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Title: Participation Update


1
Introduction
  • Participation Update
  • Chapter 12 The Strategy of International
    Business
  • Chapter 13 The Organization of International
    Business
  • Globalization Debate!

2
What do you have in common?
BLUE
Black Eyed Peas
Vanilla Sky
3
Participation Ranking
  • Last Week
  • 1st Jaime
  • 2nd Jade
  • 3rd Erika, Enrique, Johannes Shekinah
  • This week
  • 1st Jade Jaime
  • 2nd Johannes Enrique
  • 3rd Thais Gasper
  • 4th Michael

http//www.elko.k12.nv.us/jackpot/users/lolson/ima
ges/Students20in20Classroom20clip20art.gif
4
Chapter 12 The Strategy of International Business
  • Wendy Jeffus
  • Harvard Summer School

5
Group Projects
N.G.O. (Pakistan)
Consult. (Nigeria)
P.A.T. (Japan)
Hotel (USA)
Carbon (Brazil)
Pedometer (Germany)
eShop (Spain)
Baharat (China)
Track (Canada)
MicroFin (Botswana)
eMusic (S. Korea)
Luggage (UK)
6
N.G.O. (Pakistan)
Consult (Nigeria)
Group Projects
P.A.T. (Japan)
Hotel (USA)
Carbon (Brazil)
Pedometer (Germany)
eShop (Spain)
Baharat (China)
Track (Canada)
MicroFin (Botswana)
eMusic (S. Korea)
Luggage (UK)
  • Image sources
  • http//images.google.com

7
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.

8
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

9
Perceptions of Value
  • Which red car with 2 doors is worth more?
  • Which brown bag is worth more?

2011 Mitsubishi
2011 Ferrari
http//allworldcars.com/wordpress/wp-content/uploa
ds/2007/07/windowslivewriter2008ferrari430scuderia
-1c202008-ferrari-430-scuderia-11.jpg http//fotog
rill.com/wp-content/uploads/2008/01/2008-mitsubish
i-lancer-evolution-x-front-and-side-1600x1200.jpg
http//www.thebudgetfashionista.com/images/eluxury
lv-thumb.jpg
10
Value Creation
  • Example Cost per unit (C) 15,000 Price per
    unit (P) 20,000 Value to Customer (V) 22,000

Track (Canada)
N.G.O. (Pakistan)
  • Example Cost per unit (C) 1,500 Price per
    unit (P) 2,000 Value to Customer (V) 2,500

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.
11
Strategic Positioning Value Creation
  • 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

12
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 the online bulk music company
    position their product?
  • Where should the Spa Hotel and Arizona compete?

The Efficient Frontier shown below has a convex
shape due to diminishing returns
Hotel (USA)
eMusic (S. Korea)
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.
13
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.

14
The Value Chain
Carbon (Brazil)
Consult. (Nigeria)
P.A.T. (Japan)
15
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

16
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
  • Core competencies are the bedrock of a firms
    competitive advantage and enable them to reduce
    the costs of value creation

17
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

18
Location Economies
  • Consider the following
  • Where are the best designers?
  • Where is the low cost or skilled labor?
  • Who will develop the best marketing
  • strategy?
  • 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

Note Transportation trade complicate the
picture.
Pedometer (Germany)
19
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

Track (Canada)
Baharat (China)
Making the first track-o-mat, is much more
expensive than making the 1000th
20
Leveraging Subsidiary Skills
  • Leveraging the skills created within subsidiaries
    and applying them to other operations within the
    firms global network may create value
  • Learning how to leverage the skills of
    subsidiaries presents a challenge for managers of
    multinational organizations
  • They must have the humility to recognize that
    valuable skills leading to competencies can arise
    anywhere within the firms global network
  • They must establish an incentive system that
    encourages local employees to acquire new skills
  • They must have a process for identifying when
    valuable new skills have been created in a
    subsidiary
  • They need to act as facilitators, helping to
    transfer valuable skills within the firm

21
Example McDonalds
  • Old McDonalds
  • New McDonalds

http//images.businessweek.com/ss/06/05/mcdonalds/
image/spring-road-interior-3.jpg http//www.danloc
kton.co.uk/research/images/mcdonaldsseating.jpg
22
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

23
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

24
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

25
Where Does Your Company Fit?
P.A.T. (Japan)
eShop (Spain)
Pedometer (Germany)
Hotel (USA)
Carbon (Brazil)
MicroFin (Botswana)
N.G.O. (Pakistan)
Consult. (Nigeria)
Baharat (China)
Track (Canada)
eMusic (S. Korea)
Luggage (UK)
26
Choosing a Strategy
27
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

28
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 RD according to
    national conditions
  • Generally unable to realize value from experience
    curve effects and location economies
  • Possess high cost structure

29
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 RD 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

30
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 firms
    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

31
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

32
The Evolution of Strategy
33
Managerial Implications Global Activities
  • Benefits
  • Greater return on core competencies
  • Location economies
  • Challenges
  • Consumer tastes and preferences
  • Infrastructure and traditional practices
  • Distribution channels
  • Host government demands

34
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.html http/
/www.decide-guide.com/porters-five-forces-model.ht
ml
35
5 Forces Analysis (Porter)
  • 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?
  • Threat of substitutes
  • How easy can a product or service be substituted?
  • Can products be made cheaper ?
  • What are the switching costs?
  • Bargaining power of buyers
  • What buyer information is available?
  • What price sensitivity exists in the market?
  • Bargaining power of suppliers
  • Is there a monopoly of suppliers?
  • Is there presence of substitute inputs?
  • 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-mo
del.html
36
Chapter 13 The Organization of International
Business
  • Wendy Jeffus
  • Harvard Summer School

37
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?m8703x7, http//w
ww.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/
38
Organizational Architecture
  • Organizational architecture includes the totality
    of a firms organization, including formal
    organization structure, control systems and
    incentives, processes, organizational culture,
    and people
  • Superior enterprise profitability requires three
    conditions
  • The different elements of a firms organizational
    architecture must be internally consistent
  • The organizational architecture must fit the
    strategy of the firm
  • The strategy and architecture of the firm must
    not only be consistent with each other but they
    also must be consistent with competitive
    conditions

39
Organizational Architecture
Structure Formal division of the firm into
subunits (product divisions, national operations,
and functions) location of decision-making
responsibilities integrating mechanisms.
Processes - The manner in which decisions are
made and work is performed within the
organization
People - The strategy used to recruit,
compensate, and retain employees and the type
of people hired (i.e. their skills, values, and
orientation.)
Culture - The norms and value systems that are
shared among the employees of an organization
Incentives - The devices used to reward
appropriate managerial behavior Control systems
- The metrics used to measure the performance of
sub-units
40
Structure
  • Organizational structure can 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.
  • Centralized or Decentralized decision making
  • Horizontal differentiation the formal division
    of the organization into sub-units
  • Examples by function, product, geography, or
    type of business.
  • Establishment of integrating mechanisms
    mechanisms for coordinating sub-units

MicroFin (Botswana)
41
Vertical Differentiation
  • Centralization
  • Facilitates coordination
  • Ensure decisions consistent with organizations
    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

MicroFin (Botswana)
42
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

MicroFin (Botswana)
43
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.

44
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/
45
Problems with the International Structure
  • Potential for conflict and coordination problems
    between domestic and foreign operations
  • Heads of foreign subsidiaries are not given as
    much voice in the organization as the heads of
    domestic functions
  • The international division is presumed to be able
    to represent the interests of all countries to
    headquarters
  • Lack of coordination between domestic operations
    and foreign operations
  • To combat these problems firms choose one of the
    following structures
  • Worldwide product divisional structure which
    tends to be adopted by diversified firms that
    have domestic product division
  • Worldwide area structure which tends to be
    adopted by undiversified firms whose domestic
    structures are based on functions

46
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

47
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
48
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

49
Global Matrix Structure
http//www.unilever.com/default.asp
50
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

51
Integrating Mechanisms
  • 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

52
The Telephone GAME
53
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

Luggage (UK)
54
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

Luggage (UK)
55
Informal Integrating Mechanisms
56
Control Systems
  • Types of control systems
  • Personal controls personal contact with
    subordinates.
  • More common in small firms, but GEs Jack Welch
    also used this control system.
  • Bureaucratic controls high need for approval
    emphasis on rules and guidelines.
  • Typical for RD and other budgets
  • Output controls (i.e. profitability, growth,
    productivity, market share)
  • Cultural controls norms and values of the
    system guide behavior (i.e. Starbucks employees
    and Disney employees)

57
Incentive Systems
  • 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

58
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

59
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

Consult. (Nigeria)
eShop (Spain)
60
Culture and Performance
  • A Strong Culture
  • Not always good
  • Sometimes beneficial, sometimes not
  • Context is important
  • Adaptive cultures
  • Culture must match an organizations architecture
  • Culture does not necessarily translate across
    borders

61
Strategic Fit
62
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 managers preconceptions about the
    appropriate business model
  • Institutional constraints such as national
    regulations including local content rules
    regarding layoffs

63
Organizational Change
  • Change to match competitive and strategy
    environment
  • Hard to change
  • Existing distribution of power and influence
  • Current culture
  • Managers 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
/MPA208002/Project/reorganizatoin.jpg
64
Take a Break
  • see you in 10 min.

Get ready for the globalization debate!
Image source http//www.graduatejunction.net/imag
es/take_a_break.jpg
65
Is Globalization A Good Thing?
  • The Great Globalization Debate

http//www.youtube.com/watch?vjS7O9RhNa18
66
Debate Goals
And the winner is
  • 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
  • Creativity
  • Key Points

67
Group 9 Case Assignment
  • JCB in India
  • JCB's initial strategy was to export it's
    products, discuss the pros and cons of this
    strategy.
  • Why did JCB pursue a JV entry strategy in India?
    What were the risks of this strategy?
  • More recently JCB has invested in wholly owned
    factories. Discuss.
  • Present a 5-10min (timed) assessment of the case
    (answer case questions)
  • All group members must participate.

http//www.youtube.com/watch?vk3WhQB7Hq0Q
http//www.jcb.co.uk/
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