Int. Business

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The Strategy and Structure

of International Business


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When most people think of international businessesthey visualize large, complex, billion-dollarcorporations.

Today, medium-sized and even small companies arejust as likely to participate in international

business as the giants.The reason for the growing number of international

businesses particularly smaller firms, is quitestraightforward.

International business strategies have implications

for large, small, and medium sized companies.


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STRATEGY AND THE FIRM

The fundamental purpose of any business firm is tomake 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 aseries of distinct value creation activities.

PRIMARY ACTIVITES- the primary activities of a firm

have to do with creating the product, marketingand delivering the product to buyers, andproviding support and after sale service to thebuyers of the product.


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SUPPORT ACTIVITES-provide the inputs that allowthe primary activities of production andmarketing 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 firmthat competitors cannot easily match or imitate.

2. Realize location economies by dispersing

particular value creation activities to thoselocations where they can be performed mostefficiently.


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3. Realize greater experience curve economies,which reduce the costs of value creation.

EXPERIENCE CURVE-refers to the systematicreductions in production costs that have beenobserved to occur over the life of a product.

Two things explain this:

Learning effects- refer to cost savings that comefrom learning by doing.

Economies of Scale- the reductions in unit costachieved by producing a large volume of aproduct.


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THE NEED FOR LOCAL RESPONSIVENESS

First, we have implicitly assumed that the skills andproducts associated with a firms corecompetencies can be transferred wholesale fromone nation to another.

Second, we have implicitly assumed it is possible toserve the global marketplace from a singleproduction site, producing a globally standardized

product, and marketing it worldwide.

Third, we have assumed it is possible to realizelocation economies by dispersing various valuecreation activities.


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THE TRADITIONAL STRATEGIES

Global Strategy-attempt to increase theirprofitability by reaping the cost reductions thatcome from experience curve and locationeconomies.

International Strategy- attempt to increase theirprofits by transferring valuable skills and productsto markets where indigenous competitors lack

those skills and products.

Multidomestic Strategy- orient themselves towardlocal responsiveness.



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 andpreferences of consumers in different nations arevery similar if not identical.



Pressures for Local Responsiveness

Differences in consumer tastes and preferences

Differences in infrastructure and traditional

practices

Differences in distribution channels

Host-government demand



Transnational Corporation

Many industries are now so competitive thatcompanies 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 notbe easy.



The Organization of International Business

Four main dimensions of organizational structure:

1. Vertical differentiation-it is the centralization vsdecentralization of decision-making , and controlsystems.

Four arguments for centralization:

Centralization can facilitate coordination

Centralization can help ensure that decisions areconsistent with organizational objectives.

Centralization can give top-level managers themeans to bring about needed organizationalchanges.

Centralization can avoid the duplication of activities


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2. Horizontal Differentiation-basically concerned

with how the firm decides to divide itself intosubunits.

Most firms begin with no formal structure as theygrow , the demands of management become toogreat for one individual to handle.

At this point the organization is typically split upinto functions reflecting the firms value creation

activities.



The International Division

When firms have expanded abroad they havetypically grouped all their international activitiesinto an international division.

For firms with a functional structure at home, thismight mean replicating the functional structure .

For firms with a divisional structure , this mightmean replicating the divisional structure.

Worldwide Area Structure tends to be favored byfirms with a low degree of diversification and adomestic function based on function.

-appropriate for multidomestic firms.



Worldwide Product Division Structure

It is tends to be adopted by firms that arereasonably diversified and , accordingly, originallyhad domestic structures based on productdivisions.

-appropriate for global and international strategies.

Global Matrix Structure

Horizontal differentiation proceeds along twodimensions: product division and geographicalarea.



International Strategy and Coordination

The need for coordination between subunits variessystematically with the international strategy ofthe firm.

The need for coordination is greater in firmspursuing an international strategy and trying toprofit from the transfer of core competenciesbetween the foreign operations and homecountry.

The need for coordination is greater intransnational firms.



Formal Integrating Mechanisms:

The greater the need for coordination, the morecomplex the formal integrating mechanisms to be.

Direct contact-managers of the various subunits

simply contact each other whenever they have acommon concern.

Informal Integrating Mechanisms:

Management network is a system of informal

contacts between managers within anenterprise.Managers at different locations withinthe organization must be linked to each other atleast indirectly.



Control Systems

Types of Control System:

1. Personal Controls-personal contact withsubordinates.

2. Bureaucratic Controls-a system of rules andprocedures that direct the actions of subunits.

3. Output Control-involve setting goal for subunitsto achieve; expressing those goals in terms of

relatively objective criteria.

4. Cultural Controls-employees tend to control their ownbehavior which reduces the need for directmanagement supervision.



International Strategy and Control Systems

Performance Ambiguity- when the causes of asubunits performance is partly dependent onambiguous.

Strategy, Independence, and Ambiguity

Multidomestic firms-stand-alone,performance is low

International firms-independence is higher

Transnational firms-performance of ambiguity ishighest



Implications for Control

Costs of control- the amount of time topmanagement must devote to monitoring andevaluating subunits performance.

Four International Business Strategies:Strategy Interdependence Performance

AmbiguityCosts ofControl

Multidomestic Low Low Low

International Moderate Moderate Moderate

Global High High High

Transnational Very high Very High Very High



Synthesis of Strategy, Structure, and Control Systems

Structure &Control

Multidomestic International

Global Transnational

Verticaldifferentiation

decentralized

Corecompetency;restdecentralized

Somecentralized

Mixedcentralizedanddecentralized

Horizontaldiffrentiation

Worldwidearea structure

Worldwideproductdivision

Worldwideproductdivision

InformalMatrix

Need forcoordination

Low Moderate High Very High

IntegratingMechanisms

NOne Few Many Very Many

Performance

Ambiguity

LOw Moderate High Very High

Need forCulturalControl

Low Moderate High Very High


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Mode of Entry and Strategic Alliances

Entry modes serving markets include exporting,

licensing or franchising, joint-venturing, andsetting up a wholly owned subsidiary in a hostcountry 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 foreignlicensee buys the rights to manufacture a firmsproduct 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 percentownership and contributes a team of managers to

share operating control.

Wholly owned subsidiary-the firms owns 100percent of the stock


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ADVANTAGES AND DISADVANTAGES OF ENTRY MODES

Entry Mode

Exporting

Turnkey Contracts

Franchising

Advantage

Ability to realizelocation andexperience curveeconomies

Ability to earnreturns from processTechnology skills incountries when FDIis restricted

Low developmentcosts and risks

Low developmentcosts and risks

Disadvantage

High transport costsTrade barriersProblems with localmarketing agents

Creating efficientcompetitors

Lack of long-termmarket presence

Lack of control overquality

Inability to engage inglobal strategiccoordination


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Joint Ventures

Wholly owned subsidiaries

Access to local partnersknowledge

Sharing development costsand risks

Politically acceptable

Protection of technology

Ability to engage in globalstrategic coordination

Ability to realize locationand experience economies

Lack of control overtechnology

Inability to engage in globalstrategic coordination

Inability to realize locationand experience economies

High costs and risks


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Strategic Alliance-refers to cooperative agreements

between potential or actual competitors.

Example: an agreement between General Electric andPhilips to develop new semiconductors technology

Advantages: May facilitate entry into a foreign country

It allows to share the fixed costs of developing newproducts or processes.

It is a way to bring together complementary skills and

assets that neither company could easily develop on itsown.

It can make sense to form an alliance that will help thefirm establish technological standards that will benefitthe firm.


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Disadvantage:

They give competition a low-cost route to new technology andmarket

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

Alliance structure

1. Alliances can be designed to make it difficult to transfertechnology not meant to be transfered


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2. Contractual safeguards can be written into an

alliance agreements to guard against the risk ofopportunism by a partner.

3. Both can agree in advance to swap skills andtechnology.

4. The risk of opportunism can be reduced if the firmextracts a significant credible commitment fromits partner in advance.


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MANAGING THE ALLAINCE

Building trust- to build interpersonal relationshipsbetween the firms managers.

Learning from Partners- a firm must try to learnfrom its partner and then apply the knowledgewithin 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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