Chapter 4: International Strategy and Organization

Conceptual Foundations of International Business Strategies

Strategy refers to a plan for interacting with the competitive environment to achieve organizational goals.

Although organizational goals vary, it could be argued that increasing the value for shareholders and other stakeholders is among the primary goals of any organization. In order to increase the value of the organization, managers have to pursue strategies that guarantee increased profits today and in the future by developing strategies that enable the organization to increase profit margins.

Managers may also pursue strategies that focus on selling more products and services in the existing markets, or they pursue entering new markets in order to achieve increased profitability. Expanding the operations to an international level could contribute to the current profitability while increasing the rate of profit growth.

Although international businesses follow a similar path with domestic organizations while developing their strategies, variables that must be taken into consideration in the strategy formulation process are much more complicated for international businesses.

The international strategy development process starts with the analysis of the strengths, weaknesses, opportunities, and threats that affect the organization. Such an analysis that aims to determine the internal and external variables of the organization is known as a SWOT analysis . Upon the completion of the SWOT analysis, businesses can take solid steps toward developing their strategies.

These strategies focus on more than one country, and they are implemented in more than one country. International business managers formulate strategies in order to use their organizational resources effectively and efficiently, perform activities that create value at a global scale, operate in important markets, establish value-adding international partnerships, and respond to attacks by the competitors.

International businesses must pursue efficiency on a global scale. Furthermore, they require a certain level of flexibility for country-specific risks and opportunities. They learn from their international experiences, and they apply the lessons learned at the international level.

Businesses that are striving to achieve a global competitive advantage pursue various strategic objectives.

Efficiency

It refers to how an organization utilizes its resources while achieving its goals.

If organizational resources are wasted or kept idle, then it could be said that efficiency is low. For this reason, both the resources related to production and other resources such as human resources, monetary resources, and capital resources should not be wasted or kept idle.

Concerning efficiency, the main difference between international and domestic businesses is that international businesses obtain their resources from different countries and utilize them in those countries. Thus, international businesses seek organizational and managerial efficiency on a global scale.

Flexibility

It refers to an organization’s ability to respond to uncertainties by adjusting its objectives with the support of its superior knowledge and capabilities. While uncertainties cause threats for many businesses, for those who have a high level of strategic flexibility, such uncertainties could be turned into opportunities.

Businesses that are not capable of dealing with uncertainties better than their competitors cannot have market-oriented flexibility. By reducing market-related uncertainties and exerting influence on customer expectations, businesses could have more strategic options and adopt a more proactive competitive approach.

Similarly, businesses with highly flexible production systems would be most likely to have resource-oriented flexibility. Such businesses can adapt to changing market conditions faster than their competitors. In order to achieve and maintain a competitive advantage, businesses need to be flexible in their planning processes and other activities.

Having a high level of flexibility is especially important for international businesses. This is because the diversity of the environmental conditions and relatively faster changes in these conditions require international businesses to have strategic flexibility at both strategic and operational levels. However, it is essential to note that obtaining high levels of flexibility is a more challenging task for international businesses.

Learning

Diversity and change in environmental conditions lead to superior experiences for international businesses. Such experiences could be considered as learning opportunities. Notably, the dynamic environmental conditions in which international businesses operate provide unique learning opportunities.

Seizing these opportunities along with learning from the experiences helps organizations efficiently use their resources and benefit from the opportunities that they encounter. There are two major types of learning known as exploratory learning and exploitative learning .

• Exploratory learning refers to the learning of product and process development skills that are entirely new to the current experiences of the firm. Search, variation, risk-taking, experimentation, play, flexibility, discovery, and innovation are among the keywords in exploratory learning activities.
• Exploitative learning refers to learning from the knowledge and skills that are familiar with the organizations’ current experiences. Refinement, choice, production, efficiency, selection, implementation, and execution are among the keywords in exploitative learning activities.

Strategy Preferences of International Businesses

The aim of different preferences of International Businesses is to enable organizations to achieve their goals in a dynamic environment.

Product-Market Strategies

According to the matrix, organizations could achieve competitive advantage through market penetration, market development, product development, and diversification .

• Market Penetration Strategy: According to the market penetration strategy, businesses aim to increase their sales without abandoning their existing product-market strategies. Among these strategies are increasing the sales to the existing customer base or finding new customers for the existing products and services.
• Market Development Strategy: In market development strategies, businesses modify the characteristics of their products and services. By doing so, modified products and services enable the organization to enter new markets.
• Product Development Strategy: According to the product development strategy, businesses keep operating in their existing markets while developing new products and services. Businesses pursuing the product development strategy aim to offer the existing customers new products and services. Adding new specifications to the products or making radical changes in the design of a product are examples of product development strategies.
• Diversification Strategy: Because businesses change both their product mix and their markets in diversification strategy, simultaneous changes in the market and product mix cause this strategy to be known as risky. One of the main factors that determine the level of risk is how far the business departs from the existing products and markets. Businesses encounter a higher level of risks when they radically diversify their products and markets.

Businesses can pursue more than one product-market strategy at the same time. Such an approach is an indicator of the competitive power of the business and how well the business is managed.

Concurrent use of the first three strategies is an ideal option, and it provides businesses with a competitive advantage in today’s dynamic conditions.

Competitive Strategies

Strategic decisions made by the managers have essential effects on the competitive position of the business. Such competitive advantages were often expressed in terms of the additional added value which the more successful firms in an industry were able to generate vis-à-vis the most marginal firm in that industry. There are three generic strategies for businesses, each of which aims to help organizations achieve a competitive advantage.

• Cost Leadership Strategy: This strategy requires the business to achieve costs lower than its competitors. Maintaining quality while lowering the costs is an essential issue in cost leadership strategy, which requires increased efficiency, tight cost control, and cost minimization in different functional areas.
• Differentiation Strategy: Differentiation strategy focuses on innovation and superior value creation instead of cost control by offering unique and superior products and services in order to offer inimitable and unique products and services which, in return, lead to customer loyalty. The businesses that are pursuing this strategy are more likely to have better flexibility in setting the prices for their products and services.
• Focusing Strategy: Focusing strategy refers to selecting a particular buyer group or niche market as the basis for competition rather than the whole market or industry. It has two sub-strategies such as focused cost leadership strategy and focused differentiation strategy. Businesses using the focused cost leadership strategy strive to achieve a competitive advantage by selling their products and services at a relatively lower price level in a specific market. On the other hand, businesses pursuing a focused differentiation strategy strive to achieve a competitive advantage by offering unique and inimitable products and services to a specific market.

Domestic businesses pursue strategies based on one single country. Thus, all primary and support activities in the value chain are performed in one single country. On the other hand, an international business adopts a global perspective in performing all of its activities. Regardless of the industry, businesses could follow different international strategies.

Strategy in the Current Competitive Environment

There are four significant trends in the current environment:

1. Recognizing the changes in the field of strategy: The deregulation and privatization of government-controlled industries, the rapidly changing technological environment, and access to new market opportunities in developing countries such as China, India, and Brazil and in transitioning economies such as those in Central and Eastern Europe offer businesses completely new strategic options and opportunities.
2. Recognizing the effects of globalization: The globalization of business activities introduces new strategic opportunities and threats. Furthermore, domestic businesses have to respond to the actions of global businesses in their local markets. Mass customization and quick-response strategies require international businesses to be responsive to local demands.
3. Recognizing the importance of timely response: Today organizations’ capability to deal with opportunities and threats mainly depends on how fast they take action for these opportunities and threats.
4. Recognizing the importance of innovation: Successful businesses still have to innovate their products, services, and processes. Furthermore, current innovations are expected to provide businesses with timely, reliable, and quick information about their customers.

Although strategy development was considered to be a top management activity in the past, the current view suggests that all levels of the organization should have a role in the strategy development process.

Organizational design preferences, strategy formulation, and implementation processes are closely linked to the effective implementation of strategies. Therefore, organizations will not be able to achieve their goals when there is no alignment between organizational structure and strategy.

Organizing in international Businesses

Organizational structures are determined based on the needs and requirements of the organization.

The globalization process generally starts with the internationalization of local activities. At this stage, local markets are still focal to the businesses. International activities are generally considered as secondary activities in this stage.

As international operations grow further, building an organizational structure to cope with this growth becomes critical for the organization. Otherwise, businesses will not be able to meet the requirements of the global environment. At the initial stage, the organization would be most likely to build a department to handle international activities. There are several options for the business at this stage. However, as the scope of global activities expands further, businesses seek further and more advanced alternatives and solutions for organizational design decisions.

International Division: It centralizes all international operations. There are two advantages of this structure:

1. It reduces the CEO’s burden of the direct operation of overseas subsidiaries and domestic operations.
2. It creates a management team that prioritizes overseas operations. All information, authority, and decision making related to foreign efforts are channeled to this division, so there is one central clearing point for international activities.

There are also a few disadvantages of this structure:

1. A dysfunctional rivalry may emerge between domestic and international operations.
2. Failure in the successful planning of the distribution of resources between domestic and international operations may lead to severe problems.

International Organizational Design Models

Only by adopting a global organizational structure, the businesses will be able to respond to the complex and unstable conditions introduced by the international environment. The organizational structure must be built in alignment with the organizational requirements. There are several organizational design options for international businesses.

Global Product Structure

Organizations with diverse products and services prefer product structure. All international operations are also organized around these products and product groups. Organizations that adopted a global product structure may also have regional experts. Thus, they can determine the region-specific needs more accurately and respond to these needs faster. There are some advantages of the global product structure:

• There is strong coordination between functional areas that supports product groups.
• Market and customer needs are better understood since this structure focuses on products and customer groups.

There are also some disadvantages of the global product structure:

1. The duplication of functions in different product groups
2. More employment
3. Higher costs.

Global Area Structure

In this structure, businesses are organized around countries or country groups. The departments and divisions are responsible for the whole functions and products in a given geographical area.

The global area structure has some advantages:

1. Businesses can quickly respond to diversified regional needs and expectations.
2. This structure enables an organization to seize opportunities offered by different geographical areas.
3. The hierarchical structure is open and clear. Businesses can gather region-specific knowledge, and this knowledge can be used for obtaining a competitive advantage.

There are also some disadvantages of the global area structure:

1. Different geographical areas may start operating as independent divisions, which, in turn, causes coordination problems within the organization.
2. The duplication of functions in each geographical area is another disadvantage.

Global Functional Structure

It is less commonly used by international businesses. According to this structure, businesses are organized around the main functions such as marketing, finance, production, and R&D. A Global functional structure is effective only when there is strong coordination between the departments and units.

There are a few advantages of global functional structure:

1. This structure is a simple and lean structure. Thus, it is much easier to establish a robust coordination mechanism in global functional structures.
2. It supports and enhances specialization within the organization.
3. It allows an easier and more effective career planning for the employees.

There is also a disadvantage of the global functional structure:

When departments act independently, there appear functional barriers which, in turn, reduce the coordination within the organization. The subordination of organizational goals to departmental goals may lead to this problem. When such a problem occurs, organizations may find it hard to achieve organizational goals.

Matrix Structure

It is a hybrid organizational design option that blends two organizational responsibilities, such as functional structure and product structure or regional structure and product structure.
There are some advantages of matrix structure:

1. It enables an organization to focus on its capabilities and experiences and share its resources between its divisions, which, in turn, leads to efficient use of organizational resources.
2. Especially when the environmental conditions call for specialization, innovation, and meeting regional needs, the matrix structure could be an excellent organizational design option.

There are a few disadvantages of the matrix structure:

1. It may lead to problems in authority. The dual authority that is inherent in the matrix structure may cause problems for both employees and supervisors since subordinates report to two supervisors in the structure.
2. When not appropriately managed, the matrix structure is prone to communication problems.
3. The matrix structure is a costly structure.
4. Offering constant training to the employees and supervisors, and establishing an effective communication system are the essential for a strong structure.