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Ch06 Designing Organizations for the International Environment.doc

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Joel Marcus

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Chapter 6: Designing Organizations for the International Environment Entering the Global Arena Motivations for Global Expansion • Economies of scale o Achieving lower costs through large volume production; often made possible by global expansion o Building a global presence expands an organization’s scale of operations, enabling it to realize economies of scale o For many companies, domestic markets no longer provide the high level of sales needed to maintain enough volume to achieve scale economies o They also enable companies to obtain volume discounts from suppliers, lowering the organization’s cost of production • Economies of scope o Achieving economies by having presence in many product lines, technologies, or geographic areas o Having a presence in multiple countries provides marketing power and synergy compared to the same size firm that has presence in few countries o They can also increase a company’s market power as compared to competitors, because the company develops broad knowledge of the cultural, social, economic, and other factors that affect its customers in varied locations and can provide specialized products and services to meet those needs • Low-cost production factors o Factors of production are supplies necessary for production, such as land, raw materials, and labour o One of the most powerful motivators to invest abroad is the opportunity to obtain raw materials and other resources at the lowest possible cost o Companies also turn to other countries as a source of cheap labour Stages of International Development 1. Domestic Stage  A company is domestically oriented while managers are aware of the global environment  Market potential is limited and primarily in home country  The structure is domestic, and initial foreign sales are handled through an export department 2. International Stage  Company takes exports seriously and begins to think multidomestically  Multidomestic means competitive issues in each country are independent of other countries; the company deals with each country individually  At this point, an international division has replaced the export department, and specialists are hired to handle sales, service, and warehousing abroad  Multiple countries are identified as a potential market 3. Multinational Stage  A company has marketing and production facilities in many countries and more than one- third of its sales are outside its home country  Explosion occurs as international operations take off, and the company has business units scattered around the world along with suppliers, manufacturers, and distributors 4. Global Stage  The company transcends any one country  The business is not merely a collection of domestic industries; rather, subsidiaries are interlinked to the point where competitive position in one country significantly influences activities in other countries  Global companies no longer think of themselves as having a single home country, and have been called stateless corporations Global Expansion through International Strategic Alliances • Strategic alliances are one of the most popular ways companies get involved in international operations • Companies in rapid changing industries such as media and entertainment, pharmaceuticals, biotechnology, and software could have hundreds of these relationships • Typical alliances include licensing, joint ventures, and consortia • For example, pharmaceutical companies cross-license their newest drugs to one another to support industry-wide innovation and marketing and offset the high fixed costs of research and distribution • A joint venture is a separate entity for sharing development and production costs and penetrating new markets that is created with two or more active firms as sponsors o May either be with customers or competitors o Competing firms Sprint, Deutsche Telecom, and Telecom France cooperate with each other and with several smaller firms in a joint venture that serves the telecommunication needs of global corporations in sixty-five countries o Companies often seek joint ventures to take advantage of a partner’s knowledge of local markets, to achieve production cost savings through economies of scale, to share complementary technological strengths, or to distribute new products and services through another country’s distribution channels • Consortia is groups of firms that venture into new products and technologies o These include suppliers, customers, and even competitors o They join together to share skills, resources, costs, and access to one another’s markets o For example, Airbus Industrie is a consortium made up of French, British, and German aerospace companies that is successfully battering the US giant Boeing o A type of consortium, the global virtual organization, is increasingly being used in the United States and offers a promising approach to meeting worldwide competition o The virtual organization refers to a continually evolving set of company relationships that exist temporarily to exploit unique opportunities or attain specific strategic advantages Designing Structure to Fit Global Strategy Model for Global Versus Local Operations • When organizations venture into the international domain, managers strive to formulate a coherent global strategy that will provide synergy among worldwide operations for the purpose of achieving common organizational goals • One dilemma they face is whether to emphasize global standardization versus national responsiveness • Standardization is a policy that ensures all braches of the company at all locations operate in the same way • Managers must decide whether they want each global affiliate to act autonomously or whether activities should be standardized across countries o These decisions are reflected in the choice between a globalization versus a multidomestic global strategy • Globalization strategy is the standardization of product design and advertising strategy throughout the world o For example, the Japanese tool business away from Canadian and American companies by developing similar high-quality, low-cost products for all countries. Canadian and American companies incurred higher costs by tailoring products to specific countries o In general, services are less suitable for globalization because different customs and habits often require a different approach to providing service o Wal-Mart has had trouble transplanting its successful US formula without adjustment. In Indonesia, Wal-Mart closed its stores after a year because customers didn’t like the brightly lit, highly organized stores, and they thought goods were overpriced because no haggling was permitted o Economic and social changes have made strict globalization less popular, because consumers tend to be less interested in global brands and more in favor of products that have a local feel o However, a globalization strategy can help a manufacturing organization reap economy-of- scale efficiencies by standardizing product design and manufacturing, using common suppliers, introducing products around the world faster, coordinating prices, and eliminating overlapping facilities • Multidomestic strategy is one in which competition in each country is handled independently of competition in other countries o It encourages product design, assembly, and marketing tailored to the specific needs of each country o For example, Dominos Pizza has more than 2500 international restaurants and offers 100 different pizza pies, including paneer pizza in India and mayo-jaga pizza in Japan • Companies can be characterized by whether their product and service lines have potential for globalization, which means advantages through worldwide standardization • Some companies have products and services appropriate for a multidomestic strategy, which means local-country advantages through differentiation and customization to meet local needs • When forces for both global standardization and national responsiveness in many countries are low, simply using an international division with the domestic structure is an appropriate way to handle international business • For some industries, technological, social, or economic forces may create a situation in which selling standardized products worldwide provides a basis for competitive advantage, so global product structure would be appropriate • In other cases, companies can gain competitive advantages through national responsiveness – by responding to unique needs in the various countries in which they do business, and worldwide geographical structure would be appropriate here • In many instances, companies will need to respond to both global and local opportunities simultaneously, in which case the global matrix structure can be used International Division • A division that is equal in status to other major departments within a company and has its own hierarchy to handle business in various countries • The domestic divisions are typically organized along functional or product lines, and the international division has its own hierarchy in various countries, selling the products and services created by the domestic divisions, opening subsidiary plants, and in general moving the organization into more sophisticated international operations • Functional structures are less frequently used to manage a worldwide business • Lines of functional hierarchy running around the world would extend too long, so some form of product or geographical structure is used to subdivide the organization into smaller units Global Product Division Structure • A form in which product divisions take responsibility for global operations in their specific product areas • Provides a fairly straightforward way to effectively manage a variety of businesses and products around the world • Managers in each product division can focus on organizing for international operations as they see fit and directing employees’ energy toward their own division’s unique set of global problems or opportunities • The structure provides top managers at headquarters with a broad perspective on competition, enabling the entire corporation to respond more rapidly to a changing global environment • Each division’s manager is responsible for planning, organizing, and controlling all functions for the production and distribution of its products for any market around the world • The product-based structure works best when a division handles products that are technologically similar and can be standardized for marketing worldwide • A problem occurs when product divisions don’t work well together and they compete instead of cooperate Global Geographical Division Structure • A form in which an organization divides its operations into world regions, each of which reports to the CEO • A regionally based organization is well suited to companies that want to emphasize adaptation to regional or local market need through a multidomestic strategy • Each division has full control of functional activities within its geographical area • Companies that use this type of structure have typically been those with mature product lines and stable technologies • They can find low-cost manufacturing within countries, as well as meeting different needs across countries for marketing and sales • Problems are encountered by senior management because of the autonomy of each regional division o For example, it’s difficult to do planning on a global scale – such as new-product R&D – because each division acts to meet only the needs of its region Global Matrix Structure • A form of horizontal linkage in an international organization in which both product and geographical structures are implemented simultaneously to achieve a balance between standardization and globalization • Works best when pressure for decision making balances the interests of both product standardization and geographical localization and when coordination to share resources is important • Many firms apply a global hybrid or mixed structure, in which two or more different structures or elements of different structures are used Matching Organizational Structure to International Advantage Building Global Capabilities The Global Organizational Challenge • Organizations have to accept an extremely high level of environmental complexity in the international domain and address the many differences that occur among countries • Organizations must also find ways to effectively achieve coordination and collaboration among far- flung units and facilitate the development and transfer of organizational knowledge and innovation for global learning • 3 primary segments of the global organizational challenge: o Greater complexity and differentiation  Companies must create a structure to operate in numerous countries that differ in economic development, language, political system and regulations, cultural norms and values, and infrastructure  For example, although most international firms have their headquarters in wealthier countries, smart managers are investing heavily in less developed countries in Asia, Eastern Europe, and Latin America, which offer huge new markets for their goods and services  A growing number of global consumers are rejecting the notion of homogenized products and services, calling for greater response to local preferences o The need for integration  Integration refers to the quality of collaboration across organizational units  Even in a domestic firm, high differentiation among departments requires that more time and resources be devoted to achieving coordination because employees’ attitudes, goals, and work orientations differ widely, so 
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