value insights

Global Strategy/Structure Relationships- Valutrics

Although most organizations remain small or die, some firms continue to grow in terms of revenues, vertical integration, and diversity of products and services. In addition, their geographical scope may increase to include international operations.

Global strategy can play a crucial role in strengthening the business model of both
single-business and multi-business companies.Indeed,few large companies that have expanded into new industries have not already expanded globally and replicated their
business model in new countries to grow their profits.

Companies can use four basic strategies as they begin to market their products and establish production facilities abroad:
● A localization strategy is oriented toward local responsiveness,and a company decentralizes control to subsidiaries and divisions in each country in which it operates to produce and customize products to local markets.
● An international strategy is based on R&D and marketing being centralized at home
and all the other value creation functions being decentralized to national units.
● A global standardization strategy is oriented toward cost reduction, with all the
principal value creation functions centralized at the optimal global location.
● A transnational strategy is focused so that it can achieve local responsiveness and
cost reduction.Some functions are centralized and others are decentralized at the
global location best suited to achieving these objectives.

The need to coordinate and integrate global value chain activities increases as a company moves from a localization to an international,to a global standardization,and then
to a transnational strategy.To obtain the benefits of pursuing a transnational strategy,a
company must transfer its distinctive competencies to the global location where they
can create the most value and establish a global network to coordinate its divisions at
home and abroad. The objective of such coordination is to obtain the benefits from
transferring or leveraging competencies across a company’s global business units.Thus,
the bureaucratic costs associated with solving the communication and measurement
problems that arise in managing handoffs or transfers across countries are much higher
for companies pursuing a transnational strategy than it is for those pursuing the other
strategies. The localization strategy does not require coordinating activities on a global
level because value creation activities are handled locally, by country or world region.
The international and global standardization strategies fit between the other two strategies:although products have to be sold and marketed globally,and hence global product
transfers must be managed, there is less need to coordinate skill and resource transfers
when using an international strategy than there is when using a transnational strategy.
The implication is that, as companies change from a localization to an international,global standardization,or transnational strategy,they require a more complex
structure,control system,and culture to coordinate the value creation activities associated with implementing that strategy. More complex structures economize on bureaucratic costs.In general,the choice of structure and control systems for managing
a global business is a function of three factors:
1. The decision about how to distribute and allocate responsibility and authority
between managers at home and abroad so that effective control over a company’s
global operations is maintained
2. The selection of the organizational structure that groups divisions both at home
and abroad in a way that allows the best use of resources and serves the needs of
foreign customers most effectively
3. The selection of the right kinds of integration and control mechanisms and organizational culture to make the overall global structure function effectively.

When a company pursues a localization strategy, it generally operates with a global-area structure. When using this structure, a company duplicates all value creation activities and establishes an overseas division in every country or world area in which it operates.Authority is decentralized to managers in each overseas division, who devise the appropriate strategy for responding to the needs of the local environment.Managers at global headquarters use market and output controls, such as ROIC, growth in market share, and operation costs, to evaluate the performance of overseas divisions. On the basis of such global comparisons, they can make decisions about capital allocation and orchestrate the transfer of new knowledge among divisions.
A company that makes and sells the same products in many different countries often groups its overseas divisions into world regions to simplify the coordination of products across countries. Europe might be one region, the Pacific Rim another, and the Middle East a third.Grouping allows the same set of output and behavior controls to be applied across all divisions inside a region. Thus, global companies can reduce communications and transfer problems because information can be transmitted more easily across countries with broadly similar cultures. For example, consumers’ preferences regarding product design and marketing are likely to be more similar among countries in one world region than among countries in different world regions.
Because the overseas divisions themselves have little or no contact with others in different regions,no integrating mechanisms are needed.Nor does a global organizational culture develop because there are no transfers of skills or resources or transfer
of managerial personnel among the various world regions. Historically, car companies such as Chrysler, GM, and Ford used global-area structures to manage
their overseas operations. Ford of Europe, for example, had little or no contact with
its U.S. parent; capital was the principal resource exchanged.
One problem with a global-area structure and a localization strategy is that the
duplication of specialist activities across countries raises a company’s overall cost
structure. Moreover, the company is not taking advantage of opportunities to transfer,share,or leverage its competencies and capabilities on a global basis; for example,
it cannot apply the low-cost manufacturing expertise that it has developed in one
world region to another. Thus, localization companies lose the many benefits of operating globally.

A company pursuing an international strategy adopts a different route to global expansion. Normally, the company shifts to this strategy when it decides to sell domestically made products in markets abroad.
Such companies usually just add a foreign sales organization to their existing structure and continue to use the same control system. If a company is using a functional structure, this department has to coordinate manufacturing, sales, and R&D activities with the needs of the foreign market. Efforts at customization are minimal. In
overseas countries, a company usually establishes a subsidiary to handle local sales and distribution. A system of behavior controls is then established to keep the home office informed of changes in sales, spare parts requirements, and so on.
A company with many different products or businesses operating from a multi divisional structure has the challenging problem of coordinating the flow of different products across different countries. To manage these transfers, many companies create a
global division, which they add to their existing divisional structure.
Global operations are managed as a separate divisional business, with managers given the authority and responsibility for coordinating domestic product divisions with overseas markets. The global division also monitors and controls the overseas sub-sidiaries that market the products and decides how much authority to delegate to managers in these countries.

When a company embarks on a global standardization strategy today, it locates its manufacturing and other value chain activities at the global location that will allow it to increase efficiency, quality, and innovation. In doing so, it has to solve the problems of coordinating and integrating its global value chain activities. It has to find a structure that lowers the bureaucratic costs associated with resource transfers between corporate headquarters and its overseas divisions and provides the centralized control that a global standardization strategy requires.

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