Each of these strategies has its advantages and disadvantages.
Companies 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, they tend to centralise product development functions in their home country. However, they also tend to establish manufacturing and marketing functions in each major country in which they do business. Although they may undertake some local customisation 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 a company 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. However, when pressures for local responsiveness are high, companies pursuing this strategy lose out to companies that place a greater emphasis on customising the product offering and market strategy to local conditions. Furthermore, because of the duplication of manufacturing facilities, companies 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.
Companies pursuing a multidomestic strategy orient themselves toward achieving maximum local responsiveness. As with companies pursuing an international strategy, they tend to transfer skills and products developed at home to foreign markets. However, unlike international companies, multidomestic companies extensively customise both their product offering and their marketing strategy to different national environments. Consistent with this approach, they also tend to establish a complete set of activities – including production, marketing, and R&D – in each major national market in which they do business. As a result, they generally do not realise 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 decentralised 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 around the world.
Companies that follow a global strategy focus on increasing profitability by reaping the benefits of cost reductions that come from experience-curve effects and location economies. That is, they are pursuing a low-cost strategy. The various activities such as production, marketing, and R&D of companies pursuing a global strategy are concentrated in a few favourable locations. Global companies do not tend to customise their product offering and marketing strategy to local conditions. This is because customization raises costs because it involves shorter production runs and the duplication of functions. Instead, global companies prefer to market a standardised product worldwide so that they can reap the maximum benefits from the economies of scale that lie behind the experience curve. This strategy makes sense in those cases in which there are strong pressures for cost reductions and where demands for local responsiveness are minimal. These conditions exist in many industries manufacturing industrial goods.
Companies whose operations are not confined to any country or a region and which pursue low cost and product differentiation at the same time are referred to as transnational companies. In essence, transnational companies operate on a global level while maintaining a high level of local responsiveness. A transnational strategy makes sense when a company faces high pressures for cost reductions and high pressures for local responsiveness. Companies that pursue a transnational strategy basically try to achieve low-cost and differentiation advantages simultaneously. Although this strategy looks attractive, in practice it is a difficult strategy to pursue. Pressures for local responsiveness and cost reductions place conflicting demands on a company. Local responsiveness raises costs, which clearly makes cost reductions difficult to achieve. Although a transnational strategy apparently offers the most advantages, it should be remembered that implementing it raises difficult organisational issues.
The appropriateness of each strategy depends on the relative strength of pressures for cost reductions and for local responsiveness.