some complex organizational factors and processes that a firm needs to institute so as to have competitive advantage over its peers (Chaston, 2012). Ghoshal (1987) covers this tenet properly giving examples of Japanese and USA based industries. In terms of scale of economies affirm must expand the volume of its products so as to realize scale benefits. Ghoshal (1987) appreciates the fact that scale itself is a static concept stating that learning effect brings out the benefit of scale. Higher volumes help a firm to accumulate learning leading to reduction of costs as the firm slides down its own learning curve (Shah et al, 2012). Value creating activities enhance the benefits of scale (Hu, 2012). Scale efficiency can be obtained through creation of dedicated systems and assets as well as through increased specialization (Hu, 2012). There must however be operational and strategic flexibility to achieve this (Shah et al, 2012). The most contentious subject in strategic management literature has been how to maintain the balance between scale and flexibility through adoption of new technologies. Deb (2009) concurs with Ghoshal (1987) that the concept of economies of scope is relatively new and least understood by most authors and scholars. However, it is based on the idea that certain economies arise from intertwined product breadth where there is joint production of two or more products so as to achieve cost efficiency (Shah et al, 2012). The reduction of costs could be due to acquisition of technology that can be shared when developing products. A firm must have diversified ability to share costs as well as investments across same or different value chains that are used by the competitors that lack external as well as internal diversity. When a firm is diversifies some of its physical assets may be shared (Hu, 2012). Apart from the assets, external relations are also a pertinent source of scope economies. This includes the relationship between the firm and the suppliers, distributors, customers, governments, other firms, and institutions. Ghoshal (1987) gives a good example of Citibank, a multinational bank serving a MNC customer in a single country. Marketing can also be done across the same distribution channel. The third component of scope of economies is shared knowledge (Ghoshal, 1987). The author provides a table to elucidate on scope of economies as a source of competitive advantage. The workflow in this section is amazing. To leverage on scope of economies, firms must develop an external consistency with the demands of their operational environment (Gilbert & Behnam, 2009). On the other hands, firms still seeking scope of economies must have internal consistencies across different activities (Gilbert & Behnam, 2009). A final Evaluation of the overall Contribution The author achieves his major objective in the article by going even to an extent of giving examples using multinational corporations that have been in the global market for a long time. The arrangement of the article is not however, consistent with the formal arrangement a journal should have. The literature review section comes last while it should have followed the introduction. The section that would then have followed is the discussion where most of the work covered by the author would have fallen into. The journal has well elaborated and easy to understand tables that elucidate on points presented in the arguments. The author concludes the paper giving a rough overview of what his stand is and part of what the research implies. The Author (Ghoshal) has effectively pointed the scope of the article through outlining the strategic trade-offs that would otherwise hinder the smooth application of his proposed framework. Bibliography Chaston, I. (2012). Strategy for sustainable competitive advantage: Surviving declining demand and China's global development. New York: Routledge. Cullen, J. B., & Parboteeah, K. P. (2014). Multinational management: A strategic approach. Mason, OH: South-Western Cengage Learning. Deb, T. (2009). Managing human resources & industrial relations. New Delhi: Excel Books. Gilbert, D. U., & Behnam, M. (2009). Strategy process management in multinational companies: status quo, deficits and future perspectives. Problems and Perspectives in Management, 7(1), 70-85. Ghoshal, S., 1987. “Global Strategy: An Organized Framework”. Strategic Management Journal, 8 (5), 425-440. Hu, L. (2012). Strategic Management Knowledge Transfer, Absorptive Capacity and the Attainment of Strategic Objective of MNCs’ Chinese Subsidiaries. Modern Economy, 3(2), 424-428. Meyer, K. E., & Estrin, S. (2013, April 3). Local Context and Global Strategy: Extending the Integration Responsiveness Framework to Subsidiary Strategy. Retrieved from http://www.klausmeyer.co.uk/publications/2014_meyer_estrin_GSJ-subsidiary-strategy.pdf Shah, F. A., Yusaff, R. M., Hussain, A., & Hussain, J. (2012). A Critical Review of Multinational Companies, Their Structures and Strategies and Their Link with International Human Resource Management Dr. 2,3, 4. IOSR Journal of Business and Management (IOSRJBM), 3(5), 28-37. Read More