International Business (9th, Wild) - Notes for Chapter (11).doc

2 Ch 11: International Strategy and Organization Chapter 11 International Strategy and Organization Learning Objectives: 11.1 Explain the company analysis techniques that precede strategy selection. 11.2 Describe the various strategies that companies use to reach their goals. 11.3 Outline the key issues behind the selection of organizational structure. 11.4 Describe the various international organizational structures and types of work teams. Chapter Outline: Introduction Company Analysis Company Mission and Goals Types of Mission Statements Core Competency and Value-Creation Unique Abilities of Companies Value-Chain Analysis Primary Activities Support Activities National and International Business Environments Strategy Formulation Two International Strategies Multinational Strategy Global Strategy Corporate-Level Strategies Growth Strategy Retrenchment Strategy Stability Strategy Combination Strategy Business-Level Strategies Low-Cost Leadership Strategy Differentiation Strategy Focus Strategy Department-Level Strategies Primary and Support Activities Issues of Organizational Structure Centralization versus Decentralization When to Centralize When to Decentralize Participative Management and Accountability Coordination and Flexibility Structure and Coordination Structure and Flexibility Types of Organizational Structure International Division Structure International Area Structure Global Product Structure Global Matrix Structure Work Teams Self-Managed Teams Cross-Functional Teams Global Teams A Final Word A comprehensive set of specially designed PowerPoint slides is available for use with Chapter 11. These slides and the lecture outline below form a completely integrated package that simplifies the teaching of this chapter’s material. Lecture Outline I. INTRODUCTION Planning is the process of identifying and selecting an organization’s objectives and deciding how the organization will achieve those objectives. Strategy is the set of planned actions taken by managers to meet company objectives. Developing an effective strategy requires a clear definition of objectives (or goals) and a plan to achieve them. An analysis of capabilities and strengths identifies what a company does better than the competition. Assessing the competitive environment, the national, and the international business environments are part of the analysis. A well-defined strategy coordinates divisions and departments to reach company-wide goals effectively and efficiently. A clear, appropriate strategy focuses on the activities performed best to avoid mediocre performance or total failure. II. COMPANY ANALYSIS Firms must determine what products to produce, where to produce them, and where and how to market them. Whether a site for operations or potential market, each international location has a rich mixture of cultural, political, legal, and economic traditions and processes. All these factors add to the complexity of planning and strategy (See Figure 11.1). A. Company Mission and Goals Mission statement: written statement of why a company exists and what it plans to accomplish (e.g., supply the highest level of service in a market segment). 1. Types of mission statements a. Mission statements often describe how a company’s operations affect stakeholders—all parties, ranging from suppliers and employees to stockholders and consumers, affected by a company’s activities. b. The mission statement of an international business depends on the type of business, the stakeholders, and the most important aspect of the business for goal achievement. Companies must be sensitive to the needs of stakeholders in different nations. c. Stockholders’ needs for financial returns must be balanced against the public interest in countries where production is located. d. Managers must define global objectives. High-level objectives are stated in general terms, “to be the largest global company in each industry in which we compete.” Business-unit objectives are more specific, “To increase the nutritious portion of our products 50 percent by 2024.” Department-level objectives often carry numerical performance targets, “to increase global market share by 5 percent in each of the next three years.” B. Core Competency and Value-Creation Before managers formulate strategies, they analyze the company, industry, and the national business environment(s). They should examine industries and nations targeted for potential future entry. Analysis helps managers discover core competency and abilities, and the activities that create customer value. 1. Unique abilities of companies a. Core competency: an ability of a company that competitors find extremely difficult or impossible to equal. Refers to multiple skills coordinated to form a single technological outcome. b. Skills are learned through on-the-job training and personal experience, whereas core competencies develop over a long period and are difficult to teach. 2. Value-chain analysis Value-chain analysis is the process of dividing a company’s activities into primary and support activities and identifying those that create value for customers. Primary activities include inbound and outbound logistics, manufacturing, marketing and sales, and customer service. Support activities include firm infrastructure, human resource management, technology development, and procurement. Each activity is a source of strength or weakness for a company (See Figure 11.2). a. Primary activities When analyzing primary activities, managers look for areas in which the company can increase customer value. b. Support activities Support activities assist in performing primary activities. A sophisticated infrastructure improves internal communication and supports organizational culture and each primary activity. 3. National and international business environments a. National differences in language, religious beliefs, customs, traditions, and climate complicate strategy formulation. b. Manufacturing processes must sometimes be adapted to the supply of local workers, local customs, traditions, and practices. c. Differences in political and legal systems complicate international strategies. d. Different national economies complicate strategy formulation and it can also affect the location in which a company chooses to perform an activity. III. STRATEGY FORMULATION Strengths and capabilities of international companies and environmental forces play a role in strategy. A. Two International Strategies 1. Multinational strategy a. Adapts products and marketing strategies in each national market to suit local preferences. b. Benefit: monitor buyer preferences in each local market and respond quickly and effectively to new buyer preferences. Drawback: cannot exploit scale economies in product development, manufacturing, or marketing. c. Not suited to industries in which price competitiveness is a key to success. 2. Global strategy Offers the same products using the same marketing strategy in all markets. Firms take advantage of scale and location economies by producing entire inventories or components in a few optimal locations. They perform product R&D in one or a few locations and design promotional campaigns and advertising strategies at headquarters. Benefit: cost savings from standardized products and marketing; lessons learned in a market are shared. Drawback: yet a firm employing this strategy may overlook differences in buyer preferences. Only simple modifications in features. Competitors can step in and satisfy unmet local needs creating a niche market. B. Corporate-Level Strategies Companies in more than one business must formulate a corporate-level strategy by identifying the markets and industries in which to operate. Overall objectives for different business units are developed and the role of each unit in reaching those objectives is determined. 1. Growth strategy A growth strategy is designed to increase the scale or scope of a corporation’s operations. Scale refers to the size of a corporation’s activities; scope to the kinds of activities it performs. Organic growth relies on internally generated growth. Other methods of growth are mergers and acquisitions, joint ventures, and strategic alliances. Partners in pursuing these include competitors, suppliers, and buyers; firms join competitors to reduce competition, expand product lines, or expand geographically. 2. Retrenchment strategy a. Reduces the scale or scope of a corporation’s businesses. Corporations cut back the scale of operations when economic conditions worsen or competition increases by closing factories with unused capacity and laying-off employees. Corporations reduce the scope of activities by selling unprofitable business units. 3. Stability strategy Guards against change and used to avoid either growth or retrenchment. Corporations have met objectives, are satisfied with accomplishments, and see no opportunities or threats. 4. Combination strategy Mixes growth, retrenchment, and stability strategies across a corporation’s business units. Common because rarely do international corporations follow identical strategies in each business unit. C. Business-Level Strategies A company may need only one strategy for its one line of business where others may need many strategies. Key to an effective business-level strategy is a general competitive strategy in the marketplace. 1. Low-cost leadership strategy Exploits economies of scale to have the lowest cost structure of any competitor in an industry. Companies have a myriad of cost including: administrative costs and the costs of its various primary activities, including marketing, advertising, and distribution. Low-cost leadership is based on efficient production in large quantities guards against attack by competitors because of the large start-up costs. A negative aspect of the low-cost leadership strategy is low customer loyalty—buyers will purchase from the low-cost leader if everything else is equal. A low-cost leadership strategy works best with mass-marketed products aimed at price-sensitive buyers. 2. Differentiation strategy Company designs products to be perceived as unique. Tends to force a company into a lower-market-share position because it involves the perception of exclusivity or meeting the needs of a certain group. Companies develop loyal customer bases to offset smaller market shares and higher costs of producing and marketing a unique product. Products can be differentiated on the basis of quality, brand image, and product design. Special features differentiate goods and services in the minds of consumers. Manufacturers combine differentiation factors in formulating their strategies. 3. Focus strategy Company focuses on the needs of a narrowly defined market segment by being the low-cost leader, by differentiating its product, or both. Competition forces more products to be distinguished by price, quality, or design. Greater product range leads to refinement of market segments. Some firms serve the needs of one ethnic or racial group, whereas others focus on a single geographic area. D. Department-Level Strategies Achieving corporate and business-level objectives depends on effective departmental strategies that focus on activities that transform resources into products. Department-level strategies rely on capabilities—primary and support activities that create value for customers. 1. Primary and support activities Each department creates customer value through lower costs or differentiated products. For primary activities, manufacturing strategies cut production costs and improve product quality; marketing strategies promote differences in products; and efficient logistics result in cost savings. Support activities create customer value (e.g., R&D identifies market segments with unsatisfied needs and designs products to meet them). IV. ISSUES OF ORGANIZATIONAL STRUCTURE Organizational structure is the way in which a company divides its activities among separate units and coordinates activities among those units. An appropriate organizational structure for a firm’s strategic plans will help it achieve its goals. A. Centralization versus Decentralization Centralized decision making occurs at a high level in one location such as headquarters. Decentralized decision making occurs at lower levels, such as in international subsidiaries. Managers cannot get involved in every hiring decision or task assignment, but overall corporate strategy cannot be delegated to subsidiaries because only top management has the appropriate perspective. Companies rarely centralize or decentralize all decision making, but seek the approach that creates the greatest efficiency and effectiveness. International companies may centralize decision making in certain geographic markets, but decentralize it in others. 1. When to centralize a. Centralization helps coordinate international subsidiaries; it is important when one subsidiary’s output is another’s input. b. Companies maintain strong central control over financial resources by channeling all subsidiary profits back to the parent for redistribution to subsidiaries. c. Other companies centrally design policies, procedures, and standards to stimulate a single global organizational culture. 2. When to decentralize a. Decentralized decision making is beneficial when fast changing business environments require local responsiveness. b. Because subsidiary managers are in contact with local culture, politics, laws, and economies, decentralized decisions result in products suited to the needs and preferences of local buyers. c. Delayed response and misinterpreted events result in lost orders, stalled production, and weakened competitiveness. d. Participative management and accountability Decentralization fosters participative management practices. Employee morale is higher if subsidiary managers and subordinates are involved in decisions. If delegated to subsidiaries, decisions about production, promotion, distribution, and pricing can generate greater commitment from managers and workers. Decentralization improves personal accountability. When local managers are rewarded (or punished) for their decisions, they invest more effort in making and executing them. B. Coordination and Flexibility Key questions: What is the most efficient way to link divisions? Who should coordinate the divisions? How should the company process and deliver information? How should it use corrective measures? 1. Structure and coordination a. Companies need structure to define responsibility and chains of command—lines of authority that run from top management to each employee and specify internal reporting relationships. b. Companies need structures to bind areas requiring cooperation, such as linking R&D and manufacturing to avoid product designs that complicate manufacturing. 2. Structure and flexibility a. Organizational structure is not permanent, but is modified to suit changes within a company and in its external environment. b. Changes in strategy and in the business environment force modifications in organizational structure; some countries are characterized by rapidly shifting business environments. V. TYPES OF ORGANIZATIONAL STRUCTURE Four organizational structures are common for most international companies. A. International Division Structure (See Figure 11.4) 1. An international division with its own manager keeps domestic and international activities separate. A general manager for each nation in which a company operates then controls product manufacturing and marketing within that market. 2. Concentrates international expertise in one division where the manager becomes a specialist in foreign exchange, exporting, and so on. Firm reduces costs, increases efficiency, and prevents international activities from disrupting home operations. 3. Potential problems with this structure are: (1) poor coordination between the international division and the rest of the company can hurt performance; and (2) destructive rivalries may arise between different country managers within the division. B. International Area Structure (See Figure 11.5) 1. Organizes a company’s global operations into countries or regions. The more countries in which a company operates, the greater the likelihood it will organize into regions, not countries. 2. Each geographic division operates as a self-contained unit, with decision making decentralized to country or regional managers. 3. Useful structure when there are vast cultural, political, or economic differences among nations or regions. 4. By controlling activities in their environments, general managers become experts on the unique needs of their buyers. But because units act independently, resources may overlap, and cross-fertilization of knowledge across units can be limited. C. Global Product Structure (See Figure 11.6) 1. Divides worldwide operations according to a company’s product areas. Suitable when a firm has a diverse set of products. 2. Because the primary focus is on the product, domestic and international managers for each product division must coordinate their activities so they do not conflict. D. Global Matrix Structure (See Figure 11.7) 1. Splits the chain of command between product and area divisions. Each manager reports to two bosses—the president of the product division and the president of the geographic area. 2. Brings together geographic area managers and product area managers in joint decision making. 3. Bringing specialists together creates a team-type organization. Increases local responsiveness, reduces costs, coordinates worldwide operations, and can increase coordination while improving agility and local responsiveness. 4. Two major shortcomings: (1) The matrix form can be quite cumbersome as the need for complex coordination tends to make decision making time consuming and slows the reaction time. (2) Individual responsibility and accountability are blurred in the matrix organization structure; because of shared responsibility, managers may attribute poor performance to the other manager. E. Work Teams Work teams can be useful in improving responsiveness by cutting across functional boundaries (between production and marketing) that slow decision making in an organization. Work teams coordinate their efforts to arrive at solutions and implement corrective action. 1. Self-managed teams a. Employees from a single department accept responsibilities of former supervisors. In production settings, self-managed teams reduce the need for direct supervisors and increase productivity, product quality, customer satisfaction, employee morale, and company loyalty. b. Quality-improvement teams are the most common type of self-managed team in many manufacturing companies because they reduce production waste and cut costs. c. Cultural differences can cause resistance to the concept of self-management and the use of teams. Experts suggest that international managers use caution when implementing teams (See Chapter 2). d. Certain cultures are less individualistic and more collectivist; some harbor greater respect for differences in status. In cultures in which people are hard-working, teams will be productive if given greater autonomy. 2. Cross-functional teams a. Composed of employees who work at similar levels in different functional departments. Such teams can help improve interdepartmental coordination and help boost product quality. b. Break down interdepartmental barriers and reorganize operations around processes, not functional departments. 3. Global teams a. Group of top managers from both headquarters and subsidiaries who meet to develop solutions to company-wide problems. b. Large distances between team members, lengthy travel times to meetings, and the inconvenience of working across several time zones can hamper global teams. VI. A FINAL WORD Managers have the important and complicated task of formulating international strategies at the levels of the corporation, business unit, and department. International managers must identify the company’s mission and goals. Managers often analyze the company’s operations by performing a value-chain analysis. This process lets managers identify and implement strategies suited to a company’s unique capabilities. The strategies managers select then determine a firm’s organizational structure. Business environments can affect managers’ strategy and structure decisions, including whether to alter their products (standardization or adaptation), where to locate facilities (centralized or decentralized production), and what type of decision making to implement (centralized or decentralized decision making). Quick Study Questions Quick Study 1 1. Q: A written statement of why a company exists and what it plans to accomplish is called a what? A. Most companies have a general purpose for why they exist that they express in a mission statement—a written statement of why a company exists and what it plans to accomplish. 2. Q: A special ability of a company that competitors find extremely difficult or impossible to equal is called a what? A: A core competency is a special company ability that competitors find extremely difficult or impossible to equal. It is not a skill. Individuals possess skills such as the ability to hit 70 home runs in professional baseball. A core competency refers to multiple skills that are coordinated to form a single technological outcome. Core competencies develop over long periods of time and are difficult to teach or transfer. 3. Q: Value-chain analysis involves separating a company’s activities into what two categories of activities? A: Value-chain analysis is the process of dividing a company’s activities into primary and support activities and identifying those that create value for customers. Primary activities include inbound and outbound logistics, manufacturing (or operations), marketing and sales, and customer service. Support activities include firm infrastructure, human resource management, technology development, and procurement. Each primary and support activity is a source of strength or weakness for a company. Quick Study 2 1. Q: What strategy involves adapting products and their marketing strategies to national markets to suit local preferences? A: A multinational (multidomestic) strategy is a strategy of adapting products and their marketing strategies in each national market to suit local preferences. The main benefit of a multinational strategy is that it allows companies to closely monitor buyer preferences in each local market and respond quickly and effectively as new buyer preferences emerge. The main drawback of a multinational strategy is that it does not allow companies to exploit scale economies in product development, manufacturing, or marketing. 2. Q: What is the benefit of using a global strategy? A: A global strategy is a strategy of offering the same products using the same marketing strategy in all national markets. The main benefit of a global strategy is its cost savings due to product and marketing standardization. The main problem with a global strategy is that it may cause a company to overlook important differences in buyer preferences from one market to another. 3. Q: Deciding on a general competitive strategy in the marketplace is the key to developing what? A: The key to developing an effective business-level strategy is deciding on a general competitive strategy in the marketplace. Quick Study 3 1. Q: How a company divides its activities among separate units and coordinates activities among units is called what? A: Organizational structure is the way in which a company divides its activities among separate units and coordinates activities among those units. If a company’s organizational structure is appropriate for its strategic plans, it will be more effective in working toward its goals. 2. Q: What type of decision making helps coordinate the operations of international subsidiaries? A: A vital issue for top managers is determining the degree to which decision making in the organization will be centralized or decentralized. Centralized decision making is the degree to which decision making is centralized at a high level in one location such as headquarters. Decentralized decision making is the degree to which decisions are made at lower levels, such as in international subsidiaries. 3. Q: What is the benefit of decentralized decision making in an organization? A: Decentralized decision making is beneficial when fast changing national business environments put a premium on local responsiveness. Quick Study 4 1. Q: What type of organizational structure tends to concentrate all international expertise in one division? A: An international division structure separates domestic from international business activities by creating a separate international division with its own manager. 2. Q: An organizational structure that divides worldwide operations according to a firm’s product areas is called what? A: A global product structure divides worldwide operations according to a company’s product areas. The global product structure is suitable for companies offering diverse sets of products or services. 3. Q: What do we call a group of employees who work at similar levels in different departments? A: A cross-functional team is one that is composed of employees who work at similar levels in different functional departments. Such teams can improve coordination among departments, improve product quality, and help companies in reorganizing themselves around processes. Ethical Challenge You are the CEO of a multinational corporation that operates in more than 100 nations worldwide. Recent changes in the global economy are redrawing many geographical and political borders. The growing interdependence of socially, politically, economically, and legally diverse countries is causing firms to revise operating policies and strategies. You are personally involved in developing a code of ethics for your firm that reflects today’s legal and moral atmosphere. You want your firm’s code to be effective across all markets in which it operates. 11-5 Given the complexity of the issues involved, what sort of policy do you think is appropriate for a firm involved in dissimilar nations? A: Student responses to this question will vary. However, it should be noted that building a code of ethics for a multinational firm is a complicated task. In many foreign countries, business practices that would not be appropriate domestically and perhaps illegal are often a normal part of doing business (i.e. gift giving practices, bribery, kickbacks, etc.). There are two approaches that can be taken: (a) operate internationally with policies and procedures it has developed at home, or it can adopt its own practices in each foreign country where it operates or (b) establish different policies and procedures for business ethics in foreign countries. In order to for one universal ethical code, the business probably would have to make it vague or state the compliance with local customers is allowed. The code should address areas of ambiguity that workers may come across in their daily activities. 11-6 Do you think that it is possible to create a uniform code of ethics that is applicable to any business operating in any culture? What issues should such a code address? A: Many CEOs wrestle with the idea of adapting their firm’s code of ethics to local laws and customs around the world. Clearly, such global codes of conduct do exist. However, students should try to think of situations in which such a code could be challenging to implement. Although such codes look nice in the company’s annual report, the real difficulties lie on the front lines in international markets when they are implemented (to varying degrees of success). Teaming Up Two groups of four students each will debate the merits of adopting either a multinational or global strategy (each side will advocate one strategy). After the first student from each side has spoken, the second student will question the opposing side’s arguments, looking for holes and inconsistencies. The third student will attempt to answer these arguments. The fourth student will present a summary of each side’s arguments. Finally, the class will vote to determine which team has offered the more compelling argument. A: Students should be sure to support their arguments with features of each of the two types of strategies discussed in this chapter. They should also be prepared to defend their positions, after the debate, if they are called on to give a synopsis of their position in class. It may also be useful to give students some time to do outside research to prepare for the debate. Practicing International Management Case IKEA’s Global Strategy 11-9 Q: When company founder Kamprad decided to expand into China his decision was not based on market research but, rather, on his own intuition. How well is IKEA doing in China? Did Kamprad’s decision pay off? A: So far IKEA’s stores in Beijing and Shanghai are performing well. IKEA changed some elements of its global strategy in culturally diverse China. In China, the company balances the implementation of its global policies and the need for greater localization. IKEA has improved its responsiveness to the needs of the China market regarding its corporate culture, structure, and strategy. 11-10 Q: Relying on topics covered in this chapter, would you classify IKEA’s approach as one of standardization or adaptation in markets around the world? Explain. A: IKEA has standardized its brand image and main marketing concept worldwide. It has only adapted its facilities in terms of size to suit the U.S. market. The approach certainly seems to be working well for IKEA. However, IKEA also has had at times adapted its marketing strategy when doing business in other countries. In most markets, the company uses its product catalogue as a major marketing tool. In China, however, the catalogue provided opportunities for competitors to imitate the company's products. Indeed, local competitors copied IKEA's designs and then offered similar products at lower prices. IKEA decided not to react, as it realised Chinese laws were not strong enough to deter such activities. Instead, the company is using Chinese social media and micro-blogging website Weibo to target the urban youth. IKEA also adjusted its store location strategy. In Europe and the US, where most customers use personal vehicles, IKEA stores are usually located in the suburbs. In China, however, most customers use public transportation. So the company set up its outlets on the outskirts of cities which are connected by public transportation. -