THE STRATEGY

AND
ORGANISATION OF
INTERNATIONAL
BUSINESS
Prof. Reinhard Bachmann,
PhD
rb56@soas.ac.uk
 International firms can:
HOW CAN
• Expand their market: sell in
FIRMS international markets
INCREASE • Realize location economies:
disperse value creation activities
PROFITS to locations where they can be
THROUGH performed most efficiently and
effectively
INTERNATI • Realize greater cost economies
ONAL from experience effects: serve an
expanded global market from a
EXPANSIO central location
• Earn a greater return: leverage
N? skills developed in foreign
operations and transfer them
elsewhere in the firm
 Location economies are economies that arise
from performing a value creation activity in
the optimal location for that activity,

LOCATI wherever in the world that might be

By achieving location economies, firms can;
• lower the costs of value creation and achieve a low

ON cost position
• differentiate their product offering
Firms that take advantage of location
ECONO economies in different parts of the world,
create a global web of value creation

MIES
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
 LEVER Managers should:

AGING
1. Recognize that valuable skills that could be
applied elsewhere in the firm can arise
anywhere within the firm’s global network -
SUBSID not just at the corporate center
2. Have a process for identifying when valuable

IARY new skills have been created in a subsidiary

3. Act as facilitators to help transfer skills
within the firm
SKILLS
COMPETI Firms that compete in the global
marketplace face two conflicting types
TIVE of competitive pressures

PRESSUR • The pressures limit the ability of firms to

realize location economies and experience
effects, leverage products, and transfer
ES IN skills within the firm

THE Pressures for cost reductions: force

the firm to lower unit costs
GLOBAL
Pressures to be locally responsive:
MARKET require the firm to adapt its product to
meet local demands in each market a
PLACE strategy that raises costs
PRESSURES FOR COST
REDUCTIONS ARE GREATEST
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

When major competitors are based in low-cost locations

Where consumers are powerful and face low-switching

costs
PRESSURES FOR COST REDUCTIONS
AND LOCAL RESPONSIVENESS
 1. Differences in consumer tastes and preferences
– strong pressure emerges when consumer
PRESSURE tastes and preferences differ significantly
between countries
S FOR 2. Differences in traditional practices and
infrastructure
LOCAL – strong pressure emerges when there are

RESPONSI significant differences in infrastructure and/or

traditional practices between countries

VENESS 3. Differences in distribution channels

– need to be responsive to differences in

ARE 4.
distribution channels between countries
Host government demands
GREATEST – economic and political demands
imposed by host country governments
may require local responsiveness
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
1. Global standardisation - 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
• makes sense when there are strong pressures for cost reductions and
demands for local responsiveness are minimal

2. Localisation - increase profitability by customizing goods or services so that

they match tastes and preferences in different national markets
• makes sense when there are substantial differences across nations
withregard to consumer tastes and preferences and when cost pressures are
not too intense
WHICH STRATEGY
SHOULD A FIRM CHOOSE?
3. Transnational - tries to 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
• makes sense when cost pressures are intense and pressures for local
responsiveness are intense

4. International – take products first produced for the domestic market

and sell them internationally with only minimal local customization
• makes sense when there are low cost pressures and low pressures for
local responsiveness
FOUR BASIC
STRATEGIES
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
CHANGES IN STRATEGY
OVER TIME
INTERNATION
AL
ORGANISATIO
N
 Organisational
architecture is the totality
of a firm’s organisation

ORGANISATIONAL
ARCHITECTURE
 Organisational architecture includes:

1. Organisational structure
ORGANISAT – the formal division of the organisation
into subunits
IONAL – the location of decision-making
responsibilities within that structure
ARCHITECT - centralised versus decentralised
URE – the establishment of integrating
mechanisms to coordinate the activities
of subunits including cross-functional
teams or pan- regional committees
 2. Control systems and incentives
– control systems - the metrics used to
measure performance of subunits
– incentives - the devices used to reward
managerial behaviour

3. Processes, organisational culture, and

ORGANISAT people
IONAL – Processes - the manner in which
decisions are made and work is
ARCHITECT performed within the organisation
URE – Organisational culture - the norms and
value systems that are shared among
the employees of an organisation
– People - the employees and the strategy
used to recruit, compensate, and retain
employees for their skills, values, and
orientation
 THE
1. Vertical differentiation - the
DIMENSION location of decision-making
S OF responsibilities within a structure

ORGANISAT 2. Horizontal differentiation - the formal

division of the organisation into sub-units
IONAL
3. Integrating mechanisms - the
STRUCTUR mechanisms for coordinating sub-units
E
 • Vertical differentiation determines where
decision-making power is concentrated
• Centralised decision-making
WHY IS – facilitates coordination

VERTICAL – ensures decisions are consistent with

organisation’s objectives

DIFFERENT – avoids duplication of activities

– gives managers the means to bring about

IATION organisational change

• Decentralised decision-making
IMPORTAN – relieves the burden of centralised decision-

T? making
– can result in better decisions
– permits greater flexibility
– can increase control (accountability)
– has been shown to motivate individuals
 • Horizontal differentiation refers to how the firm
divides into sub-units
– usually based on function, type of business, or
geographical area
WHY IS • Most firms begin with no formal structure, but as

HORIZONT they grow, the organisation is split into functions

reflecting the firm’s value creation activities -
AL functional structure
– functions are coordinated and controlled by top
DIFFERENT management
– decision-making is centralised
IATION – product line diversification requires further
horizontal differentiation
IMPORTAN • Firms may switch to a product divisional structure
where:
T? – 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
A TYPICAL FUNCTIONAL
STRUCTURE
 A TYPICAL PRODUCT
DIVISIONAL STRUCTURE
 • When firms expand internationally, they

WHAT often group all of their international

activities into an international division

HAPPENS • Over time, manufacturing may

shift to foreign markets
• firms with a functional
WHEN structure at home would
replicate the functional
FIRMS structure in the foreign
market

EXPAND
• firms with a divisional
structure would replicate the
divisional structure in the
GLOBALLY •
foreign market
In either case, there is the potential for
? conflict and coordination problems between
domestic and foreign operations
 AN INTERNATIONAL
DIVISIONAL STRUCTURE
 THE INTERNATIONAL
STRUCTURAL STAGES
MODEL STOPFORD AND
WELL (1972)
 FIRMS 1. Worldwide product division structure - adopted
by firms that are reasonably diversified

THAT
– allows for worldwide coordination of
value creation activities of each product
division

CONTIN –

–
helps realize location and experience
curve economies
facilitates the transfer of core

UE TO –
competencies
does not allow for local responsiveness

EXPAND 2. Worldwide area structure - favored by firms with

low degree of diversification and a domestic
structure based on function

WILL — divides the world into autonomous geographic

areas
— decentralizes operational authority
MOVE — facilitates local responsiveness
— can result in a fragmentation of the organisation

TO:
— is consistent with a localization strategy
 A WORLDWIDE
AREA STRUCTURE
A WORLDWIDE PRODUCT
DIVISION STRUCTURE
 THE • The global matrix structure is an attempt to
minimize the limitations of the worldwide

GLOBA area structure and the worldwide product

divisional structure

L
– allows for differentiation along two
dimensions - product division and
geographic area

MATRI – has dual decision–making - product

division and geographic area have equal
responsibility for operating decisions
X – can be bureaucratic and slow
– can result in conflict between areas and

STRUC product divisions

– can result in finger-pointing between
divisions when something goes wrong
TURE
A GLOBAL MATRIX
STRUCTURE
 • Regardless of the type of structure,
firms need a mechanism to integrate
subunits
HOW – need for coordination is lowest in firms
with a localisation strategy and highest in
CAN transnational firms
– coordination can be complicated by
SUBUNI differences in subunit orientation and
goals

TS BE – simplest formal integrating mechanism

is direct contact between subunit

INTEGR managers, followed by liaisons

– temporary or permanent teams
composed of individuals from each
ATED? subunit is the next level of formal
integration
– the matrix structure allows for all roles
to be integrating roles
FORMAL INTEGRATING
MECHANISMS
 • Many firms are using
informal integrating

INFORM •
mechanisms
A knowledge network is a network for

AL transmitting information within an

organisation that is based not on formal
organisation structure, but on informal
INTEGR contacts between managers within an
enterprise and on distributed information
ATING systems
– a non bureaucratic conduit for knowledge

MECHA flows
– must embrace as many managers as

NISMS possible and managers must adhere

to a common set of norms and
values that override differing
subunit orientations
A SIMPLE MANAGEMENT
NETWORK
 1. Personal controls – personal contact with
DIFFERE –
subordinates
most widely used in small firms

NT 2. Bureaucratic controls – a system of rules

and procedures that directs the actions of

TYPES –
subunits
budgets and capital spending rules

OF 3. Output controls – setting goals for subunits to

achieve and expressing those goals in terms of
objective performance metrics
CONTRO – compare actual performance
against targets and intervene

L selectively to take corrective

action

SYSTEM 4. Cultural controls – exist when employees

“buy into” the norms and value systems of
the firm
S – strong culture implies less need for
other forms of control
 WHAT • Incentives are the devices used to reward
behavior

ARE – usually closely tied to

performance metrics used for
output controls
INCEN – should vary depending on the employee
and the nature of the work being

TIVE performed
– should promote cooperation between
managers in sub- units
SYSTE – should reflect national differences
in institutions and culture

MS? – can have unintended consequences

 • Performance ambiguity exists when the
causes of a subunit’s poor performance are
WHAT IS not clear
– is common when a subunit’s performance
PERFOR is dependent on the performance of other
subunits
MANCE – is lowest in firms with a localization
strategy
AMBIGUI – is higher in international firms

TY? – is still higher in firms with a global

standardization strategy
– is highest in transnational firms
THE LINK BETWEEN
STRATEGY AND
ARCHITECTURE
WHAT IS THE
LINK For a firm to succeed:
BETWEEN 1. The firm’s strategy must be consistent
ENVIRON with the environment in which the
MENT, firm operates
STRATEG 2. The firm’s organisation
Y, architecture must be consistent
with its strategy
ARCHITE
– firms need to change their architecture
CTURE, to reflect changes in the environment
AND in which they are operating and the
PERFORM strategy they are pursuing

ANCE?
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