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The Strategy and Organization of International Business. Strategy Actions taken by managers to attain firm’s goals. Value Creation. Firm as Value Chain. Profit (  ) The difference between total revenue (TR ) and total costs (TC):  =TR-TC. Maximize Long-term profitability.

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strategy and the firm

Strategy

Actions taken by managers

to attain firm’s goals.

Value

Creation

Firm as

Value Chain

Profit()

The difference between

total revenue (TR) and

total costs (TC):

=TR-TC

Maximize

Long-term

profitability

Role of

Strategy

Profitability

Rate of return concept; i.e.

return on sales (ROS).

ROS= /TR

Strategy and the Firm
value creation

V - P

V = Consumer Value

P = Market Price

C = Cost of Production

V-P = Consumer Surplus

P-C = Profit Margin

V-C = Value Added

P - C

V

C

P

C

Value Creation
the firm as a value chain

Materials Management

Human Resources

Information Systems

Company Infrastructure

R & D

Production

Marketing & Sales

Service

The Firm as a Value Chain

Support Activities

Primary Activities

the role of strategy
The Role of Strategy

Identifying and taking actions that willlower costsof value creation and/ordifferentiatethe firm’s product offering through superior design, quality service, functionality, etc.

profiting from global expansion
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”.

slide7

Location Economies

Assembly

Creating a Global Web

Parts

Sales

Design

Advertising

Parts

Pontiac LeMans

Parts

needs for consideration
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.

Experience Curve
the experience curve

Strategic Significance

Moving down the curve reduces

the cost of creating value.

B

Unit Costs

A

Accumulated Output

The Experience Curve
leveraging core competencies
Leveraging Core Competencies

Firm skills that competitors

can not easilymatch

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
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
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

slide14
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.

slide15

Taste and

preference

Distribution

channels

Infrastructure

And

practice

Delegate marketing to

national subsidiaries.

Delegate production

and marketing to

national subsidiaries

Delegate manufacturing

and production to foreign

subsidiaries.

Host

government

Manufacture

locally.

Local Responsiveness

four basic strategies

High

Cost

pressures

Low

Global

Strategy

Transnational

Strategy

International

Strategy

Multi domestic

Strategy

Low High

Pressures for local responsiveness

Four Basic Strategies
slide17

International

create value by transferring skills to local markets where skills are not present.

Global

increase profitability through cost reductions from experience curve effects and location economies.

Multidomestic

oriented toward

achieving maximum

local responsiveness.

Transnational

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

Strategic Choices

the advantages and disadvantages of the four strategies

Strategy

Advantages

Disadvantages

Global

Exploit experience curve effects

Lack of local

responsiveness

Exploit location economies

Lack of local

International

responsiveness

Inability to realize

Transfer distinctive

competencies to

location economies

Foreign Markets

Failure to exploit experience curve

effects

The Advantages and Disadvantages of the Four Strategies

Table 12.1a

the advantages and disadvantages of the four strategies1

Strategy

Advantages

Disadvantages

Customize product offerings

Inability to realize location

Multi-domestic

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

The Advantages and Disadvantages of the Four Strategies
organization architecture and profitability
Organization Architecture and Profitability
  • Organization architectureis the totality of a firm’s organization, including structure, control systemsand incentives,processes, cultureandpeople.
  • Superior enterprise profitability requires three conditions;
    • An organization’s architecture must be internally consistent.
    • Strategyandarchitecture must be consistent.
    • Strategy, architecture and competitive environments must be consistent.
slide22

Structure

Controls

&

Incentives

People

Processes

Culture

Organization Architecture

Figure 13.1

organization architecture
Control Systems:

Metrics used to measure subunit performance.

Make judgments about managers’ abilities to run units.

Incentivesare 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
organization architecture1
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.

Organization Architecture

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
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.

Vertical Differentiation

Concerned with where decisions are made.

strategy and centralization

Global

Centralize

Multi-domestic

Decentralize

International

Centralize for

core competencies

Decentralize for

operating decisions

Transnational

Both Centralize

And Decentralize

Strategy and Centralization
horizontal differentiation

How a firm divides

itself into subunits

function

type

of

business

International must

reconcile conflict

between product

and location.

geographical

area

Horizontal Differentiation
a typical functional structure

Top

Management

Purchasing

Manufacturing

Marketing

Finance

Buying

units

Plants

Branch

sales units

Accounting

units

A Typical Functional Structure
the functional structure

Typically, the structure

that evolves in a

company’s early stages.

Coordination and

control rests with

top management.

The Functional Structure
a typical product division structure

Headquarters

Division product

line A

Division product

line B

Division product

line C

Department

Purchasing

Department

Manufacturing

Department

Marketing

Department

Finance

Buying

units

Plants

Branch

sales units

Accounting

units

A Typical Product Division Structure
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.

Product Division Structure
one company s 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

International

Division

General

Manager

area line

Country 1

General

Manager

(product A, B,

and / or C)

Country 2

General

Manager

(product A, B,

and / or C)

Functional units

Functional units

One Company’s International Division Structure
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.

International Division
the international structural stages model
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

Headquarters

European

area

North American

area

Far East

area

Latin American

area

Middle East /

Africa area

Worldwide Area Structure
worldwide area structure1

Favored by firms with

low degree of

diversification.

Area is usually

a country. Largely

autonomous.

Facilitates local

responsiveness.

Worldwide Area Structure

Encourages

fragmentation.

Consistent with multi-domestic strategy

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

(domestic)

Area 2

(international)

Functional units

A Worldwide Product Division Structure
product division

Reasonably

diversified firms.

Attempts to overcome

international division

and worldwide area

structure problems.

Believe that product value

creation activities should

be coordinated

worldwide.

Product Division

Consistent with global or international strategy

Weak local

responsiveness.

a global matrix structure

Headquarters

Area 1

Area 2

Area 3

Product

division A

Product

division B

Manager here

belongs to division B

and area 2

Product

division C

A Global Matrix Structure

Figure 13.7

matrix structure

Attempts to meet needs

of transnational

strategy.

Doesn’t work as well

as theory predicts.

“Flexible” matrix

structures.

Conflict and

power struggles.

Matrix Structure

Consistent with transnational strategy

integrating mechanisms
Need for coordination:

Impediments;

Different managerial orientations.

Differing goals.

Time zones, distance, nationality.

High

Transnational

Global

International

Multidomestic

Low

Integrating Mechanisms
formal integrating mechanisms

Direct contact

Liaison roles

Teams

Matrix structures

Increasing complexity

of integrating mechanism

Formal Integrating Mechanisms

Figure 13.8

a simple management network

G

E

B

C

D

A

F

A Simple Management Network

Informal contacts between

managers within an enterprise.

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.

Control Systems and Incentives
performance ambiguity

Control Systems

Multinational

Output/Bureaucratic

Global/Transnational

Cultural

Performance Ambiguity

A function of the

interdependence among

subunits.

slide46

Inter-

dependence

Low

Moderate

High

Very high

Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business Strategies

Strategy

Performance

Costs of

Ambiguity

Control

Multi-domestic

Low

Low

International

Moderate

Moderate

Global

High

High

Very high

Very high

Transnational

processes
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
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
A “Strong” Culture:

Not always good.

Sometimes beneficial, sometimes not.

Context is important.

Adaptive cultures.

Culture must match an organization’s architecture.

Culture does not necessarily translate across borders.

Transnational

Strong

Global

Culture

International

Multidomestic

Weak

Organization Culture and Performance
a synthesis of strategy structure and control systems

Structure and

control

Multi-domestic

International

Global

Transnational

Vertical

Decentralized

Core competency;

Some

Mixed

differentiation

rest decentralized

centralized

centralized and

decentralized

Worldwide

Worldwide product

Worldwide

Informal matrix

Horizontal

area structure

division

product

differentiation

division

Need for

Low

Moderate

High

Very high

coordination

Few

Integrating

None

Many

Very many

mechanisms

Performance

High

Very high

Low

Moderate

ambiguity

Need for

Low

Moderate

High

Very high

cultural

controls

A Synthesis of Strategy, Structure and Control Systems