The Strategy and Organization of International Business

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

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

The Firm as a Value Chain Support Activities Company Infrastructure Information Systems Human Resources Materials Management 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 firm’s product offering through superior design, quality service, functionality, etc.

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”.

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

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

Experience Curve 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.

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

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

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.

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

Mass producing a standardized product at an optimal location. 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.

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

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

Strategic Choices Transnational Exploit experienced based cost and location economies, transfer core competencies within the firm, and pay attention to local responsiveness needs. 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.

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

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

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.

Organization Architecture Structure People Culture Processes Controls & Incentives Figure 13.1

Organization Architecture Control Systems: Metrics used to measure subunit performance. Make judgments about managers’ abilities to run units. Incentives are 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 People: Not just employees, but the strategy to recruit, compensate, and retain individuals with necessary skills, values and orientation. Culture: Norms and value systems shared by the employees. 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.

Vertical Differentiation Concerned with where decisions are made. 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.

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

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

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

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

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

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

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

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

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

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

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

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 creation activities should be coordinated worldwide. Weak local responsiveness.

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

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

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

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

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

Control Systems and 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. Types of controls: Personal. Bureaucratic Output. Cultural.

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

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

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.

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.

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

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