Global Business: Strategy, Structure & Market Entry
Global Business Strategy Essentials
Strategy encompasses actions managers take to enhance profitability (by reducing costs, adding value, or raising prices) and achieve profit growth (by selling more in existing markets or entering new markets).
Core Concept: Value Creation
Value creation is central, focusing on the difference between a firm’s cost of production and the value that consumers perceive in its products. This can be achieved through low-cost strategies or differentiation.
Advantages for Global Operations
Global firms can leverage several advantages:
- Expand their market reach.
- Realize location economies by situating value creation activities in optimal, efficient locations where they can be performed most effectively.
- Achieve learning effects and economies of scale by moving down the experience curve. International expansion, by rapidly building sales volume for a standardized product, can assist a firm in this.
- Earn greater returns by leveraging valuable skills and transferring core competencies to foreign markets (e.g., ArcelorMittal’s expertise).
Key International Business Strategies
Global Standardization Strategy
This strategy involves pursuing a low-cost approach on a global scale, capitalizing on cost reductions from economies of scale, learning effects, and location economies. Products and marketing are generally not customized for local markets; a standardized product is offered worldwide.
Localization Strategy
The localization strategy aims to increase profitability by adapting goods and services to meet local market demands, thereby increasing their perceived value. Firms might still achieve some scale economies from their global volume by using common vehicle platforms and components across many different models, and manufacturing those platforms and components at efficiently scaled factories.
Transnational Strategy
A transnational strategy attempts to simultaneously achieve low costs through global efficiency, differentiate products to meet local needs, and foster global learning and skill transfer. This dual focus on cost reduction and local responsiveness can create inherent conflicts due to competing demands.
International Strategy
This strategy involves taking products initially developed for the domestic market and selling them internationally with only minimal local customization. Firms often offer a universal product. If they face limited competition in foreign markets, there may be less pressure to reduce their cost structure.
Designing Global Organizational Architecture
Organizational architecture refers to the totality of a firm’s organization, including its structure, control systems, incentives, processes, culture, and people.
Pillars of Organizational Architecture
1. Organizational Structure
This defines the formal division of the organization into subunits, the location of decision-making responsibilities (vertical differentiation), and the establishment of integrating mechanisms to coordinate subunit activities (horizontal differentiation).
- Vertical Differentiation (Decision-Making):
- Centralized: Facilitates coordination and ensures decisions align with overall organizational objectives.
- Decentralized: Can lead to better control, more informed decisions at lower levels, increased motivation, and greater flexibility.
- Horizontal Differentiation (Subunits): Firms often evolve from no formal structure to functional structures (departments controlled by top management) and may later adopt product divisional structures.
- Integrating Mechanisms: These coordinate subunit activities. The need varies by strategy (less for localization, more for transnational). Mechanisms include:
- Direct contact among managers (simplest).
- Liaison roles, where individuals are assigned to coordinate with other subunits.
- Cross-functional teams.
- Matrix structures, where individuals report to two managers (e.g., a functional manager and a product/area manager).
2. Control Systems
These are metrics used to measure the performance of subunits and managers, and to judge how well managers are running those subunits. Four main types exist:
- Personal Controls: Control achieved by personal contact with subordinates.
- Bureaucratic Controls: Control through a system of rules and procedures (e.g., budgets, capital spending rules).
- Output Controls: Setting goals for subunits to achieve and expressing these goals in terms of objective performance metrics like profitability or market share.
- Cultural Controls: Exist when employees internalize the norms and value systems of the organization, leading them to control their own behavior.
3. Incentives
Devices used to reward appropriate managerial behavior, closely tied to performance metrics and control systems.
4. Processes
The manner in which decisions are made and work is performed within the organization.
5. Organizational Culture
The norms and value systems shared among the employees of an organization.
6. People
The employees of the organization, including the strategy used to recruit, compensate, and retain those individuals, and the types of people they are in terms of their skills, values, and orientation.
Structures for International Expansion
As firms expand internationally, their structures often evolve:
- International Division: Initially, firms may group all their international activities into an international division, which often attempts to emulate the firm’s domestic functional structure in different countries.
- Worldwide Product Divisional Structure: Often adopted by diversified firms whose domestic structures are based on product divisions. Each division is responsible for a distinct product line worldwide.
- Worldwide Area Structure: Suited for undiversified firms whose domestic structures are based on functions. The world is divided into geographic areas, and each area is a self-contained, largely autonomous entity.
- Global Matrix Structure: This structure attempts to minimize the limitations of both the worldwide area and product divisional structures. It often gives equal importance to product division and geographic area for decision-making, which can lead to conflicts but facilitates coordination and information sharing.
The Role of Knowledge Networks
A knowledge network facilitates the transmission of information and best practices within a company, based not on the formal organizational structure, but on informal contacts between managers across different subunits and locations. This is a non-bureaucratic way to share valuable knowledge.
International Market Entry & Selection
Common Market Entry Modes
Several modes exist for entering international markets:
- Exporting: Selling domestically produced products in foreign markets.
- Turnkey Projects: The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel, and at completion of the contract, hands over a ‘key’ to a plant that is ready for full operation.
- Licensing: A licensor grants rights to intangible property (e.g., patents, inventions, formulas, processes, designs, copyrights, trademarks) to a licensee for a specified period, and in return, the licensor receives a royalty fee from the licensee.
- Franchising: A specialized form of licensing in which the franchiser not only sells intangible property (normally a trademark) to the franchisee but also insists that the franchisee agree to abide by strict rules as to how it does business.
- Joint Venture: Establishing a firm that is jointly owned by two or more otherwise independent firms, often one being a local company in the host nation.
- Wholly Owned Subsidiary: The firm owns 100% of the stock. This can be achieved through:
- Greenfield Venture: Building a subsidiary from the ground up.
- Acquisition: Acquiring an established enterprise in the host nation.
Choosing Your Entry Mode
The selection of an entry mode is influenced by several factors:
- Transport costs
- Trade barriers (tariffs, quotas, etc.)
- Political risks
- Economic risks
- Overall costs of entry
- The firm’s overall international strategy and core competencies
Criteria for Market Selection
The choice of which international markets to enter depends on their long-run profit potential. Favorable markets are often politically stable, developed or rapidly developing nations with free market systems, relatively low inflation rates, and low private sector debt.