Compulsions For Cost Reduction And Responsiveness

Liberalization of the world trade environment

XYZ which will compete globally generally face two types of competitive pressures: pressures for cost reductions and pressures to be locally responsive. International companies must cope with pressures for cost reductions. This is more so for industries producing commodity-type products such as tools, motors etc. for which price is the main competitive weapon. Pressures for cost reductions are also severe in industries in which the competitors are based in low-cost locations. Liberalization of the world trade environment is also expected to generally increase cost pressures because of greater international competition.

Countering pressures for cost reductions requires that the company minimize its unit costs. To attain this goal, XYZ may have to base its value creating activities at the most favorable low-cost location anywhere in the world and offer a standardized product globally in order to ride down the experience curve as quickly as possible. Responding to pressures to be locally responsive requires that XYZ differentiate or customize its product offering and marketing strategy in Japan an effort to cater to the different consumers’ tastes and preferences, business practices, distribution channels, competitive conditions, and governmental policies.

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Since differentiation across different sectors in Japan may involve significant duplication and a lack of product standardization, it may raise costs. Dealing with these conflicting and contradictory pressures is a difficult challenge for the company, mainly because being locally responsive tends to raise costs.

Responsiveness to local needs

Pressures for local responsiveness crop up due to differences in consumers’ tastes and preferences, differences in infrastructure, differences in distribution channels, and the demands of the host government.

Consumers’ tastes and preferences differ significantly between different parts of the country due to historic or cultural reasons. The product and marketing messages have to be customized to appeal to the tastes and preferences of local consumers in such cases. This typically requires entrusting the production and marketing decisions to local subsidiaries. Pressures for local responsiveness also crop up due to differences in infrastructure and traditional practices among countries, creating a need to customize products suitably. This may again require the delegation of manufacturing and production functions to local subsidiaries.

Differences in distribution channels in Japan may require adopting different strategies. This may necessitate the delegation of marketing functions to national subsidiaries. Finally, economic and political demands imposed by host governments may necessitate a degree of local responsiveness. Generally, threats of protectionism, economic nationalism, and local content rules all dictate that international businesses manufacture locally. Pressures for local responsiveness restrict XYZ from realizing full benefits from experience-curve effects and location advantages.

In addition, pressures for local responsiveness imply that it may not be possible to transfer from USA to Japan the skills and products associated with a company’s distinctive competencies.

Strategic choise XYZ

Corporation will use four basic strategies to enter and compete in the international environment. Each of these strategies has its advantages and disadvantages. International Strategy XYZ that pursue an international strategy create value by transferring valuable skills and products to foreign markets where local competitors lack those skills and products.

Most international companies have created value by transferring differentiated product offerings developed at home to new markets overseas. Consequently, XYZ tends to centralize product development functions in the home country. However, the company also tends to establish manufacturing and marketing functions in Japan in which it will do business. Although it may undertake some local customization of product offering and marketing strategy, this tends to be limited in scope. Ultimately, in most international companies the head quarters retains tight control over marketing and product strategy.

An international strategy makes sense if XYZ has valuable unique competencies that local competitors in foreign markets lack and if the company faces relatively weak pressures for local responsiveness and cost reductions. In such situations, an international strategy can be very profitable. When pressures for local responsiveness are high, XYZ pursuing this strategy lose out to companies that place a greater emphasis on customizing the product offering and market strategy to local conditions.

Because of the duplication of manufacturing facilities, XYZ that pursue an international strategy tend to incur high operating costs. Therefore, this strategy is often unsuitable for industries in which cost pressures are high. Multidomestic Strategy XYZ Corporation pursuing a multidomestic strategy orient itself towards achieving maximum local responsiveness. As with companies pursuing an international strategy, they tend to transfer skills and products developed at home to foreign markets.

XYZ extensively customize product offering and marketing strategy

Unlike international companies, XYZ extensively customize both their product offering and their marketing strategy to different national environments. Consistent with this approach, the company also tends to establish a complete set of activities — including production, marketing, and R&D in Japan in which it intends to do business. As a result. it generally does not realize value from experience-curve effects and location advantages and, therefore, often have a high cost structure. A multidomestic strategy makes most sense when there are high pressures for local responsiveness and low pressures for cost reductions.

The high cost structure associated with the replication of production facilities makes this strategy inappropriate in industries in which cost pressures are intense. Another limitation of this strategy is that many multidomestic companies have developed into decentralized groupings in which each national subsidiary functions in a largely autonomous manner. As a result, after some time they begin to lose the ability to transfer the skills and products derived from distinctive competencies to their various national subsidiaries.