Global Policy and Strategy

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Global Policy and Strategy

• Week 7 Organising for International Business

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Learning Objectives

• To understand how a firms organisation changes
  as it becomes more international
• To recognise the main forms of organisational
  structures used in international business and to
  understand their relative advantages and
  disadvantages
• To be able to explain the relationship between
  strategy and structure in international business

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Firms that Compete in Global Marketplace

• Face two pressures
• Cost Reductions
• Minimise unit costs
• Local Responsiveness
• Differentiate product offering from country to
  country

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Pressures for Cost Reduction

• Lower costs of value creation by mass producing a
  standardised product optimal location to
  achieve location and experience curve economies
• Usually suited to commodity type products
  people from country to country have universal
  needs tastes and preferences the same
• (Chemicals, sugar, personal computers, LCD
  screens etc)

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Pressures for Local Responsiveness

• Differences in consumer tastes
• Product and/or marketing messages have to be
  customised to appeal to the tastes and
  preferences of local consumersMTV
• Differences in infrastructure and traditional
  practices
• Product may need to be customised to the
  distinctive infrastructure and practices of
  different nationsCars UK Europe

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Pressures for Local Responsiveness

• Differences in distribution channels
• Delegate marketing functions to national
  subsidiariesLarge retailers dominate market in
  Germany, however in Italy the market is very
  fragmented
• Host Government Demands
• May require a degree of local responsiveness.
  Pharmaceutical firms subject to local regulations
  re testing, registrations, pricing.

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Implications

• May not be possible for firms to realise the full
  benefits of experience curve and location
  economies.
• Pressures for local responsiveness imply that it
  may not be possible to leverage the skills and
  products associated with a firms core
  competencies wholesale from one nation to
  another. Concessions often have to be made to
  local conditions

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Strategic Choices

• International Strategy
• Firm has valuable core competencies that
  indigenous competitors in foreign markets lack
  and if the firm faces relatively weak pressures
  for local responsiveness and cost reductions
• Multidomestic Strategy
• High pressures for local responsiveness and low
  pressures for cost reductions.

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Strategic Choices

• Global Strategy
• Strong pressures for cost reductions and where
  demands for local responsiveness are minimal.
• Transnational Strategy
• Firm faces high pressures for cost reductions,
  high pressures for local responsiveness and where
  there are significant opportunities for
  leveraging valuable skills within a mutinationals
  global network of operations

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Global Strategy

• Advantages
• Exploit experience curve effects
• Exploit location economies

• Lack of local responsiveness

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International Strategy

• Advantages
• Transfer core competencies to foreign markets

• Disadvantages
• Lack of local responsiveness
• Inability to realise location economies
• Failure to exploit experience curve effects

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Multidomestic Strategy

• Advantages
• Customise product offerings and marketing in
  accordance with local responsiveness

• Disadvantages
• Inability to realise location economies
• Failure to exploit experience curve effects
• Failure to transfer core competencies to foreign
  markets

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Transnational Strategy

• Advantages
• Exploit experience curve effects
• Exploit location economies
• Customise product offerings and marketing in
  accordance with local responsiveness
• Reap benefits of global learning

• Disadvantages
• Difficult to implement due to organisational
  problems

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Organisation Architecture
Structure
People
Controls and Incentives
Processes
Culture
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To achieve Profitability

• Different element of a firms organisational
  architecture must be internally consistent e.g.
  the control and incentive system must be
  consistent with the structure of the enterprise
• The organisational architecture must be
  consistent pursuing a global strategy with wrong
  architecture inefficient
• Strategy and architecture of the firm must also
  be consistent with the competitive conditions
  prevailing in the firms markets.

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Arguments for Centralisation

• Centralisation can facilitate co-ordination
• Ensure that decisions are consistent with
  organisational objectives
• Centralisation can give top-level managers the
  means to bring about major organisational change
• Centralisation can avoid duplication of activities

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Arguments for De- centralisation

• Top management can become overburdened when
  decision making authority is centralised and this
  can result in poor decisions
• Motivational research favours decentralisation
• Permits greater flexibility and more rapid
  response to environmental changes
• Can result in better decisions
• Can increase control

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The dimensions of structure
Domestic structure
International structure
P
P
F
G
F
Key P Product line structure F
Functions (production, marketing, finance etc.)
G Geographical areas
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Domestic structure
Sales Branches
Manufacturing units
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Main types of structure

• Pre-International Division phase
• International Division Structure
• Global Product Division
• Global Area Division
• Global Functional Division
• Global Matrix Structure

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Factors affecting choice of structure

• Degree of multidomestic, global and transnational
  policies employed
• Location and type of foreign facilities
• Impact of international operations on total
  corporate performance

Daniels and Radebaugh 1998
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Pre-International Division phase
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International Division Structure
Corporate Staff
Line Management
Domestic Division 1
Domestic Division 2
Domestic Division 3
Domestic Division 1
International Division
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International Division Structure

• Firms group all their international activities
  into international division
• Can result in lack of co-ordination between
  domestic operations and foreign operations.

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International Division Structure

• Advantages
• Reduces CEOs direct management task
• Raises status of overseas operations
• Concentrates international expertise
• Co-ordinates decisions affecting functional areas

• Disadvantages
• Divides managers into domestic and international
• Can create rivalries
• Difficult to move from domestic to international
  focus
• R D tends to retain domestic focus

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International Division Structure - Evaluation

• Initially adopted by 60 of all firms who have
  expanded internationally (S.M. Davis 1992, as
  cited in Hill Chapter 13)
• More appropriate to firms at developmental
  stages, with small sales volumes and limited
  product range
• Probably best suited for companies with
  multidomestic strategies (Daniels and Radebaugh
  1998)

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Global Structures

• As revenues from international business increase
• The company adopts a global orientation
• The distinction between domestic and foreign
  disappears
• A global structure becomes necessary to cope with
  the complexity of a global strategy

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Global Product Division structure
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Global Product Division structure

• Each division is a largely autonomous entity with
  full responsibility for its own value creation
  activities
• Lack local responsiveness as product division
  managers have more control than country managers

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Global Product Division structure

• Advantages
• High degree of global integration and
  co-ordination
• Facilitates global planning and strategy for the
  product

• Disadvantages
• Duplication
• Short term focus
• Limited voice given to area or country managers
• Lack of local responsiveness
• Difficulty of motivating managers with domestic
  background

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Global Product Division structure - Evaluation

• Suits firms with diversified products
• Appropriate when there is a significant need to
  integrate production, marketing and research
  related to a product
• Most common form of organisation among MNEs,
  particularly US-based ones

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Global Area Division structure
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Global Area Division structure

• Geography is the dominant organisational
  dimension. World divided into geographic areas
  which tend to be autonomous entity with own set
  of value creation activities. Facilitates local
  responsiveness.
• The Head of an Area division has line authority
  over all affiliates in his/her area
• The domestic market is one of many but
• Encourages fragmentation of the organisation.

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Global Area Division structure

• Advantages
• Decision-making authority is pushed down to
  regional headquarters
• Facilitates co-ordination at regional level

• Disadvantages
• Duplication of product development, technical
  knowledge and functional responsibilities
• Difficult to co-ordinate R D and global product
  planning

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Global Area Division structure - Evaluation

• Second most popular form of structure
• Best suited to businesses with
• narrow product lines
• High levels of regional product differentiation
• Opportunities for large economies of scale on a
  regional basis
• A need for local responsiveness
• Examples Pharmaceuticals, food, beverages,
  cosmetics

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Global Functional Division structure
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Global Functional Division structure

• Business functions hold worldwide
  responsibilities.
• Can create tight highly centralised organisations
  however co-ordination across function can be
  difficult.

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Global Functional Division structure

• Advantages
• Emphasis on functional expertise
• Tight centralised controls
• Lean managerial staffing

• Disadvantages
• Co-ordination of production and marketing can be
  difficult, particularly where there are multiple
  product lines

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Global Functional Division structure - Evaluation

• Not commonly used, except by companies in the oil
  or metal extraction business
• Most appropriate where there are narrow,
  standardised product lines and product knowledge
  is the significant factor

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Matrix structure
U.K.
Mexico
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Matrix structure

• Responsibility for operating decisions pertaining
  to a particular product should be shared by the
  product division and the various areas of the
  firm.
• A subsidiary reports to more than one group
  (product, geographic or functional)
• Giving product divisions and geographical areas
  equal status within the organisation reinforces
  the idea of dual responsibility. Seeks to promote
  sharing of responsibility, information and
  resources

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Matrix Structure

• Advantages
• Can respond simultaneously to all environmental
  factors
• Decentralised decision-making
• Information flows facilitate planning

• Disadvantages
• Takes time, effort and commitment to make it work
• Fiendishly difficult (Drucker)

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Matrix structure - Evaluation

• Often does not work well in practice
• Can be clumsy and bureaucratic
• Slow to respond to market shifts and to innovate
• Can lead to a blame culture

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Strategy and Structure
Multidomestic strategy
Global area structure
Global Product Divisional structure
Global or international strategy
Transnational strategy
Matrix structure
Hill 2003
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References

• Daniels, John D and Radebaugh, Lee H (1998)
  International Business - Environments and
  Operations, Addison Wesley
• Hill, Charles W.L. (2003) International Business
  competing in the Global Marketplace, McGraw
  Hill
• John R et al (1997) Global Business Strategy,
  International Thomson Business Press
• Phatak, A.V (1997) International Management
  Concepts and Cases, South-Western College
  Publishing