The Management of International Business

1
The Management of International Business

• Strategic Decisions
• Entering the Global Market
• Organizing for Success

2
The Role of Strategy

• Strategy is the actions taken at the level of the
  firm
• Strategy is
• The larger vision that guides the activities of
  managers and other employees in an organization
• The process of establishing and sustaining
  competitive advantage
• The actions managers take to attain the goals of
  the firm
• The process of identifying and taking action to
  lower the cost of value creation and/or
  differentiate the firms product through
  perceived superior design, quality, service, or
  functionality

3
Profiting from GlobalExpansion

• International firms can
• Earn a greater return from
  distinctive skills or core competencies
• Realize location efficiencies by dispersing
  operations to locations where they can be
  performed most efficiently
• Realize economies of scale
• Realize economies of scope
• Worldwide learning

4
Competitive Advantage

• What is it?
• An edge over your rivals
• Created and sustained
• Based on core competencies
• Characteristics or strengths that contribute a
  benefit to customers
• Difficult to imitate or copy
• Leverageable to a wide variety of markets or
  products
• Capability-driven strategies

5
Types of Core Competencies

• Prahalad Hamel
• Technological skills / knowledge
• Reliable process (such as product development)
• Relationship with external parties
• Alternatively (Wiersema Treacy)
• Operational excellence (business processes)
• Product leadership (best product)
• Customer intimacy

6
Firms Face Two Conflicting Pressures Overseas
Reduce costs
Respond to local needs
7
Cost Reduction

• Desire to reduce costs by
• Mass production
• Product standardization
• Optimal location production
• Hard to do with commodity-type products
• Products serving universal needs
• Substitution easy
• Also hard where competition is in low cost
  producing location
• Finally, international competition creates price
  pressures

8
Local Responsiveness

• Different consumer tastes and preferences
• MTV cricket in India
• Ben Jerrys ice cream in Japan
• Whirlpool the World Washer in India
• Different infrastructure and practice
• Left hand vs. right hand drive cars
• Cup holders

• Differences in distribution channels
• Pharmaceuticals
• Pillsbury flour in India
• Government demands
• Product standards
• Local content rules
• Level of economic development
• Bottom of the Pyramid

9
Strategic Choice

• Four basic strategies
• Home replication strategy
• Multidomestic strategy
• Global strategy
• Transnational strategy

10
Four Basic Strategies
Transnational Strategy
Global Strategy
High Cost and efficiency pressures
Low
Multi domestic Strategy
Home Replication Strategy
Low
High
Pressures for local responsiveness
11
Home Replication Strategy

• Go where locals dont have your skills
• Little adaptation. Products developed at home
  (centralization)
• Possibly a commodity item
• Manufacturing and marketing in each location
• Makes sense where low skills, competition, and
  costs exist

12-17
12
Microsoft

• Korea
• Kuwait
• Latvia
• Lebanon
• Luxembourg
• Malaysia
• Mauritius
• Morocco
• Namibia
• Netherlands
• New Zealand
• Nigeria
• Norway
• Pakistan
• Panama
• Peru
• Philippines
• Poland
• Portugal

• Russia
• Saudi Arabia
• Singapore
• Slovakia
• Slovenia
• South Africa
• Spain
• Sweden
• Switzerland
• Taiwan
• Thailand
• Tunisia
• Turkey
• Ukraine
• United Arab Emirates
• United Kingdom
• Uruguay
• Venezuela
• Vietnam

• Argentina
• Australia
• Austria
• Belgium
• Bolivia
• Brazil
• Bulgaria
• Canada
• Chile
• China
• Colombia
• Costa Rica
• Cote D'Ivoire
• Croatia
• Czech Republic
• Denmark
• Dominican Republic
• Ecuador

• Egypt
• El Salvador
• Finland
• France
• Germany
• Greece
• Guatemala
• Hong Kong
• Hungary
• India
• Indonesia
• Ireland
• Israel
• Italy
• Jamaica
• Mexico
• Japan
• Jordan
• Kenya

38.7 of 2006 revenue outside U.S
13
Not always the best strategy, though
14
Coca-Colas Global Revenues (2006)
200 countries
285

• The European Union operating segment includes the
  Companys operations in all of the current member
  states of the European Union as well as the
  European Free Trade Association countries,
  Switzerland, Israel and the Palestinian
  Territories, and Greenland.
• The North Asia, Eurasia and Middle East operating
  segment includes the Companys operations in
  China, Japan, Eurasia and Middle East (other than
  Israel and the Palestinian Territories), Russia,
  Ukraine and Belarus, and other European countries
  not included in the European Union operating
  segment.
• The East, South Asia and Pacific Rim operating
  segment includes the Companys operations in
  India, the Philippines, Southeast and West Asia,
  and South Pacific and Korea.

15
Multi-Domestic Strategy

• Maximize local responsiveness
• Customize the product and marketing strategy to
  national demands
• Extremely decentralized
• Often the strategy of choice for consumer
  products
• Good for high local responsiveness and low cost
  reduction pressures
• Nestle
• No indication of any pet food in Paraguay
• Major brand in Chile
• 6 pet food brands in U.S.

12-18
16
Global Strategy

• Best use of economies of scale and scope
• This is a low cost strategy
• Utilize product standardization to create a
  global product
• Not good where local responsiveness demand is high

17
Transnational Strategy

• Core competencies can develop in any of the
  firms worldwide operations
• Flow of skills and product offerings occurs
  throughout the firm - not only from home firm to
  foreign subsidiary (global learning)
• Makes sense where there is pressure for both cost
  reduction and local responsiveness
• But.costs involved in communication and
  coordination

More on Unilever
18
McDonalds Overseas Experience

• Detailed planning (1 2 years)
• Export of management skills
• Foreign partners (joint ventures)
• Adaptation / adopting ideas
• Kosher in Jerusalem
• Lamb-burgers in India
• The Dutch prefab arches
• Alternate locations -- Japan
• Mini-Mac -- Singapore

19
Basic Entry Decisions

• Which markets to enter?
• When to enter the markets?
• What scale of entry?

20
Which Foreign Markets

• Favorable benefit-cost-risk-trade-off
• Politically stable developed and developing
  nations.
• Free market systems
• No dramatic upsurge in inflation or
  private-sector debt.
• Unfavorable
• Politically unstable developing nations with a
  mixed or command economy or where speculative
  financial bubbles have led to excess borrowing.

21
Timing of Entry

• Advantages in early market entry
• First-mover advantage
• Build sales volume
• Move down experience curve and achieve cost
  advantage
• Create switching costs
• Disadvantages
• First mover disadvantage - pioneering costs
• Learn from others experience
• Later entrants can identify unserved or
  underserved niches
• Ability to innovate not confined by past
  successes
• Paradox Firms need to build on experience, but
  not be trapped by it

22
Scale of Entry

• Large scale entry
• Strategic commitments - a decision that has a
  long-term impact and is difficult to reverse
• May cause rivals (domestic and foreign) to
  rethink
• Logistics and supply issues may prevent
  small-scale entry
• Small scale entry
• Time to learn about market
• Reduces exposure risk

23
Entry Modes

• Exporting
• Turnkey projects
• Licensing
• Franchising
• Joint ventures
• Wholly owned subsidiaries

24
Exporting

• Advantages
• Avoids cost of establishing manufacturing
  operations
• May help achieve location economies
• Disadvantages
• May compete with low-cost location manufacturers
• Possible high transportation costs
• Tariff barriers
• Possible lack of control over marketing reps

25
Turnkey Projects

• Advantages
• Can earn a return on knowledge asset
• Less risky than conventional FDI
• Disadvantages
• No long-term interest in the foreign country
• May create a competitor
• Selling process technology may be selling
  competitive advantage as well

26
Licensing

• Advantages
• Reduces costs and risks of establishing
  enterprise
• Overcomes restrictive investment barriers
• Others can develop business applications of
  intangible property
• Disadvantages
• Lack of control
• Cross-border licensing may be difficult
• Creating a competitor

27
Franchising

• Advantages
• Reduces costs and risk of establishing enterprise
• Disadvantages
• May prohibit movement of profits from one country
  to support operations in another country
• Quality control

28
McComplex is McDonald's 45 million US
state-of-the-art food processing and distribution
center. Located in the Moscow suburb of
Solntsevo, McComplex employs more than 450
people.In addition, McComplex houses its own
Quality Assurance laboratories which ensure that
McDonald's quality requirements and standards are
met, and a distribution center. McComplex
continues to be a centralized distribution center
supplying all of McDonald's restaurants in
Russia, as well as restaurants in 17 other
countries including Belorussia, Ukraine, Moldova,
Crech Republic, Hungary, Germany, and Austria.
29
Joint Ventures

• Advantages
• Benefit from local partners knowledge
• Shared costs/risks with partner
• Reduced political risk
• Disadvantages
• Risk giving control of technology to partner
• May not realize experience curve or location
  economies
• Shared ownership can lead to conflict

30
Conflict in Joint Ventures

• Joint ventures do break up (usually in first 5 to
  6 years)
• Why?
• Differences in goals or strategies
• Cultural differences?
• But, the actual evidence that cultural
  differences lead to breakups is mixed

31
Partner Selection

• Get as much information as possible on the
  potential partner
• Collect data from informed third parties
• former partners
• investment bankers
• former employees
• Get to know the potential partner before
  committing

32
Structuring the Joint Venture to Reduce
Opportunism
Walling off critical technology
Establishing contractual safeguards
Opportunism by partner reduced by
Agreeing to swap valuable skills and technologies
Seeking credible commitments
33
Wholly Owned Subsidiary

• Advantages
• No risk of losing technical competence to a
  competitor
• Tight control of operations
• Realize learning curve and location economies
• Disadvantage
• Bear full cost and risk
• How?
• Greenfield
• Purchase

34
The Importance of Structure
Organizational Goals
Organizational Strategy
Organizational Structure
35
Organizational Architecture

• All of the firms structural elements
• Formal structure
• Differentiation (horizontal and vertical)
• Coordinating mechanisms
• Control systems and incentives
• Organizational culture
• Organizational glue
• Processes
• How decisions are made

36
Unilever

• Traditionally very decentralized, coordination
  through strong corporate culture multidomestic
  strategy
• In mid-1990s, needed to centralized to remain
  competitive move to transnational strategy
• Develop global brands
• Cost efficiencies
• The solution Regional Business Groups
• The global Ice Cream and Frozen Foods business
  is organised on the basis of the following
  organisation design principles
• Operating companies in specific countries will
  continue to interface with their local markets.
• Regional strategic business units are responsible
  for the strategic leadership of the ice cream
  category and channels in the region including
  regional brand development and innovation.

37
Unilever Organization
Unilever Bestfoods
Home Personal Care

• Africa, Middle East Turkey Home
• Diverseyever
• Home and Personal Care, Asia
• Home Personal Care, Europe
• Home Personal Care, North America
• Latin America

• Africa, Middle East Turkey Bestfoods
• Ice Cream and Frozen Foods
• Latin America Slim.fast worldwide
• Unilever Bestfoods Asia
• Unilever Bestfoods, Europe
• Unilever Bestfoods, North America

38
Vertical Differentiation / Centralization

• Concerned with where decisions are made where is
  decision making power concentrated?

• Pros
• Facilitate coordination.
• Consistency of decisions
• Easier to make changes
• Avoids duplication

• Cons
• Overburdened top management
• Employee motivation
• Lack of flexibility
• Decisions can be made closer to the information
  source

39
Strategy and Centralization

• Global strategy - centralization
• Multi-domestic firms - decentralization
• Home replication - centralize for core
  competencies (RD) and decentralize for operating
  decisions
• Transnational - use both

40
Horizontal Differentiation

• How a firm divides itself into sub-units
• Demands too great for one individual
• Firm diversifies its product offerings
• Typically
• Function
• Business area or product
• Geography

41
A Typical Functional Structure
Top Management
Purchasing
Manufacturing
Marketing
Finance
Buying units
Branch sales units
Accounting units
Plants
42
Horizontal Differentiation

• Usually firms start with an international
  division
• Leads to coordination problems, and
• Conflict between domestic and foreign operations

43
A Typical Product Division Structure
Headquarters
Division product line C
Division product line A
Division product line B
Purchasing
Manufacturing
Marketing
Finance
44
Horizontal DifferentiationWorldwide Area
Structure

• Used by firms with
• Little diversification
• Domestic structure based on function
• Fits multi-domestic strategy because of local
  responsiveness capability

45
Worldwide Area Structure
Headquarters
European area
Far East area
North American area
Middle East / Africa area
Latin American area
46
Horizontal DifferentiationWorldwide Product
Division

• Used by firms with structure based on product
  divisions
• Fits global strategy because of realization of
  experience curve and location economies

47
A Worldwide Product Division Structure
Headquarters
Worldwide product group or division A
Worldwide product group or division C
Worldwide product group or division B
48
Sara Lee Organizational Structure
49
Network Organization

• Core organization, surrounded by network of
  subcontractors
• Vertical integration, but
• Without the costs (similar to Porters related
  and supporting industries
• With additional flexibility
• Examples
• Nike
• Benetton