1. The Strategy of International Business
Chapter 13
The Strategy of International Business

2. What Is Strategy?
A firm’s strategy refers to the actions that managers take to attain the goals of the firm
Firms need to pursue strategies that increase profitability and profit growth
Firms can
add value
lower costs
sell more in existing markets
expand internationally
LO1: Explain the concept of strategy.

3. Determinants of Enterprise Value
What Is Strategy?
Determinants of Enterprise Value

4. How Is Value Created?
The firm’s value creation is the difference between V and C
a firm has high profits when it creates more value for its customers and does so at a lower cost
Profits can be increased by
Using a differentiation strategy
Using a low cost strategy
To maximize long run return on invested capital firms pick a viable position on the efficiency frontier, configure internal operations to support that position, have the right organization structure in place to execute the strategy

5. How Is Value Created?
Value Creation

6. How Are A Firm’s Operations Configured?
A firm’s operations are like a value chain composed of distinct value creation activities
Primary activities
R&D
production
marketing and sales
customer service
Support activities
information systems
logistics
human resources

7. How Are A Firm’s Operations Configured?
The Value Chain

8. How Can Firms Increase Profits Through International Expansion?
International firms can
Expand their market
Realize location economies
Realize greater cost economies from experience effects
Earn a greater return
LO2: Recognize how firms can profit by expanding globally.

9. How Can Firms Leverage Their Products And Competencies?
The success of firms that expand internationally depends on
the goods or services sold
the firm’s core competencies
Core competencies allow firms to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible

10. Why Are Location Economies Important?
By achieving location economies, firms can
lower the costs of value creation and achieve a low cost position
differentiate their product offering
Firms that take advantage of location economies in different parts of the world, create a global web of value creation activities

11. Why Are Experience Effects Important?
The experience curve - the systematic reductions in production costs that occur over the life of a product
by moving down the experience curve, firms reduce the cost of creating value
Learning effects - cost savings that come from learning by doing
Economies of scale - the reductions in unit cost achieved by producing a large volume of a product

12. What Competitive Pressures Exist In The Global Marketplace?
Firms that compete in global markets face two conflicting types of competitive pressures
limit the ability of firms to realize location economies and experience effects, leverage products, and transfer skills within the firm
Pressures for cost reductions
force the firm to lower unit costs
Pressures to be locally responsive
require the firm to adapt its product to meet local demands in each market, but raise costs
LO3: Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice.

13. When Are Pressures Greatest?
Pressures for cost reductions are greatest
For firms producing products that fill universal needs
When major competitors are in low cost locations
Where there is persistent excess capacity
Where consumers are powerful and face low switching costs
Pressures for local responsiveness arise from
Differences in consumer tastes and preferences
Differences in traditional practices and infrastructure
Differences in distribution channels
Host government demands
LO3: Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice.

14. International Business 9e
By Charles W.L. Hill
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

15. The Organization of International Business
Chapter 14
The Organization of International Business

16. What Is Organizational Architecture?
Organizational architecture is the totality of a firm’s organization including
Organizational structure
Control systems and incentives
Processes, organizational culture, and people
To be the most profitable
the elements of the organizational architecture must be internally consistent
the organizational architecture must fit the strategy
the strategy and architecture must be consistent with each other, and consistent with competitive conditions
LO1: Explain what is meant by organization architecture.

17. What Is Organizational Architecture?

18. What Are The Dimensions Of Organizational Structure?
Organizational structure has three dimensions
Vertical differentiation - location of decision-making responsibilities within a structure
Centralized decision-making
Decentralized decision-making
Horizontal differentiation - formal division of the organization into sub-units
Integrating mechanisms - the mechanisms for coordinating sub-units
LO2: Describe the different organizational choices that can be made in an international business.

19. Why Is Horizontal Differentiation Important?
Initially, most firms have no formal structure, but as they grow, develop a functional structure
Firms may switch to a product divisional structure where each division is responsible for a distinct product line
When firms expand internationally, they often group all of their international activities into an international division
LO2: Describe the different organizational choices that can be made in an international business.

20. What Is A Functional Structure?
A Typical Functional Structure
LO2: Describe the different organizational choices that can be made in an international business.

21. What Is A Product Divisional Structure?
A Typical Product Divisional Structure
LO2: Describe the different organizational choices that can be made in an international business.

22. What Is An International Divisional Structure?
One Company’s International Divisional Structure
LO2: Describe the different organizational choices that can be made in an international business.

23. What Happens Next? Firms that continue to expand will move to either a
Worldwide product divisional structure - adopted by firms that are reasonably diversified
Worldwide area structure - favored by firms with low degree of diversification and a domestic structure based on function
The global matrix structure – tries to minimize the limitations of the worldwide area structure and the worldwide product divisional structure
LO2: Describe the different organizational choices that can be made in an international business.

24. What Is A Worldwide Product Division Structure?
A Worldwide Product Divisional Structure
LO2: Describe the different organizational choices that can be made in an international business.

25. What Is A Worldwide Area Structure?
LO2: Describe the different organizational choices that can be made in an international business.

26. What Is The Global Matrix Structure?
A Global Matrix Structure
LO2: Describe the different organizational choices that can be made in an international business.

27. How Can Subunits Be Integrated?
Regardless of the type of structure, firms need a mechanism to integrate subunits
Many firms use informal integrating mechanisms
a knowledge network
Formal integrating mechanisms include
Personal controls
Bureaucratic controls
Output controls
Cultural controls

28. What Is Organizational Culture?
Organizational culture - the values and norms that employees are encouraged to follow
Evolves from
founders and important leaders
national social culture
the history of the enterprise
decisions that resulted in high performance
Managers in companies with a “strong” culture share a relatively consistent set of values and norms that have a clear impact on the way work is performed

29. How Can Firms Implement Organizational Change?
For a firm to succeed
The firm’s strategy must be consistent with the environment in which the firm operates
The firm’s organization architecture must be consistent with its strategy
To implement organization change
Unfreeze the organization through shock therapy
Move the organization to a new state through proactive change in architecture
Refreeze the organization in its new state
LO4: Discuss what is required for an international business to change its organization so that it better matches its strategy.

30. International Business 9e
By Charles W.L. Hill
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

31. Accounting and Finance in the International Business
Chapter 20
Accounting and Finance in the International Business

32. What Is Accounting? Accounting is the language of business
it is the way firms communicate their financial positions
Accounting is more complex for international firms because of differences in accounting standards from country to country
differences make it difficult for investors, creditors, and governments to evaluate firms
It is difficult to compare financial reports from country to country because of national differences in accounting and auditing standards
LO1: Discuss the national differences in accounting standards.

33. What Determines National Accounting Standards?
Accounting standards are rules for preparing financial statements
variables influencing accounting systems include
the relationship between business and the providers of capital
political and economic ties
the level of inflation
the level of economic development
the prevailing culture in a country
Auditing standards specify the rules for performing an audit
LO1: Discuss the national differences in accounting standards.

34. Why Are International Accounting Standards Important?
The growth of transnational financing and transnational investment has created a need for transnational financial reporting
many companies obtain capital from foreign providers who are demanding greater consistency
Standardization of accounting practices across national borders is probably in the best interests of the world economy
The International Accounting Standards Board (IASB) is a major proponent of standardization of accounting standards
LO2: Explain the implications of the rise of international accounting standards.

35. How Does Accounting Influence Control Systems?
The control process in most firms is usually conducted annually and involves three steps
Subunit goals are jointly determined by the head office and subunit management
The head office monitors subunit performance throughout the year
The head office intervenes if the subsidiary fails to achieve its goal, and takes corrective actions if necessary
Budgets and performance data are usually expressed in the corporate currency
LO3: Explain how accounting systems impact upon control systems within the multinational enterprise.

36. What Is Financial Management?
Financial management involves
Investment decisions –what to finance
Financing decisions –how to finance those decisions
Money management decisions –how to manage the firm’s financial resources most efficiently
Decisions are more complex in international business because of different currencies, tax regimes, regulations on capital flows, economic and political risk, etc.

37. How Do Managers Make Investment Decisions?
Financial managers must quantify the benefits, costs, and risks associated with an investment in a foreign country
To do this, managers use capital budgeting
involves estimating the cash flows associated with the project over time, and then discounting them to determine their net present value
If the net present value of the discounted cash flows is greater than zero, the firm should go ahead with the project
LO4: Discuss how operating in different nations impacts investment decisions within the multinational enterprise.

38. Why Is Capital Budgeting More Difficult For International Firms?
Capital budgeting is more complicated in international business
because a distinction must be made between cash flows to the project and cash flows to the parent company
because of political and economic risk
because the connection between cash flows to the parent and the source of financing must be recognized

39. How Does Risk Influence Investment Decisions?
Political risk - the likelihood that political forces will cause drastic changes in a country’s business environment that hurt the profit and other goals of a business
higher in countries with social unrest or disorder, or where the nature of the society increases the chance for social unrest
Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that hurt the profit and other goals of a business
LO4: Discuss how operating in different nations impacts investment decisions within the multinational enterprise.

40. How Can Firms Adjust For Political And Economic Risk?
Firms analyzing foreign investment opportunities can adjust for risk
By raising the discount rate in countries where political and economic risk is high
By lowering future cash flow estimates to account for adverse political or economic changes that could occur in the future
LO4: Discuss how operating in different nations impacts investment decisions within the multinational enterprise.

41. How Do Firms Make Financing Decisions?
Firms must consider two factors
How the foreign investment will be financed
How the financial structure (debt vs. equity) of the foreign affiliate should be configured
Most experts suggest that firms adopt the structure that minimizes the cost of capital, whatever that may be
LO5: Discuss the different financing options available to the foreign subsidiary of a multinational enterprise.

42. What Is Global Money Management?
Money management decisions attempt to manage global cash resources efficiently
Firms need to
Minimize cash balances - need cash balances on hand for notes payable and unexpected demands
Reduce transaction costs - the cost of exchange
multinational netting
LO6: Understand how money management in the international business can be used to minimize cash balances, transaction costs, and taxation.

43. How Can Firms Limit Their Tax Liability?
Every country has its own tax policies
most countries feel they have the right to tax the foreign-earned income of companies based in the country
Double taxation occurs when the income of a foreign subsidiary is taxed by the host-country government and by the home-country government

44. How Can Firms Limit Their Tax Liability?
Taxes can be minimized through
Tax credits - allow the firm to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government
Tax treaties - agreement specifying what items of income will be taxed by the authorities of the country where the income is earned
Deferral principle - specifies that parent companies are not taxed on foreign source income until they actually receive a dividend
Tax havens - countries with a very low, or no, income tax – firms can avoid income taxes by establishing a wholly-owned, non-operating subsidiary in the country
LO6: Understand how money management in the international business can be used to minimize cash balances, transaction costs, and taxation.

45. How Do Firms Move Money Across Borders?
Firms can transfer liquid funds across border via
Dividend remittances - the most common method of transferring funds from subsidiaries to the parent
Royalty payments and fees -the remuneration paid to the owners of technology, patents, or trade names for the use of that technology or the right to manufacture and/or sell products under those patents or trade names
LO7: Understand the basic techniques for global money management.

46. How Do Firms Move Money Across Borders?
Transfer prices -the price at which goods and services are transferred between entities within the firm
Fronting loans -loans between a parent and its subsidiary channeled through a financial intermediary, usually a large international bank
LO7: Understand the basic techniques for global money management.