The Strategy and Organization of International Business

1. The Strategy and Organization of International Business

2. Strategy Actions taken by managers to attain firm’s goals. Value Creation Firm as Value Chain Profit() The difference between total revenue (TR) and total costs (TC): =TR-TC Maximize Long-term profitability Role of Strategy Profitability Rate of return concept; i.e. return on sales (ROS). ROS= /TR Strategy and the Firm

3. V - P V = Consumer Value P = Market Price C = Cost of Production V-P = Consumer Surplus P-C = Profit Margin V-C = Value Added P - C V C P C Value Creation

4. Materials Management Human Resources Information Systems Company Infrastructure R & D Production Marketing & Sales Service The Firm as a Value Chain Support Activities Primary Activities

5. The Role of Strategy Identifying and taking actions that willlower costsof value creation and/ordifferentiatethe firm’s product offering through superior design, quality service, functionality, etc.

6. Profiting from Global Expansion Firms operating internationally are able to: • Realize location economies. • Realize greater cost economies. • Earn a greater return from the firm’s distinctive skills or core competencies. • Earn a greater return by leveraging valuable skills developed in foreign operations and transferring them to the firm’s other operations. Profitability is constrained by product customization and the “imperative of localization”.

7. Location Economies Assembly Creating a Global Web Parts Sales Design Advertising Parts Pontiac LeMans Parts

8. Needs for consideration • Transportation costs. • Trade barriers. • Political risks. • Economic risks.

9. Learning effects: Cost savings that come from “learning by doing.” More significant in complex tasks. Economies of Scale: Reduction in unit cost achieved through volume production. Sources: Spread fixed costs over volume. Employing specialized equipment or personnel. Experience Curve

10. Strategic Significance Moving down the curve reduces the cost of creating value. B Unit Costs A Accumulated Output The Experience Curve

11. Leveraging Core Competencies Firm skills that competitors can not easilymatch or imitate. • Skills and products • are most unique. • Value placed by • consumers is great. • Few capable competitors • with skills or products. Value greatest when:

12. Leveraging Subsidiary Skills • New Challenges • Humility to recognize • valuable skills can come • from anywhere. • Establish incentives to • encourage local employees • to acquire new skills. • Need a process to identify • new skill development. • Need to facilitate transfer • of new skills within the • firm. Skills can be created anywhere in a multinational’s global operations network.

13. Pressures for Cost Reduction and Local Responsiveness Company A Company C High Cost pressures Low Generally reflects the position of most companies Company B Low High Pressures for local responsiveness

14. Cost Reduction Mass producing a standardized product at an optimal location. Intense: in commodity industries. Where competitors are in low cost locations. Where there is persistent excess capacity. Where there are low switching costs. Because of greater international competition. Local responsiveness Arise from: Differences in consumer taste and preferences. Differences in infrastructure and traditional practices. Differences in distribution channels. Host government demands.

15. Taste and preference Distribution channels Infrastructure And practice Delegate marketing to national subsidiaries. Delegate production and marketing to national subsidiaries Delegate manufacturing and production to foreign subsidiaries. Host government Manufacture locally. Local Responsiveness

16. High Cost pressures Low Global Strategy Transnational Strategy International Strategy Multi domestic Strategy Low High Pressures for local responsiveness Four Basic Strategies

17. International create value by transferring skills to local markets where skills are not present. Global increase profitability through cost reductions from experience curve effects and location economies. Multidomestic oriented toward achieving maximum local responsiveness. Transnational Exploit experienced based cost and location economies, transfer core competencies within the firm, and pay attention to local responsiveness needs. Strategic Choices

18. Strategy Advantages Disadvantages Global Exploit experience curve effects Lack of local responsiveness Exploit location economies Lack of local International responsiveness Inability to realize Transfer distinctive competencies to location economies Foreign Markets Failure to exploit experience curve effects The Advantages and Disadvantages of the Four Strategies Table 12.1a

19. Strategy Advantages Disadvantages Customize product offerings Inability to realize location Multi-domestic and marketing in accordance economies with local responsiveness Failure to exploit experience curve effects Failure to transfer distinctive competencies to foreign markets Transnational Exploit experience curve Difficult to implement effects due to organizational Exploit location economies problems Customize product offerings and marketing in accordance with local responsiveness Reap benefits of global learning The Advantages and Disadvantages of the Four Strategies

20. The Organization of International Business

21. Organization Architecture and Profitability • Organization architectureis the totality of a firm’s organization, including structure, control systemsand incentives,processes, cultureandpeople. • Superior enterprise profitability requires three conditions; • An organization’s architecture must be internally consistent. • Strategyandarchitecture must be consistent. • Strategy, architecture and competitive environments must be consistent.

22. Structure Controls & Incentives People Processes Culture Organization Architecture Figure 13.1

23. Control Systems: Metrics used to measure subunit performance. Make judgments about managers’ abilities to run units. Incentivesare devices to reward appropriate managerial behavior. Processes: Manner in which decisions are made. Manner in which work is performed. Conceptually distinct from location of decision-making responsibility. Organization Architecture

24. Culture: Norms and value systems shared by the employees. People: Not just employees, but the strategy to recruit, compensate, and retain individuals with necessary skills, values and orientation. Organization Architecture If a firm is going to maximize its profitability, it must pay close attention to achieving internal consistency among the various components of its architecture.

25. 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: Overburdened top management. Motivational research favors decentralization. Permits greater flexibility. Can result in better decisions. Can increase control. Vertical Differentiation Concerned with where decisions are made.

26. Global Centralize Multi-domestic Decentralize International Centralize for core competencies Decentralize for operating decisions Transnational Both Centralize And Decentralize Strategy and Centralization

27. How a firm divides itself into subunits function type of business International must reconcile conflict between product and location. geographical area Horizontal Differentiation

28. Top Management Purchasing Manufacturing Marketing Finance Buying units Plants Branch sales units Accounting units A Typical Functional Structure

29. Typically, the structure that evolves in a company’s early stages. Coordination and control rests with top management. The Functional Structure

30. Headquarters Division product line A Division product line B Division product line C Department Purchasing Department Manufacturing Department Marketing Department Finance Buying units Plants Branch sales units Accounting units A Typical Product Division Structure

31. Probable next stage of development. Reflects company growth into new products. Each unit responsible for a product. Semiautonomous and accountable for its performance. Eases coordination and control problems. Product Division Structure

32. Headquarters Domestic Division General Manager Product line A Domestic Division General Manager Product line B Domestic Division General Manager Product line C International Division General Manager area line Country 1 General Manager (product A, B, and / or C) Country 2 General Manager (product A, B, and / or C) Functional units Functional units One Company’s International Division Structure

33. Widely used. 1. Can create conflict between domestic and foreign operations. 2. Implied lack of coordination between domestic and foreign operations. Growth can lead to worldwide structure. International Division

34. The International Structural Stages Model Worldwide Product Division Global Matrix (“Grid”) Foreign Product Diversity Alternate Paths of Development International Division Area Division Foreign Sales as a Percentage of Total Sales

35. Headquarters European area North American area Far East area Latin American area Middle East / Africa area Worldwide Area Structure

36. Favored by firms with low degree of diversification. Area is usually a country. Largely autonomous. Facilitates local responsiveness. Worldwide Area Structure Encourages fragmentation. Consistent with multi-domestic strategy

37. Headquarters Worldwide product group or division A Worldwide product group or division B Worldwide product group or division C Area 1 (domestic) Area 2 (international) Functional units A Worldwide Product Division Structure

38. Reasonably diversified firms. Attempts to overcome international division and worldwide area structure problems. Believe that product value creation activities should be coordinated worldwide. Product Division Consistent with global or international strategy Weak local responsiveness.

39. Headquarters Area 1 Area 2 Area 3 Product division A Product division B Manager here belongs to division B and area 2 Product division C A Global Matrix Structure Figure 13.7

40. Attempts to meet needs of transnational strategy. Doesn’t work as well as theory predicts. “Flexible” matrix structures. Conflict and power struggles. Matrix Structure Consistent with transnational strategy

41. Need for coordination: Impediments; Different managerial orientations. Differing goals. Time zones, distance, nationality. High Transnational Global International Multidomestic Low Integrating Mechanisms

42. Direct contact Liaison roles Teams Matrix structures Increasing complexity of integrating mechanism Formal Integrating Mechanisms Figure 13.8

43. G E B C D A F A Simple Management Network Informal contacts between managers within an enterprise.

44. Types of controls: Personal. Bureaucratic Output. Cultural. Incentives: Depends on employee and his/her tasks. Can be used to improve manager coordination between units. Need to account for national differences in institutions and culture. Caveat: beware of the rule of unintended consequences. Control Systems and Incentives

45. Control Systems Multinational Output/Bureaucratic Global/Transnational Cultural Performance Ambiguity A function of the interdependence among subunits.

46. Inter- dependence Low Moderate High Very high Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business Strategies Strategy Performance Costs of Ambiguity Control Multi-domestic Low Low International Moderate Moderate Global High High Very high Very high Transnational

47. Processes • The manner in which decisions are made and work is performed within an organization.” • Cut across national boundaries as well as organizational boundaries. • Can be developed anywhere within the firms global operations network.

48. Organization Culture • Values and norms shared among people. • Sources: • Founders and important leaders. • National social culture. • History of the enterprise. • Decisions that result in high performance. • Cultural maintenance: • Hiring and promotional practices. • Reward strategies. • Socialization processes. • Communication strategy.

49. A “Strong” Culture: Not always good. Sometimes beneficial, sometimes not. Context is important. Adaptive cultures. Culture must match an organization’s architecture. Culture does not necessarily translate across borders. Transnational Strong Global Culture International Multidomestic Weak Organization Culture and Performance

50. Structure and control Multi-domestic International Global Transnational Vertical Decentralized Core competency; Some Mixed differentiation rest decentralized centralized centralized and decentralized Worldwide Worldwide product Worldwide Informal matrix Horizontal area structure division product differentiation division Need for Low Moderate High Very high coordination Few Integrating None Many Very many mechanisms Performance High Very high Low Moderate ambiguity Need for Low Moderate High Very high cultural controls A Synthesis of Strategy, Structure and Control Systems