International Business 10e By Charles W.L. Hill Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 13 The Strategy of International Business 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 Profitability is the rate of return the firm makes on its invested capital Profit growth is the percentage increase in net profits over time 13-3 What Is Strategy? To increase profitability and profit growth, firms can add value lower costs sell more in existing markets expand internationally 13-4 What Is Strategy? Determinants of Enterprise Value 13-5 How Is Value Created? To increase profitability, firms need to create more value The firm's value creation is the difference between V (the price that the firm can charge for that product given competitive pressures) and C (the costs of producing that product) a firm has high profits when it creates more value for its customers and does so at a lower cost 13-6 How Is Value Created? Value Creation 13-7 How Is Value Created? Profits can be increased by 1. Using a differentiation strategy adding value to a product so that customers are willing to pay more for it 2. Using a low cost strategy lowering costs 13-8 Why Is Strategic Positioning Important? Michael Porter argues that firms need to choose either differentiation or low cost, and then configure internal operations to support the choice So, to maximize long run return on invested capital, firms must 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 13-9 Why Is Strategic Positioning Important? Strategic Choice in the International Hotel Industry 13-10 How Are a Firm's Operations Configured? A firm's operations are like a value chain composed of a series of distinct value creation activities: production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure All of these activities must be managed effectively and be consistent with firm strategy 13-11 How Are a Firm's Operations Configured? Value creation activities can be categorized as 1. Primary activities R&D Production marketing and sales customer service 2. Support activities information systems logistics human resources 13-12 How Are a Firm's Operations Configured? The Value Chain 13-13 How Can Firms Increase Profits Through International Expansion? International firms can 1. Expand their market sell in international markets 2. Realize location economies disperse value creation activities to locations where they can be performed most efficiently and effectively 13-14 How Can Firms Increase Profits Through International Expansion? 3. Realize greater cost economies from experience effects serve an expanded global market from a central location 4. Earn a greater return leverage skills developed in foreign operations and transfer them elsewhere in the firm 13-15 How Can Firms Leverage Their Products and Competencies? Firms can increase growth by selling goods or services developed at home internationally The success of firms that expand internationally depends on the goods or services sold the firm's core competencies 13-16 How Can Firms Leverage Their Products and Competencies? Core competencies - skills within the firm that competitors cannot easily match or imitate can exist in any value creation activity Core competencies allow firms to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible 13-17 Why Are Location Economies Important? Location economies are economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be By achieving location economies, firms can lower the costs of value creation and achieve a low cost position differentiate their product offering 13-18 Why Are Location Economies Important? Firms that take advantage of location economies in different parts of the world, create a global web of value creation activities different stages of the value chain are dispersed to locations where perceived value is maximized or where the costs of value creation are minimized 13-19 Why Are Experience Effects Important? The experience curve refers to 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 to get down the experience curve quickly, firms can use a single plant to serve global markets 13-20 Why Are Experience Effects Important? Learning effects are cost savings that come from learning by doing When labor productivity increases individuals learn the most efficient ways to perform particular tasks managers learn how to manage the new operation more efficiently 13-21 Why Are Experience Effects Important? The Experience Curve 13-22 Why Are Experience Effects Important? Economies of scale - the reductions in unit cost achieved by producing a large volume of a product Sources of economies of scale include spreading fixed costs over a large volume utilizing production facilities more intensively increasing bargaining power with suppliers 13-23 How Can Managers Leverage Subsidiary Skills? Managers should 1. Recognize that valuable skills that could be applied elsewhere in the firm can arise anywhere within the firm's global network - not just at the corporate center 2. Establish an incentive system that encourages local employees to acquire new skills 3. Have a process for identifying when valuable new skills have been created in a subsidiary 4. Act as facilitators to help transfer skills within the firm 13-24 What Types of Competitive Pressures Exist in the Global Marketplace? Firms that compete in the global marketplace face two conflicting types of competitive pressures the pressures limit the ability of firms to realize location economies and experience effects, leverage products, and transfer skills within the firm Dealing with both pressures is challenging 13-25 What Types of Competitive Pressures Exist in the Global Marketplace? Two competitive pressures: 1. Pressures for cost reductions force the firm to lower unit costs 2. Pressures to be locally responsive require the firm to adapt its product to meet local demands in each market but, this strategy can raise costs 13-26 What Types of Competitive Pressures Exist in the Global Marketplace? Pressures for Cost Reductions and Local Responsiveness 13-27 When Are Pressures for Cost Reductions Greatest? Pressures for cost reductions are greatest 1. In industries producing commodity type products that fill universal needs (needs that exist when the tastes and preferences of consumers in different nations are similar if not identical) where price is the main competitive weapon 2. When major competitors are based in low cost locations 3. Where there is persistent excess capacity 4. Where consumers are powerful and face low switching costs 13-28 When Are Pressures for Local Responsiveness Greatest? Pressures for local responsiveness arise from 1. Differences in consumer tastes and preferences strong pressure emerges when consumer tastes and preferences differ significantly between countries 2. Differences in traditional practices and infrastructure strong pressure emerges when there are significant differences in infrastructure and/or traditional practices between countries 13-29 When Are Pressures for Local Responsiveness Greatest? 3. Differences in distribution channels need to be responsive to differences in distribution channels between countries 4. Host government demands economic and political demands imposed by host country governments may require local responsiveness 13-30 Which Strategy Should a Firm Choose? There are four basic strategies to compete in international markets the appropriateness of each strategy depends on the pressures for cost reduction and local responsiveness in the industry 13-31 Which Strategy Should a Firm Choose? Four Basic Strategies 13-32 Which Strategy Should a Firm Choose? 1. Global standardization - increase profitability and profit growth by reaping the cost reductions from economies of scale, learning effects, and location economies goal is to pursue a low-cost strategy on a global scale This strategy makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal 13-33 Which Strategy Should a Firm Choose? 2. Localization - increase profitability by customizing goods or services so that they match tastes and preferences in different national markets This strategy makes sense when there are substantial differences across nations with regard to consumer tastes and preferences and cost pressures are not too intense 13-34 Which Strategy Should a Firm Choose? 3. Transnational - tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects firms differentiate their product across geographic markets to account for local differences and foster a multidirectional flow of skills between different subsidiaries in the firm's global network of operations This strategy makes sense when both cost pressures and pressures for local responsiveness are intense 13-35 Which Strategy Should a Firm Choose? 4. International - take products first produced for the domestic market and sell them internationally with only minimal local customization This strategy makes sense when there are low cost pressures and low pressures for local responsiveness 13-36 How Does Strategy Evolve? An international strategy may not be viable in the long term to survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors Localization may give a firm a competitive edge, but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures would require a shift toward a transnational strategy 13-37 How Does Strategy Evolve? Changes in Strategy over Time 13-38 International Business 10e By Charles W.L. Hill Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 14 The Organization of International Business What Is Organizational Architecture? Organizational architecture is the totality of a firm's organization including 1. Organizational structure the formal division of the organization into subunits the location of decision-making responsibilities within that structure centralized versus decentralized the establishment of integrating mechanisms to coordinate the activities of subunits including crossfunctional teams or pan-regional committees 14-3 What Is Organizational Architecture? 2. Control systems and incentives control systems - the metrics used to measure performance of subunits incentives - the devices used to reward managerial behavior 14-4 What Is Organizational Architecture? 3. Processes, organizational culture, and people processes - how decisions are made and work is performed within the organization organizational culture - norms and values that are shared among the employees of an organization people - the employees and the strategy used to recruit, compensate, and retain those individuals and the type of people they are in terms of their skills, values, and orientation 14-5 What Is Organizational Architecture? 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 14-6 What Is Organizational Architecture? Organizational Architecture 14-7 What Are the Dimensions of Organizational Structure? Organizational structure has three dimensions 1. Vertical differentiation - the location of decision-making responsibilities within a structure 2. Horizontal differentiation - the formal division of the organization into subunits 3. Integrating mechanisms - the mechanisms for coordinating subunits 14-8 Why Is Vertical Differentiation Important? Vertical differentiation determines where decision-making power is concentrated Centralized decision making facilitates coordination ensures decisions are consistent with the organization's objectives gives managers the means to bring about organizational change avoids duplication of activities 14-9 Why Is Vertical Differentiation Important? Decentralized decision making relieves the burden of centralized decision making has been shown to motivate individuals permits greater flexibility can result in better decisions can increase control 14-10 Why Is Horizontal Differentiation Important? Horizontal differentiation refers to how the firm divides into subunits usually based on function, type of business, or geographical area Most firms begin with no formal structure, but as they grow, split into functions reflecting the firm's value creation activities - functional structure functions are coordinated and controlled by top management decision making is centralized product line diversification requires further horizontal differentiation 14-11 What Is a Functional Structure? A Typical Functional Structure 14-12 Why Is Horizontal Differentiation Important? Firms may switch to a product divisional structure each division is responsible for a distinct product line headquarters retains control for the overall strategic direction of the firm and for the financial control of each division 14-13 What Is a Product Divisional Structure? A Typical Product Divisional Structure 14-14 What Happens When Firms Expand Globally? When firms expand internationally, they often group all of their international activities into an international division Over time, manufacturing may shift to foreign markets firms with a functional structure at home would replicate the functional structure in the foreign market firms with a divisional structure would replicate the divisional structure in the foreign market In either case, there is the potential for conflict and coordination problems between domestic and foreign operations 14-15 What Is an International Division Structure? One Company's International Division Structure 14-16 What Happens Next? Firms that continue to expand will move to either a 1. Worldwide product division structure - adopted by firms that are reasonably diversified allows for worldwide coordination of value creation activities of each product division helps realize location and experience curve economies facilitates the transfer of core competencies does not allow for local responsiveness 14-17 What Is a Worldwide Product Division Structure? A Worldwide Product Divisional Structure 14-18 What Happens Next? 2. Worldwide area structure - favored by firms with low degree of diversification and a domestic structure based on function divides the world into autonomous geographic areas decentralizes operational authority facilitates local responsiveness can result in a fragmentation of the organization is consistent with a localization strategy 14-19 What Is a Worldwide Area Structure? A Worldwide Area Structure 14-20 How Does Organizational Structure Change over Time? The International Structural Stages Model 14-21 What Is the Global Matrix Structure? The global matrix structure - tries to minimize the limitations of the worldwide area structure and the worldwide product divisional structure allows for differentiation along two dimensions product division and geographic area has dual decision making - product division and geographic area have equal responsibility for operating decisions can be bureaucratic and slow can result in conflict between areas and product divisions can result in finger-pointing between divisions when something goes wrong 14-22 What Is the Global Matrix Structure? A Global Matrix Structure 14-23 How Can Subunits Be Integrated? Regardless of the type of structure, firms need a mechanism to integrate subunits need for coordination is lowest in firms with a localization strategy and highest in transnational firms coordination can be complicated by differences in subunit orientation and goals simplest formal integrating mechanism is direct contact between subunit managers, followed by liaisons temporary or permanent teams composed of individuals from each subunit is the next level of formal integration the matrix structure allows for all roles to be integrating roles 14-24 How Can Subunits Be Integrated? Formal Integrating Mechanisms 14-25 How Can Subunits Be Integrated? Many firms use informal integrating mechanisms A knowledge network - network for transmitting information within an organization that is based not on informal contacts between managers and on distributed information systems a non-bureaucratic conduit for knowledge flows must embrace as many managers as possible and managers must adhere to a common set of norms and values that override differing subunit orientations 14-26 How Can Subunits Be Integrated? A Simple Management Network 14-27 What Are the Different Types of Control Systems? 1. Personal controls -personal contact with subordinates most widely used in small firms 2. Bureaucratic controls -a system of rules and procedures that directs the actions of subunits budgets and capital spending rules 14-28 What Are the Different Types of Control Systems? 3. Output controls - setting goals for subunits to achieve and expressing those goals in terms of objective performance metrics compare actual performance against targets and intervene selectively to take corrective action 4. Cultural controls - exist when employees \"buy into\" the norms and value systems of the firm strong culture implies less need for other forms of control 14-29 What Are Incentive Systems? Incentives - devices used to reward behavior usually closely tied to performance metrics used for output controls should vary depending on the employee and the nature of the work being performed should promote cooperation between managers in sub-units should reflect national differences in institutions and culture can have unintended consequences 14-30 What Is Performance Ambiguity? Performance ambiguity exists when the causes of a subunit's poor performance are not clear is common when a subunit's performance is dependent on the performance of other subunits is lowest in firms with a localization strategy is higher in international firms is still higher in firms with a global standardization strategy is highest in transnational firms 14-31 What Is the Link Between Control, Incentives, And Strategy? Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business Strategies 14-32 What Are Processes? Processes refer to the manner in which decisions are made and work is performed many processes cut across national boundaries as well as organizational boundaries processes can be developed anywhere within a firm's global operations network formal and informal integrating mechanisms can help firms leverage processes 14-33 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 14-34 What Is Organizational Culture? Organizational culture can be maintained through hiring and promotional practices reward strategies socialization processes communication strategies Organizational culture tends to change very slowly 14-35 What Is Organizational Culture? 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 A \"strong\" culture is not always good may not lead to high performance could be beneficial at one point, but not at another Companies with adaptive cultures have the highest performance 14-36 What Is the Link Between Strategy And Architecture? A Synthesis of Strategy, Structure, and Control Systems 14-37 What Is the Link Between Strategy And Architecture? 1. Firms pursuing a localization strategy focus on local responsiveness they do not have a high need for integrating mechanisms performance ambiguity and the cost of control tend to be low the worldwide area structure is common 14-38 What Is the Link Between Strategy And Architecture? 2. Firms pursuing an international strategy create value by transferring core competencies from home to foreign subsidiaries the need for control is moderate the need for integrating mechanisms is moderate performance ambiguity is relatively low and so is the cost of control the worldwide product division structure is common 14-39 What Is the Link Between Strategy And Architecture? 3. Firms pursuing a global standardization strategy focus on the realization of location and experience curve economies headquarters maintains control over most decisions the need for integrating mechanisms is high strong organizational cultures are encouraged the worldwide product division is common 14-40 What Is the Link Between Strategy And Architecture? 4. Firms pursuing a transnational strategy focus on simultaneously attaining location and experience curve economies, local responsiveness, and global learning some decisions are centralized and others are decentralized the need for coordination and cost of control is high an array of formal and informal integrating mechanism are used a strong culture is encouraged matrix structures are common 14-41 How Are the Environment, Strategy, Architecture and Performance Related? For a firm to succeed 1. The firm's strategy must be consistent with the environment in which the firm operates 2. The firm's organization architecture must be consistent with its strategy firms need to change their architecture to reflect changes in the environment in which they are operating and the strategy they are pursuing 14-42 How Can Firms Implement Organizational Change? To implement organization change 1. Unfreeze the organization through shock therapy requires taking bold actions like plant closures or dramatic structural reorganizations 2. Move the organization to a new state through proactive change in architecture requires a substantial and quick change in organizational architecture so that it matches the desired new strategic posture 3. Refreeze the organization in its new state requires that employees be socialized into the new way of doing things 14-43 How Can Firms Implement Organizational Change? Organizations can be difficult to change because of the existing distribution of power and influence the current culture managers' preconceptions about the appropriate business model or paradigm institutional constraints 14-44