A companys is defined as the actions that managers take to attain the goals of the company

Introduction to Topic 6 Discussion Notes

The Topic Discussion Notes provide you with a brief summary of the essential concepts to master in each Topic and the major Learning Outcomes.

Specifically, each of the key concepts in the relevant chapters for each Topic are summarised briefly. 

In addition, there are brief summaries of each slide related to the Course Slides for each chapter. You will find that the summaries for each slide provide you with an essential background of knowledge, ideally after you have read each chapter. In this way it enables you to test your knowledge, as well as laying a foundation to build on and deepen your knowledge of international business by reading many of the of the Course Journal Articles. While they are optional reading, reading the Course Journal Articles will assist you to have a much broader, more contemporary and practical knowledge base from which to apply your knowledge now and in the future.

Note that the Course Slides are located on the Learnonline site and the Journal Articles are available through the e-Library Resources for this Course.

Chapter 13: The Strategy of International Business

Learning objectives 

• Explain the concept of strategy. 
• Recognize how firms can profit by expanding globally. 
• Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice. 
• Identify the different strategies for competing globally and their pros and cons. 

In this chapter the focus shifts from the environment to the firm itself and, in particular, to the actions managers can take to compete more effectively as an international business. 

This chapter looks at how firms can increase their profitability by expanding their operations in foreign markets, the different strategies that firms pursue when competing internationally, and the various factors that affect a firm’s choice of strategy. 

Subsequent chapters build on the framework established here to discuss a variety of topics including the design of organization structures and control systems for international businesses, strategies for entering foreign markets, the use and misuse of strategic alliances, strategies for exporting, and the various manufacturing, marketing, R&D, human resource, accounting, and financial strategies that international businesses pursue. 

The opening case describes how Swedish furniture and home goods retailer IKEA adjusted its strategy to account for consumer tastes when expanding globally. Following disappointing sales during its expansion into the United States in the 1980s, IKEA found international success by localizing its store designs and product offerings. The closing case explores the five global strategy “levers,” or dimensions, that determine how local or global a company is on the international marketplace.

LECTURE OUTLINE

 The PPT slides include additional notes that can be viewed by clicking on “view,” then on “notes.” The following provides a brief overview of each Power Point. 

Slides 13-2 through 13-4 Strategy and the Firm

How can firms compete more effectively internationally? 

A firm’s strategy can be defined as the actions that managers take to attain the goals of the firm.

Slides 13-5 through 13-7 Value Creation

If consumers perceive the value of a good to be much higher than the actual cost of producing that good, profit margins will be higher. Porter emphasizes two basic strategies to create value and attain competitive advantage: low cost strategy and differentiation strategy.

Slides 13-8 through 13-9 Strategic Positioning  

Not all positions on the efficiency frontier are viable. Firms must choose a strategic position that is viable. 

Another Perspective:Firms often face resistance when they change their strategic course.  To learn how to stay on track, consider {http://www.businessweek.com/managing/content/aug2010/ca20100810_373428.htm}.

Slides 13-10 through 13-12 Operations and Value Creation

A firm’s operations are like a value chain composed of a series of value-creation activities. Activities include primary activities (production, research and development, marketing and sales, and customer service) and support activities (information systems, logistics, and human resources management). 

Slides 13-12 and 13-14 Global Expansion, Profitability, and Profit Growth

Expanding globally allows firms to increase their profitability and rate of profit growth in ways not available to purely domestic enterprises.

Slides 13-15 and 13-16 Expanding the Market: Leveraging Products and Competencies

The success of firms that expand internationally depends on the goods or services they sell, and on their core competencies (skills within the firm that competitors cannot easily match or imitate).

Slides 13-17 and 13-18 Location Economies

Location economies are the economies that arise from performing a value creation activity in the optimal location for that activity.

Slides 13-19 through 13-22 Experience Effects

Experience effects are systematic reductions in production costs over the life of the product.  The speed with which a firm moves down the experience curve will determine how much advantage it has over its competitors

Slide 13-23 Leveraging Subsidiary Skills

A global corporation can find vital skills developed in one foreign subsidiary and leverage them in another part of the world.  In order to take advantage of subsidiary skills the company must have sophisticated processes that identify new skills that could be of interest.  Once these skills are identified, managers must have the capability to transfer them elsewhere. 

Managers need to keep in mind the complex relationship between profitability and profit growth when making strategic decisions about pricing.

Slides 13-23 through 13-26 CostPressures and Pressures for Local Responsiveness

Firms that compete in the global marketplace typically face two types of competitive pressures:

• pressures for cost reductions
• pressures to be locally responsive

Slide 13-27 Pressures for Cost Reduction

International businesses often face pressures for cost reductions because of the competitive global market.

Slides 13-28 and 13-29 Pressures for Local Responsiveness

Pressure for local responsiveness comes from differences in consumer tastes, infrastructure, distribution channels, or host government demands.

Slide 13-30 Think Like a Manager: Determine Your Strategy

Slides 13-31 through 13-36 Choosing a Strategy

There are four basic strategies to compete in the international environment:

• global standardization
• localization
• transnational
• international 

The global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies. 

The localization strategy focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets.                               

The transnational strategy 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
• foster a multidirectional flow of skills between different. 

The international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization. 

Slides 13-37 and 13-38 The Evolution of Strategy

Strategy is an evolutionary process. Firms need to change their strategic approach as the environment changes.

Chapter 14: The Organization of International Business  

 Learning objectives 

• Explain what is meant by organizational architecture. 
• Describe the different organizational choices that can be made in an international business. 
• Explain how organization can be matched to strategy to improve the performance of an international business. 
• Discuss what is required for an international business to change its organization so that it better matches its strategy. 

This chapter identifies the organizational architecture that international businesses use to manage and direct global operations. The core argument outlined in this chapter is that superior enterprise profitability requires three conditions: 

First, the different elements of a firm’s organizational architecture must be internally consistent. 

Second, the organizational architecture must match or fit the strategy of the firm—strategy and architecture must be consistent. 

Third, the strategy and architecture of the firm must be consistent with competitive conditions prevailing in the market place. 

The opening case explores the reorganization and streamlining of U.S. household products conglomerate Procter & Gamble, which began under the guidance of CEO Alan “A.G.” Lafley in 2014. The closing case explores the evolution of Koninklijke Philips NV’s structure. Since World War II, the company has moved from its national organizational approach to one in which three global divisions are responsible for product strategy, global marketing, and production systems. 

LECTURE OUTLINE 

The PPT slides include additional notes that can be viewed by clicking on “view,” then on “notes.” The following provides a brief overview of each Power Point. 

Slides 14-2 through 14-6 What Is Organizational Architecture?

Organizational architecture refers to the totality of a firm’s organization, including formal organization structure, control systems and incentives, processes, organizational culture, and people. 

Three conditions must be satisfied for an organization to deliver profitability: architecture must be internally consistent; strategy and architecture must be consistent; and strategy and architecture together must be consistent with the competitive environment of the firm. 

Organizational structure refers to:

• 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 cross-functional teams or pan-regional committees 

Control systems measure and evaluate managerial performance and the performance of subunits. Incentives connect to control systems, and processes need to be consistent with the strategic objectives of the organization. Efforts to shape values and norms in an organization are intricately linked to human resource practices, especially at the selection and recruitment stages.

Slide 14-7 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. The establishment of integrating mechanisms - the mechanisms for coordinating subunits

Slides 14-8 and 14-9 Vertical Differentiation: Centralization and Decentralization

Vertical differentiation determines where decision-making power is concentrated.

Slides 14-10 through 14-13 Horizontal Differentiation: The Design of Structure 

Horizontal differentiation is concerned with how the firm decides to divide itself into subunits. 

The typical entrepreneurial firm begins with no formal structure. As the firm grows, when the decision load becomes too intense for one person to handle, the firm is split into functions representing value creation activities. If growth continues, eventually the complexities of size push for the restructuring of the firm into a divisional form.

Slides 14-14 through 14-20 Global Expansion

When firms expand internationally, they often group all of their international activities into an international division. 

Many firms that continue to expand will abandon their international division structure and move to either a:

 Worldwide product division structure - tends to be adopted by diversified firms that have domestic product division

• Worldwide area  structure - tends to be adopted by undiversified firms whose domestic structures are based on functions

Slides 14-21 and 14-22 Global Matrix

The global matrix structure is an attempt to minimize the limitations of the worldwide area structure and the worldwide product divisional structure.

Slides 14-23 through 14-26 Integrating Mechanisms

Regardless of the type of structure, firms need a mechanism to integrate subunits. 

The simplest formal integrating mechanism is direct contact between subunit managers, followed by liaisons. The next level of formal integration is temporary or permanent teams composed of individuals from each subunit. Finally, the matrix structure allows for all roles to be integrating roles.   

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.

Slides 14-27 and 14-28 Control Systems

A firm’s leaders need to ensure that the actions of subunits are consistent with the firm’s overall strategic and financial objectives. This is achieved through control and incentive systems.  

There are four main types of control systems:

1. Personal controls – control by personal contact with subordinates

2. Bureaucratic controls – control through a system of rules and procedures that directs the actions of subunits

3. Output controls – setting goals for subunits to achieve and expressing those goals in terms of relatively objective performance metrics

4. Cultural controls – exist when employees “buy into” the norms and value systems of the firm

Slide 13-29 Incentive Systems

Incentives are the devices used to reward behavior. Incentives are usually closely tied to performance metrics used for output controls.

Slides 14-30 and 14-31 Performance Ambiguity

The key to understanding the relationship between international strategy, control systems and incentive systems is performance ambiguity, which exists when the causes of a subunit’s poor performance are not clear. 

The costs of controlling transnational firms are higher than the costs of controlling firms pursuing other strategies.

Slide 14-32 Processes

Processes refer to the manner in which decisions are made and work is performed.

Slides 14-33 through 14-35 Organizational Culture

Organizational culture is a social construct, a system of values and norms shared among people.  

Organizational culture comes from:

• founders and important leaders
• national social culture
• the history of the enterprise
• decisions that resulted in high performance. 

Organizational culture can be maintained through:

• hiring and promotional practices
• reward strategies
• socialization processes
• communication strategies. 

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. 

Another Perspective: A recent Microsoft study reveals that the use of social media tools increases employee productivity. To learn more, go to {http://www.networkworld.com/community/blog/microsoft-study-shatters-myth-says-social-media-use-increases-work-productivity}. 

Another Perspective: Toyota’s legendary corporate culture enabled the company to become a leader in the global auto industry. To learn more about the company’s strong culture and how it helped the company through its recent quality problems go to {http://www.businessweek.com/managing/content/jun2011/ca20110624_657612.htm}.   

Slide 36 Think Like a Manager: Transmitting an Organizational Culture

Slides 14-37 through 14-41 Synthesis of Strategy and Architecture

What is the interrelationship between the four basic strategies (localization, international, global standardization, transnational). 

Firms pursuing a localization strategy focus on local responsiveness, do not have a high need for integrating mechanisms, have low performance ambiguity and control costs. 

Firms pursuing an international strategy create value by transferring core competencies from home to foreign subsidiaries. They have moderate needs for control and integrating mechanisms. Performance ambiguity is relatively low and so is the cost of control.  

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, and strong organizational cultures are encouraged. 

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, coordination needs are high, and an array of formal and informal integrating mechanisms are used.

Slide 14-42 Environment, Strategy, Architecture, and Performance

For a firm to succeed, two conditions must be met:

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.

Slides 14-43 and 14-44 Implementing Organizational Change

There are three basic principles for successful organization change:

1. Unfreeze the organization through shock therapy

2. Move the organization to a new state through proactive change in architecture

3. Refreeze the organization in its new state 

Sources of inertia include:

• the existing distribution of power and influence
• the current culture
• senior managers’ preconceptions about the appropriate business model or paradigm
• institutional constraints.

                                           Copyright © 2017 McGraw-Hill Education. 

                                    Adapted for MBA BUSS 5251 International Business

                               for the purpose of individual study and course preparation.

What are the two ways a firm can create more value for its products?

Which strategy should firms pursue when they are trying to simultaneously achieve low costs through location economies economies of scale and learning effects?

When a company focuses on increasing its profitability by reaping cost reductions?

What are the four main strategic postures that firms can use when competing globally?