WHAT IS INTERNATIONAL STRATEGY, AND WHY IT IS IMPORTANT?

International strategy is concerned with the way firms make fundamental choices about developing and
developing scarce resources internationally. International strategy involve decisions that deal with the all the
various functions and activities of a company, not merely a single areas such as marketing and production.
To be effective, a companys international strategy needs to be consistent among the various functions,
products and regional units of the company internal consistency as well as with the demands of the
international competitive environment.

GOAL OF INTERNATIONAL STRATEGY:

COMPETITIVE ADVANTAGE:
The goal of the international strategy is to achieve and maintain a unique and valuable competitive position
both within the nation and globally, a position that has been termed as competitive advantage. This suggests
that the international company either must perform activities different from those competitors or perform the
same activities in different ways. To create a competitive advantage that is sustainable over time, the
international company should try to develop skills or competencies that:
1. Create value for customers and for which customer are willing to pay.
2. Are rare, since competencies shared among many competitors cannot be a basis for competitive
advantage.
3. Are difficult to imitate or substitute for, and ,
4. Are organized in a way that allows the company to exploit fully the competitive potential of these
valuable, rare and difficult to imitate competencies.

CHALLENGES:
Managers of international companies that are attempting to develop a competitive advantage face a
formidable challenge: resource time, talent and money are always scarce. There are many alternative
ways to use these scarce resources for example, which nations to enter, which technology to invest in, and
which product to develop, and these alternative are not equally attractive. A companys managers are forced
to make choices regarding what to do, and what not to do, now and overtime. Different companies make
different choices and those choices have implications for each companys ability to meet the needs of
customers and create a defensible competitive position internationally. Without adequate planning, mangers
are more likely to make decisions that do not make good sense competitively and the companys
international competitiveness may be harmed.

GLOBAL STRATEGIC PLANNING:

WHY PLAN GLOBALLY?
Because of the challenges mentioned, many international firms have found it necessary to institute formal
global strategic planning to provide a means for top management to identify opportunities and threats from
all over the world, formulate strategies to handle them and stipulate how to finance the strategies'
implementation. Global strategic plans not only provide for consistency of action among the firm's managers
worldwide but also require the participants to consider the ramifications of their actions in the other
geographical and functional areas of the firm. These plans provide a thorough, systematic foundation for
making decisions regarding what resources and competencies to develop, when and how to develop them,
and how to use these competencies to achieve competitive advantage.

INTRODUCTION:
1 The International Business

STRATEGIC PLANNING:
Strategic planning is the process of evaluating the enterprise's environment and its internal strengths, next
identifying long and short range objectives and then implementing a plan of action for attaining these goals .
Multinational enterprises (MNEs) rely heavily on this process because it provides them with both general
direction and specific guidance in carrying out their activities. Without a strategic plan, these enterprises
would have great difficulty in planning, implementing and evaluating operations. With strategic planning,
however, research shows that many MNEs have been able to increase their profitability.

STRATEGIC ORIENTATIONS:
Before examining the strategic planning process, we must realize that MNEs have strategic predispositions
toward doing things in a particular way. This predisposition helps determine the specific decisions the firm
will implement. There are four such predispositions: ethnocentric, polycentric, regiocentric and geocentric.
ETHNOCENTRIC PREDISPOSITION:
An MNE with an ethnocentric predisposition will rely on the values and interests of the parent company in
formulating and implementing the strategic plan. Primary emphasis will be given to profitability and the
firm will try to run operations abroad the way they are rum at home.
POLYCENTRIC PREDISPOSITION:
An MNE with polycentric predisposition will tailor its strategic plan to meet the needs of a local culture. If
the firm is doing business in more than one culture, the overall plan will be adapted to reflect these
individual needs. The basic mission of a polycentric MNE is to be accepted by the local culture and to blend
into the country. Profits will be put back into the country in the form of expansion and growth.
REGIOCENTRIC PREDISPOSITION:
An MNE with regiocentric predisposition will be interested in obtaining both profit and public acceptance
( a combination of the ethnocentric and polycentric approaches) and will use a strategy that allows it to
address both local and regional needs. The company is less focused on a particular country than on a
geographic region.
GEOCENTRIC PREDISPOSITION:
An MNE with a geocentric predisposition will view operations on a global basis. The largest international
corporations often use this approach. They will produce global products with local variations and will staff
their offices with the best people they can find, regardless of country of origin. Multinationals, in the true
meaning of the word, have a geocentric predisposition. However, it is possible for an MNC to have a
polycentric or regiocentric predisposition if the company is moderately small or limits operations to specific
cultures or geographic regions.
The predisposition of an MNE will greatly influence its strategic planning process.
EXAMPLE:
Some MNEs are more interested in profits and/or growth than they are in developing a comprehensive
corporate strategy that exploits their strengths. Some are more interested in large scale manufacturing
that will allow them to compete on a price basis across the country or region, as opposed to developing a
high degree of responsiveness to local demand and tailoring a product to these specific market niches.
Some prefer to sell in countries where the cultures are similar to their own so that the same basic
marketing orientation can be used throughout the regions. These orientations or predispositions will
greatly influence the strategy.
2 The International Business

3 The International Business

MNE
Ethnocentric

Polycentric

Regiocentric

Geocentric

Company s
basic missions

Profitability

Public acceptance
legitimacy

Both profitability and

public acceptance

Both profitability and public

acceptance

Type of
governance

Top down

Bottom up each
local unit sets
objectives

Mutually negotiated
between the region
and its subsidiaries

Mutually negotiated at the levels

of the organization

Strategy

Global integration

National
responsiveness

Regional integration
and national
responsiveness

Global integration and national

responsiveness

Structure

Hierarchal product
divisions

Hierarchal area
divisions and
autonomous
national units

Product and regional

organizational tied
together through
matrix structure

A network of organizations in
some cases this includes
stockholders and competitors

Culture
technology

Home country
Mass production

Host country
Batch production

Regional
Flexible
manufacturing

Global
Flexible manufacturing

Marketing
strategy

Product
development is
determined
primarily by the
needs of the home
country
customers.

Local product
development
based on local
needs.

Standardized within
the region, but not
across regions.

Global regions with local

variations.

Profit strategy

Profit are brought

back to home
country

Profits are kept in

the host country.

Profits are
redistributed within
the region

Redistribution is done on the

global basis

Human resource
management
practices

Overseas
operations are
managed by
people from the
home country

Local nationals are

used in key
management
practices

Regional people are

developed for key
managerial position
anywhere in the region

The best people anywhere in the

world are developed for key
positions everywhere in the
world.

Orientation

SOURCE: Adapted from Balaji S. Chakarvarthy and Howard V. Perlmutter, Strategic Planning for a Global
Business, Colombia Journal of World Business, Summer 1985,pp. 5 -6. Based on some Perlmutters earlier work.

STRATEGIC FORMULATION:
Strategy formulation is the process of evaluating the enterprise's environment and its internal strengths. This
typically begins with consideration of the external arena since the MNE will be directed to the internal
environment and the resources the organization has available or can develop, to take advantage of these
opportunities.

EXTERNAL ENVIRONMENT ASSESSMENT:

4 The International Business

The analysis of the external environment involves two activities: information gathering and information
assessment. These steps help to answer two key questions: What is going on in the external environment?
How will these developments affect our company?
INFORMATION GATHERING:
Information gathering is a critical phase of international strategic planning. Unfortunately, not all firms
recognize this early enough.
There are number of ways that MNEs conduct an environmental scan and then forecast the future. Four of
the most common methods include 1) asking experts in the industry to discuss industry trends and to make
projections about the future 2) using historical industry trends to forecast future developments 3) asking
knowledgeable managers to write scenarios describing what they foresee for the industry over the next 2 or
3 years and 4) using computers to stimulate the industry environment and to generate likely future
developments. Mitsubishi has over 700 employees in New York City whose primary objective is to gather
information on American Competitor strength and weakness.
This information helps MNEs to identify competitor strength and weakness and to target areas for attack.
This approach is particularly important when a company is delivering a product or service for many market
niches around the world that are too small to be individually profitable.
INFORMATION ASSESSMENT:
Having gathered information on the competition and industry, MNEs will then asses the data. One of the
most common approaches is to make an overall assessment based on the five forces that determine industry
competitiveness- buyers, suppliers, and potential new entrants to the industry, the availability of substitute
goods and services and rivalry among the competitors.

FIVE FORCES OF INDUSTRY:

BARGAINING POWER OF BUYERS:
MNEs will examine the power of their buyers because they will want to predict the likelihood of
maintaining these customers. If the firm believes buyers may be moving their business to competitors, the
MNE will want to formulate a strategy for countering this move.
BARGAINING POWER OF SUPPLIERS:
An MNE will look at the power of the industry's suppliers to see if it can gain a competitive advantage here.
For example, if there are a number of suppliers in the industry, the MNE may attempt to play them off
against each other in an effort to get a lower price. Or the company may move to eliminate any threat from
the suppliers by acquiring one of them, thus guaranteeing itself a ready source of inputs.
THE NEW ENTRANTS:
The company will examine the likelihood of new firms entering the industry and will try to determine the
impact they might have on the MNE. Two typical ways that MNEs attempt to reduce the threat of new
entrants are by 1) keeping costs low and consumer loyalty high and 2) encouraging the government to limit
foreign business activity through regulation such as duties, tariffs, quotas and other protective measures.
THE THREAT OF SUBSTITUTES:
The MNE will look at the availability of substitute goods and services and try to anticipate when such
offerings will reach the market. There are a number of steps that the company will take to offset this
5 The International Business

competitive force including 1) lowering prices 2) offering similar products and 3) increasing services to the
customer.
RIVALRY:
The MNE will examine the rivalry that currently exists between itself and the competition and seek to
anticipate future changes. Common strategies for maintaining and/or increasing market strength include 1)
offering new goods and services 2) increasing productivity and thus reducing overall costs 3) working to
differentiate current goods and services from those of the competition 4) increasing overall quality of goods
and services 5) targeting specific niches with a well designed market strategy.

As the MNE examines each of these five forces, it will decide the attractiveness and unattractiveness of
each.
Potential
Threats of new entrants
Entrants Thr

Bargaining
power of
suppliers

Industry

Suppliers

Buyers

Competitor
s

Bargaining power of buyers

Threats of substitute products/services

Substitutes
The Five Forces of Industry Competiveness
Sources: Michael Porter, Competitive Advantage, New York Free Press, 1980, p. 4

EXAMPLE:
Following figure shows the five forces model applied to the semiconductor industry.
Notice in figure that the suppliers in the semiconductor industry, at the time this analysis was conducted,
were not very powerful, so this was an attractive force for the MNE. Buyers did not have many substitute
products from which to choose (an attractive development), but there was some backward integration
toward purchasing their own sources of supply (an unattractive development). Overall, the attractiveness
of the buyer power was regarded as inconclusive. The third force, entry barriers, was quite attractiveness
of because of the high costs of getting into the industry and the short product life cycles that existed there.
It was very difficult for a company to enter this market. The fourth force, substitutes, was unattractive
because new products were being developed continually and customer loyalty was somewhat low. The
6 The International Business

fifth and final force, industry rivalry, was also unattractive because of the high cost of doing business, the
cyclical nature of sales and the difficulty of differentiating one's product those of the competition.
On an overall basis, however, the industry was classified as attractive. MNEs operating in the
semiconductor industry would use this analysis to help them increase the attractiveness of those forces
that currently are not highly attractive.

Entry
Barriers
Very
Attractive

High capital investments

Short product life cycles
R and D
Proprietary products
Industry standards
Economies of scale
Large distribution channels
needed
Some closed markets

Cyclical sales
High corporate stakes
Differentiation becoming difficult
Large vertically integrated competitors
Favorable growth trends

Intensity of
Rivalry and
Competition
Very
Unattractive

Suppliers
Power
Very
Attractivematerial used
Conventional

Suppliers not concentrated

No threat of forward integration

Power
Buyers
Inconclusiv
e
Attractivene
Some
backward integration
ss
Proprietary products means

low substitutes
Buyers are noted
confederated
High percentage price / total
purchase

Substitute
s
Unattractiv
e
Long term substitutes
redesigns

Some low customers loyalty.

Conclusions
The industry can be classified as attractive
despite intense rivalry. The changes taking
place favor consolidation into larger firms,
which have substantial resources necessary to
commit R and D throughout the cycles of the
industry.
The Five Forces Model Applied To Semiconductor Industry
Sources: Scott Beardsley and Kenji Sakagami, Advanced Micro Devices: Posed for Chip
Greatness. Unpublished student paper, Sloan School of Management, MIT, 1988. Reported in
Arnold C. Hax and Nicolas S. Majluf, The Strategy of Concept and Process: A Pragmatic
Approach Englewood Cliffs, NJ. : Prentice Hall, 1991, p. 46.

INTERNAL ENVIRONMENTAL ASSESSMENT:

7 The International Business

The internal environmental assessment helps to pinpoint MNE strengths and weaknesses. There are two
specific areas that a multinational will examine in this assessment: 1) physical resources and personnel
competencies and 2) the way in which value chain analysis can be used to bring these resources together in
the most synergistic and profitable manner.

PHYSICAL RESOURCES AND PERSONNEL COMPETENCIES:

The physical resources are the assets the MNE will use to carry out the strategic plan. Many of these are
reported on the balance sheet as reflected by the firm's cash, inventory, machinery, and equipment accounts.
The location and disposition of these resources is also important.
STRATEGIC BUSINESS UNIT:
Another important consideration is the degree of integration that exists within the operating units of thd
MNE. Large companies, in particular, tend to be divided into strategic business units (SBUs). These are
operating units with their own strategic space; they produce and sell goods and services to a market segment
and have a well-defined set of competitors. SBUs are sometimes referred to as "business within the
business".
VERTICAL INTEGRATION:
In fact, many large MNEs own assets that allow them to handle almost everything involved in producing a
good or service and delivering it to the customer, known as vertical integration. Many large Japanese
manufacturing firms, in particular, have moved toward vertical integration by purchasing controlling
interests in their suppliers. The objective is to obtain control over the supply and to ensure that the materials
or goods are delivered as needed. Many U.S. and European firms have shied away from this strategy
because "captured suppliers" are often less cost effective than independents.
So, vertical integration may reduce costs in some instances, but it can be an ineffective strategy in other
cases. In particular, one of the major problems with vertical integration is defending oneself from
competitors who are less vertically integrated and are able to achieve cost efficiencies as a result.
Personnel competencies are the abilities and talents of the people. An MNE will want to examine these
because they reflect the company's strengths and weakness.
For example, if the firm has an outstanding R&D department, it may be able to develop high-quality,
state-of- the- art product.
Not every MNE has the personnel competencies to be first in the field, and many are happy to follow
because the investment risk is less and the opportunity for profit is often good.
VALUE CHAIN ANALYSIS:
A value chain is the way in which primary and support activities are combined in providing goods and
services and in increasing profit margins. The primary activities in this chain include 1) inbound logistics
such as receiving, storing, materials handling, and warehouse activities; 2) operations in which inputs are put
into final product form by performing activities such as machining, assembling, testing and packaging
3)outbound logistics which involves distributing the finished product to the customer 4)marketing and sales
which are used to encourage buyers to purchase the product and 5) service for maintaining and enhance the
value of the product after the sale through activities such as repair, product adjustment , training and parts
supply. The support activities in the value chain consist of 1) the firm's infrastructure, which is made up of
the company's management, planning, finance, accounting, legal ,government affairs, and quality
management areas; 2) human resource management ,which is made up of the selection, placement,
appraisal ,promotion, training and development of the firm's personnel 3) technology in the form of
8 The International Business

knowledge, research and development and procedures that can result in improved goods and services ; and
4) procurement; which involves the purchasing of ram materials, supplies and similar goods.

Firm Infrastructure
Human Resource Management
Technology Development
Procurement

Services

Promotion

Sales force
Administratio
n
Technical
Literature

Sales force
Operation

Advertising

Marketing
management

Outbound
logistics

Operations

Inbound
logistics

Marketing and Sales

A Basic Value Chain

Source: Michael Porter, Competitive Advantage, New York Free Press, 1985, p. 46.

MNEs can use these primary and support activities to increase the value of the goods and services they
provide.
EXAMPLE:
An example is provided in figure, which helps to explain why IBM has been so effective in the
international market. The company combines the primary and support activities so as to increase the
value of its products. IBM's alliance with ROLM and MCI and its strengths in software and hardware
technologies provide the company with a solid foundation for launching successful strategies in the
telecommunications industry.
Firm
Infrastructure

Multi domestic presence

Access to most major corporations

Human
resource
management

Lifetime
employment
In-house career
development
Strong R and D
resources

Technology
Development
Procurement

All employees
think in
marketing terms

Margin
In-house

technical

training

Strong
software
capability

Owns ROLM
CPEmanufacturer
Leading computer
technology used
in-house
Partnership with
MCI
9 The International Business

Strong reputation
for excellence
Already sells to
most major
corporations
Experienced sales
force

Margin
Experienced
buyer
training

Inbound logistics

Operations

Inbound
logistics

Marketing and
sales

Services

The Value Chain for IBM

Source: Reported in Arnold C. Hax and Nicolas S. Majluf , The Strategy of Concept and
Process: A Pragmatic Approach Englewood Cliffs, NJ. : Prentice Hall, 1991, p. 82.

GENERIC STRATEGIES:
Analysis of the value chain can also help a company to determine the type of strategy that will be most
effective. In all, there are three generic strategies: cost, differentiation and focus.
1) COST STRATEGY: relies on such approaches an aggressive construction efficient avoidance of
marginal customer accounts, and cost minimization in areas like R&D, service, sales and advertising.
2) DIFFERENTIATION STRATEGY: is direct toward creating something that is perceived as being
unique. Approaches to differentiation can take many forms, including the creation of design or brand image,
improved technology or features, and increased customer service or dealer networks.
3) FOCUS STRATEGY: involves concentrating on a particular buyer group and segmenting that niche
based on product line or geographic market. While low-cost and differentiation strategies are aimed at
achieving objectives industry wide, a focus strategy is built around servicing a particular target market, and
each functional policy is developed with this in mind.
In addition, the firm will determine its competitive scope, which is the breadth of its target within the
industry.

GOAL SETTING:
The external and internal environment analyses will provide the MNE with the information needed for
setting goals. Some of these goals will be determined during the external analysis, as the company identifies
opportunities that it wants to exploit. Others will be finalized after the value chain analysis is complete. In
either event one of the outcomes of strategy formulation will be the identification of goals.
There are two basic ways of examining the goals or objectives of international operations. One is to review
them on the basis of operating performance or functional area. Some of the major goals will be related to
profitability, marketing, production, finance, and human resources. A second way is to examine these goals
by geographic area or on an SBU basis. There will be accompanying functional goals for marketing,
production and finance. If the MNE has SBUs, each strategic business unit in these geographic locales will
have its own list of goals.
This approach uses what is called a "cascading effect because, like a cascade of water rippling down the
side of a hill, it reaches the bottom by moving from one level to the next. The MNE will start out by setting
a profitability goal for the overall enterprise. Each geographic area or business unit will then be assigned a
profitability goal which, if attained, will result in the MNE reaching its overall desired profitability. This
same approach will be used in other key areas such as marketing, production, and finance. Within each unit,
these objectives will then be further subdivided so that every part of the organization understands its
objectives and everyone is working toward the same overall goals.

STRATEGY IMPLEMENTATION:
Strategy implementation is the process of attaining goals by using the organization structure to execute the
formulated strategy properly. There are many areas of focus in this process. Three of the most important are
location, ownership decisions and functional area implementation.
10 The International Business

LOCATION:
Location is important for a number of reasons. Local facilities often provide a cost advantage to the
producer. This is particularly true when raw materials, parts or labor needed to produce the product can be
inexpensively obtained close to the facility. Location is also important because residents may prefer locally
produced products.
Imported goods may be subject to a tariff, quota, or other governmental restriction, making local
manufacture more desirable. Finally, the MNE may be doing so much business in a country that the local
government will insist that it set up local operations and begin producing more of its goods internally.
Although the benefits can be great, there can be a number of drawbacks associated with placing operations
overseas. An unstable political climate may leave an MNE vulnerable to low profits and bureaucratic red
tape. A second drawback is the possibility of revolution or armed conflict.
Example:
Some ... opt for locales where the cost of running a small enterprise is significantly lower than that of
running a large one. In this way they spread their risk, setting up many small locations throughout the
world rather than one or two large ones. Manufacturing firms are a good example. Some production
firms feel that the economies of scale associated with a large-scale plant are more than offset by the
potential problems that can result should economic or political difficulties develop in the country. This
firms strategy is to spread the risk by opting for a series of small plants spread throughout a wide
geographic region.

OWNERSHIP:
Ownership of international operations has become an important in foreign-owned business in the United
States is weakening the economy. People in other countries have similar feelings about U.S. businesses
there. In truth, the real issue of ownership is whether or not the company is contributing to the overall
economic good of the country where it is doing business.
Countries that want to remain economically strong must be able to attract international investors who will
provide jobs that allow their workers to increase their skills and build products that are demanded on the
world market. In accomplishing this objective, two approaches are now in vogue: international joint ventures
and strategic alliance.
INTERNATIONAL JOINT VENTURES:
An international joint venture is an agreement between two or more partners to own and control an overseas
business. There are a number of reasons for the rise in the popularity of these ventures. One is government
encouragement and legislation, designed to make it attractive for foreign investors to bring in local partners.
A second is the need for the partners who know the local economy, the culture and the political system and
who can cut through red tape in getting things done. A third is a desire to find partners who have local
operations that can create a beneficial synergy with an outside company.
Unfortunately, in many cases international joint ventures have not worked out well. Several studies indicate
a failure rate of 30 percent for ventures in developing countries and 45 to 50 percent in less developed
countries. The major reason has been the desire by MNEs to control the operation, which sometimes has
result in poor decision making and/ or conflicts with the local partners. In general joint ventures are difficult
to manage and are frequently unstable. This is why many MNEs have turned to the use of strategic
partnerships.
STRATEGIC PARTNERSHIPS:
11 The International Business

A strategic partnership is an agreement between two or more competitive MNEs for the purpose of serving a
global market. In contrast to a joint venture where the partners may be from different businesses, strategic
partnerships are almost always formed by firms in the same line of business.
EXAMPLE:
For example, Motorola and Toshiba have a manufacturing facility in Japan, and they exchange a broad
range of microprocessor and memory chip technology. Motorola is strong in the microprocessor area and
Toshiba is a leader in chip technology, so the strategic alliance has benefits for both firms.
This alliance helps to illustrate the growing popularity of international business ownership agreements. The
final determinant will always be whether the arrangement is in the best interests of all involved parties.
When it is, a strategic alliance is likely to be formed.

FUNCTIONAL STRATEGIES:
Functional strategies are used to coordinate operations and to ensure that the plan is carried out properly.
While the specific functions that are key to the success of the MNE will vary, they typically fall into six
major areas: marketing, manufacturing, finance, procurement, technology and human resources. For
purposes of analysis, they can be examined in terms of three major considerations: marketing,
manufacturing and finance.

MARKETING:
The marketing strategy is designed to identify consumer needs and to formulate a plan of action for selling
the desired goods and services to these customers. Most marketing strategies are built around what is
commonly known as the four P's" of marketing: product, price, promotion and place. The company will
identify the products that are in the market niches they are pursuing. It will apprise the manufacturing
department of any modifications that will be necessary to meet local needs, and it will determine the price at
which the goods can be sold. Then the company's attention will be devoted to promoting the products and to
selling them in the local market.

MANUFACTURING:
The manufacturing strategy is designed to dovetail with the marketing plan and to ensure that the right
products are built and delivered in time for sale. Manufacturing will also coordinate its strategy with the
procurement and technology people, so as to ensure that the desired materials are available and that the
products have the necessary state-of-the-art quality. If the MNE is producing goods in more than one
country, it will be giving attention to coordinating activities where needed. For example, some firms produce
goods in two or more countries and then assemble and sell them in other geographic regions. Japanese auto
firms send car parts to the United States for assembly and then sell some of the assembled cars in Japan.
Such production and assembly operations have to be coordinated carefully.

FINANCE:
Financial strategies used to be formulated and controlled out of the home office. However, in recent years
MNEs have learned that this approach can be cumbersome, and, because of fluctuating currency prices, it
can be costly. Today overseas units have more control over their finances than before, but they are guided by
a carefully constructed budget that is in accord with the overall strategic plan. They are also held to account
for financial performance in the form of return on investment, profit, capital budgeting, debt financing, and
working capital management. The financial strategy often serves both to lead and lag the other functional
strategies. In the lead position, finance limits the amounts of money that can be spent on marketing (new
product development, advertising, and promotion) and manufacturing (machinery, equipment, quality
12 The International Business

control) to ensure that the desired return on investment is achieved. In the lag position, the financial strategy
is used to evaluate performance and to provide insights regarding how future strategy should changed.

Typical Goals of an MNE

Profitability
Levels of
products
Return on assets,
investment,
equity, sales
Annual profit
growth
Annual earnings
per share growth

Marketing
Total sales volume
Market share
worldwide, region,
country
Growth in sales
volume
Integration of
country markets for
marketing
efficiency and
effectiveness.

Production
Ratio in foreign
to domestic
production
shares.
Economies of
scale via
international
production
integration
Quality and cost
control
Introduction of
cost- efficient
production
methods

Finance

Human Resource
Management

Finance of foreign
affiliates retained
earnings or local
borrowing
Taxation- minimizing
the burden globally
Optimum capital
structure
Foreign exchange
management
minimizing losses
from foreign
fluctuations

Development of managers
with global orientation
management
Development of host
country national

Source: Adapted from Arvind V. Phatak, International Dimensions of Management, 2d ed.

Boston: PWS Kent Publishing, 1989, p. 72

INTERNATIONAL STRATEGIES:
Companies have three different strategies that they can use to compete internationally:

Multi- domestic
Global
Translational

As the figure suggested that the strategy that would be appropriate for the company , overall and for
various activities in the value chain , depends on the amount of pressure the company faces in the terms of
adapting to local markets and achieving cost reductions. Each of these strategies has its own set of
advantages and disadvantages.

13 The International Business

High

Global
Strategy
Pressure to reduce
costs

Translationa
l Strategy

Multidomestic
Strategy
Low
Low

High
Pressure for local adaption

Cost and Adaption Pressures and Their Implications for International

Strategies

GLOBAL STRATEGY:
A global strategy tends to be used when a company faces strong pressures for reducing costs and limited
pressure to adapt products for local markets. Strategy and decision making is typically centralized at
headquarters and the company tends to offer standardized products and services. Value chain activities are
often located in only one or a few areas, to assist the company in achieving cost reductions due to economies
of scale. There tends to be strong emphasis on close coordination and integration of activities across markets
and products as well as the development of efficient logistics and distribution capabilities. These strategies
are common in industries such as semiconductors or large commercial aircrafts. However, global strategies
may also confront challenges such as limited ability to adjust quickly and effectively to changes in customer
needs across national or regional markets, increased transportation and tariff costs from exporting products
from centralized production sites and the risks of locating activities in a centralized location (which can, for
example, cause the firm to confront risks from political changes or trade conflicts, exchange rate fluctuations
and similar factors)

MULTI-DOMESTIC STRATEGY:

14 The International Business

A multi domestic strategy tends to be used when there is strong pressure for the company to adapt its
product or services for local markets. Under these circumstances, decision making tends to be more
decentralized in order to allow the company to modify its products and respond quickly to changes in local
competition and demand. By tailoring its products for specific markets, the company may be able to charge
higher prices. However, local adaption of products usually will increase the company's cost structure. In
order to effectively adapt products, the company will have to invest in additional capabilities and knowledge
in terms of local culture, language, customer demographics, human resource practices, government
regulations, distribution systems and so forth. Adapting products too much to local tastes may also take
away the distinctiveness of the company's products.
EXAMPLE:
KFC's chicken outlets in China are highly popular because they are perceived to reflect American values
and standards, something that might be lost if the company tried to adapt the stores and products to be
more likely other Chinese food outlets.

The extent of local adaption may also change over time, as when customer demands start to converge due
to the emergence of global telecommunications, media and travel, as well as reduced differences in
income between nations. The cost and complexity of coordinating a range of different strategies and
product offerings across national and regional markets can also be substantial.

TRANSLATIONAL STRATEGY:
A translational strategy tends to be used when a company simultaneously confronts pressure for cost
effectiveness and local adaption, and when there is a potential for a competitive advantage from
simultaneously responding to these to two divergent forces. The location of the company's assets and
capabilities as well as based on where it would be most beneficial for each specific activity , neither highly
centralized as with a global strategy, nor widely dispersed as with a multi domestic strategy. Typically, more
" upstream" value chain activities such as product development, raw materials sourcing and manufacturing,
will be more centralized while the more "downstream" activities such as marketing, sales and services will
be more decentralized , located closer to the customer. Of course, achieving an optimal balance in locating
activities is a challenge for management, as in maintaining this balance overtime as the company faces
changes in competition, customer needs, regulations and other factors. Management must ensure that the
comparative advantage of the locations of their value chain activities are captured and internalized rather
than wasted due to the limitations of the organization's people, structures and coordination and control
systems. The complexity associated with the strategic decisions, as well as the supporting structures and
systems of the organization will be much greater with a translational strategy.
NOTED:
It is also important to remember that management must consider the corporate culture when choosing among
strategies. If the company decides to put into effect a quality control system that includes quality circles and
heretofore there has been little employee participation in decision making, the strategy will have to include
the cost of and time for training the employees to accept this cultural change.

CONTROL AND EVALUATION:

The strategy formulation and implementation processes are a prelude to control and evaluation. The control
and evaluation process involves an examination of the MNEs performance for the purpose of determining 1)
how well the organization has done and 2) what actions should be taken in light of this performance. This
process is tied directly to the overall strategy in that the objectives serve as the basis for comparison and
evaluation.
15 The International Business

If the comparison and the evaluation show that strategic business unit or overseas operation is performing
according to expectations, then things will continue as before. The objectives may be altered because of
changes in the strategic plan but otherwise nothing major is likely to be done. On the other hand, if there
have been problems, the MNE will want to identify the causes and work to eliminate or minimize them.
Similarly, if the unit has performed extremely well and achieved more than forecasted, the management may
want to reset the objectives to a higher level because there is obviously greater market demand than was
believed initially. In making these decisions, the company will use a variety of measures. Some will be
highly quantitative and depend on financial and productivity performance; others will be more qualitative
and judgmental in nature.

Establishment of
predetermined
standards

Measurement of these
standards

Yes
Identification
of goals and
other end
points to be
measured

Continue as
before

Does the
performance match the
standards?

No
Take corrective
actions

The Control and Evaluation Process

COMMON METHODS OF MEASUREMENT:

The following discussion examines six of the most common methods of measurement used for control and
evaluation purposes.

RETURN ON INVESTMENT:

Return on investment, which is measured by dividing net income before taxes by total assets, is a major
consideration. There are a number of reasons that ROI is popular as a control and evaluation measure. These
include the fact that:
1) is a single comprehensive result that is influenced by everything that happens in the business,
2) is a measure of how well the managers in every part of the world are using the investments at their
command and
3) allows a comparison of results among units in the same country as well as inter-country basis.
Of course, there are shortcomings in using ROI, such as

16 The International Business

1) the ROL in a growing market will be higher than that in markets which are just getting off the ground
or which are maturing , so that a comparison of the ROI performance between units can be misleading;
and
2) the ROI is a short term measure of performance and if is relied on too heavily, managers will not
develop the necessary long-term time horizons.

SALES GROWTH AND/OR MARKET SHARE:

Another measure is sales growth and/or market share. Units will be given sales targets that usually require
greater sales this year than last year. If the firm has made an estimate of the total demand, a market share
figure will accompany the sales target. The reason for this is twofold:
1)the MNE wants to increase its sales and
2) the firm wants at least to maintain , if not increase , market share. If the market is judged to be
declining, sales targets will be lowered but the MNE will still try to maintain market share.

COSTS:
A third performance area is costs. The MNE will want to achieve increased sales and market share at as low
a cost as possible. The firm will also want to maintain close control of production costs. So expenses will be
monitored carefully. This is particularly important in declining markets, where the company will want to cut
costs as sales decline.

NEW PRODUCT DEVELOPMENT:

New product development is another area of performance measure. This area is extremely important for
firms that rely on new offerings. A good example is Nintendo, the Japanese manufacturer of such wellknown video games as Mario Brothers: In order to maintain market share and sales growth, the company
must continually introduce new product offerings. MNEs in high- tech areas such as electronic goods and
computers also fall into this category. In an environment where product improvement or innovation is
critical to success, new product development is a key area for control and evaluation.

MNE/HOST COUNTRY RELATIONS:

MNE/host country relations is another performance area that must be evaluated. Overseas units have to work
within the cultural and legal framework of the host country. Many attempt to do this by blending into the
community, hiring local managers and employees, adapting their product into the community, hiring local
managers and employees, adapting their product to the demands of that market, reinvesting part (if not all)
of their profits back into the country, and working to improve the economic conditions of the area. As a
result, they get on well in the country and there are no problems with the government or other local groups.
One thing MNEs know from long experience is that poor host country relations can seriously endanger
profits and may result in a loss of invested capital.

MANAGEMENT PERFORMANCE:
Finally, management performance must be considered. In rating this criterion, the MNE will consider two
types of measures: quantitative and qualitative. In the quantitative area, in addition to those discussed above,
other common considerations include return on invested capital and cash flow. In the qualitative area, in
addition to host country relations, consideration will be given to relations with the home office, the
leadership qualities of the unit's managers, how well the unit is building a management team, and how well
the managers of the unit have implemented the assigned strategy.

17 The International Business

These
methods
of

NINTENDOS WORLDWIDE STRATEGY

measurement will be used in arriving at an overall assessment of the unit's performance. Based on the
results, the MNE will then set new goals and the international strategic planning process will begin anew.

Nintendo is the most successful company in the worldwide home video game market. The success is
accounted for by its powerful products and viselike grip on the distribution channels, where marketers sell
Nintendo games exclusively. Nintendo offers more than 200 different games, ranging from baseball to
medieval warfare. The best-known game is Mario Brothers, the all- time highest selling series of games
more than 39 million copies which involves quests through fantasy realms by an Italian plumber who can
transform himself into a raccoon. The game is so well known that a recent poll of U.S. schoolchildren found
Mario to be more popular than Mickey Mouse.
Nintendos strategic approach for capturing and maintaining the market has been well formulated. First, it
continually develops new products. This is critical because many customers already have numerous
Nintendo games, so the firms must bring new offerings to markets; this is done through in- house
development and the purchase of games from other developers. When outside developers produce a product,
Nintendo pays a royalty on all games that are sold; this arrangement has made more than a few Japanese
entrepreneurs very wealthy.
Before bringing a game to market, Nintendo puts it through a rigorous testing procedure to ensure that there
are no problems in there program. At the Nintendo research and development center, it is common to find
groups of designers testing and refining the products in an effort to ensure quality and customer acceptance.
Once the product is ready to release, Nintendo sends it to retailers through out the world. These firms have
agreements with Nintendo that they will not sell competing lines. This helps Nintendo to maintain strong
market channels and thus reduces competition from other game companies. These retail agreements are so
18 The International Business

critical
OPENING CASE:
JOHNSON & JOHNSON
to
success
in the
industry
that
competitors such as Atari Games have filed antitrust suits against Nintendo in the United States.
It Nintendo is to continue growing in a market that could well be saturated by the mid -1990s; it must
develop products and new markets niches. Some of the firms future plans include
1.
2.
3.
4.

Games for adults.

The development of a new generation game console that will provide more lavish video images
Expansion into Europe
The development of nationwide tournaments in which customers can compete from their living
rooms using Nintendos and televisions hooked up to telephone lines and
5. Research into areas such as childhood learning, in order to understand better how to develop
educational games for young children.
One of the biggest threats that the company faces is the shrinking demand brought on by competitive
offerings and a decline of interest in video games. The company is also concerned about its exclusivity
with distributors. On the other hand, if Nintendo can continue to grow as rapidly as it did during the
1980s, the firm will be one of the largest corporations in the world by the turn of the century.

Since beginning operations in 1886, Johnson & Johnson (J&J) has evolved into the most broadly based health-care
corporation in the world. It markets its products in more than 175 countries, generates annual global revenues of more
than $47 billion and employs about 111,000 people (of which nearly 60% are located outside the United States). J&Js
business strategy aims for leadership in the firms three core areas: pharmaceuticals, medical devices, and consumer
products. It pursues this strategy via a complex organizational structure that combines responsibility across 37 product
groups and 14 health-care areas (known as platforms) that act as staging areas from which J&J leverages its
knowledge, development skills, marketing expertise, and global reach. Formal planning at the business-unit level
includes initiatives on major issues such as biotechnology, the restructuring of the health-care industry and
globalization. Although J&Js operating units are largely decentralized, headquarters managers are responsible for
coordinating production and marketing on a global basis and dealing with issues common to many or all operating
units. Successful employees are rotated among units. Self-directed councils (research, operations, etc.) meet regularly
to swap ideas.

19 The International Business

INTRODUCTION:
Organizational challenges abound in this era of globally dispersed resources and operations. International
managers must create structures, systems, and a culture that will effectively implement their companys
strategies around the world. Formulating the appropriate strategy is merely the first step of a long process
that includes crafting an organization that will work to implement that strategy. The organization of
international business is challenging due to:
1.
2.
3.
4.
5.

the geographic and cultural distances that separate countries

the need to operate differently among countries
the large number of uncontrollable factors
the high uncertainty resulting from rapid change in the international environment
problems in gathering reliable data in many places

THE CAUSES OF CHANGE:

In the past, structuring the organization was thought to be merely a matter of reorganizing the lines and
boxes of the formal organizational chart. In times of rapid change, however, it is necessary to jumpstart the
development of knowledge-generating and decision-making relationships rather than to wait for them to
form according to the prescribed organizational chart. Globalization has changed the opportunity set and
efficiency frontier for companies and has resulted in new strategies that demand more sophisticated
organizations. Knowledge has become the engine of sustainable competitive advantage, requiring MNEs to
build organizations that spread powerful ideas throughout their worldwide business. Finally, workplace
trends in which the conduct and context of jobs are changing require that organizations change the nature of
management and structure to fit the changes in the nature of work.

20 The International Business

ORGANIZATION IN THE INTERNATIONAL BUSINESS:

Companies seek to develop a complementary mix of structure, coordination and control systems, and
organizational culture in order to thrive in the face of significant environmental and workplace changes.
Flexibility is fostered in many organizations through the use of cross-functional task forces, dual reporting
relationships, informal networking, and incentive compensation tied to group performance.

ORGANIZATION STRUCTURE:
Organizational structure is the formal arrangement of roles, responsibilities, and relationships within an
organization and is a powerful tool with which to implement strategy. A companys choice of structure
depends on many factors, including the configuration of a companys value chain in terms of the location
and type of foreign facilities, as well as the impact of international operations on total corporate
performance. Two central issues in organization structure are vertical and horizontal differentiation.

Organizational Structure of Coco Cola

A. VERTICAL DIFFERENTIATION: CENTRALIZATION VERSUS

DECENTRALIZATION
Vertical differentiation refers to the issue of determining where in the company hierarchy is the
authority to make what decisions. This issue becomes a decision between centralization versus
decentralization of decision making authority. This relates to the discussion in Chapter 11, which
illustrated the issue of balancing global integration (centralization) with local differentiation
(decentralization). Centralization is the degree to which high-level managers, usually above the
country level, make important decisions and pass them down to lower levels for implementation.
Decentralization is the degree to which lower level managers, usually at or below the country
21 The International Business

level, make and implement important decisions . Centralized decision making is usually associated
with an international or global strategy, decentralized decision making is usually associated with a
multidomestic strategy, and a transnational strategy usually relies on a combination of both.

Vertical Differentiation
Concerned with where decisions are made

Centralization:

I.

Facilitates coordination
Ensure decisions consistent
with organizations objectives
Top-level managers have means
to bring about organizational
change
Avoids duplication of activities

Decentralization:

Give top management time to

focus on critical issues
Motivational research favors
decentralization
Permits greater flexibility
Can result in better decisions
Can increase control

B. HORIZONTAL DIFFERENTIATION: THE DESIGN OF THE FORMAL

STRUCTURE
Horizontal differentiation describes how the company designs its formal structure in order to (i)
specify the total set of organizational tasks, (ii) divide those tasks into jobs, departments,
subsidiaries, and divisions, and (iii) assign authority and reporting relationships.
INTRODUCTION
Organizational challenges abound in this era of globally dispersed resources and operations.
International managers must create structures, systems, and a culture that will effectively implement
their companys strategies around the world. Formulating the appropriate strategy is merely the first
step of a long process that includes crafting an organization that will work to implement that strategy.
Figure 15.1 summarizes the challenge of integrating different elements into a unified whole.

II. THE CAUSES OF CHANGE

In the past, structuring the organization was thought to be merely a matter of reorganizing the lines and
boxes of the formal organizational chart. In times of rapid change, however, it is necessary to jumpstart
the development of knowledge-generating and decision-making relationships rather than to wait for
them to form according to the prescribed organizational chart. Globalization has changed the
opportunity set and efficiency frontier for companies (see Chapter Eleven) and has resulted in new
strategies that demand more sophisticated organizations. Knowledge has become the engine of
22 The International Business

sustainable competitive advantage, requiring MNEs to build organizations that spread powerful ideas
throughout their worldwide business. Finally, workplace trends in which the conduct and context of
jobs are changing require that organizations change the nature of management and structure to fit the
changes in the nature of work.
III. ORGANIZATION IN THE INTERNATIONAL BUSINESS
Companies seek to develop a complementary mix of structure, coordination and control systems, and
organizational culture in order to thrive in the face of significant environmental and workplace changes.
Flexibility is fostered in many organizations through the use of cross-functional task forces, dual
reporting relationships, informal networking, and incentive compensation tied to group performance.
IV. ORGANIZATION STRUCTURE

Organizational structure is the formal arrangement of roles, responsibilities, and

relationships within an organization and is a powerful tool with which to implement
strategy. A companys choice of structure depends on many factors, including the
configuration of a companys value chain in terms of the location and type of foreign
facilities, as well as the impact of international operations on total corporate performance.
Two central issues in organization structure are vertical and horizontal differentiation.

23 The International Business

B. Vertical Differentiation: Centralization versus Decentralization

Vertical differentiation refers to the issue of determining where in the company hierarchy is the
authority to make what decisions. This issue becomes a decision between centralization versus
decentralization of decision making authority. This relates to the discussion in Chapter 11, which
illustrated the issue of balancing global integration (centralization) with local differentiation
(decentralization). Centralization is the degree to which high-level managers, usually above the
country level, make important decisions and pass them down to lower levels for implementation.
Decentralization is the degree to which lower level managers, usually at or below the country
level, make and implement important decisions (See Table 15.1). Centralized decision making is
usually associated with an international or global strategy, decentralized decision making is usually
associated with a multidomestic strategy, and a transnational strategy usually relies on a
combination of both.
B. Horizontal Differentiation: The Design of the Formal Structure
Horizontal differentiation describes how the company designs its formal structure in order to (i)
specify the total set of organizational tasks, (ii) divide those tasks into jobs, departments,
subsidiaries, and divisions, and (iii) assign authority and reporting relationships.
C. Functional Structure
A functional structure groups personnel according to business function. It is ideal when products
and production methods are undifferentiated across countries. However, as new and different
products are added, the structure becomes cumbersome.
D. Divisional Structures
Divisional structures specify roles and relationships within the company in terms of outputs. Each
division is assigned responsibility for a different set of products or markets.
1. International Division Structure. An international division groups all international
activities into a single division within a firm. While this structure creates a critical mass of
international expertise, the relationship between the international and domestic divisions is
often complicated.
2. Product Division Structure. Product divisions are very popular among international
companies today because most companies businesses involve a variety of diverse products.
This structure is well suited for a global strategy and enhances a companys ability to sell or
spin off certain product lines. There will, however, likely be some duplication of activities
among product divisions and knowledge transfer between divisions is minimal.
3. Geographic (Area) Division Structure. A geographic division groups activities on a
regional basis and is used when a firm has extensive foreign operations that are not dominated
by a single country or area. The structure is useful when maximum economies of scale and
scope can be captured on a regional rather than a global basis.

24 The International Business

E. Matrix Structure
A matrix structure is a two-tiered structure designed to give functional, product and/or geographic
groups a common focus. It is based on the theory that the groups will become interdependent and
thus will more readily exchange information and resources with each other. However, the dual
reporting/oversight responsibilities can also create conflicts across groups with differing objectives.
F. Mixed Structure

Firms seldom if ever get all of their activities to neatly correspond to a single

organizational structure. Most exhibit a mixed structure, particularly with respect to foreign
operations, due to legacies, executive preferences, and other circumstances.

G. Contemporary Structures
Many companies are moving away from traditional structures as the demands and opportunities of
the international environment change. Some examples of contemporary structures include those
described as learning organizations, virtual organizations, or modular structures. All of these share
the same premise: A structure should not be defined by, or limited to, the horizontal, vertical, or
external boundaries that block the development of knowledge-generating and decision-making
relationships in the company. Contemporary structures aim to have few to no boundaries between
different vertical ranks and functions, different units in different geographical locations, and
between the firm and its suppliers, distributors, joint venture partners, strategic allies, and
customers. Other examples of contemporary structures include the network, virtual, and project
structures.
H. Network Structure
A network organization is a small core organization that outsources value activities to key
partners (see Figure 15.3). Many Japanese firms are linked through keiretsus, i.e., networks in
which each firm owns a small percentage of the others in the network. Keiretsus may be either
vertical or horizontal in nature.
I. Virtual Organization
A virtual organization is a temporary arrangement among partners that can be easily reassembled to
adapt to market change. Operationally, the virtual organization consists of a small core of full-time
employees that temporarily hires outside specialists to work on opportunities that arise. Market
mechanisms such as contracts, rather than hierarchy and authority, hold the virtual organization
together.
J. Project Structure
This type of organization has no departments or employee job titles. All work is project based, with
project teams forming, disbanding, and forming again as the flow of work requires. This type of
structure has proven difficult to sustain and has at times given way to a more traditional matrix
organization structure.
V. COORDINATION AND CONTROL SYSTEMS
Systems are the framework of processes and procedures used to ensure that an organization can fulfill
all tasks required to achieve its objectives. MNEs use several coordination and control tools to manage
the strategic performance of their value chains.
A. Coordination Systems
Coordination systems link the various activities of a company to counteract the tendency of
different groups of managers and employees to develop different concerns and orientations based
on their location and immediate responsibilities. Managers tap several approaches to coordinate the
operations of interdependent units and individuals including coordination by standardization, by
plans, and by mutual adjustment.
1. Coordination by Standardization. Companies with widely dispersed operations often
standardize the ways that employees do their jobs and deal with customers. Standardization
25 The International Business

sets universal rules and procedures that apply worldwide and enforces consistency in
performance of activities in geographically dispersed units. Rules and regulations about how
employees interact, also called formalization, aims to reduce workplace uncertainty and
simplify the exchange of ideas and resources. Standardization is undermined when frequent
exceptions to rules are made, and is best suited for strategies that champion constancy and
predictability in stable industries. Companies with an international or geocentric strategy are
inclined to emphasize standardization.
2. Coordination by Plan. This type of coordination requires interdependent units to meet
common deadlines and objectives. MNEs following a multidomestic strategy may opt to
establish objectives and schedules that give interdependent units greater discretion in
developing coordination systems. This process is often complicated by the difficulties imposed
by distance and cultural differences. Greater expense, time, and possibility of error are
inherent in planning across national boundaries.
3. Coordination by Mutual Adjustment. Coordination by mutual adjustment
requires managers to interact with counterparts to enable flexible coordination mechanisms,
largely informally. MNEs that opt to encourage mutual adjustment also adopt a formal
structure and install standardization and planning systems, but they see great value in
encouraging the use of informal mechanisms that create more incentive for parties to talk to
one another. Mutual adjustment can be a very effective coordination tool when an MNE faces
new problems that cannot be defined with customary rules or procedures. The frequent
discussion and feedback needed to make mutual adjustment work, however, can be costly in
terms of both time and money.
2. Visits to Subsidiaries. Within many MNEs certain members of the corporate staff spend
considerable time visiting foreign subsidiaries in order to collect information and provide
direction.
3. Management Performance Evaluation. MNEs should evaluate a subsidiary manager
separately from the subsidiarys performance so as not to penalize or reward managers for
conditions beyond their control. That said, precisely what is within their control is frequently a
matter for disagreement.
4. Cost and Accounting Comparability. Headquarters needs to use considerable discretion
in interpreting the data it uses to evaluate and change subsidiary performance, especially if it is
comparing a subsidiarys performance with competitors from other countries whose currencies
and accounting methods are different from its own.
5. Evaluative Measurements. A system that relies on a combination of measurements is more
reliable than one that doesnt. The most important criteria tend to be budget-compared-withprofit and budget-compared-with-revenue. Other non-financial criteria such as market share,
quality control, and host government relations are also important.
6. Information Systems. With ever-expanding computer and global telecommunications links,
managers can share information more quickly and easily than ever before. In fact, information
technology can facilitate both the centralization and the decentralization of operations. The
primary problems associated with information systems concern the cost of information relative
to its value, its redundancy, and its irrelevance.
VI.

ORGANIZATION CULTURE
Organization culture is a system of shared values about what is important and beliefs about how the
world works. There is a significant link between organization culture and the financial performance
of a firm and can be the most critical component of a companys transition from good to great
status. Key features of culture include values and principles of management, work climate and
atmosphere, patterns of how we do things around here, traditions, and ethical standards.
A. The Growing Importance of Culture
26 The International Business

Organization culture often shapes the strategic moves a company will consider and reject and can
dramatically influence the success of corporate initiatives. Culture is increasingly important as team
based approaches to management and reliance on individual-level behaviors such as learning and
collaboration become more commonplace. The shared values that make up organization culture
influence what employees perceive, how they interpret, and what they do to respond to their world.
When confronted with opportunities or threats, organizational culture acts as a primary influence on how
employees act and react.
B. Challenges and Pitfalls
Companies increasingly develop and manage their cultures, rather than allowing them to emerge
naturally. This becomes increasingly difficult in an international context, where managers from different
countries often have different values than those endorsed by the company. Convergent values ease the
exchange of ideas between people from different countries, while different values tend to create
boundaries and barriers. To overcome these challenges, many MNEs promote closer contact among
managers from different countries by rotating mangers among operations in different countries.
C. Strategy and Organization Culture
The type of strategy a company is pursuing both influences and is limited by the principles and practices
of its organization culture . Companies pursuing a global strategy often aim to develop a forceful culture
that reinforces standardized goals, priorities, and practices. Multidomestic strategies require sensitivity
to local outlooks and norms and do not lend themselves well to a strong company-wide culture.
VII.

ORGANIZATION IN SPECIAL SITUATIONS

A. Acquisitions
An acquired company usually does not completely mesh with the existing organization and requires
changes in structures, control systems, and cultural values in order to integrate more fully with the
companys other operations.
B. Shared Ownership
Shared ownership usually makes control harder than it would be with wholly owned operations, but
there are mechanisms that can work, such as spreading the remaining ownership among many
shareholders, contract stipulations that board decisions require more than a majority, dividing equity into
voting and nonvoting stock, and side agreements on who will control decision making.
C. Dynamic Nature of Performance

As companies grow, and particularly as they expand internationally, organizational structure and control
demands evolve. Companies change their structures and control systems to meet the new requirements
that come with growth.
VIII.

THE ROLE OF LEGAL STRUCTURES

When operating in a host country, companies may choose among legal forms that affect their decisionmaking, taxes, maintenance of secrecy and legal liability. Most choose a subsidiary form for which there
are additional legal alternatives that vary by country.
C. Branch and Subsidiary Organizations
A foreign branch is a foreign operation not legally separate from the parent company. Branch
operations are possible only if the parent holds 100 percent ownership. A foreign subsidiary,
however, is a separate legal entity, established through foreign direct investment; the parent may or
may not own all of the voting stock. Because a subsidiary is legally separate from its parent, legal
authorities generally limit liability to the subsidiarys assets. This concept of limited liability is a
major factor in the choice of the subsidiary form. With few exceptions, claims against a firm for its
actions are settled by courts either where the actions occur or where the subsidiary is legally
domiciled.
27 The International Business

D. Types of Subsidiaries and Operating Form

When establishing a subsidiary in a foreign country, a firm can usually choose from among a number of
alternative legal forms. In addition to differences in liability, forms vary in terms of:

the ability of the parent to sell its ownership

the number of stockholders required to establish a subsidiary
the percentage of foreigners allowed to serve on a board of directors
the amount of required public disclosure
whether equity may be acquired by non-capital contributions
the types of eligible businesses
the minimum capital requirements for establishing a subsidiary.

CONCLUSION
As we all know that international business is the study of transactions
taking places across national borders for the purposes of satisfying the
needs of individuals and organizations. These economic transactions
consist of trade, as in the case of exporting or importing, and direst
investment of funds in overseas operations. So, for conducting the
transactions with foreign countries companies first need to understand
the dynamic environment of international business and then they must
find out the answer of this question: How can they survive in this
complex environment? To answer this question they need to adopt the
whole and comprehensive process of Strategic Planning. The
international strategic planning process consists of three major steps:
strategy formulation, strategy implementation and the control and the
evaluation process. Strategy formulation helps in achieving short range
and long objectives. Strategy implementation is the process of attaining
predetermined goals by properly executing the formulated strategy.
And the last process of the control and evaluation involves an
examination of the MNEs performance for the purpose determining how
well the organization has done and for deciding what action now needs
to be taken. All these steps help the organization in achieving its
international goals .the second part of the report deals that how multi
national enterprises organize their operations worldwide by adopting
appropriate structure, control systems and mechanisms, culture and
what
is the nature
of the organization in certain situation as well as the
Business
28 The International
legal structure in the international countries in which they operate. All
these aspects while organizing operations and conducting international
economic transactions successfully are necessary to understand.

29 The International Business

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www.prenhall.com/chap 15 ppt the organization of international business

books.google.com/books
www.globalization101.org

30 The International Business