International Business Strategy and Organization
Recap
Resource-based view and the VRIO framework.
Two approaches for sustained competitive advantage:
Isolating mechanism.
Early-mover advantage.
Global value chain – profitability and growth.
Fundamentals of competitive advantage.
Strategy in International Business and Global Firm
International firms can increase profits through:
Expanding their market.
Realizing location economies.
Realizing greater cost economies from experience effects.
Earning a greater return.
Location Economies
Location economies 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.
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.
Learning Effects and Economies of Scale
Learning effects: 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.
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.
Experience Curve
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.
Multidomestic Industry vs. Global Industry
Multidomestic Industry: Competition takes place on a country-by-country basis.
Firms specialize in industries such as processed food, consumer products, fashion, retailing, and publishing.
Firms cater to specific conditions in each country where they do business, adapting offerings to suit the language, culture, laws, income level, and other characteristics.
Each country tends to have a unique set of competitors.
Global Industry: Competition is on a regional or worldwide scale.
Firms specialize in industries such as aerospace, cars, computers, chemicals, and industrial equipment.
Customer needs vary little from country to country.
Firms sell relatively standardized offerings across entire regions or throughout the world.
The industry usually has only a handful of the same competitors that compete regionally or worldwide.
Competitive Pressures in the Global Marketplace
Firms that compete in the global marketplace face two conflicting types of competitive pressures:
Pressures for cost reductions: force the firm to lower unit costs.
Pressures to be locally responsive: require the firm to adapt its product to meet local demands in each market (a strategy that raises costs).
These pressures limit the ability of firms to realize location economies and experience effects, leverage products, and transfer skills within the firm.
The Integration-Responsiveness Framework
The need to:
Seek cost reduction through scale economies
Capitalize on converging consumer trends and universal needs
Provide uniform service to global consumers
Conduct global sourcing
Monitor and respond to global competitors
Take advantage of media with cross-national reach
The need to:
Leverage national endowments such as local talent
Cater to local customer needs
Accommodate differences in distribution channels
Respond to local competition
Adjust to cultural differences
Meet host government requirements and regulations.
Four Strategies Emerging from the I-R Framework
Global Strategy: Strong pressures for global integration, weak pressures for local responsiveness; more likely in global industries.
Transnational Strategy: Strong pressures for both global integration and local responsiveness; more likely in global industries.
Home Replication Strategy: Weak pressures for both global integration and local responsiveness; more likely in multidomestic industries.
Multidomestic Strategy: Weak pressures for global integration, strong pressures for local responsiveness; more likely in multidomestic industries.
Which Strategy Should a Firm Choose?
The appropriateness of each strategy depends on the pressures for cost reduction and local responsiveness in the industry.
Global Standardization: Increase profitability and profit growth by reaping the cost reductions from economies of scale, learning effects, and location economies.
Localization: Increase profitability by customizing goods or services so that they match tastes and preferences in different national markets.
Transnational: Simultaneously achieve low costs through location economies, economies of scale, and learning effects; differentiate the product offering 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.
International: Take products first produced for the domestic market and sell them internationally with only minimal local customization.
IKEA's Transnational Strategy
90% of the product line is identical across more than two dozen countries, but IKEA modifies some furniture offerings to suit tastes in individual countries.
An overall, standardized marketing plan is centrally developed, but it is implemented with local adjustments.
Management decentralizes some decision-making to local stores, such as product displays and language in advertising.
How Does Strategy Evolve?
An international strategy may not be viable in the long term, so 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 facing aggressive competitors, the company will also have to reduce its cost structures, requiring a shift toward a transnational strategy.
Organizational Structure
The reporting relationships inside the firm, specifying the linkages among people, functions, and processes, allowing the firm to carry out its operations.
Vertical differentiation
Horizontal differentiation
Integrating mechanisms
Centralization or Decentralization?
How much decision-making should the firm retain at headquarters, and how much should it delegate to foreign subsidiaries and affiliates?
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.
Avoids duplication of activities.
Gives managers the means to bring about organizational change.
Decentralized decision-making:
Relieves the burden of centralized decision-making.
Can result in better decisions.
Permits greater flexibility.
Can increase control (accountability).
Has been shown to motivate individuals.
Why is Horizontal Differentiation Important?
Horizontal differentiation refers to how the firm divides into sub-units, usually based on function, type of business, or geographical area.
Most firms begin with no formal structure, but as they grow, the organization is 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.
Firms may switch to a product divisional structure where:
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.
What Happens When Firms Expand Globally? An International Divisional Structure
An international divisional structure is often adopted, but as firms become more global, they may evolve further.
The International Structural Stages Model
Stopford and Well (1972) proposed a model showing how international structure evolves as firms grow more global.
Firms That Continue to Expand Will Move To:
Worldwide product division structure: Adopted by firms that are reasonably diversified.
Worldwide area structure: Favored by firms with a low degree of diversification and a domestic structure based on function.
A Global Matrix Structure
The Global Matrix 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.
How Can Subunits Be Integrated?
Regardless of the type of structure, firms need a mechanism to integrate subunits.
The 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.
Formal Integrating Mechanisms
Direct Contact
Liaison Roles
Teams
Matrix Structures
Informal Integrating Mechanisms
Many firms are using informal integrating mechanisms.
A knowledge network is a network for transmitting information within an organization that is based not on formal organization structure but on informal contacts between managers within an enterprise and on distributed information systems.
A non-bureaucratic conduit for knowledge flows.
Must embrace as many managers as possible.
Managers must adhere to a common set of norms and values that override differing subunit orientations.
Different Types of Control Systems
Personal controls
Bureaucratic controls
Output controls
Cultural controls
What Are Incentive Systems?
Incentives are the 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.
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.
The Link Between Strategy and Architecture
The firm’s strategy must be consistent with the environment in which the firm operates.
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.