The Strategy and Structure of International Business

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When most people think of international businesses they visualize large, complex, billion-dollar corporations. Today, medium-sized and even small companies are just as likely to participate in international business as the giants. The reason for the growing number of international businesses particularly smaller firms, is quite straightforward. International business strategies have implications for large, small, and medium sized companies.

STRATEGY AND THE FIRM

The fundamental purpose of any business firm is to make money. Firms can increase their profit in two ways: 1. By adding value to the product. 2. By lowering the costs of value creation. It is useful to think as a value chain composed of a series of distinct value creation activities. PRIMARY ACTIVITES- the primary activities of a firm have to do with creating the product, marketing and delivering the product to buyers, and providing support and after sale service to the buyers of the product.

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SUPPORT ACTIVITES-provide the inputs that allow the primary activities of production and marketing to occur. PROFITING FROM GLOBAL EXPANSION 1. Earn a greater return from their distinctive skills, or core competencies. CORE COMPETENCIES-refers to skills within the firm that competitors cannot easily match or imitate. 2. Realize location economies by dispersing particular value creation activities to those locations where they can be performed most efficiently.

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3. Realize greater experience curve economies, which reduce the costs of value creation. EXPERIENCE CURVE-refers to the systematic reductions in production costs that have been observed to occur over the life of a product. Two things explain this: Learning effects- refer to cost savings that come from learning by doing. Economies of Scale- the reductions in unit cost achieved by producing a large volume of a product.

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THE NEED FOR LOCAL RESPONSIVENESS First, we have implicitly assumed that the skills and products associated with a firms core competencies can be transferred wholesale from one nation to another. Second, we have implicitly assumed it is possible to serve the global marketplace from a single production site, producing a globally standardized product, and marketing it worldwide. Third, we have assumed it is possible to realize location economies by dispersing various value creation activities.
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THE TRADITIONAL STRATEGIES Global Strategy-attempt to increase their profitability by reaping the cost reductions that come from experience curve and location economies. International Strategy- attempt to increase their profits by transferring valuable skills and products to markets where indigenous competitors lack those skills and products. Multidomestic Strategy- orient local responsiveness. themselves toward

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COST PRESSURES AND LOCAL RESPONSIVENESS Pressures for Cost Reductions: Commodity-typed products Price is the main competitive weapon Serve universal needs Universal needs exist when the tastes and preferences of consumers in different nations are very similar if not identical.

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Pressures for Local Responsiveness Differences in consumer tastes and preferences Differences practices in infrastructure and traditional

Differences in distribution channels Host-government demand

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Transnational Corporation Many industries are now so competitive that companies must adopt a transnational strategy. This involves simultaneous focus on: Reducing costs Transferring skills and products Local responsiveness But the implementation of such strategy may not be easy.

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The Organization of International Business

Four main dimensions of organizational structure: 1. Vertical differentiation-it is the centralization vs decentralization of decision-making , and control systems. Four arguments for centralization: Centralization can facilitate coordination Centralization can help ensure that decisions are consistent with organizational objectives. Centralization can give top-level managers the means to bring about needed organizational changes.
Centralization can avoid the duplication of activities

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Five arguments for decentralization: Top management can become overburdened when decision-making is centralized. Motivational research favors decentralization. Decentralization permits greater flexibility. Decentralization can result better decisions. Decentralization serve to increase control.

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2.

Horizontal Differentiation-basically concerned with how the firm decides to divide itself into subunits.

Most firms begin with no formal structure as they grow , the demands of management become too great for one individual to handle.

At this point the organization is typically split up into functions reflecting the firms value creation activities.

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The International Division When firms have expanded abroad they have typically grouped all their international activities into an international division. For firms with a functional structure at home, this might mean replicating the functional structure . For firms with a divisional structure , this might mean replicating the divisional structure. Worldwide Area Structure tends to be favored by firms with a low degree of diversification and a domestic function based on function. -appropriate for multidomestic firms.

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Worldwide Product Division Structure It is tends to be adopted by firms that are reasonably diversified and , accordingly, originally had domestic structures based on product divisions. -appropriate for global and international strategies.

Global Matrix Structure

Horizontal differentiation proceeds along two dimensions: product division and geographical area.

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International Strategy and Coordination The need for coordination between subunits varies systematically with the international strategy of the firm. The need for coordination is greater in firms pursuing an international strategy and trying to profit from the transfer of core competencies between the foreign operations and home country. The need for coordination is greater in transnational firms.

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Formal Integrating Mechanisms: The greater the need for coordination, the more complex the formal integrating mechanisms to be. Direct contact-managers of the various subunits simply contact each other whenever they have a common concern.

Informal Integrating Mechanisms: Management network is a system of informal contacts between managers within an enterprise.Managers at different locations within the organization must be linked to each other at least indirectly.

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Control Systems Types of Control System: 1. Personal Controls-personal subordinates.

contact

with

2. Bureaucratic Controls-a system of rules and procedures that direct the actions of subunits. 3. Output Control-involve setting goal for subunits to achieve; expressing those goals in terms of relatively objective criteria.
4. Cultural Controls-employees tend to control their own behavior which reduces the need for direct management supervision.
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International Strategy and Control Systems Performance Ambiguity- when the causes of a subunits performance is partly dependent on ambiguous. Strategy, Independence, and Ambiguity Multidomestic firms-stand-alone,performance is low International firms-independence is higher Transnational firms-performance of ambiguity is highest

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Implications for Control

Costs of control- the amount of time top management must devote to monitoring and evaluating subunits performance. Four International Business Strategies:
Strategy
Multidomestic
Interdependence

Performance Ambiguity

Costs of Control

Low

Low

Low

International
Global Transnational

Moderate
High Very high

Moderate
High Very High

Moderate
High Very High

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Synthesis of Strategy, Structure, and Control Systems

Structure & Control

Vertical differentiation

Multidomestic

Internationa l
Core competency; rest decentralized

Global Some centralized

Transnationa l
Mixed centralized and decentralized

decentralize d

Horizontal diffrentiation Need for coordination Integrating Mechanisms Performance Ambiguity

Worldwide area structure Low

Worldwide product division

Worldwide product division

Informal Matrix

Moderate

High Many High

High

Very High Very Many

Very High Very High

NOne LOw

Few
Moderate Moderate

Need for Cultural Control

Low

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Mode of Entry and Strategic Alliances

Entry modes serving markets include exporting, licensing or franchising, joint-venturing, and setting up a wholly owned subsidiary in a host country to serve its market. Six ways to enter a foreign market: Exporting

Turnkey projects-at completion of the contract, the foreign client is handed the key to a plant
Licensing-an arrangement whereby a foreign licensee buys the rights to manufacture a firms product in their country for a negotiated fee.

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 Franchising-involve in longer term commitments -employed primarily by service firm Joint venturing- each party holds a percent ownership and contributes a team of managers to share operating control. Wholly owned subsidiary-the firms owns 100 percent of the stock

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ADVANTAGES AND DISADVANTAGES OF ENTRY MODES

Entry Mode
Exporting

Advantage
Ability to realize location and experience curve economies
Ability to earn returns from process Technology skills in countries when FDI is restricted Low development costs and risks

Disadvantage
High transport costs Trade barriers Problems with local marketing agents
Creating efficient competitors

Turnkey Contracts

Lack of long-term market presence

Franchising

Low development costs and risks

Lack of control over quality Inability to engage in global strategic coordination

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Joint Ventures

Access to local partners knowledge Sharing development costs and risks Politically acceptable

Lack of control over technology Inability to engage in global strategic coordination Inability to realize location and experience economies High costs and risks

Wholly owned subsidiaries

Protection of technology Ability to engage in global strategic coordination Ability to realize location and experience economies

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Strategic Alliance-refers to cooperative between potential or actual competitors.

agreements

Example: an agreement between General Electric and Philips to develop new semiconductors technology Advantages: May facilitate entry into a foreign country It allows to share the fixed costs of developing new products or processes. It is a way to bring together complementary skills and assets that neither company could easily develop on its own. It can make sense to form an alliance that will help the firm establish technological standards that will benefit the firm.
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Disadvantage: They give competition a low-cost route to new technology and market MAKING ALLIANCES WORK Factors: Select the right kind of ally Characteristics: 1. Helps the firm achieve its strategic goals 2. Share the firms vision for the purpose of the alliance 3. Unlikely to try opportunistically exploit the alliance for its own end 1. Alliance structure Alliances can be designed to make it difficult to transfer technology not meant to be transfered

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2. Contractual safeguards can be written into an alliance agreements to guard against the risk of opportunism by a partner. 3. Both can agree in advance to swap skills and technology. 4. The risk of opportunism can be reduced if the firm extracts a significant credible commitment from its partner in advance.

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MANAGING THE ALLAINCE Building trust- to build interpersonal relationships between the firms managers. Learning from Partners- a firm must try to learn from its partner and then apply the knowledge within its own organization.

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Thank you!!! Prepared by: JENNIFER G. FRONDA Subject: International Business 2nd semester 2010-2011 Professor: DR. FELICIANO BOLISAY

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Thank you !

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