Lesson

Although the international business environment is volatile and enormous, managers can develop policies and procedures to compete effectively in a global marketplace. Firms can increase their profitability by expanding operations in foreign markets and pursuing carefully crafted strategies. A business strategy may be defined as the actions that managers take to attain the desired goals and objectives of the business. As shown in the figure below, there are two basic approaches, which are profitability and profit growth. In the profitability approach, a business may reduce operating costs or raise prices. In the profit growth approach, a business may increase market share in existing markets or enter new markets.

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A principal benefit of expanding globally is that international firms can increase their profitability and rate of profit growth in ways not available to purely domestic enterprises. The success of firms that expand internationally depends on the goods or services they sell, as well as on their core competencies.

International firms additionally gain access to location economies, the economies that arise from performing a value creation activity in the optimal location for that activity. Experience effects are systematic reductions in production costs over the life of the product. The speed with which a firm moves down the experience curve will determine how much advantage it has over its competitors.

A singular advantage of a global corporation is that it can find vital skills developed in one foreign subsidiary and leverage them in another part of the world. In order to take advantage of subsidiary skills, the company must have processes that identify new skills.

You should visit the Course Resources page for links to relevant articles on how businesses develop and implement their international strategies.

Toyota President Fujio Cho implemented a program in the late 1990s called Construction of Cost Competitiveness for the 21^st Century, or CCC₂₁, in an effort to cut costs globally and remain competitive. For example, in its plant in Georgetown, KY, a group of workers have the sole purpose of cutting down on costs. These employees, for example, changed the production process by removing the radiator support base until the last stage of assembly. This process has been replicated in other Toyota plants and improved efficiency and lowered costs.

In Canada, the Cambridge plant introduced Circle L stations where workers double- and triple-check parts that have received past consumer complaints. This process has since been replicated at other Toyota plants.

Toyota also works with suppliers to cut down on waste and lower costs. As all of these improvements are implemented on a global scale, the costs to produce Toyota vehicles are lowered.

There are four basic strategies to compete in the international environment: (1) global standardization, (2) localization, (3) transnational, and (4) international.

The global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies.

The localization strategy focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets.

The transnational strategy tries to simultaneously achieve low costs, differentiate the product offering across geographic markets, and foster a multidirectional flow of skills between different locations.

The international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization. Managers must always keep in mind that strategy is an evolutionary process and that firms need to change their strategic approach as the environment changes (refer to the Coca-Cola case below).

Coca-Cola, a recognized brand throughout the world, has decided to centralize key decisions at the corporate headquarters but employ a regional overarching management structure. Although we think of the Coke soft drink when we think of Coca-Cola, the company owns or licenses close to 400 brands in over 200 countries. Six strategic business units (SBUs) are subdivided into divisions. For example, the European Union SBU is divided into

• Northwest Europe;
• Iberia;
• Mediterranean;
• Germany and Nordic;
• Italy and Alpine; and
  
• Central Europe.

This structure recognizes

• the geographic separation of markets;
• the variability of tastes, incomes, and consumption between markets; and
  
• the different stages of development for each market.

Another example of Coca-Cola’s local strategy is its bottling and distribution system. Consumers assume that Coca-Cola bottles and distributes its beverages. It does not. The company makes and sells beverage concentrates and syrups to independent bottling and canning operations and other distributors. Coca-Cola works with its bottlers to ensure high-quality standards are met and offers the bottlers and distributors support.

In addition to strategy, global firms must build organizational architecture to manage and direct global operations.

Organizational architecture refers to the totality of a firm’s organization, including formal organization structure, control systems and incentives, processes, organizational culture, and people. Three conditions must be satisfied for an organization to deliver profitability

1. Architecture must be internally consistent.
2. Strategy and architecture must be consistent.
3. Strategy and architecture together must be consistent with the competitive environment of the firm.

Organizational structure is the formal division of the organization into subunits and the location of decision-making responsibilities within that structure, as well as the establishment of integrating mechanisms to coordinate the activities of subunits. Control systems measure and evaluate managerial performance and the performance of subunits. Incentives offer benefits for good performance and must be consistent with the strategic objectives of the organization. Efforts to shape values and norms in an organization are intricately linked to human resource practices, especially at the selection and recruitment stages.

Organizational structure is described in terms of three dimensions. The first, vertical differentiation, is the location of decision-making responsibilities within a structure. The second, horizontal differentiation, is the formal division of the organization. The third is the establishment of integrating mechanisms, which are the mechanisms for coordinating subunits. The typical entrepreneurial firm begins with no formal structure. As the firm grows, the firm is split into functions representing value creation activities. If growth continues, as with development into an international company, the complexities of size push for the restructuring of the firm into a divisional form.

Organization can typically be matched to strategy to improve the performance of an international business.

There is a variety of interrelationships between the four basic strategies of localization, international, global standardization, and transnational.

Firms pursuing a localization strategy focus on local responsiveness, do not have a high need for integrating mechanisms, and have low performance ambiguity. Firms pursuing an international strategy create value by transferring core competencies from home to foreign subsidiaries. They have moderate needs for control and integrating mechanisms. Firms pursuing a global standardization strategy focus on the realization of location and experience curve economies. Headquarters maintains control over most decisions, the need for integrating mechanisms is high, and strong organizational cultures are encouraged. With transnational strategies, firms focus on simultaneously attaining location and experience curve economies, local responsiveness, and global learning.

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Hill, C. W. (2015). International business: Competing in the global marketplace (10thed.). New York, NY: McGraw-Hill.