International Business: The New Realities Cavusgil, Knight and Riesenberger

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1 International Business: The New Realities by Cavusgil, Knight and Riesenberger Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

2 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 Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-2

3 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-3

4 International Strategy Strategy carried out in two or more countries Managers develop international strategies to: Allocate scarce resources and configure valueadding activities on a worldwide scale Participate in major markets Implement valuable partnerships abroad Engage in competitive moves in response to foreign rivals Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-4

5 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 Learning Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-5

6 Three Strategic Objectives Efficiency: Lower the cost of the firm s operations and activities on a global scale Flexibility: 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 2012 Pearson Education, Inc. publishing as Prentice Hall 12-6

7 Key Dimensions of Successful International Firms Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-7

8 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 Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-8

9 Examples of Visionary Leaders Ratan Tata, chairman of the Tata Group, oversees a $63 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 to emerging markets worldwide. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-9

10 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-10

11 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 standards Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-11

12 Organizational Processes Managerial routines, behaviors, and mechanisms that allow the firm to function as intended 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-12

13 Important Organizational Processes for Achieving International Coordination Global teams: Internationally distributed groups of employees charged with specific problem-solving or best practice mandates that affect 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-13

14 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-14

15 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 books are 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-15

16 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-16

17 Examples of Global Industries Kodak must contend with the same rivals, Japan s Fuji and the European multinational Agfa-Gevaert, wherever it does business around the world. American Standard sells similar bathroom fixtures worldwide, competing with Toto in most major markets. Caterpillar and Komatsu compete head-on in all major markets, and offer similar brands of tractors. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-17

18 Three Levels of Competition Global International Local Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-18

19 Global Integration Coordination of the firm s value-chain activities across multiple countries to achieve worldwide efficiency, synergy, and cross-fertilization in order 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 economies Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-19

20 Local Responsiveness Meeting the specific needs of buyers in individual countries Local responsiveness requires the firm to adapt to customer needs and to the competitive environment. Local managers are free to adjust offerings, marketing, and practices to suit conditions in individual markets. When operating internationally, firms try to strike the right balance between global integration and local responsiveness. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-20

21 Integration-Responsiveness Framework Summarizes the balance that firms seek to achieve between two basic strategic needs: 1. Integrating value-chain activities globally, and 2. Creating 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-21

22 Integration-Responsiveness Framework Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-22

23 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-23

24 Pressures for Global Integration (cont.) 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 2012 Pearson Education, Inc. publishing as Prentice Hall 12-24

25 Pressures for Local Responsiveness Leverage natural endowments available to the firm. Each country has specific national resources and other endowments that the foreign firm 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 2012 Pearson Education, Inc. publishing as Prentice Hall 12-25

26 Pressures for Local Responsiveness (cont.) 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. The firm must always comply with local legal and regulatory requirements, which can vary substantially from country to country. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-26

27 Balancing Integration and Responsiveness Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-27

28 Four Strategies Emerging from the Integration Responsiveness Framework 1. Home replication strategy 2. Multidomestic strategy 3. Global strategy 4. Transnational strategy Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-28

29 Four Strategies Emerging from the Integration Responsiveness Framework Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-29

30 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 to replicate home market success. Management holds little interest in foreign markets and expects little knowledge to flow from foreign operations. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-30

31 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 among 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-31

32 Global Strategy Headquarters seeks substantial control over all country operations in order to minimize redundancy and to 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-32

33 Global Strategy Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-33

34 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. However, most firms find implementing transnational strategy very challenging Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-34

35 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 valuechain 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 Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-35

36 How IKEA Strives for Transnational Strategy Some 90% of the product line is identical across more than two dozen countries. IKEA modifies some furniture offerings 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. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-36

37 Transnational Strategy Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-37

38 Organizational Structure The reporting relationships inside the firm, the boxes and lines that specify the linkages among people, functions, and processes, that allow 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 should it delegate to foreign subsidiaries and affiliates? This is the choice between centralization and decentralization. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-38

39 The Most Experienced Global Firms: Encourage local managers to identify with the 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 goals Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-39

40 How Value Chain Activities Are Shared in the Typical Global MNE Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-40

41 Alternative Organizational Arrangements Export department International division Geographic area structure Product structure Functional structure Global matrix structure Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-41

42 Export Department A 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. Headquarters has minimal control over foreign operations, with strong potential to rely too much on intermediaries, and few opportunities to learn about foreign markets. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-42

43 International Division All 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, with limited knowledge sharing among the foreign units and with headquarters. Can result in little coordination between this division and other divisions in the firm Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-43

44 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 Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-44

45 Geographic Area Structure Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-45

46 Product Structure Management 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 2012 Pearson Education, Inc. publishing as Prentice Hall 12-46

47 Functional Structure Management 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 2012 Pearson Education, Inc. publishing as Prentice Hall 12-47

48 Global Matrix Structure Blends 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 or products, or operations in many foreign markets, is complex. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-48

49 Global Matrix Structure Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-49

50 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 12-50