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Introduction Participation Update Chapter 12: The Strategy of International

Business Chapter 13: The Organization of International

Business Globalization Debate!

5 Things Your Team has in Common

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Team 1 Things in common

Sojung Kim (Seoul, Korea)Davey Gant(Cape Town, S. Africa)Aayush Singhania (New Delhi, India)Don Davis (Chicago, USA)Jorge Arturo Hernandez D. (Mexico)

We've all played basketball and really like it.We all have siblings and have fun with them but fight with them sometimes.We all like eating at Qdoba and most of us think it is pretty good.We've all been to another country.We like Michael Jackson.We want to be wealthy and to get into Harvard Business School.

Team 4 Things in common

Philipp Krispin (Cologne, Germany)Livia Machado Carbonell (Brasilia, Brazil)Julia van Rosendael (Amsterdam, Netherlands)Dominic Lee (Hong Kong)Radhika Goel (New Delhi, India)

we all have been to at least 2 continentsWe are all fluent in two languageswe all have petswe all have siblingswe all think that Beryna project will be great 

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Participation RankingLast Week 1st Douglas & Harpeet 2nd Lasse & Preben 3rd Philip, Mohammed,

Helena & Julia

This week 1st Douglas & Harpreet 2nd Preben & Lasse 3rd Philip, Mohammed,

Helena, Julia & Livia

http://www.elko.k12.nv.us/jackpot/users/lolson/images/Students%20in%20Classroom%20clip%20art.gif

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Wendy Jeffus

Harvard Summer School

Chapter 12: The Strategy of International Business

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Globe Green(South Africa)

Web Retail (Ireland)

Micro(S. Sudan)

Group 1Sojung Kim (S. Korea)Davey Gant(S. Africa)Aayush Singhania (India)Don Davis (USA)Jorge Hernandez (Mexico)

Globe Green (South Africa)

Group 3: Douglas Bell (UK)Keith Lee (Australia)Juan Carlos Manzanera (Colombia)Sarthak Gandhi (India) Jonathan Walker (USA)

Web Retail (Ireland)

Group 5: Luis Echeverri (Colombia)Theis Bentzen (Denmark)Helena Hernandez (Spain)Azamat Shamsiev (Uzbekistan)Nakul Mittal (India)

Micro Finance (South Sudan)

Group 7: Shadia Damra (USA)Andres Echeverri (Colombia)Joseph Cornwell (Trinidad & Tobago)Vikram Bajaj (UK)Harpreet Kang (India)

PCTE (Tanzania)

Group 2: Sophie Wang (China)Rafael Alvarez (USA)Berre Simonse (Netherlands)Akash Mathran (India) Divya Yadav (India)

Paper 2 Paper (India)

Group 4: Philipp Krispin (Germany)Livia Machado Carbonell (Brazil)Julia van Rosendael (Netherlands)Dominic Lee (Hong Kong)Radhika Goel (India)

Beryna (Hong Kong)

Edu(Tanzania)

Recycle(India)

Beer(Hong Kong)

Group ProjectsUnirate

(U.K.)

Group 6:Preben Johannessen (Norway)Lasse Christensen (Denmark)Mohammed Ahmed (Egypt)Jolly Amatya (Nepal)Alessandro Tranchini (Italy)Gurmat Sahni (India)

Unirate (UK)

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Strategy Strategy – actions managers take to attain the goals of the firm.

– For most firms, the preeminent goal is to maximize the value of the firm for its owners.

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Value Creation Value Creation Activities – allow a company to

achieve superior efficiency, excellent quality, innovation, and customer responsiveness. – Product development, investments in human capital,

manufacturing, marketing, and/or R & D.

The way to increase the profitability of a firm is to create more value– The amount of value a firm creates is measured by

the difference between its costs of production and the value that consumers perceive in its products

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Perceptions of Value… Which “red car with 2 doors” is worth more?

Which “brown bag” is worth more?

2011 Ferrari

http://allworldcars.com/wordpress/wp-content/uploads/2007/07/windowslivewriter2008ferrari430scuderia-1c202008-ferrari-430-scuderia-11.jpghttp://fotogrill.com/wp-content/uploads/2008/01/2008-mitsubishi-lancer-evolution-x-front-and-side-1600x1200.jpghttp://www.thebudgetfashionista.com/images/eluxurylv-thumb.jpg

2011 Corolla

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Value Creation Example: Cost per unit (C) = $15,000; Price per unit (P)

= $20,000*; Value to Customer (V) $22,000

Example Book: Cost per unit (C) = $; Price per unit (P) = $; Value to Customer (V) $

Note: (V) is the value to the average customer, customers have different perceptions of value. If you were a monopoly supplier, you could charge a price closer to this price.

Web Retail (Ireland)

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Michael Porter states that there are two basic strategies for creating value and attaining a competitive advantage in an industry:– Low-Cost Strategy vs. Differentiation– Low Cost - value is created for the customer by

offering low priced products.– Differentiation – unique attributes that are valued by

customers and that customers perceive to be better than or different from the products of the competition

Strategic Positioning & Value Creation

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Strategic Choice Pick a position that offers

enough demand to support your choice.

Configure internal operations, such as manufacturing, marketing, logistics, IT, and HR to support your position.

Connect this decision to your organizational structure.

Example: – Where should Beryna position

their product? Incr

ease

d D

iffer

entia

tion

(V)

Low Cost (C)

The Efficient Frontier shown below has a convex shape due to diminishing returns*

*Diminishing returns imply that when a firm has significant value built into its product offering, increasing value by a small amount requires significant additional costs. A firm with a low-cost structure, also may have to give up a lot of value to obtain further cost reductions.

Beer(Hong Kong)

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The Firm as a Value Chain Any firm is composed of a series of distinct value creating activities

– Primary activities Research & development Production Marketing & Sales

– Activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc.

Customer Service– Customer support, repair services, etc.

– Support Activities Information systems

– Process automation, and other technology development Logistics

– Inbound logistics include the receiving, warehousing, and inventory control of input materials.

– Outbound logistics are the activities required to get the finished product to the customer, including warehousing, order fulfillment, etc.

Human resource– the activities associated with recruiting, development, and

compensation of employees.

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The Value Chain

Globe Green(South Africa)

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Global Expansion, Profitability, & Growth Expanding globally allows firms to increase their

profitability and rate of profit growth in ways not available to purely domestic enterprises

Firms that operate internationally are able to– Expand the market for their domestic products– Realize location & cost economies by dispersing individual value

creation activities– Earn a greater return by leveraging any valuable skills

developed in foreign operations

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Leveraging Products & Competencies A company can increase its growth rate by taking goods

or services developed at home and selling them internationally

– Returns from such a strategy are likely to be greater if local competitors lack comparable products

Success of multinational companies also rest upon the core competencies that underlie the development, production, and marketing of goods or services

– Core competencies are skills within the firm that competitors cannot easily match or imitate

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What are the Core Competencies? McDonalds

– fast food P & G

– brand marketing Wal-Mart

– logistics Starbucks

– Freshly brewed coffee

Toyota– Low cost, high quality

Boeing– Multisourcing

Dell – Inventory management

Apple– graphics

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Location Economies Location economies are the economies that arise from

performing a value creation activity in the optimal location for that activity

Can have one of two effects:– It can lower the costs of value creation and help the firm to

achieve a low-cost position and/or– It can enable a firm to differentiate its product offering from the

competition One result of this kind of thinking is the creation of a

global web of value creation activities, with different stages of the value chain being dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized

•Consider the following:•Where are the best designers?•Where is the low cost or skilled labor?•Who will develop the best marketing strategy?

Note: Transportation &trade complicate the picture.Recycle

(India)

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Experience Effects The experience curve refers to systematic reductions in

production costs that have been observed to occur over the life of a product

There are two explanations for the experience effect– Learning effects refer to cost savings that come from learning

by doing– Economies of scale refer to the reductions in unit cost achieved

by producing a large volume of a product The strategic significance of the experience curve is

clear; moving down the experience curve allows a firm to reduce its cost of creating value and increase its profitability

Making the first Beyrna is much more expensive than making the 1000th

Beer(Hong Kong)

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Cost Pressure vs. Local Responsiveness Firms that compete in the global marketplace typically

face two types of competitive pressure– Pressures for cost reductions– Pressures to be locally responsive

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Pressure for Cost Reductions International businesses often face pressures for cost

reductions because of the competitive global market Pressures for cost reduction can be particularly intense

in industries producing commodity-type products– Universal needs exist when the tastes and preferences of

consumers in different nations are similar if not identical Pressures for cost reductions are also intense

– In industries where major competitors are based in low-cost locations

– Where there is persistent excess capacity– Where consumers are powerful and face low switching costs

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Pressure for Local Responsiveness Differences in consumer tastes & preferences

– North American families like pickup trucks while in Europe they are viewed as a utility vehicle for firms

Differences in infrastructure & traditional practices– Consumer electrical system in North America is based on 110 volts; in

Europe on 240 volts Differences in distribution channels

– Germany has few retailers dominating the food market, while in Italy it is fragmented

Host-Government demands– Health care system differences between countries require

pharmaceutical firms to change operating procedures

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Where Does Your Company Fit?

Globe Green(South Africa)

Web Retail (Ireland)

Micro(S. Sudan)Edu

(Tanzania)

Recycle(India)

Beer(Hong Kong)

Unirate(U.K.)

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Choosing a Strategy

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International Strategy International Strategy – transfer the skills and products

derived from distinctive competencies to foreign markets, while undertaking some limited local customization.

Create value by transferring valuable core competencies to foreign markets that local competitors lack

Centralize product development functions at home Establish manufacturing and marketing functions in local

country but head office exercises tight control over it Limit customization of product offering and market

strategy– Strategy effective if firm faces weak pressures for local

responsive and cost reductions

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Localization Strategy Localization Strategy – customize product offering,

marketing strategy, and business strategy to national conditions

– Local responsiveness

Main aim is maximum local responsiveness Customize product offering, market strategy including

production and R&D according to national conditions Generally unable to realize value from experience curve

effects and location economies Possess high cost structure

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Global Strategy Global Strategy – focus on cost reductions

– Experience curve effects – systematic reduction in production costs that occur over the life of a product

Learning effects Economies of scale

– Location economies – arise from performing a value creation activity in the optimal location

Focus is on achieving a low cost strategy by reaping cost reductions that come from experience curve effects and location economies

Production, marketing, and R&D concentrated in few favorable functions

Market standardized product to keep costs low Effective where strong pressures for cost reductions and low

demand for local responsiveness exist– Semiconductor industry

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Transnational Strategy Transnational Strategy – simultaneous focus on

reducing costs, transferring skills and products, and being locally responsive.

To meet competition, firms aim to reduce costs, transfer core competencies while paying attention to pressures for local responsiveness

Global learning– Valuable skills can develop in any of the firm’s world wide

operations– Transfer of knowledge from foreign subsidiary to home country,

to other foreign subsidiaries Transnational strategy difficult task due to contradictory

demands placed on the organization

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The Evolution of Strategy Over time competitors inevitably emerge

– An international strategy may not be viable in the long-term so firms need to shift toward a global standardization strategy or a transnational strategy in advance of competitors

As competition intensifies– International and localization strategies tend to become less

viable– Managers need to orient their companies toward either a global

standardization strategy or a transnational strategy

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The Evolution of Strategy

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BCG Matrix The BCG Matrix is based

on the product life cycle theory and it became on of the most well-known portfolio management decision making tools in the early 1970's.

– There are two dimensions - market share and market growth.

http://www.decide-guide.com/BCG-matrix.htmlhttp://www.decide-guide.com/porters-five-forces-model.html

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5 Forces Analysis (Porter)1. Entry of competitors

– How easy or difficult is it for new entrants to start competing?

– What economies of scale does a competitor need?

– Is there a learning curve? 2. Threat of substitutes

– How easy can a product or service be substituted?

– Can products be made cheaper ? – What are the switching costs?

3. Bargaining power of buyers – What buyer information is available? – What price sensitivity exists in the

market? 4. Bargaining power of suppliers

– Is there a monopoly of suppliers? – Is there presence of substitute

inputs? 5. Rivalry among the existing players

– Does strong competition between the existing players exist?

– What barriers to exit exists? – What kind of industry growth exists?

http://www.decide-guide.com/porters-five-forces-model.html

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Wendy Jeffus

Harvard Summer School

Chapter 13: The Organization of International Business

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Strategic Choice Global strategy

– Centralized due to operational issues

Localization strategy– Decentralized due to

emphasis on local responsiveness

International strategy– Centralize core

competencies and decentralize foreign subsidiaries

Transnational strategy– Mixed Centralized for

location and experience curve economies

– And decentralized for local responsiveness

http://www.intel.com, http://www.ti.com, http://www.motorola.com/us, http://www.zara.com/, http://www.cat.com/cda/layout?m=8703&x=7,http://www.nestle.com, http://www.pg.com/en_US/index.jhtml, http://www.xerox.com/, http://www.microsoft.com/en/us/default.aspx, http://www.mtv.com/

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Organizational Architecture Organizational architecture includes the totality of a

firm’s organization, including formal organization structure, control systems and incentives, processes, organizational culture, and people

Superior enterprise profitability requires three conditions

1. The different elements of a firm’s organizational architecture must be internally consistent

2. The organizational architecture must fit the strategy of the firm

3. The strategy and architecture of the firm must not only be consistent with each other but they also must be consistent with competitive conditions

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Organizational ArchitectureStructure – Formal division of the firminto subunits (product divisions, nationaloperations, and functions); location ofdecision-making responsibilities; &integrating mechanisms.

Incentives - The devices used to reward appropriate managerial behaviorControl systems - The metrics used to measure the performance of sub-units

Processes - The manner in which decisions are made and work is performed within the organization

Culture - The norms and value systems that are shared among the employees of an organization

People - The strategy used to recruit, compensate, and retain employees and the type of people hired(i.e. their skills, values, and orientation.)

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Structure Organizational structure can be thought of in

terms of three dimensions:1. Vertical differentiation: the location of decision-

making responsibilities within a structure. Where decision-making power is concentrated.– Centralized or Decentralized decision making

2. Horizontal differentiation: the formal division of the organization into sub-units Examples: by function, product, geography, or type of

business.

3. Establishment of integrating mechanisms: mechanisms for coordinating sub-units

Edu(Tanzania)

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Vertical Differentiation Centralization:

– Facilitates coordination– Ensure decisions

consistent with organization’s objectives

– Top-level managers have means to bring about organizational change

– Avoids duplication of activities

Decentralization:– Reduces the burden on top

management– Motivational research

favors decentralization– Permits greater flexibility– Can result in better

decisions– Can increase control

Edu(Tanzania)

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Horizontal Differentiation Horizontal differentiation – how a firm divides

itself into subunits– Based on function

(i.e. finance, marketing, etc.)

– Type of business– Geographical area

Local responsiveness

– By product Location economies Experience curve economies

Edu(Tanzania)

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Typical Functional Structure Most small firms develop along these lines as they grow

– the entrepreneur typically maintains tight control.

But as firms grow and develop new product lines, it can become a clumsy structure that is difficult to supervise and it can be difficult to identify the profit/loss of each business area.

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The International Division

Many manufacturing firms expanded internationally by exporting the product manufactured at home to foreign subsidiaries to sell

In time it might prove viable to manufacture the product in each country

http://www.walmart.com/

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Worldwide Area Structure Worldwide area structure

– Favored by firms with low degree of diversification and domestic structure based on function

– World is divided into autonomous geographic areas– Operational authority decentralized– Facilitates local responsiveness – Fragmentation of organization can occur– Consistent with multi-domestic strategy

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Worldwide Product Divisional Structure Adopted by firms that are reasonably diversified Original domestic firm structure based on product division Value creation activities of each product division coordinated by that

division worldwide– Help realize location and experience curve economies– Facilitate transfer of core competencies

Problem: area managers have limited control, subservient to product division managers, leading to lack of local responsiveness

http://www.motorola.com/us

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Global Matrix Structure Helps to cope with conflicting demands of earlier

strategies Two dimensions: product division and

geographic area Product division and geographic areas given

equal responsibility for operating decisions Problems

– Bureaucratic structure slows decision making– Conflict between areas and product divisions– Difficult to make one party accountable due to dual

responsibility

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Global Matrix Structure

http://www.unilever.com/default.asp

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Organizational Structure This should be thought of in terms of three dimensions

Vertical differentiation: the location of decision-making responsibilities within a structure. Where decision-making power is concentrated

Horizontal differentiation: the formal division of the organization into sub-units

– Establishment of integrating mechanisms: mechanisms for coordinating sub-units

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Need for coordination follows the following order:

Impediments to Coordination– Differing goals and lack of respect– Different orientations due to different tasks– Differences in nationality, time zone, and distance– Particularly problematic in multinational enterprises with their

many sub-units both home and abroad

Integrating Mechanisms

Highest

Lowest

Transnational Strategy

Global Strategy

Localization Strategy

International Strategy

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The Telephone GAME

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Formal Integrating Systems Direct contact between

sub-unit managers Liaison roles: an individual

assigned responsibility to coordinate with another sub-unit on a regular basis

Temporary or permanent teams from sub-units to achieve coordination

Matrix structure: all roles viewed as integrating roles

– Often based on geographical areas and worldwide product divisions

Unirate(U.K.)

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Informal Integrating Mechanisms Informal management networks supported by an

organization culture that values teamwork and a common culture– Non-bureaucratic flow of information– It must embrace as many managers as possible

Two techniques used to establish networks– Information systems– Management development policies

Rotating managers through various sub-units on a regular basis

Unirate(U.K.)

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Informal Integrating Mechanisms

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Control Systems Types of control systems

– Personal controls – personal contact with subordinates.

More common in small firms, but GE’s Jack Welch also used this control system.

– Bureaucratic controls – high need for approval & emphasis on rules and guidelines.

Typical for R&D and other budgets

– Output controls (i.e. profitability, growth, productivity, market share)

– Cultural controls – norms and values of the system guide behavior (i.e. Starbuck’s employees and Disney employees)

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Incentive systems– Refer to devices used to reward appropriate behavior– Closely tied to performance metrics used for output controls– Differs across cultures (i.e. Lincoln Electric pays for “piecework”

in the U.S. – but this is illegal in Germany). Factors that influence incentive systems

– Seniority and nature of work Reward linked to output target that the employee can influence

– Cooperation between managers in sub-units Link incentives to profit of the entire firm

– National differences in institutions and culture – Consequences of an incentive system should be understood

Incentive Systems

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Performance Ambiguity Key to understanding the relationship between

international strategy, control systems and incentive systems is performance ambiguity

– Caused due to high degree of interdependence between sub-units within the organization

Level of performance ambiguity depends on number of sub-units, level of integration, and joint decision making

Descending order of ambiguity in firms

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Organizational Culture Values and norms shared among people Sources

– Founders and important leaders– National social culture– History of the enterprise– Decisions that result in high performance

Cultural maintenance– Hiring and promotional practices– Reward strategies– Socialization processes– Communication strategy

Micro(S. Sudan)

Beer(Hong Kong)

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Culture and Performance A “Strong” Culture

– Not always good– Sometimes beneficial, sometimes not– Context is important

Adaptive cultures– Culture must match an organization’s architecture– Culture does not necessarily translate across borders

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Strategic Fit

Structure & Controls

Localization International Global Transnational

Vertical differentiation

Decentralized Core competency centralized; other decentralized

Some centralized

Mixed (Centralized and Decentralized)

Horizontal differentiation

Area structure Product division Product division Informal matrix

Need for coordination

Low Moderate High Very high

Integrating mechanisms

None Few Many Very many

Performance ambiguity

Low Moderate High Very high

Need for controls

Low Moderate High Very high

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Organizational Change Firms need to periodically alter their architecture to conform to

changes in environment and strategy Hard to achieve due to organizational inertia Sources of inertia

– Possible redistribution of power and influence among managers– Strong existing culture– Senior manager’s preconceptions about the appropriate business model– Institutional constraints such as national regulations including local

content rules regarding layoffs

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Organizational Change Change to match competitive and strategy environment

– Hard to change Existing distribution of power and influence Current culture Manager’s preconceptions about the appropriate business model or

paradigm Institutional constraints

Principles for change– Unfreeze the organization– Moving to the new state– Refreezing the organization

http://www83.homepage.villanova.edu/richard.jacobs/MPA%208002/Project/reorganizatoin.jpg

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Take a Break… Get ready for the globalization

debate! See you in 10 min.

Image source: http://www.graduatejunction.net/images/take_a_break.jpg

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Is Globalization A Good Thing? The Great Globalization Debate

http://www.youtube.com/watch?v=jS7O9RhNa18

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Debate Goals Introduce contested ideas… Consider different points of view… Develop/reinforce your beliefs… Provide a basis for further discussion… Have fun…

Your reports were judged based on two areas: 1) Creativity2) Key Points

And the winner is…

Thanks for your participation! See you Wednesday!

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