International Business

MBA 2017-19
Term – V
 The Organization of
International Business
 Organizational Architecture
• Organizational Architecture is the totality of a
firm's organization, including formal
organization structure, control systems and
incentives, processes, organizational culture,
and people
• Organizational Structure has three parts:
• First, the formal division of the organization into
subunits such as product divisions, national
operations, and functions
• Second, location of decision-making responsibilities
within that structure
• Third, the establishment of integrating mechanisms
to coordinate the activities of subunits, including
cross-functional teams and or pan-regional
committees
 Organizational Architecture
• Control systems are the metrics used to measure the
performance of subunits and make judgments about
how well managers are running those subunits
• Incentives are the devices used to reward
appropriate managerial behavior. Incentives are
very closely tied to performance metrics.
• Processes are the manner in which decisions are
made and work is performed within the
organization
• Organizational culture refers to the norms and value
systems that are shared among the employees of an
organization
• People are not just the employees of the
organization, but also the strategy used to recruit,
compensate, and retain those individuals and the
type of people that they are in terms of their skills,
values, and orientation
 Organizational Architecture & Profitability
• Superior enterprise profitability requires three
conditions to be fulfilled.
• First, the different elements of a firm's
organizational architecture must be internally
consistent
• Second, the strategy of the firm and organizational
architecture must be consistent
• Third, strategy, architecture, and competitive
environment must all be consistent
Organizational Structure
Organizational structure can be thought of in terms of three dimensions:
• Vertical Differentiation, which refers to the location of decision-making
responsibilities within a structure;
• Horizontal Differentiation, which refers to the formal division of the
organization into subunits; and
• Integrating Mechanisms, which are mechanisms for coordinating
subunits
Vertical Differentiation: Centralization Vs Decentralization
• Arguments for Centralization
• Centralization can facilitate coordination
• Centralization can help ensure that decisions are consistent with organizational
objectives
• Centralization can give top-level managers the means to bring about needed
major organizational changes
• Centralization can avoid the duplication of activities
• Arguments for Decentralization
• Top management can become overburdened when decision-making authority is
centralized, and this can result in poor decisions
• Motivational research favors decentralization
• Decentralization permits greater flexibility
• Decentralization can result in better decisions
• Decentralization can increase control
Horizontal Differentiation: The Design of Structure
• Horizontal Differentiation is on the basis of function, type of business, or
geographical area
Horizontal Differentiation: International Division
Horizontal Differentiation: Further Path
Horizontal Differentiation: Global Matrix Structure
Integrating Mechanisms
• Strategy and Coordination in the International Business
• The need for coordination is lowest in firms pursuing a Localization Strategy,
• is Higher in International Companies,
• Higher still in Global Companies, and
• Highest of all in Transnational Companies
• Impediments to Coordination
• Managers of the various subunits have different orientations, partly because they have
different tasks
• For example, production managers are typically concerned with production issues such as capacity
utilization, cost control, and quality control, whereas marketing managers are concerned with
marketing issues such as pricing, promotions, distribution, and market share
• These differences can inhibit communication between the managers.
• These managers often do not even "speak the same language”
• There may also be a lack of respect between subunits (e.g., marketing managers "looking
down on" production managers, and vice versa)
• Differences in subunit orientation are often reinforced in multinationals by the separations
of time zone, distance, and nationality
How to integrate for better coordination?
 Formal Integrating Mechanisms
• The formal mechanisms used to
integrate subunits vary in complexity
from simple direct contact and liaison
roles, to teams, to a matrix structure
• In general, the greater the need for
coordination, the more complex the
formal integrating mechanisms need
to be.
Informal Integrating Mechanism: Knowledge Networks
• A Knowledge Network is a network
for transmitting information within
an organization that is based not on
formal organization structure, but
on informal contacts between
managers within an enterprise and
on distributed information systems
• Knowledge networks by themselves
may not be sufficient to achieve
coordination if subunit managers
persist in pursuing sub-goals that
are at variance with companywide
goals
• To eliminate this flaw, the firm must
have a strong organizational culture
that promotes teamwork and
cooperation
Control Systems and Incentives
• Four main types of control systems are used in multinational firms:
• Personal controls,
• Bureaucratic controls,
• Output controls, and
• Cultural controls
• Incentives refer to the devices used to reward appropriate employee
behavior
• The type of incentive used often varies depending on the employees and their
tasks.
• For instance, Incentives for employees working on the factory floor may be very different
from the incentives used for senior managers.
• The incentives used must be matched to the type of work being performed.
• The employees on the factory floor of a manufacturing plant may be broken into teams of 20
to 30 individuals, and they may have their bonus pay tied to the ability of their team to hit or
exceed targets for output and product quality. In contrast, the senior managers of the plant
may be rewarded according to metrics linked to the output of the entire operation.
Control Systems, Incentives, and Strategy
• Performance ambiguity exists when the causes of a subunit's poor
performance are not clear.
• It happens when a subunit's performance is partly dependent on the
performance of other subunits
• Implications: Control, Incentives and Strategy
Human Resource Management
in International Business
Role of Human Resources in Organizations
Staffing Policy
• Staffing Policy is concerned with the selection of employees for
particular jobs. At one level, this involves selecting individuals who have
the skills required to do particular jobs. At another level, staffing policy
can be a tool for developing and promoting the desired corporate culture
of the firm
• Corporate Culture means the organization's norms and value systems.
• A strong corporate culture can help a firm implement its strategy.
Types of Staffing Policy
Three types of staffing policies in international businesses:
• The Ethnocentric Staffing Policy is one in which all key management
positions are filled by parent-country nationals
• The Polycentric Staffing Policy requires host-country nationals to be
recruited to manage subsidiaries, while parent-country nationals occupy
key positions at corporate headquarters.
• In many respects, a polycentric approach is a response to the shortcomings of an
ethnocentric approach
• The Geocentric Staffing Policy seeks the best people for key jobs
throughout the organization, regardless of nationality
Strategic match to Staffing Policy
Another HR Issues in IB
• Hiring the Expatriate Manager
• Selection criterion
• Failure rate of Expatriate staffing
• Training to Expatriate staffing
• Cultural training, language training, and practical training
• Performance Appraisal
• Compensation
• International Labor Relations
Business Operations in
International Business
How to Expand Business Internationally?
Various ways:
• Exporting (& Importing)
• Global Production
• Outsource
• Strategic Alliances
The Promise and Pitfalls of Exporting
Promises
• Large revenue and profit opportunities in Foreign Markets
• Expanding the size of the market
• Can enable a firm to achieve economies of scale, thereby lowering its unit costs
Evidence: Large Firms Vis-à-vis Medium & Small Firms
(Case of MMO Music Group)
Possible Reasons:
• Firms are not proactive
• Ignorance of the potential opportunities
• Unfamiliarity and Intimidated by the complexities and mechanics of exporting to countries where
business practices, language, culture, legal systems, and currency are very different
Pitfalls:
• Poor market analysis and poor understanding of competitive conditions in the foreign market,
• Failure to customize the product offering to the needs of foreign customers,
• Lack of an effective distribution program and a poorly executed promotional campaign,
• Problems in securing financing
• Novice exporters tend to underestimate the time and expertise needed to cultivate business in foreign
countries
• Often face voluminous paperwork, complex formalities, and many potential delays and errors (UN Report)
How to Improve Export Performance?
Number of ways to gain information about foreign market opportunities
and avoid common pitfalls
• An International Comparison
• Trade associations, government agencies, and commercial banks gather
information, helping small firms identify export opportunities
• For instance, Japanese Ministry of International Trade and Industry (MITI)
• Information Sources
• Databases with Government
• provides information on marketability, the competition, comparative prices, distribution channels,
and names of potential sales representatives
• Several Government Programs to help
• Utilize an Export Management Companies or an experienced Export Consultant
• Initially focus on one market or a handful of markets
• Enter a foreign market on a small scale to reduce the costs
• Important to devote a lot of attention to building strong and enduring
relationships with local distributors and/or customers
Export and Import Financing
Fundamental Problem: Lack of Trust
• Financial devices that have evolved to cope with this problem
• By using a third party trusted by both-normally a reputable bank-to act
as an intermediary
Three Financing Instruments
• The Letter of Credit (abbreviated as L/C) states that the bank will pay a
specified sum of money to a beneficiary, normally the exporter, on
presentation of particular, specified documents
• The Draft (or Bill of Exchange) is simply an order written by an exporter
instructing an importer, or an importer's agent, to pay a specified
amount of money at a specified time
• The person or business initiating the draft is known as the maker (in this case, the
U.S. exporter). The party to whom the draft is presented is known as the drawee
(in this case, the Bank of Paris).
• Drafts fall into two categories: Sight Drafts and Time Drafts. A Sight Draft is
payable on presentation to the drawee. A Time Draft allows for a delay in
payment-normally 30, 60, 90, or 120 days.
• The Bill of Lading is issued to the exporter by the common carrier
transporting the merchandise.
• It serves three purposes: it is a receipt, a contract, and a document of title.
Export Assistance
Two ways to assist by government
• Export-Import Bank (EXIM Bank) a provides financial aid to companies
that require assistance with imports, exports, and the exchange of
commodities
• Export Credit Insurance provides coverage against commercial risks and
political risks
Countertrade
• Countertrade is an alternative means of structuring an international sale when
conventional means of payment are difficult, costly, or nonexistent
• A government may restrict the convertibility of its currency to preserve its foreign
exchange reserves
• Non-convertibility implies that the exporter may not be paid in his or her home
currency, and few exporters would desire payment in a currency that is not
convertible
• Countertrade is a common solution. It denotes a whole range of barter like
agreements; its principle is to trade goods and services for other goods and
services when they cannot be traded for money
• Saudi Arabia agreed to buy 10 747 jets from Boeing with payment in crude oil, discounted at
10 percent below posted world oil prices.
• General Electric won a contract for a $150 million electric generator project in Romania by
agreeing to market $150 million of Romanian products in markets to which Romania did not
have access.
• Five distinct types of trading arrangements: barter, counter-purchase, offset,
switch trading, and compensation or buyback.
Moving Ahead the Exporting
in International Business
Globalizing the Production
Firms increasingly confront a set of issues
• Where in the world should production activities be located?
• Should they be concentrated in a single country, or should they be dispersed around the
globe, matching the type of activity with country differences in factor costs, tariff
barriers, political risks, and the like to minimize costs and maximize value added?
• Second, what should be the long-term strategic role of foreign production sites?
• Should the firm abandon a foreign site if factor costs change, moving production to
another more favorable location, or is there value to maintaining an operation at a given
location even if underlying economic conditions change?
• Third, should the firm own foreign production activities, or is it better to outsource those
activities to independent vendors?
• Fourth, how should a globally dispersed supply chain be managed, and what is the role of
Internet-based information technology in the management of global logistics?
• Fifth, should the firm manage global logistics itself, or should it outsource the
management to enterprises that specialize in this activity?
Where to Produce
• Country factors,
• Political economy, culture, and relative factor costs
• Formal and informal trade barriers obviously influence location decisions
• Transportation costs and rules & regulations regarding foreign direct investment
• Expected future movements in its exchange rate
• Technological factors,
• The level of fixed costs,
• The minimum efficient scale, and
• The flexibility of the technology
• Most famous examples, Toyota's production system
• Product factors
• Value-to-weight ratio because of its influence on transportation costs
• Whether the product serves universal needs
• The need for local responsiveness is reduced
Where to Produce - Summary
The Hidden Costs of Foreign Locations
• High Employee Turnover,
• Experience of Microsoft in Hyderabad
• Shoddy Workmanship,
• Poor Product Quality
• Experience of US Electronics company in China
• Low Productivity
Outsourcing Production: Make-or-Buy Decisions
• A persistent question for IBs, whether they should perform a certain value
creation activity themselves or outsource it to another entity
• Case of Toyota Vis-à-vis Nike & Reebok
• Many US companies "buying" the customer call center function, while "making" other
parts of the product in-house
• The Advantages of Make
• Lowering Costs
• Facilitating Specialized Investments
• Protecting Proprietary Product Technology
• Accumulating Dynamic Capabilities
• Improving Scheduling
• The Advantages of Buy
• Strategic Flexibility
• Lower Costs
• Offsets
Strategic Alliances with Suppliers
• Several international businesses have tried to reap some benefits of
vertical integration without the associated organizational problems by
entering strategic alliances with essential suppliers.
• For example, there was an alliance between Kodak and Canon, under which Canon built
photocopiers for sale by Kodak; an alliance between Microsoft and Flextronics, under
which Flextronics built the Xbox for Microsoft
• Strategic alliances build trust between the firm and its suppliers, when a
firm makes a credible commitment to continue purchasing from a
supplier on reasonable terms.
• The relationship between the firm and each essential supplier remains
market mediated and terminable if the supplier fails to perform
• However, the long-term alliances may limit the firm’s strategic flexibility
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