VI. Strategy and Organization

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The Strategy and Organization

of International Business



2

Strategy and the Firm

ProfitabilityRate of return concept; i.e.

return on sales (ROS).ROS= /TR

Profit ()The difference betweentotal revenue (TR) and

total costs (TC): =TR-TC

ValueCreation

Firm asValue Chain

Role of

Strategy

StrategyActions taken by managers

to attain firm’s goals.

MaximizeLong-term

profitability



3

Value Creation

V = Consumer ValueP = Market PriceC = Cost of Production

V-P = Consumer SurplusP-C = Profit MarginV-C = Value Added

V - P

P - C

C

V

P

C



4

Company Infrastructure

Information Systems

Human Resources

Materials Management

Primary Activities

Support Activities

The Firm as a Value Chain

R & D Production Marketing & Sales Service



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

Realize location economies.

Realize greater cost economies.

Earn a greater return from the firm’sdistinctive skills or core competencies.

Earn a greater return by leveraging valuable

skills developed in foreign operations andtransferring them to the firm’s other operations.

Firms operating internationally are able to:

Profitability is constrained by productcustomization and the “imperative of localization”.



7

Parts

PartsParts

Assembly

Advertising Design

Sales

Location Economies

Pontiac LeMans

Creating a Global Web



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 incomplex tasks.

Economies of Scale: Reduction in unit cost

achieved throughvolume production.

Sources:

Spread fixed costs over volume.

Employingspecialized equipment orpersonnel.



10

The Experience Curve

B

A

Accumulated Output

U n i t

C o s t s

Strategic SignificanceMoving down the curve reduces

the cost of creating value.





12

Leveraging Subsidiary Skills

Skills can be createdanywhere in amultinational’s global operations network.

New Challenges1. Humility to recognize

valuable skills can come

from anywhere.2. Establish incentives toencourage local employeesto acquire new skills.

3. Need a process to identify

new skill development.4. Need to facilitate transferof new skills within thefirm.



13

Pressures for Cost Reduction and

Local Responsiveness

CompanyC

CompanyB

High

Costpressures

Low

Low High

Generally reflectsthe position of most

companies

Pressures for local responsiveness





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Local Responsiveness

Delegate marketing to

national subsidiaries.

Delegate manufacturingand production to foreign

subsidiaries.

Delegate production

and marketing tonational subsidiaries

Taste and

preference

InfrastructureAnd

practice

Distributionchannels

Manufacturelocally.

Hostgovernment



16

Four Basic Strategies

High

Cost

pressures

Low

Low High

GlobalStrategy

TransnationalStrategy

Multi domesticStrategy

InternationalStrategy

Pressures for local responsiveness



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Strategic Choices

TransnationalExploit experienced

based cost and location

economies, transfer corecompetencies within thefirm, and pay attentionto local responsiveness

needs.

Internationalcreate value by

transferring skills tolocal markets where

skills are not present.

Multidomesticoriented toward

achieving maximumlocal responsiveness.

Globalincrease profitability

through cost reductionsfrom experience curveeffects and location

economies.



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The Advantages and Disadvantages of

the Four Strategies

Table 12.1a

Strategy Advantages Disadvantages

Global Exploit experience curveeffects

Exploit locationeconomies

Lack of localresponsiveness

International

Transfer distinctive

competencies toForeign Markets

Lack oflocal responsivenessInability to realize

location economiesFailure to exploitexperience curveeffects

Th Ad d Di d f



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The Advantages and Disadvantages of

the Four Strategies

Strategy Advantages Disadvantages

Multi-domesticCustomize product offeringsand marketing in accordancewith local responsiveness

Inability to realize locationeconomies

Failure to exploit

experience curve effectsFailure to transferdistinctive competenciesto foreign markets

Transnational Exploit experience curveeffects

Exploit location economiesCustomize product offerings

and marketing in accordancewith local responsiveness

Reap benefits of global learning

Difficult to implementdue to organizationalproblems



The Organization of

International Business



21

Organization Architecture and Profitability

Organization architecture is the totality of afirm’s organization, including structure,control systems and incentives, processes,culture and people.

Superior enterprise profitability requires threeconditions;

An organization’s architecture must be internally

consistent.Strategy and architecture must be consistent.

Strategy, architecture and competitiveenvironments must be consistent.



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Organization Architecture

Structure

People

Culture

ProcessesControls

&Incentives

Figure 13.1



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Control Systems:Metrics used to measure

subunit performance.

Make judgments aboutmanagers’ abilities to

run units.

Incentives are devicesto 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.



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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.

V i l Diff i i



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Vertical Differentiation

Centralization:

Facilitates coordination.

Ensure decisions

consistent with

organization’s objectives.

Top-level managers have

means to bring aboutorganizational change.

Avoids duplication of

activities.

Decentralization:

Overburdened top

management.

Motivational research

favors decentralization.

Permits greater

flexibility. Can result in better

decisions.

Can increase control.

Concerned with where decisions are made.





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Horizontal Differentiation

geographicalarea

How a firm divides

itself into subunits

function

typeof

business

International mustreconcile conflictbetween product

and location.



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A Typical Functional Structure

Purchasing Manufacturing Marketing Finance

Top

Management

Buying

unitsPlants Branch

sales units

Accounting

units



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The Functional Structure

Typically, the structurethat evolves in acompany’s early stages.

Coordination andcontrol rests withtop management.



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A Typical Product Division Structure

DepartmentPurchasing

DepartmentManufacturing

DepartmentMarketing

DepartmentFinance

Buyingunits

Plants Branchsales units

Accountingunits

Division product

line A

Headquarters

Division product

line B

Division product

line C



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Product Division Structure

Probable next stage ofdevelopment. Reflects

company growth intonew products.

Eases coordinationand controlproblems.

Each unit responsiblefor a product.Semiautonomous and

accountable forits performance.



32

One Company’s International Division Structure

Domestic

Division

General

ManagerProduct line A

International

Division

General

Managerarea line

Headquarters

Domestic

Division

General

ManagerProduct line B

Domestic

Division

General

ManagerProduct line C

Country 1

GeneralManager

(product A, B,

and / or C)

Country 2

GeneralManager

(product A, B,

and / or C)

Functional units

Functional units



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International Division

Widely used.

1. Can create conflictbetween domestic andforeign operations.2. Implied lack of

coordination betweendomestic and foreign

operations. Growth can leadto worldwide

structure.



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The International Structural

Stages Model

Global Matrix

(“Grid”)

AreaDivision

Worldwide

ProductDivision

InternationalDivision

Alternate Pathsof Development

ForeignProductDiversity

Foreign Sales as a Percentage of Total Sales



35

Worldwide Area Structure

Europeanarea

Middle East /

Africa area

Far Eastarea

Headquarters

North Americanarea

Latin American

area





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A Worldwide Product Division Structure

Worldwideproduct groupor division A

Worldwideproduct groupor division C

Headquarters

Worldwideproduct groupor division B

Area 1

(domestic)

Area 2

(international)

Functional units



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Product Division

Reasonably

diversified firms.Attempts to overcomeinternational divisionand worldwide areastructure problems.

Believe that product valuecreation activities should

be coordinatedworldwide.

Weak localresponsiveness.

Consistent with global orinternational strategy



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A Global Matrix Structure

Figure 13.7

Headquarters

Area 1 Area 2 Area 3

Productdivision A

Productdivision B

Productdivision C

Manager herebelongs todivision Band area 2





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Integrating Mechanisms

Need for coordination: Impediments;

Different

managerialorientations.

Differing goals.

Time zones,distance,nationality.

Low

High

Multidomestic

International

Global

Transnational



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Formal Integrating Mechanisms

Increasing complexityof integrating mechanism

Direct contact

Liaison roles

Teams

Matrix structures

Figure 13.8



43

A Simple Management Network

GB

C D

A F

E

Informal contacts betweenmanagers within an enterprise.



44

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 andculture.

Caveat: beware of the rule of

unintended consequences.



Interdependence Performance Ambiguity



46

Interdependence, Performance Ambiguity,

and the Costs of Control for the Four

International Business Strategies

Strategy Inter-

dependencePerformance

Ambiguity

Costs of

Control

Multi-domestic Low Low

International Moderate Moderate

Global High High

Transnational

Low

Moderate

High

Very high Very high Very high



47

Processes

The manner in which decisions aremade 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



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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.

O i ti C lt d P f



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Organization Culture and Performance

A “Strong” Culture:

Not always good.

Sometimes beneficial,

sometimes not.

Context is important.

Adaptive cultures.

Culture must match anorganization’s architecture.

Culture does not necessarily

translate across borders.

C

ul t ur e

Transnational

Multidomestic

GlobalInternational

Strong

Weak

A S th i f St t g St t d



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A Synthesis of Strategy, Structure and

Control Systems

Multi-domestic International Global Transnational

Verticaldifferentiation

Decentralized Core competency;

rest decentralized

Some

centralized

Mixed

centralized and

decentralized

Horizontaldifferentiation

Worldwide

area structure

Worldwide product

division

Worldwide

product

division

Informal matrix

Need for

coordinationLow Moderate High Very high

Integrating

mechanisms

None Few Many Very many

Performance

ambiguity

Low Moderate High Very high

Need for

cultural

controls

Low Moderate High Very high

Structure and

control

Documents

VI. Strategy and Organization