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Learning Objectives 1. The role of strategy in international business 2. The integration-responsiveness framework 3. Distinct strategies emerging from the integration-responsiveness framework 4. Organizational structure 5. Alternative organizational arrangements for international operations 6. Building the global firm 7. Putting organizational change in motion
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What Is Strategy? Strategy is a plan of action that channels an organizations resources so that it can effectively differentiate itself from competitors and accomplish unique and viable goals. Managers develop strategies based on the organizations strengths and weaknesses relative to the competition and assessing opportunities. Managers decide which customers to target, what product lines to offer, and with which firms to compete.
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Strategy in an International Context Strategy in an international context is a plan for the organization to position itself vis-a-vis its competitors, and resolve how it wants to configure its value chain activities on a global scale. Its purpose is to help managers create an international vision, allocate resources, participate in major international markets, be competitive, and perhaps reconfigure its value chain activities given the new international opportunities.
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Formulate a strong international vision Allocate scarce resources on a worldwide basis Participate in major markets Implement global partnerships Engage in global competitive moves Configure value-adding activities on a global scale
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The Purpose of Global Strategy Bartlett and Ghoshal argue that managers should look to develop, at one and the same time, global scale in efficiency, multinational flexibility, and the ability to develop innovations and leverage knowledge on a worldwide basis. These three strategic objectives efficiency, flexibility, and learning must be sought simultaneously by the firm that aspires to become a globally competitive enterprise.
Efficiency lower the cost of operations and activities Flexibility tap local resources and opportunities to help keep the firm and its products unique Learning -- add to its proprietary technology, brand name and management capabilities by internalizing knowledge gained from international ventures.
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In the final analysis, international business success is largely determined by the degree to which the firm achieves the goals of efficiency, flexibility, and learning. But it is often difficult to excel in all three areas simultaneously. Rather, one firm may excel at efficiency, while another may excel at flexibility, and a third at learning. Sustainability over time is also a challenge.
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Multi-Domestic Industries Companies in the food and beverage, consumer products, and clothing and fashion industries often may resort to a country-by-country approach to marketing to specific needs and tastes, laws, and regulations. Industries in which competition takes place on a country-by-country basis are known as multidomestic industries. In such industries, each country tends to have a unique set of competitors.
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Global Industries Industries such as aerospace, automobiles, telecommunications, metals, computers, chemicals, and industrial equipment are examples of global industries, in which competition is on a regional or worldwide scale. Formulating and implementing strategy is more critical for global industries than multi-domestic industries. Most global industries are characterized by the existence of a handful of major players that compete head on in multiple markets.
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Kodak must contend with the same rivals, Japans Fuji and the European multinational Agfa-Gevaert, wherever it does business around the world. American Standard and Toto dominate the worldwide bathroom fixtures market. Caterpillar and Komatsu compete headon in all major world markets.
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International
North America
North America
Local
United Kingdom Australia
Korea
Integration-Responsiveness Framework
The Integration-Responsiveness Framework summarizes two basic strategic needs: to integrate value chain activities globally, and to create products and processes that are responsive to local market needs. Global integration means coordinating the firms value chain activities across many markets to achieve worldwide efficiency and synergy to take advantage of similarities across countries.
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The IR Framework
The discussion about the pressures on the firm of achieving global integration and local responsiveness has become known as the integrationresponsiveness (IR) framework.
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Global Integration
Global integration refers to coordination of the firms value-chain activities across countries to achieve worldwide efficiency, synergy, and cross-fertilization in order to take maximum advantage of similarities across countries.
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Objectives of Global Integration Global integration seeks economic efficiency on a worldwide scale, promoting learning and cross-fertilization within the global network, and reducing redundancy. Headquarters personnel justify global integration by citing converging demand patterns, spread of global brands, diffusion of uniform technology, availability of pan-regional media, and the need to monitor competitors on a global basis. Companies in such industries as aircraft manufacturing, credit cards, and pharmaceuticals are more likely to emphasize global integration.
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Local Responsiveness
Local responsiveness refers to meeting the specific needs of buyers in individual countries. It requires a firm to adapt to customer needs, the competitive environment, and the distribution structure. Local managers enjoy substantial freedom to adjust the firms practices to suit distinctive local conditions. Wal-Mart store managers in Mexico may need to adjust such practices as store hours, employee training and compensation, the merchandise mix, and promotion. Companies in such industries as food and beverages, retailing, and book publishing are likely to be responsive to local differences.
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Home Replication Strategy (Export Strategy or International Strategy) The firm views international business as separate from, and secondary to, its domestic business. Such a firm may view international business as an opportunity to generate incremental sales for domestic product lines. Products are designed with domestic customers in mind, and international business is sought as a way of extending the product lifecycle and replicating its home market success. The firm expects little knowledge flows from foreign operations.
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Advantages of Multi-Domestic Strategies If the foreign subsidiary includes a factory, locally produced goods and products can be better adapted to local markets. The approach places minimal pressure on headquarters staff because management of country operations is delegated to individual managers in each country. Firms with limited international experience often find multi-domestic strategy an easy option as they can delegate many tasks to their country managers (or foreign distributors, franchisees, or licensees, where they are used).
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Global Strategy
With global strategy, the headquarters seeks substantial control over its country operations in an effort to minimize redundancy, and achieve maximum efficiency, learning, and integration worldwide. In the extreme case, global strategy asks why not make the same thing, the same way, everywhere? It favors greater central coordination and control than multi-domestic strategy, with various product or business managers having worldwide responsibility. Activities such as R&D and manufacturing are centralized at headquarters, and management tends to view the world as one large marketplace.
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A coordinated approach to internationalization in which the firm strives to be more responsive to local needs while retaining sufficient central control of operations to ensure efficiency and learning. Transnational strategy combines the major advantages of multi-domestic and global strategies, while minimizing their disadvantages. Transnational strategy implies a flexible approach: standardize where feasible; adapt where appropriate.
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What Transnational Strategy Implies Exploiting scale economies by sourcing from a reduced set of global suppliers; concentrating the production of offerings in relatively few locations where competitive advantage can be maximized. Organizing production, marketing, and other value-chain activities on a global scale. Optimizing local responsiveness and flexibility. Facilitating global learning and knowledge transfer. Coordinating competitive moves --how the firm deals with its competitors, on a global, integrated basis.
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Some 90% of the product line is identical across more than two dozen countries. IKEA does modify some of its furniture offerings to suit tastes in individual countries. IKEAs overall marketing plan is centrally developed at company headquarters in response to convergence of product expectations; but the plan is implemented with local adjustments. IKEA decentralizes some of its decisionmaking, such as language to use in advertising, to local stores.
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Organizational Structure
Organizational structure refers to the reporting relationships inside the firm the boxes and lines that specify the linkages among people, functions, and processes that allow the firm to carry out its operations. In the larger, more experienced MNE, these linkages are extensive and include the firm's subsidiaries, affiliates, suppliers, and other partners. A fundamental issue is how much decision-making responsibility the firm should retain at headquarters and how much it should delegate to foreign subsidiaries and affiliates. This is the choice between centralization and decentralization.
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An MNE Network
Subsidiary Level Network S: Suppliers R: Regulatory institutions B: Buyers C: Customers
BE CE RA
SE RE E RB
RD SD BD CD SF CF F BF RF CA D
SA
BA
A H SC BC CC RC
SB BB CB
Structure Supports Strategy Structural decisions usually involve a choice between centralized and decentralized decisionmaking, and they should be consistent with decisions about the firms international strategy. A centralized structure fits best with the home replication or global strategy. A decentralized structure fits best with the multidomestic strategy. A matrix structure combines centralized and decentralized aspects with the transnational strategy.
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Encouraging local managers to identify with broad, corporate objectives and make their best efforts. Visiting subsidiaries to instill corporate values and priorities. Rotating employees within the corporate network to develop multiple perspectives. Encouraging country managers to interact and share experiences with each other through regional meetings. Establishing financial incentives and penalties to promote compliance with headquarters goals.
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Alternative Organizational Arrangements For International Business A long-established stream of literature suggests that structure follows strategy. The organizational design a firm chooses is largely the result of how important managers consider international business and whether they prefer centralized or decentralized decision-making. The firms experience in international business also affects the organizational design. Organizational designs tend to follow an evolutionary pattern -- As the firms international involvement increases, it adopts increasingly more complex organizational designs.
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Alternative Organizational Arrangements The export department, with the international division as a variant. The decentralized structure involves geographic area division The centralized structure involve either product or functional division A global matrix structure blends the geographic, product and functional structures although this is complex and difficult to achieve.
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Export Department
For manufacturing firms, exporting is usually the first foreign market entry mode. It rarely involves much of a structured organizational response at first. As export sales reach a substantial proportion of the firms total sales, however, senior managers will usually establish a separate export department whose manager may report to senior management or the head of domestic sales and marketing.
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Geographic Area Division An organizational design in which control and decision-making is decentralized to the level of individual geographic regions whose managers are responsible for operations within their region. Firms that market relatively uniform goods across entire regions with little adaptation requirements tend to organize their international operations geographically. The structure is decentralized because management of international operations is largely delegated to the regional headquarters responsible for each geographic area.
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Product Division
An arrangement in which decision-making and management of the firms international operations is organized by major product line. Management creates a structure based on major categories of products within the firms range of offerings. Each product division has responsibility for producing and marketing a specific group of products, worldwide. Motorola organizes its international operations within each of its product categories, including cell phones, consumer electronics, and satellites.
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Functional Division
An arrangement in which decision-making and management of the firms international operations are organized by functional activity (such as production and marketing). E.g., oil and mining firms, which have value-adding processes of exploration, drilling, transportation and storing, tend to use this type of structure. Cruise ship lines may engage in both shipbuilding and passenger cruise marketing -- two very distinctive functions that require separate departments for international production and international marketing. Thus, it makes sense to delineate separate divisions for the performance of production and marketing functions worldwide.
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The advantages of the functional division are a small central staff, which provides strong central control and coordination, and a united, focused global strategy with a high degree of functional expertise. However, the functional approach may falter in coordinating manufacturing, marketing, and other functions in diverse geographic locations because the central staff lacks expertise in these areas. When the firm deals with numerous product lines, coordination can get unwieldy.
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An arrangement that blends the geographic area, product, and functional structures in an attempt to leverage the benefits of a purely global strategy and maximize global organizational learning, while remaining responsive to local needs. It is an attempt to capture the benefits of the geographic area, product, and functional organization structures simultaneously, while minimizing their shortcomings.
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Truly global companies manage to achieve: Visionary leadership Global strategy Appropriate organizational structure Strong organizational culture Dynamic organizational processes
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Visionary Leadership
Senior human capital in an organization that provides the strategic guidance necessary to manage efficiency, flexibility, and learning in an internationalizing firm. Exemplified by: 1. 2. 3. 4. Global mindset and cosmopolitan values: openness to, and awareness of, diversity across cultures Willingness to commit resources: financial, human, and other resources Global strategic vision: articulating a global strategic vision -- what the firm wants to be in the future and how it will get there. Willingness to invest in human assets: such practices such as the use of foreign nationals, promoting multicountry careers, and cross-cultural and language training to develop global supermanagers.
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Examples of Visionary Leaders Ratan N. Tata, the chairman of the Tata Group, transformed this Indian conglomerate into a transnational organization. Tata oversees a $22 billion family conglomerate whose companies market a range of products from automobiles to watches. Carlos Ghosn, the CEO of Nissan and Renault, has transformed a Japanese automotive firm from bankruptcy to profitable operations. Toyota CEO Fujio Cho has led his firm to record sales in the intensely competitive global automobile industry.
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Organizational Culture
The pattern of shared values, norms of behavior, systems, policies, and procedures that employees learn and adopt. Employees acquire them as the correct way to perceive, think, feel, and behave in relation to new problems and opportunities that confront the firm. Organizational culture is the personality of the firm. Employees demonstrate organizational culture by using the firms common language and accepting rules and norms such as the pace and amount of work expected and the degree of cooperation between management and employees.
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Implementation of Organizational Culture As ilustrated in the case of IKEA, organizational culture is derived from the influence of the founders and visionary leaders, or some unique history of the firm. The role of the founders values and beliefs is particularly important. Visionary leaders can transform organizational culture, as Lou Gerstner and Jack Welch radically altered the fortunes of IBM and GE -large bureaucratic organizations that had failed to adapt to changing environments.
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Best Practice in Organizational Culture Proactively build a global organizational culture. Value and promote a global perspective in all major initiatives. Value global competence and cross-cultural skills among their employees. Adopt a single corporate language for business communication. Promote interdependency between the headquarters and subsidiaries. Subscribe to globally accepted ethical standards.
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Corporate Social Responsibility: An Aspect of Organizational Culture Companies aspiring to become truly global seek to maintain strong ethical standards in all the markets where they are represented. Ultimately, senior leadership of any company must be held accountable for cultivating an organizational culture that welcomes social responsibility and is deliberate about it. Corporate social responsibility refers to operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations of stakeholders (customers, shareholders, employees, and communities).
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Organizational Processes
Managerial routines, behaviors, and mechanisms that allow the firm to function as intended. Typical processes include mechanisms for collecting strategic market information, developing employee compensation, and budgeting for international operations. GE and Toyota have gained competitive advantage by emphasizing and refining the countless processes. GE digitizes all key documents and uses intranets and the Internet to automate many activities and reduce operating costs. Many processes cross functional areas within the firm (e.g., new product development process involves input from R&D, engineering, marketing, finance, and operations). In global firms, processes also cut across national borders, which increase both the urgency and complexity of devising well-functioning processes.
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Global Teams
Global teams are charged with problem-solving and best practice development within the MNE. Team members are drawn from geographically diverse units of the MNE and may interact entirely via corporate intranets and video-conferencing, without meeting in person. A global team brings together employees with the experience, knowledge, and skills to resolve common challenges. They are assigned fairly complex tasks, represent a diverse composition of professional and national backgrounds, and have members that are distributed throughout the world. Often, global teams are charged with specific agendas and a finite time period to complete their deliberations and make recommendations.
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Success depends on our ability to effectively share the intellect, insight and experience of the business with everyone in the organization. Our workplace philosophy is one of ensuring sustained knowledgesharing, collaboration, and client focus. As an example, iKnow is our database of research, written reports, and knowledge networks across the organization. iKonnect is our knowledge sharing service which provides our staff with quick and direct access to best available knowledge anywhere in the world.
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The Importance of Global Talent Pools Global firms invest in their employees to build needed capabilities, not just in technical or business terms, but in terms of language and cultural capabilities and types of international experience. The development of a global talent pool requires the creation of an environment that fosters and promotes cooperation across borders, the free exchange of information, and the development of creative managers capable of functioning effectively anywhere in the world.
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