The Strategy and Organization

of International Business

Strategy and the Firm

Value Creation
Firm as Value Chain Role of Strategy Strategy Actions taken by managers to attain firms goals.

Profit () The difference between total revenue (TR) and total costs (TC): =TR-TC

Maximize Long-term profitability

Profitability Rate of return concept; i.e. return on sales (ROS). ROS= /TR
2

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

The Firm as a Value Chain

Support Activities Materials Management Human Resources Information Systems Company Infrastructure

R&D

Production

Marketing & Sales

Service

Primary Activities

The Role of Strategy

Identifying and taking actions that will lower costs of value creation and/or differentiate the firms product offering through superior design, quality service, functionality, etc.
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Profiting from Global Expansion

Firms operating internationally are able to:

Realize location economies.

Realize greater cost economies. Earn a greater return from the firms

distinctive skills or core competencies. Earn a greater return by leveraging valuable skills developed in foreign operations and transferring them to the firms other operations.
Profitability is constrained by product 6 customization and the imperative of localization.

Location Economies
Creating a Global Web

Assembly

Sales

Parts

Advertising

Design

Pontiac LeMans

Parts

Parts
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Needs for consideration

Transportation costs. Trade barriers. Political risks.

Economic risks.
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Experience Curve
Learning effects:
Cost savings that

Economies of Scale:
Reduction in unit cost

come from learning by doing.

More significant in

complex tasks.

achieved through volume production. Sources: Spread fixed costs over volume. Employing specialized equipment or personnel.
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The Experience Curve

Strategic Significance Moving down the curve reduces the cost of creating value.

Unit Costs

B A
Accumulated Output

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Leveraging Core Competencies

Firm skills that competitors can not easily match or imitate. 1. Value greatest when: Skills and products are most unique. 2. Value placed by consumers is great. 3. Few capable competitors with skills or products.

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Leveraging Subsidiary Skills

New Challenges 1. Humility to recognize valuable skills can come from anywhere. 2. Establish incentives to encourage local employees to acquire new skills. 3. Need a process to identify new skill development. 4. Need to facilitate transfer of new skills within the firm.
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Skills can be created anywhere in a multinationals global operations network.

Pressures for Cost Reduction and Local Responsiveness

High
Company C

Cost pressures

Low Low

Generally reflects the position of most companies Company B

High

Pressures for local responsiveness

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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. 14

Local Responsiveness
Taste and preference Infrastructure And Delegate production practice and marketing to
national subsidiaries

Distribution channels
Delegate marketing to national subsidiaries.

Host government

Delegate manufacturing and production to foreign subsidiaries.

Manufacture locally.
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Four Basic Strategies

High
Global Strategy Transnational Strategy

Cost pressures
International Strategy Multi domestic Strategy

Low Low High Pressures for local responsiveness

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

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

Strategy Advantages Disadvantages Multi-domesticCustomize product offerings Inability to realize location 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
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The Organization of International Business

Organization Architecture and Profitability

Organization architecture is the totality of a

firms organization, including structure, control systems and incentives, processes, culture and people. Superior enterprise profitability requires three conditions;
consistent. Strategy and architecture must be consistent. Strategy, architecture and competitive environments must be consistent.

An organizations architecture must be internally

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Organization Architecture
Structure

Controls & Incentives

People

Processes

Culture

Figure 13.1
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Organization Architecture
Control Systems: Processes: Metrics used to measure Manner in which subunit performance. decisions are made. Make judgments about Manner in which work managers abilities to is performed. run units. Conceptually distinct Incentives are devices from location of to reward appropriate decision-making managerial behavior.

responsibility.

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Organization Architecture
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.

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. 24

Vertical Differentiation
Concerned with where decisions are made.
Centralization: Facilitates coordination. Ensure decisions consistent with organizations 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. 25

Strategy and Centralization

Global Centralize Multi-domestic Decentralize

International Centralize for core competencies Decentralize for operating decisions

Transnational Both Centralize And Decentralize

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Horizontal Differentiation

How a firm divides itself into subunits

function

type of business
International must reconcile conflict between product and location.

geographical area

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A Typical Functional Structure

Top Management

Purchasing

Manufacturing

Marketing

Finance

Buying units

Plants

Branch sales units

Accounting units

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The Functional Structure

Typically, the structure that evolves in a companys early stages.

Coordination and control rests with top management.

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A Typical Product Division Structure

Headquarters Division product line A Division product line B

Division product line C

Department Purchasing

Department Manufacturing Plants

Department Marketing Branch sales units

Department Finance Accounting units

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Buying units

Product Division Structure

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.

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One Companys International Division Structure

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

Functional units

Country 1 General Manager (product A, B, and / or C)

Country 2 General Manager (product A, B, and / or C)

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Functional units

International Division

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.

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The International Structural Stages Model

Foreign Product Diversity Worldwide Product Division Global Matrix (Grid)

Alternate Paths of Development International Division

Area Division

Foreign Sales as a Percentage of Total Sales

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Worldwide Area Structure

Headquarters

North American area

European area Latin American area Middle East / Africa area Far East area

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Worldwide Area Structure

Favored by firms with low degree of diversification.

Area is usually a country. Largely autonomous.

Encourages fragmentation.

Facilitates local responsiveness.

Consistent with multi-domestic strategy

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A Worldwide Product Division Structure

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

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Product Division
Consistent with global or international strategy
Reasonably diversified firms.

Attempts to overcome international division and worldwide area structure problems.

Weak local responsiveness.

Believe that product value creation activities should be coordinated worldwide.

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A Global Matrix Structure

Headquarters

Area 1 Product division A Product division B Product division C

Manager here belongs to division B and area 2

Area 2

Area 3

Figure 13.7
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Matrix Structure

Attempts to meet needs of transnational strategy. Doesnt work as well as theory predicts. Flexible matrix structures.

Conflict and power struggles.

Consistent with transnational strategy

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Integrating Mechanisms
Need for coordination:
Transnational High

Global
International Multidomestic

Low

Impediments; Different managerial orientations. Differing goals. Time zones, distance, nationality.
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Formal Integrating Mechanisms

Direct contact Liaison roles Teams Matrix structures

Increasing complexity of integrating mechanism

Figure 13.8

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A Simple Management Network

G

Informal contacts between managers within an enterprise.

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Control Systems and Incentives

Types of controls:
Personal.

Incentives:
Depends on employee and

Bureaucratic
Output.

Cultural.

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. 44

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

Global/Transnational Cultural

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Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business Strategies
Strategy
Interdependence
Low Moderate High Very high

Performance Ambiguity
Low Moderate High Very high

Costs of Control
Low Moderate High Very high

Multi-domestic International Global Transnational

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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.

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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.

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Organization Culture and Performance

A Strong Culture:
Culture must match an

organizations architecture. Not always good. Culture does not necessarily Sometimes beneficial, translate across borders. sometimes not. Context is important. Transnational
Strong

Adaptive cultures.

Culture
Weak

Global International

Multidomestic
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A Synthesis of Strategy, Structure and Control Systems

Structure and control Vertical differentiation Multi-domestic Decentralized International Core competency; rest decentralized Worldwide product division Moderate Few Moderate Moderate Global Some centralized Worldwide product division High Many Transnational Mixed centralized and decentralized Informal matrix

Horizontal differentiation Need for coordination Integrating mechanisms

Worldwide area structure Low None Low Low

Very high Very many

Performance
ambiguity Need for cultural controls

High
High

Very high
Very high

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