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

2. 5 Things Your Team has in Common 2 Team 1 Things in common Sojung Kim (Seoul, Korea) Davey Gant(Cape Town, S. Africa) Aayush Singhania (New Delhi, India) Don Davis (Chicago, USA) Jorge Arturo Hernandez D. (Mexico)  We've all played basketball and really like it.  We all have siblings and have fun with them but fight with them sometimes.  We all like eating at Qdoba and most of us think it is pretty good.  We've all been to another country.  We like Michael Jackson.  We want to be wealthy and to get into Harvard Business School. Team 4 Things in common Philipp Krispin (Cologne, Germany) Livia Machado Carbonell (Brasilia, Brazil) Julia van Rosendael (Amsterdam, Netherlands) Dominic Lee (Hong Kong) Radhika Goel (New Delhi, India)  we all have been to at least 2 continents  We are all fluent in two languages  we all have pets  we all have siblings  we all think that Beryna project will be great

3. 3 Participation Ranking Last Week 1 st Douglas & Harpeet 2 nd Lasse & Preben 3 rd Philip, Mohammed, Helena & Julia This week 1 st Douglas & Harpreet 2 nd Preben & Lasse 3 rd Philip, Mohammed, Helena, Julia & Livia http://www.elko.k12.nv.us/jackpot/users/lolson/images/Students%20in%20Classroom%20clip%20art.gif

4. 4 Wendy Jeffus Harvard Summer School Chapter 12: The Strategy of International Business

5. 5 Globe Green (South Africa) Web Retail (Ireland) Micro (S. Sudan) Group 1 Sojung Kim (S. Korea) Davey Gant(S. Africa) Aayush Singhania (India) Don Davis (USA) Jorge Hernandez (Mexico) Globe Green (South Africa) Group 3: Douglas Bell (UK) Keith Lee (Australia) Juan Carlos Manzanera (Colombia) Sarthak Gandhi (India) Jonathan Walker (USA) Web Retail (Ireland) Group 5: Luis Echeverri (Colombia) Theis Bentzen (Denmark) Helena Hernandez (Spain) Azamat Shamsiev (Uzbekistan) Nakul Mittal (India) Micro Finance (South Sudan) Group 7: Shadia Damra (USA) Andres Echeverri (Colombia) Joseph Cornwell (Trinidad & Tobago) Vikram Bajaj (UK) Harpreet Kang (India) PCTE (Tanzania) Group 2: Sophie Wang (China) Rafael Alvarez (USA) Berre Simonse (Netherlands) Akash Mathran (India) Divya Yadav (India) Paper 2 Paper (India) Group 4: Philipp Krispin (Germany) Livia Machado Carbonell (Brazil) Julia van Rosendael (Netherlands) Dominic Lee (Hong Kong) Radhika Goel (India) Beryna (Hong Kong) Edu (Tanzania) Recycle (India) Beer (Hong Kong) Group Projects Unirate (U.K.) Group 6: Preben Johannessen (Norway) Lasse Christensen (Denmark) Mohammed Ahmed (Egypt) Jolly Amatya (Nepal) Alessandro Tranchini (Italy) Gurmat Sahni (India) Unirate (UK)

6. 6 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.

7. 7 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

8. 8 Perceptions of Value… Which “red car with 2 doors” is worth more? Which “brown bag” is worth more? 2011 Ferrari http://allworldcars.com/wordpress/wp-content/uploads/2007/07/windowslivewriter2008ferrari430scuderia-1c202008-ferrari-430-scuderia-11.jpg http://fotogrill.com/wp-content/uploads/2008/01/2008-mitsubishi-lancer-evolution-x-front-and-side-1600x1200.jpg http://www.thebudgetfashionista.com/images/eluxurylv-thumb.jpg 2011 Corolla

9. 9 Value Creation Example: Cost per unit (C) = $15,000; Price per unit (P) = $20,000*; Value to Customer (V) $22,000 Example Book: Cost per unit (C) = $; Price per unit (P) = $; Value to Customer (V) $ 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. Web Retail (Ireland)

10. 10 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 Strategic Positioning & Value Creation

11. 11 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 Beryna position their product? Increased Differentiation (V) Low Cost (C) The Efficient Frontier shown below has a convex shape due to diminishing returns* *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. Beer (Hong Kong)

12. 12 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.

13. 13 The Value Chain Globe Green (South Africa)

14. 14 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

15. 15 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

16. 16 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

17. 17 Location Economies 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 Consider the following: Where are the best designers? Where is the low cost or skilled labor? Who will develop the best marketing strategy? Note: Transportation & trade complicate the picture. Recycle (India)

18. 18 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 Making the first Beyrna is much more expensive than making the 1000th Beer (Hong Kong)

19. 19 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

20. 20 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

21. 21 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

22. 22 Where Does Your Company Fit? Globe Green (South Africa) Web Retail (Ireland) Micro (S. Sudan) Edu (Tanzania) Recycle (India) Beer (Hong Kong) Unirate (U.K.)

23. 23 Choosing a Strategy

24. 24 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

25. 25 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 R&D according to national conditions Generally unable to realize value from experience curve effects and location economies Possess high cost structure

26. 26 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 R&D 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

27. 27 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 firm’s 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

28. 28 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

29. 29 The Evolution of Strategy

30. 30 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.html

31. 31 5 Forces Analysis (Porter) 1. 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? 2. Threat of substitutes – How easy can a product or service be substituted? – Can products be made cheaper ? – What are the switching costs? 3. Bargaining power of buyers – What buyer information is available? – What price sensitivity exists in the market? 4. Bargaining power of suppliers – Is there a monopoly of suppliers? – Is there presence of substitute inputs? 5. 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-model.html

32. 32 Wendy Jeffus Harvard Summer School Chapter 13: The Organization of International Business

33. 33 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?m=8703&x=7, http://www.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/

34. 34 Organizational Architecture Organizational architecture includes the totality of a firm’s organization, including formal organization structure, control systems and incentives, processes, organizational culture, and people Superior enterprise profitability requires three conditions 1. The different elements of a firm’s organizational architecture must be internally consistent 2. The organizational architecture must fit the strategy of the firm 3. The strategy and architecture of the firm must not only be consistent with each other but they also must be consistent with competitive conditions

35. 35 Organizational Architecture Structure – Formal division of the firm into subunits (product divisions, national operations, and functions); location of decision-making responsibilities; & integrating mechanisms. Incentives - The devices used to reward appropriate managerial behavior Control systems - The metrics used to measure the performance of sub-units Processes - The manner in which decisions are made and work is performed within the organization Culture - The norms and value systems that are shared among the employees of an organization People - The strategy used to recruit, compensate, and retain employees and the type of people hired (i.e. their skills, values, and orientation.)

36. 36 Structure Organizational structure can be thought of in terms of three dimensions: 1. Vertical differentiation: the location of decision- making responsibilities within a structure. Where decision-making power is concentrated. – Centralized or Decentralized decision making 2. Horizontal differentiation: the formal division of the organization into sub-units Examples: by function, product, geography, or type of business. 3. Establishment of integrating mechanisms: mechanisms for coordinating sub-units Edu (Tanzania)

37. 37 Vertical Differentiation Centralization: – Facilitates coordination – Ensure decisions consistent with organization’s 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 Edu (Tanzania)

38. 38 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 Edu (Tanzania)

39. 39 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.

40. 40 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/

41. 41 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

42. 42 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

43. 43 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

44. 44 Global Matrix Structure http://www.unilever.com/default.asp

45. 45 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

46. 46 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 Integrating Mechanisms Highest Lowest Transnational Strategy Global Strategy Localization Strategy International Strategy

47. 47 The Telephone GAME

48. 48 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 Unirate (U.K.)

49. 49 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 Unirate (U.K.)

50. 50 Informal Integrating Mechanisms

51. 51 Control Systems Types of control systems – Personal controls – personal contact with subordinates. More common in small firms, but GE’s Jack Welch also used this control system. – Bureaucratic controls – high need for approval & emphasis on rules and guidelines. Typical for R&D and other budgets – Output controls (i.e. profitability, growth, productivity, market share) – Cultural controls – norms and values of the system guide behavior (i.e. Starbuck’s employees and Disney employees)

52. 52 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 Incentive Systems

53. 53 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

54. 54 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 Micro (S. Sudan) Beer (Hong Kong)

55. 55 Culture and Performance A “Strong” Culture – Not always good – Sometimes beneficial, sometimes not – Context is important Adaptive cultures – Culture must match an organization’s architecture – Culture does not necessarily translate across borders

56. 56 Strategic Fit Structure & Controls LocalizationInternationalGlobalTransnational Vertical differentiation DecentralizedCore competency centralized; other decentralized Some centralized Mixed (Centralized and Decentralized) Horizontal differentiation Area structureProduct division Informal matrix Need for coordination LowModerateHighVery high Integrating mechanisms NoneFewManyVery many Performance ambiguity LowModerateHighVery high Need for controls LowModerateHighVery high

57. 57 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 manager’s preconceptions about the appropriate business model – Institutional constraints such as national regulations including local content rules regarding layoffs

58. 58 Organizational Change Change to match competitive and strategy environment – Hard to change Existing distribution of power and influence Current culture Manager’s 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/MPA%208002/Project/reorganizatoin.jpg

59. 59 Take a Break… Get ready for the globalization debate! See you in 10 min. Image source: http://www.graduatejunction.net/images/take_a_break.jpg

60. 60 Is Globalization A Good Thing? The Great Globalization Debate http://www.youtube.com/watch?v=jS7O9RhNa18

61. 61 Debate Goals 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: 1)Creativity 2)Key Points And the winner is…

62. Thanks for your participation! See you Wednesday! 62