chapter 12

International Business: The New Realities, Global Edition, 3rd Edition

by

Cavusgil, Knight, and Riesenberger

Chapter 12


Learning Objectives

1. Strategy in international business

2. Building the global firm

3. The integration-responsiveness framework

4. Strategies based on the integration

responsiveness framework

5. Organizational structure

6. Organizational structures for international

operations


What Is Strategy?

A planned set of actions that managers take to make best use of the firm’s resources and core competences to gain a competitive advantage

• When developing strategies, managers examine the firm’s strengths and weaknesses, and the opportunities and challenges facing the firm.

• They then decide which customers to target, what product lines to offer, how best to contend with competitors, and how generally to configure and coordinate the firm’s activities around the world.


International Strategy

• Strategy carried out in two or more countries.

• Managers develop international strategies to: allocate scarce resources and configure value-

adding activities on a worldwide scale

participate in major markets

implement valuable partnerships abroad

engage in competitive moves in response to foreign rivals.


Global, Sustainable Competitive Advantage

• Managers should aim to “…develop, at one and the same time, global scale in efficiency, multinational flexibility, and the ability to develop innovations and leverage knowledge on a worldwide basis.”

• Thus, the firm that aspires to become a globally competitive enterprise should simultaneously strive for three strategic objectives: – efficiency – flexibility, and – learning


Three Strategic Objectives

• Efficiency – lower the cost of the firm’s operations and activities on a global scale

• Flexibility – the agility to manage diverse country-specific risks and opportunities by tapping resources in individual countries and exploiting local opportunities

• Learning – develop the firm’s products, technologies, capabilities, and skills by internalizing knowledge gained from international ventures

• Often, even successful firms excel at only one or two of these objectives.Copyright © 2014 Pearson Education

Essentials of Successful Global Firms


Visionary Leadership

A quality of senior management that provides superior strategic guidance for managing efficiency, flexibility, and learning

1. International mindset and cosmopolitan values: Openness to, and awareness of, diversity across cultures

2. Willingness to commit resources: financial, human, and other resources

3. Strategic vision: articulating what the firm wants to be in the future and how it will get there

4. Willingness to invest in human assets: Emphasizing the use of foreign nationals, promoting multi-country careers, and training to develop international ‘supermanagers’


Examples of Visionary Leaders

• Ratan Tata, chairman of the Tata Group, oversees a $67 billion family conglomerate whose companies market a range of products from cars to watches.

• His group made numerous international acquisitions, reflecting a change in strategic vision from local to global.

• Recently, Tata developed a $2,500 car, the Nano, targeted worldwide to emerging markets.


Organizational Culture

The pattern of shared values, behavioral norms, systems, policies, and procedures that employees learn and adopt

• Employees acquire the culture as the correct way to perceive, think, feel, and behave in relation to new problems and opportunities that confront the firm.

• Usually derives from the influence of founders and visionary leaders or some unique history of the firm.

• Management should seek to build a global organizational culture, key to the development and execution of successful international strategy.


Firms with a Global Organizational Culture:

• Value and promote a global perspective in all major initiatives

• Value international competence and cross-cultural skills among their employees

• Adopt a single corporate language for business communication

• Promote interdependency between headquarters and subsidiaries

• Subscribe to appropriate ethical standardsCopyright © 2014 Pearson Education

Ethical Connections

• The annual revenue of the five largest corporations exceeds the combined GDP of the world’s poorest 100 countries.

• MNEs can do much to help reduce poverty. • Global pharmaceuticals provide AIDS medications to the

poor in Africa. Global retailers develop distribution infrastructure that increases access to needed goods at lower costs. MNEs engage is large-scale charity work.

• Critics argue that a company's duty is to its shareholders, not society at large.

• Many firms, however, defy such thinking. Bimbo, Pfizer, and Unilever are among many that support the world’s poor while ensuring profitable worldwide operations.


• Typical processes include mechanisms for collecting information, ensuring quality control in manufacturing, and maintaining effective payment systems

• General Electric acquired competitive advantage by emphasizing countless superior processes. GE digitizes all key documents and uses intranets and the Internet to automate activities and cut operating costs.

Organizational Processes

Managerial routines, behaviors, and mechanisms that allow the firm to function as intended


Important Organizational Processesfor Achieving International Coordination

• Global teams: An internationally distributed group of employees charged with a specific problem-solving or best practice mandate that affects the entire firm

• Global information systems: Global IT infrastructure, together with tools like intranets and electronic data interchange, provide virtual interconnectedness within the international firm

• Because the processes of the international firm may operate across numerous countries, they must function especially well.


Multidomestic Industry

An industry in which competition takes place on a country-by-country basis.

• Firms that specialize in such industries as processed food, consumer products, fashion, retailing, and publishing usually cater to specific conditions in each country where they do business.

• In such industries, the firm must adapt its offerings to suit the language, culture, laws, income level, and other specific characteristics of each country.

• Each country tends to have a unique set of competitors.


Examples of Multidomestic Industries

• The British publisher Bloomsbury has translated each volume of its Harry Potter series into the local language in every country where the book is sold.

• Beverage companies produce various brands and flavors in markets worldwide. Coca-Cola offers ‘Georgia Coffee’ in Japan, ‘Café Zu’ in Thailand, Inca Cola in Peru, and ‘Burn’ energy drink in France.

• In Asia, KFC restaurants are often multi-story structures that sell distinctive flavors of chicken


Global Industry

An industry in which competition is on a regional or worldwide scale

• Firms that specialize in such industries as aerospace, cars, computers, chemicals, and industrial equipment, typically cater to customers on a regional or global scale. For example, Subaru markets similar cars worldwide.

• In such industries, customer needs vary little from country to country. Firms sell relatively standardized offerings across entire regions or throughout the world.

• The industry usually has only a handful of the same competitors that compete regionally or worldwide.


Examples of Global Industries

• Kodak contends with the same rivals worldwide ─ Japan’s Fuji and European multinational Agfa-Gevaert.

• American Standard sells similar bathroom fixtures worldwide and competes with Toto in most major markets.

• Caterpillar and Komatsu compete head-on in all major markets and offer similar brands of tractors


Global

International

Local


Global Integration

Coordination of the firm’s value-chain activities across multiple countries to achieve worldwide

efficiency, synergy, and cross-fertilization to take advantage of similarities between countries.

• Firms that emphasize global integration: Make and sell standardized products and

services to capitalize on converging customer needs and tastes

Compete on a regional or worldwide basis Minimize operating costs by centralizing value chain

activities and emphasizing scale economiesCopyright © 2014 Pearson Education

Local Responsiveness

Meeting the specific needs of buyers in individual countries

• Local responsiveness requires the firm to adapt to customer needs and the competitive environment.

• Local managers are free to adjust offerings, marketing, and practices to suit conditions in individual markets.

When operating internationally, firms tryto strike the right balance between global integration and local responsiveness. Copyright © 2014 Pearson Education

Integration-Responsiveness Framework

• Summarizes the balance that firms seek to achieve between two basic strategic needs:

1. to integrate value chain activities globally, and

2. to create products and practices responsive to local market needs.

• The main goal of firms that emphasize global integration is to maximize the efficiency of their value chain activities on a worldwide scale.

• The main goal of firms that emphasize local responsiveness is to maximize sales and market share by being highly responsive to local needs.


The Integration-Responsiveness Framework


Pressures for Global Integration

• Seek cost reduction through economies of scale. Concentrating manufacturing in a few advantageous locations achieves economies of mass production.

• Capitalize on converging consumer trends and universal needs. Companies like Nike, Dell, ING, and Coca-Cola offer products that appeal to customers everywhere.

• Provide uniform service to global customers. Services are easiest to standardize when firms centralize their creation and delivery.


Pressures for Global Integration (cont’d)

• Conduct global sourcing of raw materials, components, energy, and labor. Sourcing of inputs from large-scale, centralized suppliers provides economies of scale and consistent performance.

• Monitor and respond to global competitors. Globally coordinating the firm’s response to competitive threats is more efficient and effective.

• Take advantage of global media. Firms leverage the Internet, cross-national TV, and other global media to advertise in many countries simultaneously. Copyright © 2014 Pearson Education

Pressures for Local Responsiveness

• Leverage natural endowments available to the firm. Each country has specific national resources and other endowments that the foreignfirm should access.

• Cater to local customer needs. Businesses in multidomestic industries should adapt products, services, and marketing to suit local customer needs.

• Accommodate differences in distribution channels. For example, Japan’s distribution system for consumer goods is characterized mainly by small retailers.Copyright © 2014 Pearson Education

Pressures for Local Responsiveness (cont’d)

• Respond to local competition. To out-compete local rivals, successful firms devise offerings and practices that best meet local demand.

• Adjust to cultural differences. For those products where cultural differences are important, the firm should adapt the product and marketing, especially when local competitors are numerous.

• Meet host government requirements and regulations. They must always comply with local legal and regulatory requirements, which can vary substantially from country to country.


Balancing Integration and Responsiveness

A worker inspects Coca-Cola beverages production in a plant in Africa. While Coca- Cola headquarters provides global brand support and broad marketing guidance to its bottlers in individual countries, the local bottler assumes responsibility for local customer research, local sales promotion, retailer support, and meeting local government requirements.Copyright © 2014 Pearson Education

Four Strategies Emerging from the Integration Responsiveness Framework

1. Home replication strategy

2. multidomestic strategy

3. Global strategy

4. Transnational strategy


Four Strategies Emerging from the Integration Responsiveness Framework


Home Replication Strategy

• The firm views international business as separate from, and secondary to, its domestic business. Expansion abroad is an opportunity to generate incremental sales for domestic product lines.

• Products are designed for domestic customers, and international business is pursued mainly to extend the life of domestic products and replicate home market success.

• Management holds little interest in foreign markets and expects little knowledge to flow from foreign operations.


Multidomestic Strategy

• The firm develops subsidiaries or affiliates in each of its foreign markets and appoints local managers to operate independently and be locally responsive.

• Products and services are adapted to suit the needs and wants of buyers in each country.

• Because headquarters acknowledges differences between national markets, subsidiaries are allowed to vary products and practices by country.

• Country managers are often nationals of the host country and generally don’t share knowledge and experience with managers in other countries.


Global Strategy

• Headquarters seeks substantial control over all country operations in order to minimize redundancy and achieve maximum efficiency, learning, and integration worldwide.

• Global strategy asks “why not make the same thing, the same way, everywhere?” Products, marketing, and company practices are relatively standardized.

• R&D, manufacturing, marketing and other activities tend to be concentrated at headquarters, where they can be centrally coordinated and controlled.

• Management views the world as one large marketplace.


Global Strategy

Whirlpool’s global strategy emphasizes relying on a small number of first-rate suppliers around the world and manufacturing in low-cost countries. This Whirlpool factory is in Shanghai, China.Copyright © 2014 Pearson Education

Transnational Strategy

• A coordinated approach to internationalization in which the firm strives to be more responsive to local needs while retaining sufficient central control of operations to ensure efficiency and learning.

• The firm seeks to combine the major advantages of multidomestic and global strategies, while minimizing their disadvantages.

• It’s a flexible approach: standardize where feasible; adapt where appropriate.

• But, most firms find implementing transnational strategy very challengingCopyright © 2014 Pearson Education

Transnational Strategy requires the firm to:

• Exploit scale economies by sourcing from a reduced set of global suppliers and concentrating production in relatively few locations where competitive advantages can be maximized

• Organize production, marketing, and other value-chain activities on a global scale

• Optimize local responsiveness and flexibility

• Facilitate global learning and knowledge transfer

• Coordinate global competitive moves — that is, deal with competitors on a global, integrated basis.


How IKEA Strives for Transnational Strategy

• Some 90% of the product line is identical across more than two dozen countries. IKEA modifies some furniture to suit tastes in individual countries.

• An overall, standardized marketing plan is centrally developed at the firm’s headquarters in Sweden but is implemented with local adjustments.

• Management decentralizes some decision-making to local stores, such as product displays and language to use in advertising.


Transnational Strategy

China’s Lenovo follows a transnational strategy. The firm’s computers are similar worldwide except the keyboards and internal software, which are adapted for individual markets to suit language differences. Lenovo’s retailing Web sites, which look identical across the world, are also adapted for language.Copyright © 2014 Pearson Education

Organizational Structure

The reporting relationships inside the firm, “the boxes and lines” that specify the linkages among people, functions, and processes, allowing the firm to carry out its operations.

• In large MNEs, these linkages are extensive and include the firm's subsidiaries, affiliates, suppliers, and other partners worldwide.

• A fundamental issue: How much decision-making should the firm retain at headquarters and how much it should delegate to foreign subsidiaries and affiliates. It is the choice between centralization and decentralization.


The most experienced global firms:

• Encourage local managers to identify with broad objectives of the firm

• Visit subsidiaries periodically to instill corporate values and priorities

• Rotate employees within the corporate network to promote development of a global perspective

• Encourage country managers to interact and share experiences with each other through regional and global meetings

• Provide incentives and penalties to promote compliance with headquarters’ goalsCopyright © 2014 Pearson Education

How value chain activities are shared in the typical, global MNE


Alternative Organizational Arrangements

• Export Department

• International Division

• Geographic Area Structure

• Product Structure

• Functional Structure

• Global Matrix StructureCopyright © 2014 Pearson Education

Export DepartmentA unit within the firm charged

with managing the firm’s export operations

• Most closely associated with home replication strategy• The firm’s resource commitment is small. Export

activities are unified under one department, providing efficiencies in selling, distribution, and shipping.

• But headquarters has minimal control over foreign operations, a strong potential to rely too much on intermediaries, and few opportunities to learn about foreign markets.


International DivisionAll international activities are centralized within

one division in the firm, separate from domestic units

• Associated with increased focus on international business

• Concentrates international expertise with greater coordination and management of international operations

• However, can result in fierce competition between domestic and international units for company resources and limited knowledge sharing among theforeign units and with head-quarters. Can result in little coordination between the division and other divisions in the firm.Copyright © 2014 Pearson Education

Geographic Area Structure

Management and control are decentralized to individual geographic regions, whose managers are

responsible for operations within their region

• Often used by firms that market relatively standardized products across entire regions or groups of countries

• Results in greater responsiveness to customer needs and wants in each market, providing a good balance between global integration and local adaptation

• However, managers’ orientation is more regional than global, which affects development and management of products. Global economies of scale may suffer.


Geographic Area Structure

Nestlé uses a geographic area structure for organizing its international operations. In Africa, Nestlé conducts advertising in local languages. This large ad for Nido milk powder is in Cameroon.


Product StructureManagement of international

operations is organized by major product line

• Each product division is responsible for producing and marketing a specific group of products worldwide.

• The firm develops expertise with specific products on a global basis, ensuring scale economies and knowledge sharing among units worldwide for a given product line.

• However, it can result in duplicating the firm’s support functions in each product division. There is also potential for excessive focus on products and too little on developing the firm’s markets. Copyright © 2014 Pearson Education

Functional StructureManagement of international

operations is organized by functional activity

• For example, oil companies tend to organize their worldwide operations along two major functional lines – production and marketing of petroleum products.

• The approach implies a small central staff that provides strong central control and coordination with a focused global strategy and concentrated functional expertise.

• However, coordination becomes unwieldy when the firm has many product lines, and the approach may not respond well to specific buyer needs in individual markets. Copyright © 2014 Pearson Education

Global Matrix StructureBlends the geographic area, product, and functional structures to leverage the benefits of a purely global

strategy while the firm remains responsive to local needs

• Simultaneously leverages the benefits of global strategy and responsiveness to local needs

• Emphasizes interorganizational learning and knowledge sharing among the firm’s units worldwide

• However, the dual reporting chain of command means employees may receive contradictory instructions from multiple managers, which can lead to conflicts.

• Managing many subsidiaries, products, or operations in numerous foreign markets is complex.Copyright © 2014 Pearson Education

Global Matrix Structure


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