International Business Hill Summary Chapters 13-19 PDF

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International Business: Competing in the Global Marketplace by Charles W. L. Hill Chapter 13 This chapter identified the organizational structures and internal control mechanisms, both formal and informal, that international businesses use to manage and direct their global operations. A central theme of the chapter was that different strategies require different structures and control systems. To succeed, a firm must match its structure and controls to its strategy in discriminating ways. Firms whose structure and controls do not fit their strategic requirements will experience performance problems. This chapter made the following points:

1. There are four main dimensions of organizational structure: vertical differentiation, horizontal differentiation, integration, and control systems.

2. Vertical differentiation is the centralization versus decentralization of decision-making responsibilities.

3. Operating decisions are generally decentralized in multidomestic firms, somewhat centralized in international firms, and more centralized still in global firms. The situation in transnational firms is more complex. 4. Horizontal differentiation refers to how the firm is divided into subunits. 5. Undiversified domestic firms are typically divided into subunits on the basis of functions. Diversified domestic firms typically adopt a product divisional structure. 6. When firms expand abroad, they often begin with an international division. However, this structure rarely serves satisfactorily very long because of its inherent potential for conflict and coordination problems between domestic and foreign operations. 7. Firms then switch to one of two structures: a worldwide area structure (undiversified firms) or a worldwide product division structure (diversified firms). 8. Since neither of these structures achieves a balance between local responsiveness and location and experience curve economies, many multinationals adopt matrix-type structures. However, global matrix structures have typically failed to work well, primarily due to bureaucratic problems. 9. Firms use integrating mechanisms to help achieve coordination between subunits. 10. The need for coordination (and hence integrating mechanisms) varies with firm strategy. This need is lowest in multidomestic firms, higher in international firms, higher still in global firms, and highest in transnational firms. 11. Integration is inhibited by a number of impediments to coordination, particularly by differing subunit orientations. 12. Integration can be achieved through formal integrating mechanisms. These vary in complexity from direct contact and simple liaison roles, to teams, to a matrix structure. A drawback of formal integrating mechanisms is that they can become bureaucratic. 13. To overcome the bureaucracy associated with formal integrating mechanisms, firms often use informal mechanisms, which include management networks and organization culture. 14. For a network to function effectively, it must embrace as many managers within the organization as possible. Information systems and management development policies (including job rotation and management education programs) can be used to establish firmwide networks. 15. For a network to function properly, subunit managers must be committed to the same goals. One way of achieving this is to foster the development of a common organization culture. Leadership by example, management development programs, and human relations policies are all important in building a common culture. 16. A major task of a firm's headquarters is to control the various subunits of the firm to ensure consistency with strategic goals. Headquarters can achieve this through control systems. 17. There are four main types of controls: personal, bureaucratic, output, and cultural (which foster self-control). 18. The key to understanding the relationship between international strategy and control systems is the concept of performance ambiguity. Performance ambiguity is a function of the degree of interdependence of subunits, and it raises the costs of control.

19. The degree of subunit interdependence--and, hence, performance ambiguity and the costs of control--is a function of the firm's strategy. It is lowest in multidomestic firms, higher in international firms, higher still in global firms, and highest in transnationals. 20. To reduce the high costs of control, firms with a high degree of interdependence between subunits (e.g., transnationals) must develop cultural controls. Chapter 14 This chapter addressed two related topics: the optimal choice of entry mode to serve a foreign market and strategic alliances. The two topics are related in that several entry modes (e.g., licensing and joint ventures) are strategic alliances. Most strategic alliances, however, involve more than just issues of market access. This chapter made the following points:

1. Basic entry decisions include identifying which markets to enter, when to enter those markets, and on what scale.

2. The most attractive foreign markets tend to be found in politically stable developed and developing nations that have free market systems and where there is not a dramatic upsurge in either inflation rates or private-sector debt. 3. There are several advantages associated with entering a national market early, before other international businesses have established themselves. These advantages must be balanced against the pioneering costs that early entrants often have to bear including the greater risk of business failure. 4. Large-scale entry into a national market constitutes a major strategic commitment that is likely to change the nature of competition in that market and limit the entrant's future strategic flexibility. The firm needs to think through the implications of such commitments before embarking on a large-scale entry. Although making major strategic commitments can yield many benefits, there are also risks associated with such a strategy. 5. There are six modes of entering a foreign market: exporting, turnkey projects, licensing, franchising, establishing joint ventures, and setting up a wholly owned subsidiary. 6. Exporting has the advantages of facilitating the realization of experience curve economies and of avoiding the costs of setting up manufacturing operations in another country. Disadvantages include high transport costs and trade barriers and problems with local marketing agents. The latter can be overcome if the firm sets up a wholly owned marketing subsidiary in the host country. 7. Turnkey projects allow firms to export their process know-how to countries where FDI might be prohibited, thereby enabling the firm to earn a greater return from this asset. The disadvantage is that the firm may inadvertently create efficient global competitors in the process. 8. The main advantage of licensing is that the licensee bears the costs and risks of opening a foreign market. Disadvantages include the risk of losing technological know-how to the licensee and a lack of tight control over licensees. 9. The main advantage of franchising is that the franchisee bears the costs and risks of opening a foreign market. Disadvantages center on problems of quality control of distant franchisees. 10. Joint ventures have the advantages of sharing the costs and risks of opening a foreign market and of gaining local knowledge and political influence. Disadvantages include the risk of losing control over technology and a lack of tight control. 11. The advantages of wholly owned subsidiaries include tight control over technological know-how. The main disadvantage is that the firm must bear all the costs and risks of opening a foreign market. 12. The optimal choice of entry mode depends on the strategy of the firm. 13. When technological know-how constitutes a firm's core competence, wholly owned subsidiaries are preferred, since they best control technology. 14. When management know-how constitutes a firm's core competence, foreign franchises controlled by joint ventures seem to be optimal. This gives the firm the cost and risk benefits associated with franchising, while enabling it to monitor and control franchisee quality effectively. 15. When the firm is pursuing a global or transnational strategy, the need for tight control over

operations in order to realize location and experience curve economies suggests wholly owned subsidiaries are the best entry mode. 16. Strategic alliances are cooperative agreements between actual or potential competitors. 17. The advantage of alliances are that they facilitate entry into foreign markets, enable partners to share the fixed costs and risks associated with new products and processes, facilitate the transfer of complementary skills between companies, and can help firms establish technical standards. 18. The disadvantage of a strategic alliance is that the firm risks giving away technological know-how and market access to its alliance partner in return for very little. 19. The disadvantages associated with alliances can be reduced if the firm selects partners carefully, paying close attention to the issue of reputation and structure of the alliance so as to avoid unintended transfers of know-how. 20. Two of the keys to making alliances work seem to be building trust and informal communications networks between partners and taking proactive steps to learn from alliance partners. Chapter 15 In this chapter, we examined the steps that firms must take to establish themselves as exporters. This chapter made the following points: 1. One big impediment to exporting is ignorance of foreign market opportunities. 2. Neophyte exporters often become discouraged or frustrated with the exporting process because they encounter many problems, delays, and pitfalls. 3. The way to overcome ignorance is to gather information. In the United States, a number of institutions, most important of which is the US Department of Commerce, can help firms gather information and in the matchmaking process. Export management companies can also help an exporter to identify export opportunities. 4. Many of the pitfalls associated with exporting can be avoided if a company hires an experienced export management company, or export consultant and if it adopts the appropriate export strategy. 5. Firms engaged in international trade must do business with people they cannot trust and people who may be difficult to track down if they default on an obligation. Due to the lack of trust, each party to an international transaction has a different set of preferences regarding the configuration of the transaction. 6. The problems arising from lack of trust between exporters and importers can be solved by using a third party that is trusted by both, normally a reputable bank. 7. A letter of credit is issued by a bank at the request of an importer. It states that the bank promises to pay a beneficiary, normally the exporter, on presentation of documents specified in the letter. 8. A draft is the instrument normally used in international commerce to effect payment. It is an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time. 9. Drafts are either sight drafts or time drafts. Time drafts are negotiable instruments. 10. A bill of lading is issued to the exporter by the common carrier transporting the merchandise. It serves as a receipt, a contract, and a document of title. 11. US exporters can draw on two types of government - backed assistance to help finance their exports: loans from the Export - Import Bank and export credit insurance from the FCIA. 12. Countertrade includes a whole range of barterlike agreements. It is primarily used when a firm exports to a country whose currency is not freely convertible and who may lack the foreign exchange reserves required to purchase the imports. 13. The main attraction of countertrade is that it gives a firm a way to finance an export deal when other means are not available. A firm that insists on being paid in hard currency may be at a competitive disadvantage vis-à-vis one that is willing to engage in countertrade. 14. The main disadvantage of countertrade is that the firm may receive unusable or poor-quality goods that cannot be disposed of profitably. Chapter 16

This chapter explained how efficient manufacturing and materials management functions can improve an international business's competitive position by lowering the costs of value creation and by performing value creation activities in such ways that customer service is enhanced and value-added maximized. We looked closely at three issues central to international manufacturing and materials management: where to manufacture, what to make and what to buy, and how to coordinate a globally dispersed manufacturing and supply system. This chapter made the following points:

1. The choice of an optimal manufacturing location must consider country factors, technological factors, and product factors.

2. Country factors include the influence of factor costs, political economy, and national culture on manufacturing costs.

3. Technological factors include the fixed costs of setting up manufacturing facilities, the minimum efficient scale of production, and the availability of flexible manufacturing technologies.

4. Product factors include the value-to-weight ratio of the product and whether the product serves universal needs.

5. Location strategies either concentrate or decentralize manufacturing. The choice should be made in light of country, technological, and product factors. All location decisions involve trade-offs.

6. Foreign factories can improve their capabilities over time, and this can be of immense strategic benefit to the firm. Managers need to view foreign factories as potential centers of excellence and to encourage and foster attempts by local managers to upgrade factory capabilities. 7. An essential issue in many international businesses is determining which component parts should be manufactured in-house and which should be outsourced to independent suppliers. 8. Making components in-house facilitates investments in specialized assets and helps the firm protect its proprietary technology. It may improve scheduling between adjacent stages in the value chain, also. In-house production also makes sense if the firm is an efficient, low-cost producer of a technology. 9. Buying components from independent suppliers facilitates strategic flexibility and helps the firm avoid the organizational problems associated with extensive vertical integration. Outsourcing might also be employed as part of an "offset" policy, which is designed to win more orders for the firm from a country by pushing some subcontracting work to that country. 10. Several firms have tried to attain the benefits of vertical integration and avoid its associated organizational problems by entering long-term strategic alliances with essential suppliers. 11. Although alliances with suppliers can give a firm the benefits of vertical integration without dispensing entirely with the benefits of a market relationship, alliances have drawbacks. The firm that enters a strategic alliance may find its strategic flexibility limited by commitments to alliance partners. 12. Materials management encompasses all the activities that move materials to a manufacturing facility, through the manufacturing process, and out through a distribution system to the end user. The materials management function is complicated in an international business by distance, time, exchange rates, custom barriers, and other things. 13. Just-in-time systems generate major cost savings from reduced warehousing and inventory holding costs. In addition, JIT systems help the firm spot defective parts and remove them from the manufacturing process quickly, thereby improving product quality. 14. For a firm to establish a good materials management function, it needs to legitimize materials management within the organization. It can do this by giving materials management equal footing with other functions in the firm. 15. Information technology, particularly electronic data interchange, plays a major role in materials management. EDI facilitates the tracking of inputs, allows the firm to optimize its production schedule, allows the firm and its suppliers to communicate in real time, and eliminates the flow of paperwork between a firm and its suppliers. Chapter 17 This chapter discussed the marketing and R&D functions in international business. A persistent theme of the chapter is the tension that exists between the need to reduce costs and the need to be responsive to

local conditions, which raises costs. This chapter made the following points:

1. Theodore Levitt has argued that, due to the advent of modern communications and transport technologies, consumer tastes and preferences are becoming global, which is creating global markets for standardized consumer products. However, this position is regarded as extreme by many commentators, who argue that substantial differences still exist between countries. 2. Market segmentation refers to the process of identifying distinct groups of consumers whose purchasing behavior differs from each other in important ways. Managers in an international business need to be aware of two main issues relating to segmentation--the extent to which there are differences between countries in the structure of market segments, and the existence of segments that transcend national borders. 3. A product can be viewed as a bundle of attributes. Product attributes need to be varied from country to country to satisfy different consumer tastes and preferences. 4. Country differences in consumer tastes and preferences are due to differences in culture and economic development. In addition, differences in product and technical standards may require the firm to customize product attributes from country to country. 5. A distribution strategy decision is an attempt to define the optimal channel for delivering a product to the consumer. 6. Significant country differences exist in distribution systems. In some countries, the retail system is concentrated; in others, it is fragmented. In some countries, channel length is short; in others, it is long. Access to distribution channels is difficult to achieve in some countries. 7. A critical element in the marketing mix is communication strategy, which defines the process the firm will use in communicating the attributes of its product to prospective customers. 8. Barriers to international communication include cultural differences, source effects, and noise levels. 9. A communication strategy is either a push strategy or a pull strategy. A push strategy emphasizes personal selling, and a pull strategy emphasizes mass media advertising. Whether a push strategy or a pull strategy is optimal depends on the type of product, consumer sophistication, channel length, and media availability. 10. A globally standardized advertising campaign, which uses the same marketing message all over the world, has economic advantages, but it fails to account for differences in culture and advertising regulations. 11. Price discrimination exists when consumers in different countries are charged different prices for the same product. Price discrimination can help a firm maximize its profits. For price discrimination to be effective, the national markets must be separate and their price elasticities of demand must differ. 12. Predatory pricing is the use of profit gained in one market to support aggressive pricing in another market to drive competitors out of that market. 13. Multipoint pricing refers to the fact a firm's pricing strategy in one market may affect rivals' pricing strategies in another market. Aggressive pricing in one market may elicit a competitive response from a rival in another market that is important to the firm. 14. Experience curve pricing is the use of aggressive pricing to build accumulated volume as rapidly as possible to quickly move the firm down the experience curve. 15. New-product development is a high-risk, potentially high-return activity. To build a competency in new-product development, an inte...