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 firm’s 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
C
V = Consumer Value
P = Market Price
C = Cost of Production
V-P = Consumer Surplus
P-C = Profit Margin
V-C = Value Added
3
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 firm’s 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 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
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
multinational’s 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
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
create value by
transferring skills to
local markets where
skills are not present.
Multidomestic
oriented toward
achieving maximum
local responsiveness.
Global
increase profitability
through cost reductions
from experience curve
effects and location
economies.
Transnational
Exploit experienced
based cost and location
economies, transfer core
competencies within the
firm, and pay attention
to local responsiveness
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
firm’s organization, including structure,
control systems and incentives, processes,
culture and people.
 Superior enterprise profitability requires three
conditions;
 An organization’s 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
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. 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
company’s 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 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
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.
Doesn’t work as well
as theory predicts.
Conflict and
power struggles.
“Flexible” matrix
structures.
Consistent with transnational strategy
40
Integrating Mechanisms
 Need for coordination:
Transnational
High
Global
International
Multidomestic
Low
Impediments;
 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
A
E
D
Informal contacts between
managers within an enterprise.
F
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
organization’s architecture.
 Not always good.
 Culture does not necessarily
 Sometimes beneficial,
translate across borders.
sometimes not.
 Context is important.
Transnational
Culture
Adaptive cultures.
Strong
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
None
Few
Many
Very many
Performance
Low
Moderate
High
Very high
Low
Moderate
Horizontal
differentiation
ambiguity
Need for
cultural
controls
High
Very high
50