The Strategy and Organization

of International Business
 Strategy and the Firm
Strategy
Actions taken by managers
Value to attain firm’s goals.
Creation

Firm as Profit ()

Maximize
Value Chain The difference between
Long-term
total revenue (TR) and profitability
total costs (TC):
Role of  =TR-TC
Strategy Profitability
Rate of return concept; i.e.
return on sales (ROS).
ROS=  /TR
2
 Value Creation

V-P V = Consumer Value

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

3
 The Firm as a Value Chain
Support Activities

Materials Management
Human Resources
Information Systems
Company Infrastructure

R&D Production Marketing & Sales Service

Primary Activities

4
 The Role of Strategy

Identifying and taking actions that will

lower costs of value creation and/or
differentiate the firm’s product
offering through superior design,
quality service, functionality, etc.
5
 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 6
customization and the “imperative of localization”.
 Location Economies Assembly

Creating a Global Web

Parts
Sales

Advertising Design

Pontiac LeMans Parts

Parts
7
 Needs for consideration

Transportation costs.

Trade barriers.

Political risks.

Economic risks.
8
 Experience Curve
 Learning effects:  Economies of Scale:
 Cost savings that  Reduction in unit cost
achieved through
come from volume production.
“learning by  Sources:
doing.” Spread fixed costs
over volume.
 More significant in Employing
specialized
complex tasks. equipment or
personnel.
9
The Experience Curve

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

B
Unit Costs

Accumulated Output

10
Leveraging Core Competencies
Firm skills that competitors
can not easily match
or imitate.

1. Skills and products

are most unique.
Value greatest when: 2. Value placed by
consumers is great.
3. Few capable competitors
with skills or products.

11
 Leveraging Subsidiary Skills
New Challenges
1. Humility to recognize
valuable skills can come
Skills can be created from anywhere.
anywhere in a 2. Establish incentives to
multinational’s global encourage local employees
operations network. to acquire new skills.
3. Need a process to identify
new skill development.
4. Need to facilitate transfer
of new skills within the
firm.

12
 Pressures for Cost Reduction and
Local Responsiveness
High
Company Company
A C

Cost Generally reflects

the position of most
pressures
companies
Company
B
Low

Low High

Pressures for local responsiveness

13
 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 Distribution
channels
Infrastructure
Delegate production And Delegate marketing to
and marketing to practice national subsidiaries.
national subsidiaries

Delegate manufacturing
and production to foreign
subsidiaries.
Host
government
Manufacture
locally.
15
 Four Basic Strategies
High
Global Transnational
Strategy Strategy

Cost
pressures
International Multi domestic
Strategy Strategy
Low

Low High
Pressures for local responsiveness

16
Strategic Choices

International
International Global
Global
create
createvalue
valueby
by increase
increaseprofitability
profitability
transferring
transferringskills
skillsto
to through
throughcost
costreductions
reductions
local
localmarkets
marketswhere
where from
fromexperience
experiencecurve
curve
skills
skillsare
arenot
notpresent.
present. effects
effectsand
andlocation
location
economies.
economies.
Multidomestic
Multidomestic
oriented Transnational
orientedtoward
toward Transnational
achieving Exploit
Exploitexperienced
achievingmaximum
maximum experienced
local based
basedcost
costand
andlocation
localresponsiveness.
responsiveness. location
economies,
economies,transfer
transfercore
core
competencies
competencieswithin
withinthe
the
firm,
firm,and
andpay
payattention
attention
to
tolocal
localresponsiveness
responsiveness
needs.
needs.
17
 The Advantages and Disadvantages of
the Four Strategies

Strategy Advantages Disadvantages

Global Exploit experience curve Lack of local
effects responsiveness
Exploit location Lack of
International economies local responsiveness
Transfer distinctive Inability to realize
competencies to location economies
Failure to exploit
Foreign Markets
experience curve
effects
Table 12.1a
18
 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
19
 The Organization of
International Business
Organization Architecture and Profitability
 Organization architecture is the totality of a
firm’s organization, including structure,
control systems and incentives, processes,
culture and people.
 Superior enterprise profitability requires three
conditions;
 An organization’s architecture must be internally
consistent.
 Strategy and architecture must be consistent.
 Strategy, architecture and competitive
environments must be consistent. 21
 Organization Architecture

Structure

Controls
& People Processes
Incentives

Culture
Figure 13.1

22
 Organization Architecture
Control Systems: Processes:
 Metrics used to  Manner in which
measure subunit decisions are made.
performance.  Manner in which work
 Make judgments about
is performed.
managers’ abilities to
 Conceptually distinct
run units.
from location of
 Incentives are devices
decision-making
to reward appropriate
responsibility.
managerial behavior. 23
 Organization Architecture
Culture: People:
 Not just employees, but
 Norms and value
the strategy to recruit,
systems shared by compensate, and retain
the employees. 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: Decentralization:
 Facilitates coordination.  Overburdened top
 Ensure decisions management.
consistent with  Motivational research
organization’s objectives. favors decentralization.
 Top-level managers have  Permits greater
means to bring about flexibility.
organizational change.  Can result in better
 Avoids duplication of decisions.
activities.  Can increase control. 25
Strategy and Centralization

Global
Multi-domestic
Centralize
Decentralize

International
Transnational
Centralize for
Both Centralize
core competencies
And Decentralize
Decentralize for
operating decisions

26
 Horizontal Differentiation

function
How a firm divides
itself into subunits

type
of
business

International must geographical

reconcile conflict area
between product
and location.

27
 A Typical Functional Structure

Top
Management

Purchasing Manufacturing Marketing Finance

Buying Plants Branch Accounting

units sales units units

28
The Functional Structure

Typically, the structure

that evolves in a
company’s early stages.

Coordination and
control rests with
top management.

29
A Typical Product Division Structure
Headquarters

Division product Division product Division product

line A line B line C

Department Department Department Department

Purchasing Manufacturing Marketing Finance

Buying Plants Branch Accounting

units sales units units

30
Product Division Structure

Probable next stage of

development. Reflects
company growth into Each unit responsible
new products. for a product.
Semiautonomous and
accountable for
its performance.
Eases coordination
and control
problems.

31
One Company’s International Division Structure
Headquarters

Domestic Domestic Domestic International

Division Division Division Division
General General General General
Manager Manager Manager Manager
Product line A Product line B Product line C area line

Functional units Country 1 Country 2

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

Functional units 32
 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.

33
 The International Structural
Stages Model

Worldwide Global Matrix

Foreign Product
Product Division (“Grid”)
Diversity

Alternate Paths
of Development
International Area
Division Division

Foreign Sales as a Percentage of Total Sales

34
 Worldwide Area Structure
Headquarters

North American European

area area

Far East
Latin American Middle East / area
area Africa area

35
 Worldwide Area Structure

Favored by firms with

low degree of
diversification.

Area is usually
a country. Largely
autonomous.

Encourages Facilitates local

fragmentation. responsiveness.

Consistent with multi-domestic strategy 36

A Worldwide Product Division Structure

Headquarters

Worldwide Worldwide Worldwide

product group product group product group
or division A or division B or division C

Area 1 Area 2

(domestic) (international)

Functional units 37
 Product Division
Consistent with global or
international strategy
Reasonably
diversified firms.
Attempts to overcome
international division
and worldwide area
structure problems.

Believe that product value

Weak local creation activities should
responsiveness. be coordinated
worldwide.

38
 A Global Matrix Structure
Headquarters

Area 1 Area 2 Area 3

Product
division A

Product
division B Manager here
belongs to
Product division B
and area 2
division C Figure 13.7

39
 Matrix Structure

Attempts to meet needs

of transnational
strategy.

Doesn’t work as well

as theory predicts.

“Flexible” matrix
Conflict and structures.
power struggles.

Consistent with transnational strategy 40

 Integrating Mechanisms

 Need for Impediments;

coordination: High  Different
Transnational
managerial
Global
orientations.
International  Differing goals.
Multidomestic  Time zones,
Low
distance,
nationality.
41
Formal Integrating Mechanisms

Direct contact

Liaison roles

Teams

Matrix structures

Figure 13.8
Increasing complexity
of integrating mechanism
42
A Simple Management Network

G E
B
C D

A F
Informal
Informalcontacts
contactsbetween
between
managers within an enterprise.
managers within an enterprise.

43
 Control Systems and Incentives
Incentives:
Types of controls:  Depends on employee and
 Personal. his/her tasks.
 Can be used to improve
 Bureaucratic manager coordination
between units.
 Output.
 Need to account for national
 Cultural. 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

45
Interdependence, Performance Ambiguity,
and the Costs of Control for the Four
International Business Strategies
Strategy Inter- Performance Costs of
dependence Ambiguity Control

Multi-domestic Low Low Low

International Moderate Moderate Moderate

Global High High High

Transnational Very high Very high Very high

46
 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. 47
 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.
48
 Communication strategy.
Organization Culture and Performance
 Culture must match an
 A “Strong” Culture:
organization’s architecture.
 Not always good.
 Culture does not necessarily
 Sometimes beneficial,
translate across borders.
sometimes not.
 Context is important.
Strong Transnational
 Adaptive cultures.

Culture
Global
International

Weak Multidomestic

49
 A Synthesis of Strategy, Structure and
Control Systems
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
Integrating None Few Many Very many
mechanisms
Performance Low Moderate High Very high
ambiguity
Need for Low Moderate High Very high
cultural
controls
50