Global Business Management - PUC's Students need it.

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International Strategy and
Organization
DY Chhunsong
Lecture 7
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Fundamentals of Global Business Management
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Planning
Process of identifying and selecting an organization’s objectives
and deciding how the organization will achieve those objectives.

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Fundamentals of Global Business Management
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Strategy
Set of planned actions taken by managers to help a company meet
its objectives.
Fundamentals of Global Business Management
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1. Strategy Formulation
The Strategy Formulation Process consists of 3 stages: 1) Identify
Company Missions and Goals, 2) Identify Core Competency
and Value Creating Activity, and 3) Formulate Strategies.

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Fundamentals of Global Business Management
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1. Company Missions and Goals
Most companies have a general purpose for they exist that they
express in their mission statements.
Mission Statement is a written statement of why a company exists
and what it plans to accomplish.
The statements may spell out how a company’s operations affect its
stakeholders: suppliers, employees, stockholders, and consumers….
Sample: As a global eye care company, we will help consumers see,
look and feel better through innovative technology and design.
Fundamentals of Global Business Management
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2. Formulate Strategies:
Multinational Strategy
Adapting products and their marketing strategies in each national
market to suit local preferences.
It refers to a separate strategy for each of the multiple nations in
which a company markets its products.
Companies establish largely independent subsidiaries in each
national market.
Each subsidiary undertakes its own product research and
development, production and marketing.

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Fundamentals of Global Business Management
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2. Formulate Strategies:
Multinational Strategy (1)
It is appropriate for companies in industries in which buyers’
preferences do not converge across national borders.
The benefit: it allows a company to learn and respond quickly and
effectively as buyers’ preference emerge.
The disadvantage: it does not allow a company to exploit scale
economies in product development, manufacturing, or marketing.
Fundamentals of Global Business Management
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2. Formulate Strategies: Global Strategy
Offering the same products using the same marketing strategy in all
national markets.
The benefit of the strategy: scale and location economies by
producing inventories of products in a few optimal locations and
cost saving due to product and marketing standardization.
The disadvantage of the strategy: companies may overlook important
differences in buyers’ preferences from 1 market to another.

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Fundamentals of Global Business Management
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Either Multinational or Global Strategy a company undertakes, the
company needs to formulate strategies for the corporation, each
business unit, and each department.
Fundamentals of Global Business Management
Issues in Assignment of
Decision Rights
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• Centralization vs. Decentralization
 Decision rights on CEO or on local managers?
• Horizontal placement of decentralized decision rights
CEO
A Branch
Manager
B Branch
Manager
 One manager or all managers?
• Coordination vs. Efficient use of information/incentives

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Fundamentals of Global Business Management
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Why do you need to give decision rights
to local managers?
Fundamentals of Global Business Management
Benefits of DC: Effective
Use of Local Knowledge
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 Local demand, price sensitivity of consumers, local used product
market condition.. etc..
• Local knowledge
• If you can use local knowledge effectively, you can
 Quickly respond to changing market conditions
 Make rapid decision
• Decentralization
 Need not to transfer relevant knowledge to the headquarter
• Centralization
 Permission required to change prices
 Local information is transferred to the HQ or ignored (time
consuming and slower decision)

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Fundamentals of Global Business Management
Benefits of DC: Conversation of
Management Time
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 Operational decision
• Types of managerial decision
 Strategic decision (investment in a new product line, R&D
investment decision etc.)
• Delegating operational decision and focusing on strategic
decision
 GM’s M-form (HQ has decision rights on strategic incentives and
control)
 Top management uses their home on strategic decisions
Fundamentals of Global Business Management
Benefits of DC: Training
and Motivating Local Managers
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 More authority is preferred by job applicants
• Attracting and retaining talented/ambitious managers
 Local managers tend to stay with jobs with more authority
• Training opportunities
 Have to deal with unexpected situations
 Accumulate experience in decision making and creative initiatives
• Strong commitment on their projects
 Have stronger incentives to exert in fighting, evaluating, and
implementing new projects

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Fundamentals of Global Business Management
Costs of DC: Agency Problem
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• What if local managers do not choose to maximize profit?
 Local managers may offer very low prices to their friends and
families
 Due to the measurement issue, evaluation and compensation have
limitation
 Are those preferred customers important for the firm or only
for the managers?
Fundamentals of Global Business Management
Costs of DC: Agency Problem (1)
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• Agency problem
 The objectives of a principal and an agent are not aligned
 An agent’s behavior is hard to observe
• Costs of direct monitoring
 Setting up such monitoring system is costly

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Fundamentals of Global Business Management
Costs of DC: Pricing Externalities
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• Externalities
 When the decision made by one individual has an effect on other
individuals
 And this effect is not taken into account by the decision maker
 Divisions often make pricing decisions to maximize their own
profits
• Pricing externalities
 But they do not take into account the impact on other division’s
sales and profits
Fundamentals of Global Business Management
Costs of DC: Coordination Failure
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• Independent pricing cannot internalize externality
 If Phnom Penh and Battambang are independent markets
 When the manager of PP sets up the price, he does not consider its
effect on Battambang market under decentralization
 It depends on whether both markets are complement or substitute
 Consumers in Phnom Penh may buy from Battambang branch

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Fundamentals of Global Business Management
Costs of DC: Narrow-Minded
Use of Information
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• Will a local manager care about the following information?
 Manufacturing costs
 New product development plans around the world
 Demand change in other remote region
• Central managers may have more comprehensive informa-
tion on local divisions
 Information across multiple regions through a long period
Fundamentals of Global Business Management
Implications for Organizations
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• It is necessary for organizations to be decentralized and delegate the
decision-making authority to divisions when:
 The corporate level lacks the expertise to make all decisions
 Divisions need to act quickly on “local” information
• Problems naturally arise when there are interdependencies among
divisions
 Externalities can destroy value in the organization
• The CEO needs to simultaneously keep its “hand off,” letting the
managers do what they do best, and its “hand on,” managing the
interdependencies wisely
 The lack of interdivisional coordination can destroy value
 Promote information flows
 Coordination among decisions