The Strategy and Organization

of International Business

Strategy and the Firm

Value
Creation
Firm as
Value Chain
Role of
Strategy

Strategy
Actions taken by managers
to attain firms goals.

Profit ()
The difference between
total revenue (TR) and
total costs (TC):
=TR-TC

Maximize
Long-term
profitability

Profitability
Rate of return concept; i.e.
return on sales (ROS).
ROS= /TR
2

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

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 firms 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 firms

distinctive skills or core competencies.

Earn a greater return by leveraging valuable
skills developed in foreign operations and
transferring them to the firms 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:
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.
9

The Experience Curve

Unit Costs

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

B
A
Accumulated Output

10

Leveraging Core Competencies

Firm skills that competitors
can not easily match
or imitate.
1.
Value greatest when:

Skills and products

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

11

Leveraging Subsidiary Skills

Skills can be created

anywhere in a
multinationals global
operations network.

New Challenges
1. Humility to recognize
valuable skills can come
from anywhere.
2. Establish incentives to
encourage local employees
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
A

Company
C
Generally reflects
the position of most
companies
Company
B

Cost
pressures
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
And
Delegate production
practice
and marketing to
national subsidiaries

Host
government

Delegate marketing to
national subsidiaries.

Delegate manufacturing
and production to foreign
subsidiaries.

Manufacture
locally.
15

Four Basic Strategies

High

Global
Strategy

Transnational
Strategy

International
Strategy

Multi domestic
Strategy

Cost
pressures
Low

Low
High
Pressures for local responsiveness

16

Strategic Choices
International
International
create
createvalue
valueby
by
transferring
transferringskills
skillsto
to
local
localmarkets
marketswhere
where
skills
skillsare
arenot
notpresent.
present.
Multidomestic
Multidomestic
oriented
orientedtoward
toward
achieving
achievingmaximum
maximum
local
localresponsiveness.
responsiveness.

Global
Global
increase
increaseprofitability
profitability
through
throughcost
costreductions
reductions
from
fromexperience
experiencecurve
curve
effects
effectsand
andlocation
location
economies.
economies.
Transnational
Transnational
Exploit
Exploitexperienced
experienced
based
basedcost
costand
andlocation
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
Global
International

Advantages
Exploit experience curve
effects
Exploit location
economies
Transfer distinctive
competencies to
Foreign Markets

Disadvantages
Lack of local
responsiveness
Lack of
local responsiveness
Inability to realize
location economies
Failure to exploit
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

firms organization, including structure,

control systems and incentives, processes,
culture and people.
Superior enterprise profitability requires three
conditions;
An organizations architecture must be internally

consistent.
Strategy and architecture must be consistent.
Strategy, architecture and competitive
environments must be consistent.

21

Organization Architecture
Structure

Controls
&
Incentives

People

Culture

Processes

Figure 13.1
22

Organization Architecture
Control Systems:
Processes:
Metrics used to measure Manner in which
subunit performance.
decisions are made.
Make judgments about
Manner in which work
managers abilities to
is performed.
run units.
Conceptually distinct
Incentives are devices
from location of
to reward appropriate
decision-making
managerial behavior.

responsibility.

23

Organization Architecture
Culture:
Norms and value

systems shared by
the employees.

People:
Not just employees, but
the strategy to recruit,
compensate, and retain
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:
Facilitates coordination.
Ensure decisions

consistent with
organizations 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. 25

Strategy and Centralization

Global

Multi-domestic

Centralize

International
Centralize for
core competencies
Decentralize for
operating decisions

Decentralize

Transnational
Both Centralize
And Decentralize

26

Horizontal Differentiation

How a firm divides

itself into subunits

function
type
of
business

International must
reconcile conflict
between product
and location.

geographical
area

27

A Typical Functional Structure

Top
Management

Purchasing
Buying
units

Manufacturing

Plants

Marketing

Branch
sales units

Finance

Accounting
units

28

The Functional Structure

Typically, the structure

that evolves in a
companys early stages.

Coordination and
control rests with
top management.

29

A Typical Product Division Structure

Headquarters

Division product
line A

Department
Purchasing
Buying
units

Division product
line B

Department
Manufacturing
Plants

Division product
line C

Department
Marketing
Branch
sales units

Department
Finance
Accounting
units
30

Product Division Structure

Probable next stage of

development. Reflects
company growth into
new products.

Each unit responsible

for a product.
Semiautonomous and
accountable for
its performance.

Eases coordination
and control
problems.

31

One Companys International Division Structure

Headquarters
Domestic
Division
General
Manager
Product line A

Domestic
Division
General
Manager
Product line B

Domestic
Division
General
Manager
Product line C

Functional units

Functional units

Country 1
General
Manager
(product A, B,
and / or C)

International
Division
General
Manager
area line

Country 2
General
Manager
(product A, B,
and / or C)
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
Foreign
Product
Diversity

Worldwide
Product
Division

Alternate Paths
of Development
International
Division

Global Matrix
(Grid)

Area
Division

Foreign Sales as a Percentage of Total Sales

34

Worldwide Area Structure

Headquarters

North American
area

European
area
Latin American
area

Middle East /
Africa area

Far East
area

35

Worldwide Area Structure

Favored by firms with

low degree of
diversification.
Area is usually
a country. Largely
autonomous.
Encourages
fragmentation.

Facilitates local
responsiveness.

Consistent with multi-domestic strategy

36

A Worldwide Product Division Structure

Headquarters

Worldwide
product group
or division A

Worldwide
product group
or division B

Worldwide
product group
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.
Weak local
responsiveness.

Believe that product value

creation activities should
be coordinated
worldwide.
38

A Global Matrix Structure

Headquarters

Area 1

Area 2

Area 3

Product
division A
Product
division B
Product
division C

Manager here
belongs to
division B
and area 2

Figure 13.7
39

Matrix Structure

Attempts to meet needs

of transnational
strategy.
Doesnt work as well
as theory predicts.

Conflict and
power struggles.

Flexible matrix
structures.

Consistent with transnational strategy

40

Integrating Mechanisms
Need for

coordination:
Transnational

Impediments;
High

Global
International
Multidomestic

Low

Different

managerial
orientations.
Differing goals.
Time zones,
distance,
nationality.
41

Formal Integrating Mechanisms

Direct contact
Liaison roles
Teams
Matrix structures

Increasing complexity
of integrating mechanism

Figure 13.8

42

A Simple Management Network

G

B
C

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

E
D

43

Control Systems and Incentives

Types of controls:
Personal.
Bureaucratic
Output.
Cultural.

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. 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

Multi-domestic
International
Global
Transnational

Interdependence

Performance
Ambiguity

Costs of
Control

Low

Low

Low

Moderate

Moderate

Moderate

High

High

High

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.
Communication strategy.

48

Organization Culture and Performance

A Strong Culture:

Culture must match an

organizations architecture.
Not always good.
Culture does not necessarily
Sometimes beneficial,
translate across borders.
sometimes not.
Context is important.
Transnational
Strong
Culture

Adaptive cultures.

Weak

Global
International
Multidomestic
49

A Synthesis of Strategy, Structure and

Control Systems
Structure and
control

Multi-domestic

International

Global

Transnational

Vertical
differentiation

Decentralized

Core competency;
rest decentralized

Some
centralized

Worldwide
area structure

Worldwide product
division

Worldwide
product
division

Mixed
centralized and
decentralized
Informal matrix

Need for
coordination

Low

Moderate

High

Very high

Integrating
mechanisms
Performance
ambiguity

None

Few

Many

Very many

Low

Moderate

High

Very high

Low

Moderate

Horizontal
differentiation

Need for
cultural
controls

High

Very high
50