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PART 3
STRATEGY AND OPPORTUNITY ASSESSMENT
CHAPTER 11
STRATEGY AND ORGANIZATION IN THE INTERNATIONAL FIRM
Instructor’s Manual by Marta Szabo White, Ph.D.
I. LECTURE STARTER/LAUNCHER
■ This chapter marks a transition in the textbook and in the course that moves us from a
macro-level analysis of international business to the micro, or firm, level. In Chapter 11,
we begin to discuss the actions that firms take and their options as they consider
international business.
■ The instructor may start by talking about Nestlé, an international company that most
students will recognize and that has used various strategies in its history to succeed in
international business.
■ Ask students to name some of the Nestlé products. U.S. students may name Nestle’s
Quik and Nestle’s Crunch bars; Latin American students may mention Nescafé; African
students may name Milo, a nutritious breakfast drink quite different from Quik; British
students may name Kit-Kat bars.
■ Many students are surprised that Nestlé is a relatively “nationless” company, based
in Switzerland, but not particularly tied to any country. Always international, Nestlé has
moved from using a multidomestic strategy to integrating some aspects of a global
strategy, and, in some ways, is working to achieve a transnational strategy.
■ All three are strategy types that students will learn about in this chapter. Nestlé’s
historical tendency to use a very local approach to manufacturing and marketing in each
country is a rich example of how a company’s international strategy can evolve.
■ See the article by Yeniyurt, Cavusgil and Hult (2005) in International Business
Review, 14: 1-19 titled A Global Market Advantage Framework: The Role of Global
Market Knowledge Competencies.
http://econpapers.repec.org/article/eeeiburev/v_3a14_3ay_3a2005_3ai_3a1_3ap_3a1-1
9.htm
Accessed: October 31, 2015
■ Market entry strategies consist of exporting, sourcing, foreign direct investment,
licensing, franchising, and non-equity alliances. This chapter explains one type of
foreign market entry strategy: Exporting, and in so doing, also discusses the counterpart
of exporting: Importing (also called global sourcing), as well as countertrade.
■ Explain to students that many companies begin their international ventures by
exporting, principally because, all else being equal, it is the least risky and the easiest to
recover from if things go wrong.
■ For example, if a SME (small or medium-sized enterprise) exports one shipment to a
foreign customer, and the shipment gets tied up unexpectedly in customs, or it arrives in
poor condition, or the product isn’t positioned properly in the new market, or if the
customer decides not to pay, certainly there are problems to solve. But it is still only one
shipment, and the loss of resources is limited and compartmentalized.
■ Explain how domestic companies can use exporting to extend the life cycle of their
products, to gain experience doing business internationally, and to compensate for slow
growth in the domestic market, among other reasons.
■ Some products are more appropriate to export to some countries than others. For
example, chances are that the market for consumer products such as clothing,
household goods, food, and health and beauty items is strong in China, but that foreign
products may be difficult to sell there on a widespread basis. This is because China has
established a strong capability to produce these items in China, making the cost of
imported goods (except for some very high-end luxury items) quite prohibitive.
■ Tariffs and duties on imported items of that nature also tend to be high, in part
because the Chinese government wants to protect local industries from competition.
However, U.S. firms find the Chinese market is quite receptive to heavy machinery and
industrial equipment imports made in the U.S. because they have a reputation for
quality and reliability. Duties on these products tend to be low, and even small- and
medium- sized firms can be successful exporters if they conduct good research, identify
appropriate products, and carefully plan their export goals and deliverables.
■ Visit globalEDGE (globaledge.msu.edu), search on China then click on the U.S.
Department of Commerce Country Commercial Guide, and review the chapter on
Leading Sectors for U.S. Export and Investment, to start finding information about this
topic.
II. LEARNING OBJECTIVES AND THE OPENING VIGNETTE
LEARNING OBJECTIVES
After studying this chapter, students should be able to:
11.1 Describe strategy in international business.
11.2 Understand building the global firm.
11.3 Describe the integration-responsiveness framework.
11.4 Learn to identify strategies based on the integration-responsiveness framework.
11.5 Understand organizational structure in international business.
11.6 Understand foreign market entry strategies.
Key Themes
■ In this chapter, there are six themes:
[1] Strategy in international business.
[2] Building the global firm.
[3] The integration-responsiveness framework.
[4] Strategies based on the integration-responsiveness framework.
[5] Organizational structure in international business.
[6] Foreign market entry strategies.
■ Chapters 1 through 10 discussed the macro or general environmental level of doing
business internationally, focusing on the Foundation Concepts and the Environment
of International Business. Chapters 11-17 will focus on the micro- or firm level and
discuss how individual companies use macro-level information to make good
international entry decisions, focusing on Strategy and Opportunity Assessment,
Entering and Working in International Markets, and Functional Area Excellence.
■ It is important that the instructor make this point about distinct levels of analysis, and
perhaps draw a diagram that looks like one-half of a hard-boiled egg: a large circle
labeled “macro-level” with a smaller circle inside labeled “micro- or company-level.” It
helps students understand the difference.
■ So, here is where firm-level decision making matters, and managers start thinking
about how the concepts in Chapter 1-10 may provide opportunities – or risks – to their
companies.
■ To undertake an international venture, managers have to think, analyze and plan.
■ This involves considering what industry the firm is in and what resources the firm has
– both of which are huge determinants of how the firm will operate and compete in an
international venture.
Themes
[1] Strategy in international business.
The firm that aspires to become globally competitive must simultaneously seek three
key strategic objectives—efficiency, flexibility, and learning.
[2] Building the global firm.
Managers who exhibit visionary leadership possess an international mind-set,
cosmopolitan values, and a globally strategic vision.
[3] The integration-responsiveness framework.
The integration-responsiveness (IR) framework describes how internationalizing firms
simultaneously seek global integration and local responsiveness.
[4] Strategies based on the integration-responsiveness framework.
The IR framework presents four alternative strategies: home replication strategy,
multidomestic strategy, global strategy and transnational strategy.
[5] Organizational structure in international business.
Organizational structure determines where key decisions are made, the relationship
between headquarters and subsidiaries, and the nature of international staffing. Six
organizational structures are discussed: the export department, the international
division structure, the geographic area structure, the product structure, the
functional structure and the global matrix structure.
[6] Foreign market entry strategies.
■ Market entry strategies consist of exporting, sourcing, and foreign direct
investment as well as licensing, franchising, and nonequity alliances.
■ Each strategy has advantages and disadvantages. To select a strategy, managers
must consider the firm’s resources and capabilities, conditions in the target country,
risks inherent in each venture, competition from existing and potential rivals, and the
characteristics of the product or service to be offered in the market.
■ Global sourcing (importing) is the procurement of products and services from
worldwide sources for use at home.
Teaching Tips
■ Tell students you will focus on two important, and somewhat opposing, characteristics
of good international strategy: the need to integrate operations worldwide to keep
transaction and other costs low, and the need to be responsive to individual country and
regional markets.
■ Emphasize that this doesn’t just mean designing the product to local tastes and
customs, or sourcing manufacturing from one country such as China.
■ It means determining how integration and customization affect all pieces of the value
chain including distribution, marketing, legal considerations, human resources, and
competition, as well as the product itself.
■ Ask students if they’ve traveled abroad, and if they’ve seen and used any products or
services overseas that they recognize from home: McDonald’s, Coca-Cola, Burger King,
Starbucks, Midas Muffler, Hertz, Avis, Nestlé.
■ Ask students if their experience with the product was the same abroad as it is at
home. What differences did they experience? Why?
■ Talk about this and explain that this is one way that companies handle local
responsiveness.
■ Now ask them about some other companies: Dannon, Michelin, Bayer. Did they know
that the first two are French (Dannon, the yogurt maker, is called Danone in France) and
the third is a German chemical company that invented aspirin?
■ Explain that the industries each company is in will determine what kind of strategy
they use: food and consumer products companies with an international scope have
tended to use multi-domestic strategies, at least to begin with, since customer
preferences vary so much across markets.
■ The sections in the chapter on organizational structure and process may be a
challenge.
■ Students often find structure a boring topic, since structure is so hard for students to
see. It is challenging to make it interesting.
■ It will help your explanation to point out that strategy and structure have to fit and
match to work properly.
■ Try reinforcing the notion that, in order for a company’s international venture to work,
managers must use proper and visionary (1) leadership, (2) strategy, (3) org culture, (4)
org structure, and (5) org processes.
Commentary on the Opening Vignette:
IKEA’s STRATEGIES FOR GLOBAL SUCCESS
Key message
■ This vignette reveals that IKEA successfully combines global operational efficiencies
in production and training with local responsiveness by delegating autonomy and
decision-making regarding product markets to local managers.
■ The case underscores two big ideas in this chapter:
◘ How industry determines strategy
◘ How a firm’s resources also determine strategy and structure.
Uniqueness of the situation described
■ IKEA’s experience internationally is becoming more universal for other firms as they
recognize and struggle with the need to be efficient from a cost standpoint, and
responsive or differentiated to customers, who demand increased value. It is a difficult
strategy to implement, and one worth discussing.
■ 1943- Ingvar Kamprad founded the Swedish firm and originally sold pens, picture
frames, jewelry, and nylon stockings.
■ 1950- IKEA began selling furniture and housewares
■ 1970s- expanded into Europe and North America and began rapidly growing
■ 2015- Total sales exceeded $35 billion, making IKEA the world’s largest furniture
retailer, with stores located in major cities- huge warehouse-style outlets that stock
some 9,500 items— from sofas to plants to kitchen utensils.
■ Philosophy- offer high-quality, well-designed furnishings at low prices. Its functional,
utilitarian, and space-saving pieces have a distinctive Scandinavian style, which the
customer assembles at home.
■ Kamprad family- still owns IKEA, with corporate offices in the Netherlands, Sweden,
and Belgium. Product development, purchasing, and warehousing are concentrated in
Sweden. Headquarters designs and develops IKEA’s global branding and product line,
often collaborating closely with external suppliers.
■ About 30% of the merchandise is made in Asia, and 2/3 in Europe. A few items are
sourced in North America to address the specific needs of that market, but 90% of the
product line is identical worldwide. Store managers constantly report market research
on sales and customer preferences to headquarters.
■ Strategy- Targeting a global customer segment allows IKEA to offer standardized
products at uniform prices, leveraging global economies by consolidating worldwide
design, purchasing, and manufacturing. It differentiates itself from niche furniture
makers that serve fragmented markets.
■ Catalogue- Universally the most important marketing tool for this centralized
advertising strategy.
◘ 2015- 215 million copies were printed in 32 languages, representing the
largest circulation of a free publication in the world, also online (www.ikea.com)
◘ Catalogue- prepared in Sweden to ensure conformity with IKEA’s
cosmopolitan style. Each product has a unique proper name: Scandinavian rivers or
cities for sofas (Henriksberg, Falkenberg); women’s names for fabric (Linne, Mimmi,
Adel); and men’s names for wall units (Billy, Niklas, Ivar).
■ Employees- Pivotal to success
■ Corporate Culture- informal
◘ Few titles, no executive parking spaces, and no corporate dining rooms.
Managers fly economy class and stay in inexpensive hotels.
◘ Centralized Management Style- Most initiatives are developed in Sweden
and communicated to all stores worldwide- to speed decision making and ensure that
the IKEA culture is easily globalized.
◘ Consensus-based decision making- managers share their knowledge and
skills with co-workers and help employees and suppliers feel they are important
members of a global organization.
◘ Communication- Management in each store is required to speak either
English or Swedish, to ensure efficient communications with headquarters.
◘ “Anti-bureaucratic week” -each year- managers wear sales clerks’ uniforms
and do everything from operating cash registers to driving forklifts. This keeps
managers in touch with all IKEA operations and close to suppliers, customers, and sales
staff.
◘ IKEA’s strong global culture supports continued growth.
IKEA CHALLENGES
■ Manage operations across 51 countries, 315 stores, 20 franchises,
147,000 employees, 47 distribution centers, and 1,002 suppliers in 54 countries.
■ Russia- suspended investment because of onerous government intervention.
■ China- established several stores in key cities.
■ India- pondering expansion, but there is substantial government red tape
■ Complexity- Adapting to national markets: employment, operations, supplier
relationships, government regulations, and customer preferences.
■ IKEA must figure out how to:
◘ Incorporate customer feedback and design preferences from diverse markets into
decision-making at headquarters
◘ Reward employees and motivate suppliers despite varying business customs and
expectations from country to country
◘ Balance the benefits of international operations — efficiency/ learning on a global
scale — while remaining responsive to local needs
◘ Maintain standardized designs across markets yet respond to local preferences and
trends
◘ Delegate adequate autonomy to local store managers while retaining central control.
■ Success- IKEA fared well during the recent global recession. Its value-oriented
furniture and housewares appeal to customers during tough economic times.
Classroom discussion
■ Why is IKEA so successful in a country such as Germany, Europe’s biggest economy,
and Walmart was forces to bid Auf Wiedersehen to Germany? This is a pivotal question
and goes to the heart of strategy. IKEA was willing to adapt to the local market and
employ an integrated strategy, while Walmart expected its American strategy to
successfully translate worldwide, and it did not. In fact, Walmart’s retreat from Germany
in 2006 cost the retail giant about $1 billion USD.
■ Ask students to locate an article on this subject and share it with the class, identifying
one of the reasons contributing to Walmart’s failure in Germany. Compare each reason
with IKEA’s strategy, underscoring the contrast between two international firms, their
strategies and structures. For example, issues such as corporate culture, work ethic,
strong unions, labor costs, video surveillance, American-style management practices,
and not knowing their customer are revealed in several articles, for example:
Why did Wal-Mart Fail in Germany?
Andreas Knorr and Andreas Arndt of Universität Bremen
http://www.iwim.uni-bremen.de/publikationen/pdf/w024.pdf
Accessed October 18, 2015
World's Biggest Retailer Wal-Mart Closes Up Shop in Germany
Deutsche Welle
http://www.dw-world.de/dw/article/0,,2112746,00.html
Accessed October 18, 2015
■ Segue into discussion by asking students to describe their experience with IKEA,
either in the store or on the website. It is useful to show the website, if you can
(www.ikea.com). Do they like the products offered? Does IKEA’s streamlined, no-frills,
do-it-yourself, standardized product and sales approach appeal to them? Did they know
how international the company really was?
