Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-1 A Framework for International Business by Cavusgil, Knight, & Riesenberger Chapter 8: Strategy and Organization in the International Firm

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-2 In this chapter, you’ll learn about: 1. Strategy in international business 2. Building the global firm 3. The integration-responsiveness framework 4. Strategies based on the integration-responsiveness framework 5. Organizational structure 6. Organizational structures for international operations Learning Objectives

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-3 What Is Strategy? A set of planned actions by managers that make the best use of firm’s resources & core competences to gain a competitive advantage To develop strategies, managers examine firm’s strengths & weaknesses, & the opportunities and challenges facing the firm. They then decide: - which customers to target, - what product lines to offer, - how best to contend with competitors, & - how to configure & coordinate the firm’s global activities

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-4 International Strategy Strategy carried out in two or more countries Managers develop international strategies to:  Allocate scarce resources and configure value-adding activities on a worldwide scale  Participate in major markets  Implement valuable partnerships abroad  Engage in competitive moves in response to foreign rivals

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-5 Experts say that managers should aim to “…develop, at one and the same time, global scale in efficiency, multinational flexibility, & the ability to develop innovations & leverage knowledge on a worldwide basis” Thus, the firm that aspires to become a globally competitive enterprise should simultaneously strive for three strategic objectives: – Efficiency – Flexibility – Learning Global, Sustainable Competitive Advantage

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-6 Three Strategic Objectives Efficiency: Lower the cost of the firm’s operations and activities on a global scale Flexibility: Manage diverse country-specific risks and opportunities by tapping resources in individual countries and exploiting local opportunities Learning: Develop the firm’s products, technologies, capabilities, and skills by internalizing knowledge gained from international ventures Often, even successful firms excel at only one or two of these objectives

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-7 Key Dimensions of Successful International Firms

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-8 Visionary Leadership Senior management’s ability to provide superior strategic guidance for managing efficiency, flexibility, & learning 1.International mind-set: Openness to & awareness of diversity across cultures 2.Resource commitment: Financial, human, and other resources 3.Strategic vision: Articulating what the firm wants to be in the future and how it will get there 4.Investment in human assets: Emphasizing the use of foreign nationals, promoting multi-country careers, and training to develop international “supermanagers”

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-9 Organizational Culture A pattern of shared values, behavioral norms, systems, policies, and procedures that employees learn and adopt Culture drives perceptions, thoughts, feelings, & behavior of employees in ways consistent with firm norms These can be traced to the influence of founders and visionary leaders or some unique history of the firm Management should seek to build a shared global organizational culture; key to the development and execution of successful international strategy

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-10 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 headquarters and subsidiaries Subscribe to appropriate ethical standards Firms with a Global Organizational Culture

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-11 Organizational Processes Managerial routines, behaviors, and mechanisms that allow the firm to function as intended Typical processes include mechanisms for collecting information, ensuring quality control in manufacturing, and maintaining effective payment systems GE acquired competitive advantage by emphasizing countless superior processes. GE digitizes all key documents and uses intranets and the Internet to automate activities and cut operating costs

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-12 Important Organizational Processes for Achieving International Coordination Global teams: Internationally distributed groups of employees charged with specific problem-solving or best practice mandates that affect the entire firm Strategic global teams: these identify and/or implement tactics that enhance long-term direction of the global firm Operational global teams: these focus on the efficient operation of the business across the whole network Global information systems: Global IT infrastructure, together with tools such as intranets & electronic data interchange, provide virtual interconnectedness within the international firm

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-13 Multidomestic Industry An industry in which competition takes place on a country-by- country basis Firms that specialize in such industries as processed food, consumer products, fashion, retailing, and publishing usually cater to specific conditions in each country where they do business In such industries, the firm must adapt its offerings to suit the language, culture, laws, income level, and other specific characteristics of each country Each country tends to have a unique set of competitors

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-14 Examples of Multidomestic Industries The British publisher Bloomsbury has translated each volume of its Harry Potter series into the local language in every country where the books are sold Beverage companies produce various brands and flavors in markets worldwide. Coca-Cola offers “Georgia Coffee” in Japan, “Café Zu” in Thailand, “Inca Cola” in Peru, & “Burn” energy drink in France In Asia, KFC restaurants are often multi-story structures that sell distinctive flavors of chicken

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-15 Global Industry An industry in which competition is on a regional or worldwide scale Industries such as aerospace, cars, computers, & chemicals cater to customers on a regional/global scale. Examples: Subaru markets similar cars worldwide & DuPont makes similar products. Customer needs vary little from country to country. Firms sell relatively standardized offerings across entire regions or throughout the world. The industry usually has only a handful of the same competitors that compete regionally or worldwide.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-16 Global Integration Coordination of value-chain activities across multiple countries to achieve worldwide efficiency & cross-fertilization in order to take advantage of similarities between countries. Firms that emphasize global integration: Make and sell standardized products & services to capitalize on converging customer needs and tastes Compete on a regional or worldwide basis Minimize operating costs by centralizing value-chain activities and emphasizing scale economies

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-17 Local Responsiveness Meeting the specific needs of buyers in individual countries Local responsiveness requires the firm to adapt to customer needs and to the competitive environment Local managers are free to adjust offerings, marketing, and practices to suit conditions in individual markets When operating internationally, firms try to strike the right balance between global integration and local responsiveness

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-18 Integration-Responsiveness Framework Summarizes the balance that firms seek to achieve between two basic strategic needs: 1.Integrating value-chain activities globally, and 2.Creating products and practices responsive to local market needs The main goal of firms that emphasize global integration is to maximize the efficiency of their value-chain activities on a worldwide scale The main goal of firms that emphasize local responsiveness is to maximize sales and market share by being highly responsive to local needs

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-19 Integration-Responsiveness Framework

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-20 Pressures for Global Integration Seek cost reduction through economies of scale. Concentrating manufacturing in a few advantageous locations achieves economies of mass production Capitalize on converging consumer trends and universal needs. Companies like Nike, Dell, ING, and Coca-Cola offer products that appeal to customers everywhere Provide uniform service to global customers. Services are easiest to standardize when firms centralize their creation and delivery

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-21 Conduct global sourcing of raw materials, components, energy, and labor. Sourcing of inputs from large-scale, centralized suppliers provides economies of scale and consistent performance Monitor and respond to global competitors. Globally coordinating the firm’s response to competitive threats is more efficient and effective Take advantage of global media. Firms leverage the Internet, cross-national TV, and other global media to advertise in many countries simultaneously Pressures for Global Integration (cont.)

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-22 Pressures for Local Responsiveness Leverage natural endowments available to the firm. Each country has specific national resources and other endowments that the foreign firm should access Cater to local customer needs. Businesses in multidomestic industries should adapt products, services, and marketing to suit local customer needs Accommodate differences in distribution channels. For example, Japan’s distribution system for consumer goods is characterized mainly by small retailers

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-23 Pressures for Local Responsiveness (cont.) Respond to local competition. To out-compete local rivals, successful firms devise offerings and practices that best meet local demand Adjust to cultural differences. For those products where cultural differences are important, the firm should adapt the product and marketing, especially when local competitors are numerous Meet host government requirements and regulations. The firm must always comply with local legal and regulatory requirements, which can vary substantially from country to country

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-24 Four Strategies Emerging from the Integration-Responsiveness Framework 1. Home replication strategy 2. Multidomestic strategy 3. Global strategy 4. Transnational strategy

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-25 Four Strategies Emerging from the Integration-Responsiveness Framework

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-26 Home Replication Strategy The firm views international business as separate from, and secondary to, its domestic business Expansion abroad is an opportunity to generate incremental sales for domestic product lines Products are designed for domestic customers, and international business is pursued mainly to extend the life of domestic products and to replicate home market success More successful when firm targets markets similar to their home market

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-27 Multidomestic Strategy The firm develops subsidiaries or affiliates in foreign markets which operate independently and are locally responsive Products and services are adapted to suit the needs and wants of buyers in each country Because headquarters acknowledges differences among national markets, subsidiaries are allowed to vary products and practices by country Country managers are often local nationals & generally don’t share knowledge and experience with managers in other countries

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-28 Global Strategy Headquarters seeks substantial control over all country operations in order to minimize redundancy and to achieve maximum efficiency, learning, and integration worldwide Global strategy asks, “Why not make the same thing, the same way, everywhere?” Products, marketing, and company practices are relatively standardized R&D, manufacturing, marketing, and other activities tend to be concentrated at headquarters, where they can be centrally coordinated and controlled

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-29 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 The firm seeks to combine the major advantages of multidomestic and global strategies while minimizing their disadvantages It’s a flexible approach: standardize where feasible; adapt where appropriate However, most firms find implementing transnational strategy very challenging Transnational Strategy

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-30 Transnational Strategy Requires the Firm to: Exploit scale economies by sourcing from a reduced set of global suppliers and concentrating production in relatively few locations where competitive advantages can be maximized Organize production, marketing, and other value-chain activities on a global scale Optimize local responsiveness and flexibility Facilitate global learning and knowledge transfer Coordinate global competitive moves—that is, deal with competitors on a global, integrated basis

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-31 Organizational Structure 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 large MNEs, these linkages are extensive and include the firm's subsidiaries, affiliates, suppliers, and other partners worldwide A fundamental issue: How much decision making should the firm retain at headquarters & how much should it delegate to foreign subsidiaries & affiliates? This is the choice between centralization and decentralization

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-32 Choices About Decision Making Generally, the more at stake (money, reputation, etc.), the more that decision making is centralized Not beneficial or feasible to centralize all/most operations Good rule is to think globally and locally, and act appropriately Structure (including decision-making approach) often follows strategy (or at least should!)

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-33 A Comparison of Organizational Structures

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-34 Export Department Unit within a firm that manages the firm’s export operations Most closely associated with home replication strategy The firm’s resource commitment is small. Export activities are unified under one department, providing efficiencies in selling, distribution, and shipping Headquarters has minimal control over foreign operations, with strong potential to rely too much on intermediaries, and few opportunities to learn about foreign markets

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-35 Associated with increased focus on international business Concentrates expertise, with greater coordination & management of international operations But, can result in competition & limited sharing of info between domestic & international units Can result in lack of coordination between this division and others in the firm International Division All international activities are centralized within one division in the firm, separate from domestic units.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-36 Used by firms that market standardized products across entire regions or groups of countries Results in greater openness to customer needs in markets, providing a good balance between global integration & local adaptation But, manager’s orientation is more regional than global; affects development & and management of products Global economies of scale may suffer Geographic Area Structure Management control is shared with geographic regions, whose managers are responsible for operations within their region.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-37 Each product division is responsible for producing & marketing a specific group of products worldwide The firm develops expertise with specific products on a global basis, ensuring scale economies and knowledge sharing among units worldwide for a given product line However, it can result in duplicating the firm’s support functions in each product division There is also potential for excessive focus on products and too little on developing the firm’s markets Product Structure Management of international operations is organized by major product line.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-38 For example, oil companies tend to organize their worldwide operations along two major functional lines: production and marketing of petroleum products The approach implies a small central staff that provides strong central control and coordination, with a focused global strategy and concentrated functional expertise However, coordination becomes unwieldy when the firm has many product lines, and the approach may not respond well to specific buyer needs in individual markets Functional Structure When international operations are organized by functional activity

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-39 Global Matrix Structure A blend of the geographic area, product, and functional structures that leverages benefits of a purely global strategy while also remaining responsive to local needs Simultaneously leverages the benefits of global strategy and responsiveness to local needs Emphasizes inter-organizational learning & knowledge sharing among the firm’s units worldwide But, dual reporting chain of command means employees may get contradictory instructions from managers; can lead to conflicts Managing many subsidiaries or products, or operations in many foreign markets, is complex

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-40 Global Matrix Structure

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-41 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.