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  1. Introduction • Participation Update • Chapter 12: The Strategy of International Business • Chapter 13: The Organization of International Business • Globalization Debate!

  2. What do you have in common? BLUE Black Eyed Peas Vanilla Sky

  3. Last Week 1st Jaime 2nd Jade 3rd Erika, Enrique, Johannes & Shekinah This week 1st Jade & Jaime 2nd Johannes & Enrique 3rd Thais Gasper 4th Michael Participation Ranking

  4. Wendy Jeffus Harvard Summer School Chapter 12: The Strategy of International Business

  5. N.G.O. (Pakistan) Consult. (Nigeria) Group Projects P.A.T. (Japan) Hotel (USA) Carbon (Brazil) Pedometer (Germany) eShop (Spain) Baharat (China) Track (Canada) MicroFin (Botswana) eMusic (S. Korea) Luggage (UK)

  6. N.G.O. (Pakistan) Consult (Nigeria) Group Projects P.A.T. (Japan) Hotel (USA) Carbon (Brazil) Pedometer (Germany) eShop (Spain) Baharat (China) Track (Canada) MicroFin (Botswana) eMusic (S. Korea) Luggage (UK) • Image sources •

  7. Strategy • Strategy – actions managers take to attain the goals of the firm. • For most firms, the preeminent goal is to maximize the value of the firm for its owners.

  8. Value Creation • Value Creation Activities – allow a company to achieve superior efficiency, excellent quality, innovation, and customer responsiveness. • Product development, investments in human capital, manufacturing, marketing, and/or R & D. • The way to increase the profitability of a firm is to create more value • The amount of value a firm creates is measured by the difference between its costs of production and the value that consumers perceive in its products

  9. Perceptions of Value… Which “red car with 2 doors” is worth more? Which “brown bag” is worth more? 2011 Mitsubishi 2011 Ferrari

  10. Value Creation • Example: Cost per unit (C) = $15,000; Price per unit (P) = $20,000*; Value to Customer (V) $22,000 Track (Canada) N.G.O. (Pakistan) • Example: Cost per unit (C) = $1,500; Price per unit (P) = $2,000*; Value to Customer (V) $2,500 Note: (V) is the value to the average customer, customers have different perceptions of value. If you were a monopoly supplier, you could charge a price closer to this price.

  11. Strategic Positioning & Value Creation • Michael Porter states that there are two basic strategies for creating value and attaining a competitive advantage in an industry: • Low-Cost Strategy vs. Differentiation • Low Cost - value is created for the customer by offering low priced products. • Differentiation – unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition

  12. Pick a position that offers enough demand to support your choice. Configure internal operations, such as manufacturing, marketing, logistics, IT, and HR to support your position. Connect this decision to your organizational structure. Example: Where should the online bulk music company position their product? Where should the Spa & Hotel and Arizona compete? Increased Differentiation (V) Low Cost (C) Strategic Choice The Efficient Frontier shown below has a convex shape due to diminishing returns* Hotel (USA) eMusic (S. Korea) *Diminishing returns imply that when a firm has significant value built into its product offering, increasing value by a small amount requires significant additional costs. A firm with a low-cost structure, also may have to give up a lot of value to obtain further cost reductions.

  13. The Firm as a Value Chain • Any firm is composed of a series of distinct value creating activities • Primary activities • Research & development • Production • Marketing & Sales • Activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc. • Customer Service • Customer support, repair services, etc. • Support Activities • Information systems • Process automation, and other technology development • Logistics • Inbound logistics include the receiving, warehousing, and inventory control of input materials. • Outbound logistics are the activities required to get the finished product to the customer, including warehousing, order fulfillment, etc. • Human resource • the activities associated with recruiting, development, and compensation of employees.

  14. The Value Chain Carbon (Brazil) Consult. (Nigeria) P.A.T. (Japan)

  15. Global Expansion, Profitability, & Growth • Expanding globally allows firms to increase their profitability and rate of profit growth in ways not available to purely domestic enterprises • Firms that operate internationally are able to • Expand the market for their domestic products • Realize location & cost economies by dispersing individual value creation activities • Earn a greater return by leveraging any valuable skills developed in foreign operations

  16. Leveraging Products & Competencies • A company can increase its growth rate by taking goods or services developed at home and selling them internationally • Returns from such a strategy are likely to be greater if local competitors lack comparable products • Success of multinational companies also rest upon the core competencies that underlie the development, production, and marketing of goods or services • Core competencies are skills within the firm that competitors cannot easily match or imitate • Core competencies are the bedrock of a firm’s competitive advantage and enable them to reduce the costs of value creation

  17. McDonalds fast food P & G brand marketing Wal-Mart logistics Starbucks Freshly brewed coffee Toyota Low cost, high quality Boeing Multisourcing Dell Inventory management Apple graphics What are the Core Competencies?

  18. Consider the following: • Where are the best designers? • Where is the low cost or skilled labor? • Who will develop the best marketing • strategy? Location Economies • Location economies are the economies that arise from performing a value creation activity in the optimal location for that activity • Can have one of two effects: • It can lower the costs of value creation and help the firm to achieve a low-cost position and/or • It can enable a firm to differentiate its product offering from the competition • One result of this kind of thinking is the creation of a global web of value creation activities, with different stages of the value chain being dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized Note: Transportation & trade complicate the picture. Pedometer (Germany)

  19. Experience Effects • The experience curve refers to systematic reductions in production costs that have been observed to occur over the life of a product • There are two explanations for the experience effect • Learning effects refer to cost savings that come from learning by doing • Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product • The strategic significance of the experience curve is clear; moving down the experience curve allows a firm to reduce its cost of creating value and increase its profitability Baharat (China) Track (Canada) Making the first track-o-mat, is much more expensive than making the 1000th

  20. Leveraging Subsidiary Skills • Leveraging the skills created within subsidiaries and applying them to other operations within the firm’s global network may create value • Learning how to leverage the skills of subsidiaries presents a challenge for managers of multinational organizations • They must have the humility to recognize that valuable skills leading to competencies can arise anywhere within the firm’s global network • They must establish an incentive system that encourages local employees to acquire new skills • They must have a process for identifying when valuable new skills have been created in a subsidiary • They need to act as facilitators, helping to transfer valuable skills within the firm

  21. Old McDonalds New McDonalds Example: McDonalds

  22. Cost Pressure vs. Local Responsiveness • Firms that compete in the global marketplace typically face two types of competitive pressure • Pressures for cost reductions • Pressures to be locally responsive

  23. Pressure for Cost Reductions • International businesses often face pressures for cost reductions because of the competitive global market • Pressures for cost reduction can be particularly intense in industries producing commodity-type products • Universal needs exist when the tastes and preferences of consumers in different nations are similar if not identical • Pressures for cost reductions are also intense • In industries where major competitors are based in low-cost locations • Where there is persistent excess capacity • Where consumers are powerful and face low switching costs

  24. Pressure for Local Responsiveness • Differences in consumer tastes & preferences • North American families like pickup trucks while in Europe they are viewed as a utility vehicle for firms • Differences in infrastructure & traditional practices • Consumer electrical system in North America is based on 110 volts; in Europe on 240 volts • Differences in distribution channels • Germany has few retailers dominating the food market, while in Italy it is fragmented • Host-Government demands • Health care system differences between countries require pharmaceutical firms to change operating procedures

  25. Where Does Your Company Fit? P.A.T. (Japan) eShop (Spain) Pedometer (Germany) Hotel (USA) Carbon (Brazil) MicroFin (Botswana) N.G.O. (Pakistan) Consult. (Nigeria) Baharat (China) Track (Canada) eMusic (S. Korea) Luggage (UK)

  26. Choosing a Strategy

  27. International Strategy • International Strategy – transfer the skills and products derived from distinctive competencies to foreign markets, while undertaking some limited local customization. • Create value by transferring valuable core competencies to foreign markets that local competitors lack • Centralize product development functions at home • Establish manufacturing and marketing functions in local country but head office exercises tight control over it • Limit customization of product offering and market strategy • Strategy effective if firm faces weak pressures for local responsive and cost reductions

  28. Localization Strategy • Localization Strategy – customize product offering, marketing strategy, and business strategy to national conditions • Local responsiveness • Main aim is maximum local responsiveness • Customize product offering, market strategy including production and R&D according to national conditions • Generally unable to realize value from experience curve effects and location economies • Possess high cost structure

  29. Global Strategy • Global Strategy – focus on cost reductions • Experience curve effects – systematic reduction in production costs that occur over the life of a product • Learning effects • Economies of scale • Location economies – arise from performing a value creation activity in the optimal location • Focus is on achieving a low cost strategy by reaping cost reductions that come from experience curve effects and location economies • Production, marketing, and R&D concentrated in few favorable functions • Market standardized product to keep costs low • Effective where strong pressures for cost reductions and low demand for local responsiveness exist • Semiconductor industry

  30. Transnational Strategy • Transnational Strategy – simultaneous focus on reducing costs, transferring skills and products, and being locally responsive. • To meet competition, firms aim to reduce costs, transfer core competencies while paying attention to pressures for local responsiveness • Global learning • Valuable skills can develop in any of the firm’s world wide operations • Transfer of knowledge from foreign subsidiary to home country, to other foreign subsidiaries • Transnational strategy difficult task due to contradictory demands placed on the organization

  31. The Evolution of Strategy • Over time competitors inevitably emerge • An international strategy may not be viable in the long-term so firms need to shift toward a global standardization strategy or a transnational strategy in advance of competitors • As competition intensifies • International and localization strategies tend to become less viable • Managers need to orient their companies toward either a global standardization strategy or a transnational strategy

  32. The Evolution of Strategy

  33. Managerial Implications: Global Activities • Benefits • Greater return on core competencies • Location economies • Challenges • Consumer tastes and preferences • Infrastructure and traditional practices • Distribution channels • Host government demands

  34. The BCG Matrix is based on the product life cycle theory and it became on of the most well-known portfolio management decision making tools in the early 1970's. There are two dimensions - market share and market growth. BCG Matrix

  35. 5 Forces Analysis (Porter) • Entry of competitors • How easy or difficult is it for new entrants to start competing? • What economies of scale does a competitor need? • Is there a learning curve? • Threat of substitutes • How easy can a product or service be substituted? • Can products be made cheaper ? • What are the switching costs? • Bargaining power of buyers • What buyer information is available? • What price sensitivity exists in the market? • Bargaining power of suppliers • Is there a monopoly of suppliers? • Is there presence of substitute inputs? • Rivalry among the existing players • Does strong competition between the existing players exist? • What barriers to exit exists? • What kind of industry growth exists?

  36. Wendy Jeffus Harvard Summer School Chapter 13: The Organization of International Business

  37. Global strategy Centralized due to operational issues Localization strategy Decentralized due to emphasis on local responsiveness International strategy Centralize core competencies and decentralize foreign subsidiaries Transnational strategy Mixed Centralized for location and experience curve economies And decentralized for local responsiveness Strategic Choice,,,,,,,,,

  38. Organizational Architecture • Organizational architecture includes the totality of a firm’s organization, including formal organization structure, control systems and incentives, processes, organizational culture, and people • Superior enterprise profitability requires three conditions • The different elements of a firm’s organizational architecture must be internally consistent • The organizational architecture must fit the strategy of the firm • The strategy and architecture of the firm must not only be consistent with each other but they also must be consistent with competitive conditions

  39. Organizational Architecture Structure – Formal division of the firm into subunits (product divisions, national operations, and functions); location of decision-making responsibilities; & integrating mechanisms. Processes - The manner in which decisions are made and work is performed within the organization People - The strategy used to recruit, compensate, and retain employees and the type of people hired (i.e. their skills, values, and orientation.) Culture - The norms and value systems that are shared among the employees of an organization Incentives - The devices used to reward appropriate managerial behavior Control systems - The metrics used to measure the performance of sub-units

  40. Structure • Organizational structure can be thought of in terms of three dimensions: • Vertical differentiation: the location of decision-making responsibilities within a structure. Where decision-making power is concentrated. • Centralized or Decentralized decision making • Horizontal differentiation: the formal division of the organization into sub-units • Examples: by function, product, geography, or type of business. • Establishment of integrating mechanisms: mechanisms for coordinating sub-units MicroFin (Botswana)

  41. Centralization: Facilitates coordination Ensure decisions consistent with organization’s objectives Top-level managers have means to bring about organizational change Avoids duplication of activities Decentralization: Reduces the burden on top management Motivational research favors decentralization Permits greater flexibility Can result in better decisions Can increase control Vertical Differentiation MicroFin (Botswana)

  42. Horizontal Differentiation • Horizontal differentiation – how a firm divides itself into subunits • Based on function • (i.e. finance, marketing, etc.) • Type of business • Geographical area • Local responsiveness • By product • Location economies • Experience curve economies MicroFin (Botswana)

  43. Typical Functional Structure • Most small firms develop along these lines as they grow – the entrepreneur typically maintains tight control. • But as firms grow and develop new product lines, it can become a clumsy structure that is difficult to supervise and it can be difficult to identify the profit/loss of each business area.

  44. The International Division • Many manufacturing firms expanded internationally by exporting the product manufactured at home to foreign subsidiaries to sell • In time it might prove viable to manufacture the product in each country

  45. Problems with the International Structure • Potential for conflict and coordination problems between domestic and foreign operations • Heads of foreign subsidiaries are not given as much voice in the organization as the heads of domestic functions • The international division is presumed to be able to represent the interests of all countries to headquarters • Lack of coordination between domestic operations and foreign operations • To combat these problems firms choose one of the following structures • Worldwide product divisional structure which tends to be adopted by diversified firms that have domestic product division • Worldwide area structure which tends to be adopted by undiversified firms whose domestic structures are based on functions

  46. Worldwide Area Structure • Worldwide area structure • Favored by firms with low degree of diversification and domestic structure based on function • World is divided into autonomous geographic areas • Operational authority decentralized • Facilitates local responsiveness • Fragmentation of organization can occur • Consistent with multi-domestic strategy

  47. Worldwide Product Divisional Structure • Adopted by firms that are reasonably diversified • Original domestic firm structure based on product division • Value creation activities of each product division coordinated by that division worldwide • Help realize location and experience curve economies • Facilitate transfer of core competencies • Problem: area managers have limited control, subservient to product division managers, leading to lack of local responsiveness

  48. Global Matrix Structure • Helps to cope with conflicting demands of earlier strategies • Two dimensions: product division and geographic area • Product division and geographic areas given equal responsibility for operating decisions • Problems • Bureaucratic structure slows decision making • Conflict between areas and product divisions • Difficult to make one party accountable due to dual responsibility

  49. Global Matrix Structure

  50. Organizational Structure • This should be thought of in terms of three dimensions • Vertical differentiation: the location of decision-making responsibilities within a structure. Where decision-making power is concentrated • Horizontal differentiation: the formal division of the organization into sub-units • Establishment of integrating mechanisms: mechanisms for coordinating sub-units