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Unit-III

Strategy making and International Business: Structure of Global Organizations,


Types of Strategies used in Strategic Planning for achieving Global Competitive
Advantage, Meaning, Concept and scope of Distinctive Competitive Advantage,
Financial Integration, Cross border Merger and Acquisitions.

Structures of Global Organizations

An organization structure consists of activities such as task allocation, co-


ordination and supervision which are directed towards the achievement of
organization objectives.

While designing the organization structure of a international firm, several


factors need to be considered

1) Overall Objective
2) Nature of Business
3) External Environment
4) Management style
5) Size of Enterprise
6) Technology
7) Mode of Entry

Types of Global Organization Structure


Global Functional Structure

In global functional structure there is worldwide centralization of decision making,


co-ordination and control in the key functional activities such as R & D ,operations
and marketing . All strategic and operational decisions are made at head quarters
level. Subsidiaries in the host countries are required to comply with local laws.

Advantages
1)Centralization leads to coherent policies and decisions thereby increasing
efficiency
2)There is specialization leading to economies of scale
3)Duplication of efforts is avoided
Disadvantages
1)The standardized and undifferentiated approach leads to inflexibility
2)Centralization may foster bureaucracy

Corporate
Headquarter

Global
Global R & D Global
Marketing
Operations

Local Marketing Local


Local R & D 1
1 Operations 1

Local Marketing Local


Local R & D 2
2 Operations 2

Global Product Division Structure

Under product organization structure , worldwide responsibility for specific


product groups is assigned to separate operating division within the compny.For
example , a company dealing with consumer products may have separate divisions
for laundry products , personal care products and food and beverages.

Advantages
1) The company can effectively manage multiple or diverse products
2) Decisions can be taken faster so as to compete in rapidly changing environment
3) Responsibility of market share can be easily fixed.

Disadvantages
1) Unnecessary duplication of facilities
2 )Conflict between division may arise on sharing common resources.
Global Area Structure

Under global are structure , regional headquarter are established in different parts
of the world. Each regional headquarter is responsible for all products sold and
distributed in the region. Each regional division is further segmented into operating
departments.

Advantages
1)The firm can better cater to the local needs and preference of specific regions
2)Responsibility of sales and profit can be easily fixed.

Disadvantages

1)Duplication of facilities and personnel in each region.


2)Cost may rise due to lack of centralized management
Chief Executive

Corporate Staff
Finance and Accounting Personnel/
Legal Marketing, R & D

G.M. G.M. G.M. G.M.


Western Region Eastern Region Southern Region Northern Region

Engineering Production Marketing

Strategic Business Unit Structure


A strategic business unit (SBU) is a grouping of related business which have some
strategic elements in common. The common elements may be closely related
strategic mission , a common need to compete globally, a common set of
competitors or common technologies .The SBU heads are assigned the authority
and responsibility for the management of SBUs. They report to the chief executive
who coordinates and control the operations of diversified units

Advantages
1)The managerial burden of the corporate headquarter is reduced as the chief
executive has to control a few heads of strategic business units
2)There is between coordination between division with similar products , markets
and technologies with SBUs

Disadvantages

1)Corporate headquarter may become distant from the divisions


2)Complexity of corporate portfolio analysis increases

Chief Executive
Officer

Corporate Staff R & D


Finance and Corporate Accounting
Marketing Services
Personnel/ Legal Affairs
Public Relation

GP Vice President GP Vice President GP Vice President


SBU- I SBU- II SBU- III

Business Unit Business Unit Business Unit


Division Division Division
Global Matrix Structure
Global matrix structure is a hybrid design as it involves combination of functional
and divisional structures. Some departments are organized on functional basis so
that employees who perform similar tasks can be grouped together. Other
departments are subdivided and assigned to various product divisions. Global
functional structure may be combined either with global product structures.

CHIEF EXECUTIVE OFFICER

Vice President Vice President Vice President Vice President


Production Production Purchase Administration

Project A
AVP AVP AVP AVP
Manager

Project B
AVP AVP AVP AVP
Manager

Project C
AVP AVP AVP AVP
Manager

Project D
AVP AVP AVP AVP
Manager

Advantages

1)Flexibility of operations is higher


2)Cost of operations can be reduced
3)Each project manager gain experience in general management functions
Disadvantages

1)Managerial attention needs to be focused simultaneously on two or more key


issues
2)There is need to process large amount of diverse information.

Global Network Structures

Global network structure combines elements of functional , product and area


structures. At the centre of the network structure there is a nodal unit. It is
responsible for coordinating information relating to functions, products and areas.
Different product line adopts different structures depending on what is best for
their operations .the units differ in their functioning. Some of them specialize in
manufacturing , others in marketing and so on.

Advantages
1)Helps to achieve global competiveness.
2)Administrative overhead cost can be minimized.

Disadvantages

1)Employee have less loyalty to the network


2)Lack of hands on control by the headquarters team
3)Any part of the network can be lost at any time.

Strategies used in Strategic Planning for achieving Global Competitive


Advantage
Competitive advantages are capabilities that are difficult to replicate or initiate and
are non-tradable.
According to Pitts and Snow a competitive advantage is any feature of a
business firm that establishes it to earn a higher return on investment despite
counter pressure from competitors.

Strategies for achieving competitive Advantage

1)Overall Cost Leadership A firm that can produce the product or service
at a low cost and operate with lower cost than competitors can earn above
average returns. Its cost position gives the firm a defence against rivalry
from competitors. In order to acquire cost leadership, the firm must have
high market share and or favourable access to raw material .Product
simplification , a wide line of related products , building sales volume ,
efficient facilities and tight cost control are other means of gaining cost
leadership.

Examples

Tata steel emerged globally as the lowest cost producer of steel .Its vision
statement included the intention of becoming cheapest steel producers

2)Differentiation- In this strategy the firm offers a product or service in a


unique way which buyers perceive as important. There can be different
forms of differentiation :design or brand image(Mercedes in automobiles),
product features , customer service , dealer network and so on. Ideally the
firm should differentiate itself along several dimensions.

For example ,
Maruti Suzuki is well know not only for its dealer network and excellent
availability of spare parts but also for its high quality products and after sales
services. Differentiation is viable strategy for earning above average returns
in the industry.

3)Focus- Under this strategy , the firms selects a segment within the industry
and tailors its products /service to serve that segment exclusively. It is not
sufficient merely to target certain customers. The product must provide an
added value through cost or differentiation that rivals can not offer.
In focused differentiation strategy the firm concentrates on one special
market segment and tries to offer customers in that segment a unique
product.

Example Tanishq the jewellery brand of Tata , adopts a focus


differentiation strategy offering range of gold , pearl and diamond jewellery
for women and men. The brand projects itself as the reputed firm with a
guarantee of purity

In focussed cost leadership the firm concentrates on one special market


segment and tries to provide with lowest costs in that segment.

Example Micromax Companies like Samsung ,Sony etc had been


offering smart phones , but charge a fortune. Micromax came into play
offering similar products at much cheaper rate as compared to the previous
mentioned companies

GLOBAL FINANCIAL MANAGEMENT/ FINANCIAL INTEGRATION


Integration of different countries or national economies in terms of financial
markets and financial operations is known as financial integration. Free flow of
capital and investment between countries is necessary for financial integration. In
reality there is a global financial market because financial market of different
countries is so integrated now a days.
Benefits of Financial Integration

Production Consumption
Benefits Benefits

These benefits are as below


Higher Economic Growth
In the absence of financial integration highly profitable projects may not be
undertaken due to lack of funds. At the same time projects with lower returns may
be undertaken in other countries. Financial integration makes local savings.
Financial integration accelerates investments by supplementing domestic savings.
Financial Integration and Productivity
Financial integration can increase productivity by transferring investment from low
return projects to high return projects. Risks can also be reduced through
diversification of investments.
Consumption benefits
By lowering the cost of borrowings and investments, the price of the products/
services will come down.
Spillover effects of Financial System
By reducing the risk of premium because of diversification of risks, cost of capital
will reduce. Foreign financial institutions provide access to new financial
instruments and increase liquidity by participating in domestic capital markets.
Spillover effect of F.D.I.
Global financial integration also facilitates inward and outward flows of foreign
direct investment. It increases volume of total investment and raises the efficiency
of existing investment.
Reason for Pvt. Capital Flows to Developing Countries
1. Higher rate of return because of shortage of capital
2. Diversification of Risk

3. Stagnating demand in developed Nations

4. Higher competition in developed nations

5. Change in developing nations policies

6. Restriction on repatriation of profits relaxed

7. Entry of F.I.I. rules relaxed

8. Effects of demographic structure change

Cross border Merger and Acquisitions

Acquisition
Direct investment to purchase an existing company or facility.
Merger
A special type of acquisition in which two firms join to form a new larger firm.

In case of cross border mergers or acquisitions two firms belong to two different
countries.

Advantages

1) Faster Entry Growth

2) Quick Increase in Market share

3) Smooth Entry into another markets

4) Resource Sharing

5) Increased economies of scale


6) Reduced costs by eliminating duplicative activities.

7) Broader range of products/ services for sale.

8) Inter-partner learning

Challenges/ Disadvantages in Cross Border M & A.


1. Cultural Differences

2. Complexity due to involvement of bankers ,lawyers, regulations etc

3. Possibility of goal conflict

4. Restrictions by host countries on acquisitions of local firm by foreigners

5. Different Competition Policy

6. Different Corporate Values.

7. Different Operating Methods.

Difference between Cross Border Merger and Acquisitions

Cross Border Merger Cross Border Acquisitions

It is merger of two organizations into It is buying of one organization by


one.In case of cross border mergers two another. In case of cross border
organizations belong to two different acquisitions
countries. two organizations belong to two
different countries
It is a mutual decision It can be friendly takeover or hostile
takeover
Merger is expensive Acquisitions is less expensive
It is time consuming and company has It is faster and easier transactions
to maintain so much on legal issues
Dilution of ownership occurs in case of The acquirer does not experience the
mergers dilution of ownership
Examples

1) Maruti Motors operating in India and Suzuki based in Japan amalgamated to


form new company called Maruti Suzuki (India ) Ltd.

2)Tata Steel acquired UK based company Corus for $ 8 billion .