1. The Strategy and Organization of International Business

2. 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

3. 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

4. The Firm as a Value Chain
Support Activities
Company Infrastructure
Information Systems
Human Resources
Materials Management
R & D
Production
Marketing & Sales
Service
Primary Activities

5. 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.

6. 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”.

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

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

9. 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.

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

11. 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:

12. 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.

13. 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

14. 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.

15. 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

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

17. 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.

18. 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

19. 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

20. The Organization of International Business

21. 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.

22. Organization Architecture
Structure
People
Culture
Processes
Controls
&
Incentives
Figure 13.1

23. 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.

24. 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.

25. 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.

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

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

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

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

30. 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

31. 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.

32. 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

33. 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.

34. 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

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

36. 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

37. 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

38. 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.

39. 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

40. 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

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

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

43. A Simple Management NetworkB C D A F E
Informal contacts between
managers within an enterprise.

44. 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.

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

46. 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

47. 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.

48. 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.

49. 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

50. 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