Challenge 2 PDF

Chapter 2 Building & Sustaining Competitive Advantage Strategy in international business The firm that aspires to become globally competitive must simultaneously seek three key strategic objectives 1. Efficiency 2. Flexibility 3. Learning Plans to crea...

Chapter 2 Building & Sustaining Competitive Advantage Strategy in international business The firm that aspires to become globally competitive must simultaneously seek three key strategic objectives 1. Efficiency 2. Flexibility 3. Learning Plans to create value Not focuses on profit, at least not in the beginning Creating value for stakeholders ○ Willing to pay, quality, complements, network effects ○ Willingness to sell, make job more attractive, raise wages Price and compensation determine firm margin Building the global firm Visionary Leadership: managers who express visionary leadership and international mindset, cosmopolitan values, and a globally strategic vision. Leading the firm to a better future, while managing efficiency, flexibility, and learning. Visionary leaders exhibit superior creativity, discipline, and passion Complexity: International vs. domestic: leadership is more complex in international than domestic firms because valuable organizational assets, productive capabilities, brands, and human resources may be employed across a variety of countries and in diverse business environment Managers: are focused on directing the firm’s day-to-day operations. They are responsible for administering or controlling specific activities in the firm Leaders: are visionary and hold a long-term perspective on the challenges and opportunities that confront the firm. Leaders are exceptionally skilled at motivating people and at setting the tone for how the firm will pursue its goals and objectives. FOUR CHARACTERISTICS of BUSINESS VISIONARY LEADERS 1. International mindset and cosmopolitan values: openness to and awareness of diversity across cultures  Those who are open minded, committed to internationalization, and ready to adapt to other cultures are likely to succeed 2. Willingness to commit Resources: complexities of foreign markets imply that international ventures take more time than domestic ones to become profitable. Visionary leaders commit to them and believe the firm will eventually succeed. Commitment drives them to develop the financial, human, and other resources their firms need to achieve their international goals. Highly committed firms engage in systematic international market expansion, allocate necessary resources, and empower structures and processes that ensure ultimate success. 3. Strategic Vision: articulate a strategic vision — what the firm wants to be in the future and how it will get there- what is the ideal picture of what the firm should become. This picture becomes a driving force for all plans, actions, and employees. 4. Willingness to invest in human assets: cultivate the most critical asset of any organization—human capital. In global firms, senior leaders adopt human resource practices such as hiring foreign nationals, promoting multi-country careers, and providing cross-cultural/language training. Organizational Culture Organizational Culture: the pattern of shared values, behavioral norms, systems, policies, and procedures that employees learn and adopt ○ Organizational culture derives from the founders, visionary leaders or some unique history of the firm- it identifies the correct way for employees to perceive, think, feel, and behave relative to new situations. ○ Management should cultivate a culture that welcomes social responsibility and is deliberate about fulfilling its role. Organizational Processes Organizational Processes: the managerial routines, behaviors, and mechanism that allow the firm to function as intended Processes include mechanisms for collecting strategic information, ensuring quality control in manufacturing, and maintaining efficient payment systems for international sales. ○ Ex. Example- General Electric gained a competitive advantage by developing and continuously improving processes that comprise its value chains- e.g. digitization of key documents, thus employing intranets and the Internet to automate activities and reduce operating costs.  Globalization Mechanisms: common processes provide interconnectedness within the MNE network for meaningful cross-fertilization and knowledge. They include global teams and global informations systems Global Team: internationally distributed group of employees charged with a specific problem-solving or best practice mandate that affects the entire organization ○ Team members are drawn from geographically diverse units of the MNE and may interact via in-person meetings, corporate intranets, and video conferencing- integrating employees with the experience, knowledge, and skills to resolve common challenges ○ Tasks of global entry teams very Strategic Teams identify or implement initiatives that enhance the positioning of the firm in its global industry Operational global teams: focus on the efficient and effective operation of the business across the whole network Successful teams are flexible, responsive, and innovative Culturally diverse teams have three valuable roles: 1. Create a global view inside the firm while remaining in touch with local realities. 2. Generate creative ideas and make fully informed decisions about the firm’s global operations 3. Ensure team decisions are implemented throughout the firm’s global operations The Distinction between Multidomestic and Global Industries 1. Multidomestic Strategies: The firm develops subsidiaries or affiliates in each of its foreign markets, and appoints local managers to operate independently and be locally responsive. Ex. McDonalds, starbucks competition takes place on a country by country basis products/services tailored to the local markets, e.g. processed food, consumer products, fashion, retailing, and publishing - adapting to the culture, laws, income levels, and other specific characteristics of each country.  2. Global Industries- competition takes place on a regional or worldwide basis, e.g aerospace, automobiles, metals, computers, chemicals, industrial equipment, earth moving machinery, photography STRATEGIC FOUNDATIONS: Underlying Framework of Success Global information systems: intranets, the Internet, and electronic data interchange – transcend geographic distances and cross-cultural differences to share knowledge ○ Ex. General Motors leveraged global information systems to tap GM capabilities around the world when it developed the Equinox, a sport utility vehicle to compete with Toyota’s RAV4 and Honda’s CR-V. The integration-responsiveness framework (strategy) Integration Response framework, describes how internationalizing firms simultaneously seek global integration and local responsiveness. ○ two basic strategic needs companies have: to integrate value chain activities globally, capitalizing upon economies of scale, and to create products/ processes that are responsive to local market needs. Global Integration: the 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 ❖ Maximize worldwide value chain efficiencies Reduce operational redundancies Minimize costly market tailoring of product/services Promote learning and cross fertilization of knowledge within their global network in order to enhance innovation and gain competitive advantages ❖ Global integration justification Converging buyer demand  Spread of global brands Diffusion of uniform technology Availability of pan-regional media Need to monitor competitors on a global basis ❖ Pressures for global integration Seek cost reduction through scale of economies: Certain industries profit from manufacturing in a few select locations, where firms can profit from economies of scale in production, quality control and speed to market. Capitalize on converging consumer trends and universal needs. Making and selling products that are standardized is more cost effective than adapting products for each market. Worldwide standardization has become feasible as buyer needs and tastes have become increasingly similar. Provide uniform service to global customers. Services are easiest to standardize when firm can centralize their creation and delivery Conduct global sourcing of raw materials, components, energy, and labor. Firms face ongoing pressure to procure high-quality input goods cost effectively. Sourcing inputs from large-scale, centralized suppliers allows firms to obtain economies of scale, more consistent quality, lower costs, and generally more efficient operations. Monitor and respond to global competitors. Foreign rivals that compete on a global basis are more threatening than those that compete only locally Take advantage of media that reaches buyers in multiple markets. The availability of cost-effective, global media makes it possible for  firms to design advertising and employ other promotional activities that target multiple countries simultaneously. Local Responsiveness: meeting specific buyer needs in individual countries, responding to specific conditions in local markets, managing diverse opportunities and risks, on a country by country basis ○ Adjust the firm‘s practices to suit distinctive needs and conditions in each country ○ Adapt to local customer requirements, language, culture, regulation, the competitive environment, and the local distribution structure. ○ Emphasize local responsiveness Local responsiveness justification: countries, cultures, markets demand unique product/services ○ Such demand difference must be addressed through customized products/services PRESSURES FOR LOCAL RESPONSIVENESS ○ Leverage natural endowments available to the firm. Each country has distinctive resources such as raw materials and skilled knowledge workers that provide foreign firms with competitive advantages ○ Cater to local customer needs. Particularly in multidomestic industries, buyer needs vary from country to country and firms must adapt to meet diverse cross-national needs. ○ Accommodate differences in distribution channels. Channels can vary from market to market and may increase the need for local responsiveness. In Latin America, small stores are the most common type of retailer, so foreign firms must adapt their approach ○ Respond to local competition. Foreign firms are disadvantaged in markets that have numerous local competitors, so successful MNEs must devise innovative offerings to meet the local demand.  ○ Adjust to cultural differences. In markets where cultural differences are important – for example, in sales of food and clothing – the firm must adapt its products and marketing activities accordingly ○ Meet host government requirements and regulations. To protect local firms, governments sometimes impose trade barriers or other restrictions that hinder foreign firms. The MNE can overcome such obstacles by establishing local operations to attain the status of a local firm. Integration Response framework includes 4 strategies 1. Home replication strategy 2. Multi-domestic strategy 3. Global Strategy 4. Transnational Strategy Organizational structure in international business. Organizational structure determines where key decisions are made, the relationship between headquarters and subsidiaries, and the nature of international staffing. Six organizational Structures are discussed 1. Export department 2. International division structure 3. Geographic area structure 4. The product structure 5. The function structure 6. Global matrix structure Foreign market entry strategies Market entry strategies consist of… ○ Exporting ○ Sourcing ○ And Foreign Direct investment ○ Licensing ○ Franchising ○ Non Equity alliances  Global sourcing (importing) is the procurement of products and services from worldwide source FOR USE AT HOME SO THAT IS WHY IT SAYS IMPORTING, WE ARE GETTING RESOURCES FROM ANOTHER COUNTRY Strategy in International Business Strategy: a planned set of actions that managers take to make best use if firm’s resources and core competencies to gain COMPETITIVE ADVANTAGE ○ Managers examine firms strengths and weakness, opportunities, and challenges facing the firm when develop strategies International strategies to help the firm allocate scarce resources and configure value-adding activities on a worldwide scale, participate in major markets, implement valuable partnerships abroad, and engage in competitive moves in response to foreign rivals. Developing Global, Sustainable, Competitive Advantage depends on three strategic objectives 1. Efficiency: the first must build efficient international value chairs Such as lowering the cost of the firm’s operations and activities on a global scale Examples- Automotive companies strive for scale economies by concentrating manufacturing and sourcing activities in a limited number of locations ○ manufactures in low-cost countries such as China and in major markets like the U.S. Toyota works with its suppliers to ensure they provide low-cost parts and components while maintaining quality 2. Flexibility: Firms must develop worldwide flexibility to accommodate diverse country specific risks (threats) and opportunities (external to the company) Independent suppliers/distributors v.s. foreign direct investment decisions. Adaptation of marketing and human resource practices to suit unique country conditions Exchange rate fluctuations may prompt managers to switch to local sourcing or to adjust prices- the more critical to firm performance, the more pivotal is the ability to be responsive. 3. Learning: Firms must create the ability to learn from operating in international environments and exploit the learning on a worldwide basis  The diversity of the international environment presents the internationalizing firm with unique learning opportunities ○ New technical and managerial know-how ○ New product ideas ○ Improved R&D capabilities ○ Partnering skills ○ Survival capabilities in unfamiliar environments Integration Response framework includes 4 strategies 5. Home replication strategy 6. Multi-domestic strategy 7. Global Strategy 8. Transnational Strategy Strategy based on the Integration Responsiveness Framework Home Replication Strategy Firm views international business as separate from, and secondary to, its domestic business Expanding abroad is viewed as an opportunity to generate additional sales for domestic product lines Firms designs products with domestic customers in mind and seeks international business in order to extend product life cycles and replicate home-market success Little useful knowledge flows from the foreign operations. Strategy works best if commodities- raw materials and basic parts- are used because they do not require a sophisticated internationalization strategy. ○ Also successful when the firm only targets markets similar to the home market. With limited human and financial resources, the firm relies heavily on its foreign intermediaries to import and distribute the product, with no adaptation for foreign customers. Little control over how its products are marketed abroad Replicating a home strategy abroad offers few competitive advantages in foreign markets. Thus, it is usually an initial, temporary strategy rather than a long-term strategy. Typically implemented by inexperienced firms/those with limited international goals MULTIDOMESTIC STRATEGY (also called multi local strategy) More advanced approach.  Firm internationalization where headquarters delegates considerable autonomy to each foreign unit, allowing them to operate independently and pursue local responsiveness. Subsidiaries/affiliates are developed in each of numerous foreign markets. Cognizant of country differences, subsidiaries uniquely adapt products/services and management practices to suit country needs. Country managers are often nationals of the host country and tend to function independently, with little incentive to share knowledge and experience with managers in other countries. Multidomestic Example- food and beverage giant Nestlé (www.nestle.com) ○ Nestlé employs highly autonomous nationals who meet specific local needs and conditions. ○ As such, Nestlé is often perceived as a local firm in each of its market Advantages ○ Locally produced products can be better adapted to the local market. ○ There is minimal pressure on headquarters staff because local operations are managed by individual managers in each country. ○ Firms with limited international experience find multidomestic strategy an easy option, as they can delegate many tasks to their country managers, foreign distributors, franchisees, or licensees. GLOBAL STRATEGY Headquarters seeks substantial control over its country operations in order to minimize redundancy and achieve maximum efficiency, learning, and integration worldwide Through universal products/services, central coordination and control of international operations is emphasized Activities such as R&D and manufacturing are centralized at headquarters, and management tends to view the world as one large marketplace Samsung Electronics (www.samsung.com) ○ With a global strategy, Samsung optimizes its value chains and enjoys superior performance around the world. ○ Once a manufacturer of home appliances in South Korea, the firm now manages a wide collection of global activities from company headquarters. Advantages ○ Provides substantial ability to respond to worldwide opportunities. It creates economies of scale, which results in lower operational costs.  ○ It increases opportunities for cross-national learning and cross-fertilization of the firm’s knowledge among all its subsidiaries. ○ Product/process quality improvement — by simplifying manufacturing and other processes ○ High-quality products give rise to global brand recognition, increased consumer preference, and efficient international marketing programs. Global strategy is easy to implement ○ Converging buyer characteristics worldwide ○ Growing acceptance of global brands ○ Increased diffusion of uniform technology (especially in industrial markets) ○ Spread of international collaborative ventures, ○ Integration effects of globalization and advanced communications technologies Disadvantages ○ Challenging for management to closely coordinate the activities of widely dispersed international operations ○ The firm must maintain ongoing communications between headquarters and its subsidiaries as well as between the subsidiaries ○ May result in a loss of responsiveness and flexibility in local markets Transnational Strategy (Multidomestic + Global) A coordinated approach to internationalization in which the firms strikes to be both more responsive to local needs (multi) while retaining sufficient central control of operation to ensure efficiency and learning (global) To implement transnational strategy, the firm should: ○ Exploit scale economies: by sourcing from a reduced set of global suppliers and concentrate manufacturing 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, rather than following a country by country approach, deal with competitors on a global integrated basis Ex. Lenovo, chinese producer of personal computers and laptop ○ Firm rotes its headquarters between China and the U.S. ○ Production is focused in low-cost countries to generate the greatest cost efficiencies and economies of scale. Challenges: given the difficulty of balancing central control and local responsiveness, mot MNEs find it difficult to implement transnational strategy ○ In the long run, almost all need to include some elements of localized decision making, because each county has unique characteristics Organizational Structure in International Business Strategy Implementation through Structure: while strategy is the blueprint for action, a firm needs a structure with people, resources and processes to implement it Organizational structure: Reporting relationships inside the firm that specify the links between people, functions, and processes, through which the firm’s vision and strategies are implemented The centralization and decentralization fundamental question- how much decision-making responsibility should a firm retain at headquarters and how much should it delegate to foreign subsidiaries/affiliates ○ Global integration: is a centralized approach, gives headquarters considerable authority and control over the firm’s activities worldwide ○ Local responsiveness, is decentralized approach, substantial autonomy and decision making are delegated to the firm’s subsidiaries around the world In each firm, management tends to devise a structure consistent with its local vision and strategies. Whether headquarters or the subsidiary will make decisions about the firm’s value chain activities depends on the firm’s products, the size of its markets, the nature of competitor operations, the size and strategic importance of each foreign venture. Centralized- The larger the financial outlay or the riskier the anticipated result, the more headquarters will contribute to decision making  ○ Ex. decisions about developing new products or building factories abroad tend to be centralized to headquarters ○ Decisions that affect two or more countries are best left to headquarters managers who have a regional or global perspective Joint- Decisions about local products that will be sold in only one country, however, are typically the joint responsibility of corporate and country-level managers, with the latter is taking the lead role Decentralized- Decisions on day-to-day human resource issues in individual subsidiaries are generally left to local managers. Companies need to effectively balance the benefits of centralization and local autonomy. Retaining some local autonomy is both desirable and necessary. - The challenge for managers is to achieve these goals simultaneously - Think globally, act locally,” oversimplifies the true complexities of today’s global competition; a better description of current MNE reality is: Export Department ○ For manufacturing firms, exporting is usually the first foreign market entry strategy ○ Initially, the firm will channel exports through an outside intermediary, such as a foreign distributor. ○ When export sales reach a substantial proportion of total sales, the firm will usually establish a separate export department INTERNATIONAL DIVISION STRUCTURE ○ With increased international activities, an international division is a separate unit within the firm dedicated to managing its international operations ○ The decision to create a separate division is usually accompanied by a significant shift in resource allocation and an increased focus on international business ○ Division managers oversee the development and maintenance of relationships with foreign suppliers, distributors, and other value chain partners  ○ Over time, the division typically undertakes more advanced internationalization options, such as licensing and small-scale foreign direct investment. ○ With increasing internationalization, firms evolve from this strategy/structure to multidomestic or global strategies with commensurate structures ○ Advantages Centralization- management and coordination of international operations It is staffed with international experts who focus on developing new business opportunities abroad and offering assistance and training for foreign operations The signal from management is their commitment to international operations ○ Disadvantages This structure can lead to a domestic versus international power struggle over limited resources. Competitors rather than partners- adversarial relationship- likely little sharing of knowledge between the domestic and foreign units, or among the foreign units themselves. R&D and future-oriented planning activities tend to remain separate and may be domestically focused. Products continue to be developed for the domestic market, with international needs considered only after domestic needs have been addressed. With increasing complexity/coordination issues, at more advanced internationalization stages, firms establish more advanced organizational structures and take advantage of economies of scale/scope, innovation, learning effects, resource pooling, and expertise Geographic Area structure (Decentralized Structure) ○ Multidomestic strategy  An organizational design in which management and control are decentralized to the level of individual geographic regions, where local managers are responsible for operations within their region. Firms that organize their operations geographically tend to market products that are relatively standardized across entire regions or groupings of countries. Decentralized structure because top management delegates local operations to regional managers responsible for each geographic area. Firms that use the geographic area approach are often in mature industries with narrow product lines, such as the pharmaceutical, food, automotive Advantages ➔ Local responsiveness ➔ Regional balancing of global integration and local adaptation ➔ Area managers can modify products and strategy ➔ Improved communications and coordination between subsidiaries within each region Disadvantages ➔ Communications and coordination are often lacking with other area units and corporate headquarters ➔ Geographic area managers typically lack a global orientation when it comes to developing and managing products. ○ Global Strategy (centralized approach)  The firm organizes its international operations by major product lines. Each product division is responsible for producing and marketing a specific group of products worldwide. Each international product division operates as a stand-alone profit center with substantial autonomy- the goal being a high degree of worldwide coordination within each product category. Centralized structure- increased coordination facilitates economies of scale and sharing of technology and product knowledge among the firm’s operations worldwide Motorola : Product categories for international operations include mobile phones and network solutions Apple: Product categories include the iPad, iPod, iPhone, and personal computers Advantages: All support functions, such as R&D, marketing, and manufacturing, are focused on the product. Global efficiencies Disadvantages The product division structure may result in duplication of corporate support functions for each product division and a tendency for managers to focus their efforts on subsidiaries with the greatest potential for quick returns. ○ Functional Structure (centralized) The firm’s international operations are organized by functional activities, such as production and marketing. Example- Oil companies ➔ Organize their worldwide operations along two major functional lines – production and marketing of petroleum products. Advantages  Small central staff, which provides strong centralized control and coordination, and a united, focused global strategy with a high degree of functional expertise Disadvantages Headquarters may lack expertise in coordinating manufacturing, marketing, and other functions in diverse geographic locations Coordination may become unwieldy with numerous product lines ○ GLOBAL MATRIX STRUCTURE [Closely associated with Transnational] This structure is a blend of the geographic area, product, and functional structures, leveraging the global efficiencies of a global strategy and the local responsiveness of a multidomestic strategy The global matrix aims to reap the advantages of each while minimizing their disadvantages Both global efficiencies and local responsiveness are leveraged Combination: Geographic area, product, and functional structures.  Headquarters management should: Coordinate and control international operations. Respond to needs in individual countries. Maximize inter-organizational learning and knowledge sharing among the firm’s units worldwide. Firms develop a dual reporting system in which, for example, an employee in a foreign subsidiary reports to two managers – the local subsidiary general manager and the corporate product division manager Disadvantages The chain of command from superiors to subordinates can become muddled and complex. Employees may receive contradictory instructions from multiple managers, who may be located far apart and come from different cultural and business backgrounds. The matrix structure can waste managerial time and result in conflicts.  Potential limitations emerge as the firm’s international operations become more complex over time. ○ 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, 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.