BUSA4000 Global Business Challenge 2 PDF

**BUSA4000** **Global Business** **Challenge 2. Building & Sustaining Competitive Advantage** **LEARNING OBJECTIVES** **1. Identify the competing forces on internationalizing firms** **2. Understand the fit between strategy, structure and processes** **3. Apply the Integration-Responsiveness F...

**BUSA4000** **Global Business** **Challenge 2. Building & Sustaining Competitive Advantage** **LEARNING OBJECTIVES** **1. Identify the competing forces on internationalizing firms** **2. Understand the fit between strategy, structure and processes** **3. Apply the Integration-Responsiveness Framework** **4. Understand the challenges of coordination and control within the MNE** **Challenge 2. How do firms build and sustain competitive advantage in international markets?** **Strategy in international business.** The firm that aspires to become globally competitive must simultaneously seek three key strategic objectives---efficiency, flexibility, and learning. **Building the global firm.** Managers who exhibit **visionary leadership** possess an international mind-set, cosmopolitan values, and a globally strategic vision. **The integration-responsiveness framework.** The integration-responsiveness (IR) framework describes how internationalizing firms simultaneously seek global integration and local responsiveness. **Strategies based on the integration-responsiveness framework.** The IR framework presents four alternative strategies: **home replication strategy**, **multidomestic** **strategy, global strategy** and **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: the export department, the international division structure, the geographic area structure, the product structure, the functional structure and the global matrix structure. **Foreign market entry strategies.** **** Market entry strategies consist of *exporting, sourcing*, and *foreign direct investment* as well as *licensing, franchising*, and *nonequity alliances*. **** Each strategy has advantages and disadvantages. To select a strategy, managers must consider the firm's resources and capabilities, conditions in the target country, risks inherent in each venture, competition from existing and potential rivals, and the characteristics of the product or service to be offered in the market. ** Global sourcing (importing)** is the procurement of products and services from worldwide sources for use at home. **STRATEGY IN INTERNATIONAL BUSINESS** ** Strategy-** A planned set of actions that managers take to make best use of the firm's resources and core competences, to gain competitive advantage. International strategy is strategy carried out in two or more countries. **** 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. STRATEGY FORMULATION derives from matching internal strengths/weaknesses with external opportunities/threats and answering the questions in the following diagram: ** Developing Global, Sustainable, Competitive Advantage depends on three strategic objectives:** (Bartlett and Ghoshal, 1989) **EFFICIENCY** *The firm must build efficient international value chains*. Efficiency refers to 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. **◘ Toyota-** ([[www.toyota.com]](http://www.toyota.com)) 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; logistical operations for worldwide shipping are efficient and cost effective. **FLEXIBILITY** *The firm must develop worldwide flexibility to accommodate diverse country-specific risks and opportunities*. The diversity and volatility of international environments are especially challenging for managers, making the firm's ability to tap local resources and exploit local opportunities critical. ◘ **Examples**- Independent suppliers/distributors versus 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. ** LEARNING** *The firm must create the ability to learn from operating in international environments and exploit this learning on a worldwide basis*. The diversity of the international environment presents the internationalizing firm with unique learning opportunities. ◘ **Examples-** By operating in various countries, an MNE can acquire: New technical and managerial know-how New product ideas Improved R&D capabilities Partnering skills Survival capabilities in unfamiliar environments **BUILDING THE GLOBAL FIRM** ** Successful Global firms:** Visionary leadership Strong organizational culture Superior organizational processes Appropriate organizational structure Strategies that optimize international operations **Visionary Leadership** **** **Visionary leadership-** a quality of senior management that provides inspirational strategic guidance, 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 environments. ** Leaders vs. Managers** **** **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:** | +=======================================================================+ | ** International mindset and cosmopolitan values-** an 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. | +-----------------------------------------------------------------------+ | ** 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. | +-----------------------------------------------------------------------+ | ** 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. | +-----------------------------------------------------------------------+ | ** 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 mechanisms 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. **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. ** Globalizing mechanisms-** common processes provide interconnectedness within the MNE network and allow for meaningful cross-fertilization and knowledge. They include *global teams* and *global information 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 teams vary: ◘ *Strategic global 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:** ◘ Create a global view inside the firm while remaining in touch with local realities. ◘ Generate creative ideas and make fully informed decisions about the firm's global operations. ◘ Ensure team decisions are implemented throughout the firm's global operations. **STRATEGIC FOUNDATIONS: Underlying Framework of Success** Universality- global efficiencies- world-scale efficiency and minimal redundancy ** Global information systems--** intranets, the Internet, and electronic data interchange -- transcend geographic distances and cross-cultural differences to share knowledge. ** Example- 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 Equinox's V6 engine was built in China, with cooperation from engineers in Canada, China, Japan, and the U.S. Engineers in Toronto teleconferenced virtual-reality renderings of the vehicle and collaborated on styling of exteriors and component design with counterparts in Shanghai, Tokyo, and the U.S. **The Distinction Between Multidomestic and Global Industries\ ** **Two types of strategies:** ◘ **Multidomestic Industries** -- 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. ◘ **Global Industries-** competition takes place on a *regional or worldwide* basis, e.g. aerospace, automobiles, metals, computers, chemicals, industrial equipment, earth-moving machinery, and photography. **THE INTEGRATION-RESPONSIVENESS FRAMEWORK** **Integration-Responsiveness Framework-** **Balance between global integration and local responsiveness.** **Global Local** **Integration Responsiveness** **** **Integration-Responsiveness Framework -** summarizes 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 **GOALS** **◘** **Maximize worldwide value chain efficiencies** **◘** Reduce operational redundancies **◘** Minimize costly market tailoring of products/services **Typically found in *global* industries** **Examples-** **Dupont** sells essentially the same chemicals around the world. **Subaru** markets very similar cars in most of the countries where it does business. **Caterpillar** and **Komatsu** compete head-on in all major world markets. ** 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. **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. **GOALS** **◘** 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 products/services **◘** Such demand differences must be addressed through customized products/services. **Typically found in *multidomestic i*ndustries** **Examples-** ** Bloomsbury ---** British publisher**---** translates each volume of its Harry Potter series into the local language in every country where the book is sold. ** Coca-Cola** varies its local beverages to suit differing conditions abroad. ** Walmart-** adjusts its store hours, employee training, compensation, product line, and promotional tools to suit local conditions (Mexico) **PRESSURES FOR GLOBAL INTEGRATION** **Seek cost reduction through scale 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 firms 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. **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. **STRATEGIES 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. Firm 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 adaption 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 *multilocal 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]](http://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 markets. **◘** Nestlé varies taste, distribution (supermarkets, small shops, market stalls, vending machines, mobile vendors, and door-to-door), marketing and pricing depending on the country. **Spain-** Nescafé brand instant coffee has an intense, full-bodied flavor. **Northern Europe**, it is mild and aromatic. **Nigeria**- it built a network of small warehouses and ships goods via pickup trucks. **China**- created a system of simple distribution links among villages that facilitate direct delivery by local vendors, often by bicycle. **Russia**- advertising emphasizes Russian history and literature. **Africa**- hired local singers to visit villages and offer a mix of entertainment and product demonstrations. ** Brazil/China-** lower prices charged to suit lower local buying power. **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. **Disadvantages** **** Each foreign subsidiary manager tends to develop a local strategic plan, organizational culture, and business processes that may differ substantially from those of headquarters. Subsidiaries- little incentive to share knowledge and experience with other country managers → reduced economies of scale. Limited information sharing also reduces the possibility of developing a knowledge-based competitive advantage Diseconomies of scale - inefficient manufacturing, redundant operations, a proliferation of over- adapted products, and higher operating costs. **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. **Global** **Examples-** **Samsung Electronics** ([[www.samsung.com]](http://www.samsung.com)) **◘** Leading manufacturer of consumer electronics. **◘** Once a manufacturer of home appliances in South Korea, the firm now manages a wide collection of global activities from company headquarters. **◘** Its integrated value chains mean Samsung's most advanced expertise in consumer electronics, technology, production, and distribution are continuously shared among the firm's business units worldwide. **◘** Its engineers continuously seek the most cost-effective ways to produce leading-edge products based on common parts and components. **◘** Samsung R&D personnel from Asia, Europe, and the Americas work in global teams to develop semiconductors, flat-screen TVs, smartphones, and other electronics based on standardized platforms, with little cross-national variation. **◘** In a typical Samsung smartphone, the internal electronics are identical wherever the product is sold; internal software is varied to suit differing national preferences. **◘** The company intranet allows R&D teams to access ideas and specifications on how to create inputs that can be integrated into Samsung products, wherever they are made. **◘** Parts and components are sourced from a limited number of top worldwide suppliers. **◘** Samsung does much of its manufacturing in China, Brazil, and other emerging markets to keep costs low. **◘** In total, Samsung sells its smartphones in more than 120 countries. **◘** Marketing activities are standardized and focus on making Samsung a globally recognized brand. **◘** With a global strategy, Samsung optimizes its value chains and enjoys superior performance around the world. **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 easier due 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 firm strives to be both- more responsive to local needs while retaining sufficient central control of operations to ensure efficiency and learning. **Maximizes the major advantages of multidomestic\ and global strategies while minimizing their disadvantages.** ** Flexible approach: Standardize where feasible; Adapt where appropriate.** **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** --- that is, rather than following a country-by-country approach, deal with competitors on a global, integrated basis. **Transnational** **Example-** **◘** **Lenovo** ([[www.lenovo.com]](http://www.lenovo.com)) Chinese producer of personal computers and laptops **◘** Emerged on the global scene when it bought the PC arm of IBM, gaining a global sales force and strong global brands, such as the ThinkPad line. **◘** The firm rotates its headquarters between China and the U.S.; its official language is English. **◘** Planning and design are done in the U.S., while manufacturing is done in China (for Asian markets), Mexico (for the Americas) and Poland (for Europe). **◘** Production is focused in low-cost countries to generate the greatest cost efficiencies and economies of scale. **◘** The basic computers are the same, but the keyboards and internal software are adapted for each market to accommodate language differences. **◘** The retailing websites look identical worldwide, but are adapted for language. **◘** Marketing operations are centralized to Bangalore, India, and include global campaigns designed to sell computers in over 60 countries with ads that can air in multiple regions. **◘** Lenovo strikes a balance between pursuing global strategy and adapting its offerings/approaches, as needed, to suit individual markets. **Challenges** Given the difficulty of balancing central control and local responsiveness, most MNEs find it difficult to implement a transnational strategy. In the long run, almost all need to include some elements of localized decision making, because each country has unique characteristics. **ORGANIZATIONAL STRUCTURE IN INTERNATIONAL BUSINESS** **(Strategy Implementation through Structure)** While a 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? **Centralized or Decentralized Structure?** **\ ** **Global integration -** A ***centralized** **approach*** gives headquarters considerable authority and control over the firm's activities worldwide. **Local responsiveness -** A ***decentralized** **approach*** means substantial autonomy and decision-making authority 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. **◘ Example**- decisions about developing new products or building factories abroad tend to be centralized to headquarters. **Centralized-Decentralized**- 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: **THINK GLOBALLY AND LOCALLY AND ACT APPROPRIATELY** **Example- Coca-Cola** **◘ Centralized-** While Coca-Cola headquarters provide global brand support and broad marketing guidance to its bottlers in individual countries **◘ Decentralized-** the local bottler assumes responsibility for such activities as local customer research, local sales promotion, retailer support, and meeting local government requirements. **Myopia-** Highly centralized, top-down decision making ignores subsidiary managers' intimate knowledge of host countries. Highly decentralized, bottom-up decision making by autonomous subsidiary managers ignores the big-picture knowledge of headquarters managers and fails to integrate strategies across countries and regions. Shared decision making necessitates negotiations between headquarters and subsidiary managers, with give-and-take on both sides. Ultimately, however, all decisions are subject to headquarters approval. **HEADQUARTERS MANAGEMENT SHOULD:** **◘** Encourage local managers to identify with broad, corporate objectives.\ **◘** 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/penalties to promote compliance with headquarters' goals. **Organizational Structures for International Operations** Generally, "**structure follows strategy**." Structure as a ***tool*** that facilitates the implementation of strategy Organizational structures tend to evolve over time --- as the firm's involvement in international business increases, it adopts increasingly complex organizational structures. Organizational structure is a function of the **centralization/decentralization** decision. **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**. This approach is most closely associated with **home replication strategy**. **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. **MORE ADVANCED ORGANIZATIONAL STRUCTURES:** Decentralized structure, typically organized around geographic areas, or a centralized structure organized around product or functional lines. **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, cosmetics, and beverage industries. **Example- Nestlé** **◘** Organizes itself into a South America division, a North America division, an Asia division, etc. **◘** Nestlé treats all geographic locations, including the domestic market, as equals. **◘** Assets, including capital, are distributed to ensure optimal return on corporate goals --- not area goals. **◘** Geographic area units usually manufacture and market locally appropriate goods within their own areas. **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. **(GEOGRAPHIC) PRODUCT STRUCTURE \[Centralized Structure\]** **Global Strategy** The firm organizes its international operations by major product line. 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. **Examples-** **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** **\[Centralized Structure\]** The firm's international operations is 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. **Example-** **Cruise ship lines** **◘** Engage in both shipbuilding and cruise marketing --- two distinctive functions that require separate departments. **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. **Structural** **Provenance:** **◘** The experience of MNEs in the 1970s and 1980s highlighted the strengths and weaknesses of the organizational structures described above. **◘** The geographic area structure proved effective for responding to local needs but did little to enhance worldwide economies of scale and knowledge sharing among far-flung geographic units. **◘** The product structure overcame these shortcomings but was weak in responding to local needs. **◘** **1980s-** conditions began to evolve quickly towards a more globally-oriented world economy. **◘** At the same time, in some markets, customers showed a renewed preference for local brands. Gradually, MNE managers realized that such trends\ increasingly required them to address global and local needs *simultaneously*. 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. Managerial responsibility for each product is shared by each product unit and the particular geographic areas of the firm. 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. Flexible and responsive country-level operations are recognized as critical and firms link operations to optimize operational efficiency and competitive effectiveness. Best practices for the firm's worldwide operations is achieved via information/decision-making sharing **Example-** **Unilever** ([[www.unilever.com]](http://www.unilever.com)) **◘** The \$55 billion European producer of food, beverage, household, and personal care products- owns global brands such as Lipton tea, Hellman's spreads, Slimfast, and Dove products, with a need to balance global integration with local adaptation. **◘** Local adaptation is necessary for such marketing issues as retail distribution strategy, labeling requirements, and consumer incentives. **◘ Multidomestic Structure Initially, Global Matrix Later** **◘** Unilever- originally a merger between British and Dutch firms **◘** Despite a sales volume similar to P&G's, Unilever had twice as many employees. **◘** Competitors with more centralized operations were able to respond faster to changing consumer tastes. They were better at coordinating their international units and had captured efficiencies by striking supplier contracts for many countries simultaneously. **◘** Unilever's decentralized structure resulted in needless duplication and countless obstacles to a more efficient global approach. **◘** Massive reorganization plan to centralize authority, reduce the autonomy of local subsidiaries, and create a global employee culture. **◘** Unilever divested hundreds of businesses, cut 55,000 jobs, closed 145 factories, and discontinued 1,200 brands (retaining about 400). **◘**The firm develops new products using global teams that emphasize the *commonalities* among major-country markets, and local managers are not allowed to tinker with packaging, formulation, or advertising of global brands **◘** Unilever is well on the road to implementing a more balanced matrix approach to its global operations. **Example-** **Philips** **◘** Dutch producer of electronics products and operates in over 100 countries worldwide **◘** Management has structured the firm so that its product groups are integrated across all its major country markets, and, in turn, its organizational functions are integrated and coordinated across all areas and product groups. **◘** To streamline its matrix organization, Philips reorganized itself around three product core units: consumer electronics, healthcare, and lighting products. **◘**The matrix structure assigns various roles to regional executives -- they hold responsibility for their respective regions, for the firm's core product units, and for the functions associated with the product units. **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. Many firms that experimented with the global matrix structure eventually returned to simpler organizational arrangements **\ ** **FOREIGN MARKET ENTRY STRATEGIES** **An overview of foreign market entry strategies** **** Entry strategy selection is one of the key decisions in international business. **** A foreign market entry strategy refers to the manner in which the focal firm internationalizes, whether through exporting, importing, licensing, or FDI. The type of entry mode depends on the nature of the business as well as the nature of the focal firm. **There are three basic categories of internationalization strategies:** **\[1\]** **Trade of products and services-** Generally home-based international exchange activities, such as **global sourcing (importing), exporting, and countertrade**. In both global sourcing and exporting, the firm manages its international operations largely from the home country. **\[2\]** **Equity or ownership-based international business** **activities** **\[3\]** **Contractual relationships** **** **Each strategy has advantages and disadvantages, and each requires specific managerial and financial resources.** ** Broadly speaking, exporting, licensing, and franchising require a lower level of managerial commitment** and dedicated resources **than do FDI and** equity-based collaborative ventures. **Managers must consider the following variables when selecting an ENTRY STRATEGY:** ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Goals and objectives-** profitability, market share, or competitive positioning **Degree of control**- over the decisions, operations, and strategic assets involved in the venture. **Resources/capabilities available-** financial, organizational, and technological resources and capabilities available to the firm, e.g. capital, managers, technology) **Risk tolerance** - The degree of *risk* that management can tolerate in each proposed foreign venture, relative to the firm's goals **Product/service characteristics** **Legal, cultural, and economic conditions***-* e.g. infrastructure such as distribution and transportation systems **Competition** from existing and potential rivals **Partners**- availability and capabilities **Insourcing vs. outsourcing value-adding activities** **Market: Long-term strategic importance** ** Control** is the ability to influence the decisions, operations, and strategic resources involved in the foreign venture. Without control, the focal firm will have difficulties in implementing strategies, coordinating actions and resolving disputes. ** Exporting-** little or no control ** FDI-** wholly owned subsidiary represents maximum control ◘ **Low-control strategies**- exporting, countertrade, and global sourcing- least control over foreign operations, since the focal firm delegates considerable responsibility to foreign partners, such as distributors or suppliers ◘ **Moderate-control** **strategies-** contractual relationships such as licensing, franchising and project-based collaborative ventures ◘ **High-control strategies**- equity joint ventures and FDI- the focal firm attains maximum control by establishing a physical presence and ownership of key assets in the foreign market. ** Trade-offs: COST/FLEXIBILITY/RISK** ◘ **Costly-** High-control strategies require substantial **resource commitments** by the focal firm; FDI is costly. ◘ Establishment of a permanent base limits **flexibility** in terms of operational reconfiguration, given evolving market and company conditions. ◘ Longer-term involvement translates to considerable **risk** due to uncertainty in the political and customer environments- political, cultural and currency risks. ** Additional variables:** ◘ Fragility ◘ Perishability ◘ Ratio of its value to its weight ◘ **Examples-** **The Nature of Internationalization** **With internationalization,** managers must: Patterns and characteristics associated with international expansion: **1. Risk and return must be balanced.** ◘ **Return-** Managers weigh the potential profits, revenues, and goal achievement of internationalization against the investment of money, time, and other company resources. Because of higher costs and greater complexity, international ventures often take much time to become profitable. ◘ **Risk-** Risk-taking preferences determine the firm's initial investments and its tolerance for delayed returns. Risk-averse managers prefer safe markets, conservative entry strategies, culture and language similar to the home country. **2. Initial international expansion may be gradual, incremental, or emergent.** **(Unplanned)** ◘ DLP, Inc., a manufacturer of medical devices for open-heart surgery, made its first major sale to foreign customers that its mangers met at a trade fair. Without any deliberate plans, DLP emerged onto the international business arena from its founding. **3. Push and pull factors serve as initial triggers.** ◘ **Push** factors include unfavorable trends in the domestic market that compel firms to explore opportunities beyond national borders, such as: Declining demand Growing domestic competition Maturity phase in a product's life cycle ◘ **Pull** factors are favorable conditions in foreign markets that make international expansion attractive, such as: Potential for faster growth and higher profits Foreign government incentives Increased opportunities to learn from competitors **4. Internationalization is an ongoing learning experience.** ◘ Internationalization exposes managers to new ideas and valuable lessons that they can leverage to the home and other foreign markets. ◘ **Example-** GM leveraged ideas it had acquired in Europe to develop fuel-saving cars for the U.S. market.