Chapter 12 – The Strategy of International BusinessKey Points of the chapterStrategy – is the actions managers take to attain the goals of the business (usually tomaximize value for the shareholders/stakeholders).Value Chain – The operations of the firm compose the value chain which are the seriesof value creating activities that occur to create value. These actions include sales,production, IT, accounting etc. These activities are divided into support and primaryactivities.Primary Activities – Design, creation and delivery of the product. They are:1. R&D2. Production3. Marketing4. SalesSupport Activities – Inputs that allow the primary activities to occur1. Information Systems2. Logistics3. Human ResourcesGlobal Expansion Practices1. Expand the market for your domestic products by selling internationally (Export)• Requires a company to tap into their core competencies2. Move production to the most efficient countries to realize location economies• Some countries have a comparative advantage of production• Transportation costs and trade barriers must not be an issue• Location Economies is the value created by finding the most competitiveplace to produce product, therefore adding valuei. Competitive can mean cheapest or best• Creates a global value web as opposed to a value chain3. Serve expanded markets from a single location, while recovering experienceeffects• Experience curve: Systematic reductions in production costs that occurover the life of a producti. A products production costs decline each time the cumulativeoutput doubles• Learning Effects – Costs savings through learning by doing• Economies of Scale – Reduce costs by creating a large volume of product,the larger your market, the more opportunity for this you receive.
4. Learn from foreign operations to increase your value• Mature multinationals who already have operations in foreign markets canlearn from their operations in order to create value for those specificcustomers.Pressures for Cost ReductionManagers can be forced to create value by reducing costs. This can be done through:• Mass-produce a standard product• Outsource certain functions• Tends to occur in highly commoditized products (Chemicals, sugar, gas, steel)Pressures for local ResponsivenessArise because of:• Difference in consumer tastes and preferences• Infrastructure• Accepted Business practices• Distribution channels - May require a change in marketing strategy• Host government demandsInternational Expansion StrategiesGlobal Expansion StrategyFocus• Reaping cost reduction benefits through:• Economies of Scale• Learning effects• Locations economies• Low Cost on a Global ScaleMethod• R&D, Production and Marketing activities are concentrated in a few favorablelocations• Try not to customize their products/marketing strategy• Use aggressive pricingWhen to use it• Strong pressures for cost reductions• Minimal demand for localization
Localization StrategyFocus• Increase profitability by customizing goods to match tastes and preferences ininternational marketsMethod• Increase the value of the product in the local market• Duplication of functions• Smaller production runs• Still need to be as efficient as possibleWhen to use it• When cost pressures are not high• When local tastes differ dramatically• When you have fewer competitorsTransnational StrategyFocus• Multidirectional transfer of core competencies and skills• Leveraging subsidy skills• Try to achieve low costs through location economies, economies of scale andlearning effects while differentiating their products for the local market.• Very difficult to accomplishMethod• Redesign products to use the same components and produce them in one location• Use assembly plants in key markets to assemble the more market specific finalproductWhen to use it• When customization and cost reduction pressures are high• When managers have to balance the divergent pressures
International StrategyFocus• Taking products from your local country and without much customization, sellingthem in other markets.Method• Centralize product development functions• Tend to establish manufacturing and marketing functions in each major country orgeographic region in which they do business.• Increases costs but there are no cost pressures so that isn’t an issue• May decide to do some minor customization of the marketing strategyWhen to use it• Low cost pressures• Low need for local responsiveness• Selling products that serve universal needs• Do not have many competitorsChapter QuestionsQ2: What are the risks that Wal-Mart Faces when entering other retail markets?How can the risks be mitigated?Economic Risks/ExposureLikelihood that economic mismanagement will cause drastic changes in a country’sbusiness environment that hurt the profit and other goals of a particular businessenterprise.• Increase in inflation can hurt profits• Recession• Loss of confidence in the market and loansLegal RisksIf Wal-Mart decides to enter a market where the legal system fails to provide adequatesafeguards in the case of contract violations or to protect property rights they are openingthemselves up to legal risks.• Could affect the ability to participate in long term contracts and joint venturesCross Cultural LiteracyRisk: As experienced in this case, Wal-Mart suffered from cross cultural illiteracy, wherethey were ill informed about the practices of another culture which caused them to makebad decisions.
Mitigation Strategy: Wal-Mart needs an adaptation strategy, which allows them tonegotiate properly for the market, know the appropriate pay systems, set up the rightorganization, etc. They can do this by hiring local citizens, or a consultant.Transaction ExposureRisk: Extent to which foreign exchange values affect the income from individualtransactions.Translation ExposureRisk: Impact of currency exchange rates on the reported financial statements.Mitigation Strategy: Lead strategy where you collect the foreign receivables early. Lagstrategy, involves delaying payables if the currency is expected to appreciate.Political RisksDepending on where Wal-Mart is choosing to expand to, political forces that could causea drastic change in the country’s business environment could adversely affect the profitand other goals of a business enterprise.• Strikes• Demonstrations• Terrorism• Violent Conflict• Enactment of unfavorable business lawsCT 5 – Reread the management focus on the evolution of strategy at Procter andGamble, then answer these questions:a) What strategy was P&G pursuing when it first entered foreign markets inthe period up until the early 1990s?b) Why do you think this strategy became less viable in 1990s.In the pre-1990’s era P&G found their international expansion through the use of alocalization strategy. They did develop many of their products in Cincinnati, but theyrelied on their semi-autonomous subsidiaries to manufacture, market and customize manyof their products for the local markets their served.This model started to show signs of strain when many of the trade barriers thatexisted, specifically between European countries were lifted. This created an increase incompetition, and for P&G exposed their now unnecessary duplication of assets andprocesses. Also the creation of the “big box” retailers (such as Wal-Mart and Tesco)were causing the competitive factors driven by purchasing power to put pressures onlowering P&G’s prices even further.Due to the increase in competition and the changing market conditions P&Gclosed some of their local plants and asked their subsidiaries to exploit as mucheconomies of scale as possible in their production lines. They also asked their localcenters to create and use global brands whenever possible to try and reduce marketing
costs. While these cost savings were effective, they were still not enough and P&G thenreorganized the company to be a pure Transnational Strategy, with more controloccurring in the regional centers than ever before and using as little local responsivenessas possible to reach their customers so they could compete on price as much as possible.The benefits of the transnational strategy include:• Cost reduction• Reducing duplication of assets• Creating global brands• Manufacturing in places that have a comparative advantage in the production ofthat product• Increase market share by beating your competitors pricesRisks• Very difficult to implement & manage• Organizational Structures have to be very complex and it can lead too Performance ambiguityo Confusion over corporate goalso Culture issues• High coordination needs that are both formal and informalChapter 13 – The Organization of International BusinessKey Points of the ChapterOrganizational Architecture: the totality of a firm’s organization, organizational cultureand people. These three areas must be addressed for a company to be successful in theglobal market place. The architecture must match the strategy of the firm.Organizational structure: Formal division of the organization, the location of thedecision making (centralize vs. decentralized) and the establishment of intergratingmechanisms to coordinate the activities of subunits.Control Systems are metrics used to measure the performance of subunits and makejudgments about how well managers are running those subunits.Incentives are the divides used to reward appropriate managerial behavior. Incentrivesare very closely tied to performance metrics.Processes are the manner in which decisions are made and work is performed within theorganization.
Organizational Culture refers to the norms and values systems that the employees of anorganization share. Organizations are societies of individuals who come together toperform collective tasks.Organizational Structure1) Vertical Differentiation – location of decision makinga) Centralized – When the decisions are made by upper managementPros:• Can facilitate coordination• Ensure decisions are consistent with organizational objectives• Give top level manager the means to bring about changes (authority)• Avoid duplication of activitiesb) Decentralized – Local managers make the decisions• Top management can become overburdened when decision making authority iscentralized, which can result in poor decisions.• Motivational research favors decentralization, people are more likely to givemore to their jobs when they have a greater degree of individual freedom andcontrol over their work.• More rapid responsePeopleCultureProcessesIncentives&controlsStructure
• Can result in better decisions because the people with the best information arethe ones making the decisions.• Can increase control, making the management more autonomous and thereforeaccountable.Frequently it makes sense to centralize some decisions and to decentralize others,depending on the type of decisions and the firm’s strategy.2) Horizontal Differentiation – formal organization structureDecision is made on functions, type of business or geographical area.• International Division – When a single division runs all the internationalactivities. Facilitates the international strategy.• Worldwide area structure – World is divided into geographic areas, each divisionhas its own value creation activities. Facilitates local responsiveness. Difficult totransfer core competencies.• Worldwide product divisional structure - Each division has its own value creationactivities organized around the products they produce. Headquarters retainresponsibility for the overall strategic development and financial control. Givesopportunities to consolidate the value chain creation of different subunits. Canrequire a lack of local responsiveness.• Global Matrix Structure – Tries to solve the issue Bartlett and Ghoshal haveargued where a company needs to be price competitive and locally responsive bycreating a matrix where decisions are made by both product and regionalmanagers. It is very difficult to pull off a global matrix structure as it createsconflict for the employees having two bosses with two different goals. In light ofthese problems many firms that pursue a transnational strategy have tried to buildflexible matrix structures based on enterprisewide management knowledgenetworks and a shared dual culture.3) Integrating Mechanism – mechanisms for coordinating subunits• The need for integrating mechanisms changes with the strategy, the company isusing:Lowest – Localization strategyHighest – Global and Transnational• Very important in firms trying to transfer core competencies between units• Very important in firms trying to recover economies of scale and learningexperience with a web like value “chain”QuestionsCT2 - Discuss the statement “An understanding of the causes and consequences ofperformance ambiguity is central to issue of organizational design in multinationalfirms.”
Performance Ambiguity exists when the causes of a subunit’s poor performanceare not clear. This is not uncommon when a subunit’s performance is partly dependenton the performance of other subunits; when there is high interdependence betweendifferent subunits.In firms not pursuing a localization strategy, certain degrees of performanceambiguity are going to exist. In an international strategy, integration is required tofacilitate the transfer of core competencies and skills. The success of a foreign operationis partly dependent on the quality of the competencies transferred from the home country,therefore these firms must design an organizational strategy with enough integratingmechanisms to achieve this.In firms pursuing a global standardization strategy they need to recover locationand experience curve economies, making many of the firms processes interdependent.This will require even greater controls and integrating mechanisms and make thedecisions more complex and the decision tradeoffs more substantial (i.e. save money onthis product or spend money to make it easy to sell the product).Firms with the highest level of performance ambiguity are transnational firms.The multidirectional transfer of competencies requires significant interdependence andlots of join decision making, making the performance ambiguity very high. This meansthe control costs are going to be highest in transnational firms and that many of the costsrecovered by the transnational strategy are lost to creating the expensive control systemsthat must exist to facilitate the strategy. Another byproduct of this strategy is that globaland transnational firms need to do more than use only output controls of objectiveperformance metrics such as profits, productivity and market share in order to controltheir subsidiaries. These firms must look into cultural controls, encouraging managers towant to assume he norms and value systems and use those values to solve problemsbetween the interdependent units and avoid finger pointing based on the output results.CT5 – If a firm is changing its strategy from an international to a transnationalstrategy what are the most important challenges it is likely to face in implementingthis change? How can the firm overcome these challenges?While becoming a multinational firm does not require a strategy change, in orderto compete in the global economy and be the best at what you do, organizational changemay become a requirement. First the company must decide their strategy and then theymust develop an appropriate organizational structure to complement those goals.A transnational strategy focuses on the simultaneous attainment of location andexperience curve economies, local responsiveness and global learning. This firm maywant to look into a matrix structure where managers from regional and product areascome together to make decisions that will benefit both points of view. They need toimplement control systems that will allow them to work with their globally dispersedvalue chain and to transfer core competencies and therefore will likely be more culturallydriven then output driven. Decisions should be made at both a centralized anddecentralized level depending on what the company needs to transfer between units andwhat specifically about the product needs to be locally responsive (e.g.branding/marketing). There needs to be a mix of informal and formal integratingmechanisms which can be found in the decision matrix and via informal networking tools
(e.g. Twitter). Finally there needs to be strong culture cultivation to keep all the units onthe same page which can be accomplished by a strong leadership with good vision and awillingness to participate in the dissemination of that vision.According to the text the three basic principals for performing organizational changeinclude:1) Unfreeze the corporation through shock therapy• Incremental changes are not necessarily enough• People can easily reject or avoid incremental change• In this case the announcement of a dramatically different structuralorganization to facilitate the new goals• Senior managers must lead the way in the changes and the unfreezingprocess2) Move the org to a new state through proactive change in the architecture• Reassigning the responsibilities in the new organization• Changing the control systems to be less output based and moreculturally based• Letting people go who are unwilling to change• The changes must be done quickly• Involving the employees from the beginning will get their buy in andwill makes the changes better received.3) Refreeze the org in its new state• This step can take longer• It requires culture establishment while the old one is dismantled• Re-socialization of employee behaviors• Hiring policies must change• Control systems must be tested and be consistent with the new culture andignore the old one• The upper management must be diligent and not allow the old pressure tocreep upChapter 14 – Entry Strategy and Strategic AlliancesKey Chapter PointsTwo Major Ideas:1) The decision of which foreign markets to enter, when to enter them and on whatscale2) The choice of entry modeWhich Market (Recap of chapter 2)• The attractiveness of a country as a potential market depends on balancing thebenefits, costs and risks associated with doing business in that country
• Long Run economic benefits of a function of size of the market, presentwealth, likelihood of future wealth• Future economic growth, which is a function of a free market system and thecountry’s capacity for wealth.• Riskier in politically and economically unstable countries• What kind of value the firm can create for consumers in that marketTiming of EntryEarly entry – when a firm enters a foreign market before others doFirst movers advantage• Pre-empt rivals• Gain market share• Establish a strong brand• Creating switching costs to tie your buyers to you• Set the price so you can cut prices when competitors arriveFirst movers disadvantage• Pioneering costs, from the foreign business system being so different that timeand expense must be sacrificed to learn the ropes• Business failure if the firm makes mistakes based on bad knowledge• Promotion of a new product or ideaLate Entry – When a firm enters a foreign market after other firms do• Can watch what your competitors do, and learn from their mistakes• Can ride the coattails of their marketing and promotion• Don’t need to educate your customersScale of entry• Large scaleo Requires significant resource commitment which can lead to strategycommitments, where you can’t get out of the deal without sufferingsignificant consequenceso It does create a presence and instills belief that you are committed to yourproduct and customers• Small Scaleo Allows a firm to learn the market without exposing the firm to riskso Way to gather informationo Lack of commitment may make it harder to attract customersEntry ModesExportingAdvantages
• Avoids substantial costs of establish manufacturing operations in another country• May help the firm achieve experience curve, location economies and economiesof scaleDisadvantages• It may be cheaper to produce abroad• High transportation costs on shipping could make it uneconomical to export• Tariff barriers may prohibit your exporting, making it uneconomical, and thethreat of tariff barriers can make it risky• Delegates of the company that perform the sales, marketing, service may work forother competitors and therefore will not have your best interests in mindTurnkey Projects – The contractor agrees to handle every detail of the project for aforeign clients, including the training of operational personnel. At the end the client ishanded the “key” to a fully functional plant. Typically in complex production businesses.Advantages• The know how is a valuable asset and you can earn returns on that knowledge• Useful when FDI is limited• Can be less risky than traditional FDIDisadvantages• No long term interest in that country• May create a competitor out of the creator of your factory• Could be selling your comparative advantageLicensing – The licensor grants the rights to intangible property to another entity for aspecified period, and in return, he licensor receives a royalty fee from the licensee.Advantages• Licensee puts up most of the capital• Good for firms lacking capital• Prohibited from direct investment in a foreign marketDisadvantages (3 serious ones)• Does not give tight control over manufacturing, marketing, strategy, etc. that sirequired for realizing the experience curve and location economies.• Limits a firms ability to share wealth amongst various divisions, and thereforelimits a coordinated international strategy• Giving away your comparative advantageFranchising - a specialized form of licensing in which the franchiser sells the IP, butalso the franchisee needs to follow those specific rules the franchisor sets out.Advantages• Firm is relieved of many of the costs and risks• Good for firms lacking capital
• Good when you are prohibited from FDI in that country• Allows you to build a global presence quicklyDisadvantage• Great for services, but perhaps not manufacturing• Limits a firms ability to share wealth amongst various divisions, and thereforelimits a coordinated international strategy• There are different definitions of quality, safety, etc. in different places making itdifficult to maintain your image across other countriesJoint Ventures – Establishing a firm that is jointly owned by two or more otherwiseindependent firms, it’s popular mode of entry into foreign markets.Advantages• Get to benefit from the local firm’s knowledge of the host country culture, norms,language, political situation, etc.• Provide the local knowhow to a new country• Share the risks with another company• Sometime political factors make it impossible not to partner with a local firmDisadvantages• Risking giving away your comparative advantage to a potential competitor• The firm doesn’t have tight control over local operations, making it difficult forcompanies needing to transfer a culture• Shared ownership can lead to conflicts between the two corporations, which canbe exacerbated by the fact that the two firms are from different nations.Wholly Owned Subsidiary – The firm owns 100% of the stock in the project. Can bedone through a Greenfield venture, where you build a factory from scratch or viaacquisition of an existing enterprise.Advantages• Protect your knowledge• Tight control• Required to gain experience and locations economies• Can engage in global strategic behaviorsDisadvantages• High costs and risks• Culture transfer can be difficult, especially in terms of an acquisitionChapter QuestionsTesco Q2 – How does Tesco create value in its international operations?Tesco creates value by offering something that the market is lacking: a well runcompetitive grocery store. They enter emerging markets with growth potential and few
competitors. They then acquire or partner with current enterprises in that country inorder to ensure that the value they are creating will work for that particular consumer.Tesco researches their potential partners carefully, and they pick a solid chain with somestores and they build off of that known base. They bring to the table their corecompetencies, but they don’t remove the local managers who have the knowledge of thecustomer. Finally they have the capital and the retailing know-how to bring theirmoderately successful firms into a globally back force. This value is created out ofsuccessfully leveraging the joint venture strategy, where both firms bring somethinguseful to the table and both are given the opportunity to be successful with theirknowledge.Grocery stores are part service and part goods firms. Tesco’s strengths exist inboth, but they are leveraging their service and management know-how transfer throughthe use of the joint venture.We know that value creation is measured by the difference between the convertedinputs that create the cost of a product and how much the consumer is willing to pay forthat product. More specifically in this case it is the amount consumers are willing to payfor the goods inside of the Tesco subsidiary.Porter states that it is important for the firm to decide where it wants to bestrategically positioned in terms of cost effectiveness, and differentiation. Tesco wants tobe a low cost provider of all the goods a consumer would purchase at a grocery store.They compete through their value chain by gaining purchasing power through expansion,and by leveraging their values skills in foreign markets.CT 5 – A small Canadian firm that has developed some valuable new medicalproducts using its unique biotechnology know-how is trying to decide how best toserve the EU. Establishing a manufacturing firm outside of Canada is not outside ofthe firm’s reach, but it will be a stretch. Which of the following options would yourecommend and why?a) Manufacture the product at home and let foreign sales agents handlethe marketing.b) Manufacture the product at home and set up wholly own subsidiaries inEurope to handle marketingc) Enter into an alliance with a large European pharmaceutical firm. Theproduct would be manuf in Europe y the 50/50 joint venture andmarketed by the European firm.As stated in the text, if the firm’s core competency is the based on control overproprietary technological know-how, it should avoid licensing and joint-venturearrangements if possible to minimize the risks of losing control over that technology(option C). While the strategic alliance will allow for entry into the foreign market, Idon’t feel that the EU is such a different type of market that it would be impossible tofind someone in the US who they could hire to help them understand that market. Thepartnership can give competitors low cost access to the new technology and markets.Wholly owned subsidiaries for marketing would allow for the marketing to beowned by the firm and therefore reduce the risks associated with using the local salesagents that may serve their own interests in lieu of the firm’s. However, I suggest that
the core competency of the firm is not their marketing skills, but rather theirtechnological know-how. This means that they would be choosing to take on major risksand expenses in order to transfer a non core competency and therefore find themselves atrisk of failure.Going back to the Lincoln electric case, we saw how selecting a mode of entrystrategy on something other than your comparative can lead to significant issues.Exporting (option a) allows for the firm to realize location economies, experience curveeconomies while suffering from high transport costs, trade barriers and problems withlocal marketing agents. In this instance, the cost of shipping medical instruments istypically quite low, and the trade barriers between Canada and EU are nonexistent.However, they may find the local sales agents to be at odds with other competitorsmaking it difficult to distribute the product. Despite this drawback however, I feel thatthe financial risks associated with option b and the dangers of losing their corecompetency in option c I would use the less risky option a.Chapter 15 – Exporting, Importing and Counter TradeKey Chapter PointsChapter QuestionsCT3 – An alternative to using letter of credit is export credit insurance. What arethe advantages and disadvantages of using the credit insurance rather than a letterof credit for exporting:(a) A luxury yacht from California to Canada(b) Machine tools from New York to the UkraineA letter of credit, abbreviated as L/C is:• Issued by the bank at the request of the importer• States the bank will pay a specified sum of money to a beneficiary, normally theexporter, on presentation of particular, specified documents• Charge a percentage to the importer as a fee for the service• May require the importer to do some type of deposit• It is a financial contract• Allows for the banks to determine the creditworthiness of your trade partner, sono relationship must exist for the trade to take placeExport Credit Insurance:• Sometimes exporters who require a letter of credit from an importer will lose theirbusiness to another exporter who doesn’t require all the additional work
• Thus when the importer is in a strong bargaining position and able to playcompeting suppliers against each other, an exporter may have to forgo a letter ofcredit.• This exposes the exporter to risk• The exporter can protect themselves against that risk through the us of exporterinsurance• The FCIA provides coverage against commercial and political risks. Losses dueto commercial risk result from the buyers insolvency or payment default.a) Because the competition for selling this product is somewhat high I would expectthe buyer to have more power than the seller and therefore I could see themasking the seller to forgo the letter of credit. If that is the case export creditinsurance will be the likely route to manage the trade. However, if the seller canget the buyer to comply the letter of credit between the reputable Canadian bankand the US bank will be a good asset to leverage if possible.b) Because of the nature of the transaction, the letter of credit may be the bestsolution. This way the seller can insure that the buyer is credit worthy and thebank will take care of the relationship needs so the buyer and seller do not have tocreate a relationship. My only concern would be that of the Ukrainian bank andwhether you can trust their banking system. It may be more prudent to use theexporter insurance again to guard against the ever present political and economicrisks in that country.