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PHAM HOANG HIEN, MBA, PG. (CSU) CHAPTER 8 ORGANIZATIONAL DESIGN AND STRATEGY IN A CHANGING GLOBAL ENVIRONMENT TEACHING OBJECTIVES 1. To define organizational strategy and examine the sources of core competences. (8.1) 2. To discuss the four levels of strategy: functional, divisional, corporate, and global. (8.1) 3. To explain how each function creates value through lower cost or differentiated products. (8.2) 4. To illustrate that interorganizational strategies achieve core competences. (8.2) 5. To review the importance of structure and culture to functional-level strategy. (8.2) 6. To discuss the four strategies that enlarge the organizational domain. (8.3) 7. To explain that structure should match strategy. (8.3) 8. To demonstrate how corporate-level strategies use core competences in new domains. (8.4) 9. To analyze vertical integration, related and unrelated diversification, and the interorganizational strategies to achieve benefits without costs. (8.4) 10. To discuss how to implement strategy across countries. (8.5) CHAPTER SUMMARY Strategy is an action plan for developing core competences to reach long-term goals and gain a competitive advantage. Core competences stem from specialized resources possessed by functional personnel, organizational resources, and coordination abilities. Strategies that create value and achieve competitive advantage are formulated at four levels: functional, business, corporate, and global. Achieving a competitive advantage at the functional level means gaining a low-cost or a differentiation advantage. Interorganizational strategies, such as long-term contracts, develop functional resources and coordination abilities, which strengthen core competences. Contingency theory examines differences in structural design among the R&D, manufacturing, and sales functions. Culture also affects functional-level strategy. Business-level strategy combines functional level core competences to protect the organizational domain. Two business-level strategies are differentiation and low cost. Four strategies enlarge the organizational domain: market penetration, product development, market development, and diversification. Focus strategy is reviewed. Organizational structure and culture must match business-level strategy. With only a few products, a low-cost organization uses a functional, mechanistic structure. A differentiator needs an organic structure. Other structures include: product, market, geographic, product team, and matrix. A low-cost organization needs cultural values of economy, whereas a differentiator needs values of innovation and quality.

CHAPTER 8 ORGANIZATIONAL DESIGN AND STRATEGY IN A CHANGING GLOBAL ENVIRONMENT

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1 To define organizational strategy and examine the sources of core competences. (8.1)2. To discuss the four levels of strategy: functional, divisional, corporate, and global. (8.1)3. To explain how each function creates value through lower cost or differentiated products. (8.2)4. To illustrate that interorganizational strategies achieve core competences. (8.2)5. To review the importance of structure and culture to functional-level strategy. (8.2) 6. To discuss the four strategies that enlarge the organizational domain. (8.3)7. To explain that structure should match strategy. (8.3)8. To demonstrate how corporate-level strategies use core competences in new domains. (8.4)9. To analyze vertical integration, related and unrelated diversification, and the interorganizational strategies to achieve benefits without costs. (8.4) 10. To discuss how to implement strategy across countries. (8.5)

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CHAPTER 8 ORGANIZATIONAL DESIGN AND STRATEGY IN A CHANGING GLOBAL ENVIRONMENT TEACHING OBJECTIVES 1. To define organizational strategy and examine the sources of core competences. (8.1) 2. To discuss the four levels of strategy: functional, divisional, corporate, and global. (8.1) 3. To explain how each function creates value through lower cost or differentiated products. (8.2) 4. To illustrate that interorganizational strategies achieve core competences. (8.2) 5. To review the importance of structure and culture to functional-level strategy. (8.2) 6. To discuss the four strategies that enlarge the organizational domain. (8.3) 7. To explain that structure should match strategy. (8.3) 8. To demonstrate how corporate-level strategies use core competences in new domains. (8.4) 9. To analyze vertical integration, related and unrelated diversification, and the interorganizational strategies to achieve benefits without costs. (8.4) 10. To discuss how to implement strategy across countries. (8.5) CHAPTER SUMMARY Strategy is an action plan for developing core competences to reach long-term goals and gain a competitive advantage. Core competences stem from specialized resources possessed by functional personnel, organizational resources, and coordination abilities. Strategies that create value and achieve competitive advantage are formulated at four levels: functional, business, corporate, and global. Achieving a competitive advantage at the functional level means gaining a low-cost or a differentiation advantage. Interorganizational strategies, such as long-term contracts, develop functional resources and coordination abilities, which strengthen core competences. Contingency theory examines differences in structural design among the R&D, manufacturing, and sales functions. Culture also affects functional-level strategy. Business-level strategy combines functional level core competences to protect the organizational domain. Two business-level strategies are differentiation and low cost. Four strategies enlarge the organizational domain: market penetration, product development, market development, and diversification. Focus strategy is reviewed. Organizational structure and culture must match business-level strategy. With only a few products, a low-cost organization uses a functional, mechanistic structure. A differentiator needs an organic structure. Other structures include: product, market, geographic, product team, and matrix. A low-cost organization needs cultural values of economy, whereas a differentiator needs values of innovation and quality.

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Corporate strategy uses core competences attained at the business level to expand into new domains. Corporate-level strategies are considered with advantages and disadvantages: vertical integration, global expansion, related diversification, and unrelated diversification. Structure and culture must match corporate-level strategies. Unrelated diversifiers use the conglomerate structure, whereas diversifiers use either the multidivisional or the multidivisional matrix structure. Related diversifiers foster cooperative values, and unrelated diversifiers promote economical values. Interorganizational strategies, such as strategic alliances, increase value without the bureaucratic costs associated with vertical integration, related diversification, and unrelated diversification. There are four strategies for managing the international environment: multidomestic, international, global, and transnational. Company structure should match strategy, which is influenced by the control and coordination required. Vertical differentiation and the need for integration are considered. A global geographic structure, relatively flat and decentralized, is appropriate for a multidomestic strategy, because the need for integration is low. The global product group structure, tall and centralized, is appropriate for international or global strategies, which require a medium to high level of integration. A global matrix or “matrix in the mind” is appropriate for a transnational strategy, which requires a high level of integration. This structure is flat to ensure fast responsiveness and centralization and decentralization of decision-making, Matching strategy, structure, and culture is difficult. Managers overestimate the benefits of a strategy and underestimate costs. Although the environment is uncertain, managers must forecast the value created from a strategy, control bureaucratic costs, and link strategies at all four levels. 8.1 Strategy and the Environment Organizational strategy is a plan to use core competences to achieve competitive advantage and outperform competitors. Core competences are skills and abilities in value creation activities that lead to superior efficiency, quality, innovation, or customer responsiveness. Q. Name some core competences. A. Manufacturing, marketing, materials management, R&D Q. Why do organizations have strategies? A. Strategies use existing competences to develop new competences to outperform competitors and compete for resources. Resources permit reinvestment in new resources for core competences. The process is a cycle. (Fig. 8.1) Sources of Core Competences

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A competitive advantage comes from functional and organizational resources. Functional resources stem from the skills of functional employees, such as R&D scientists. Organizational resources stem form a company’s features, including management skills, reputation, equipment, land, and brand name. Both offer a competitive advantage if they are unique and hard to copy. Coordinating resources is a source of core competences. Q. Name some coordination abilities. A. Coordination activities include using control systems, decentralizing or centralizing authority, and promoting shared values. Structure and culture coordinate activities at functional and organizational levels. Functional coordination strengthens core competences, and coordinating activities leads to competitive advantage. Coordination abilities are difficult to imitate. Global Expansion and Core Competences Global expansion creates value by transferring and enhancing core competences, establishing a network, and gaining resources and skills. (Fig. 8.2) Transferring Core Competences Abroad Creating value by transferring core competences to a foreign market facilitates low-cost or differentiated products and a competitive advantage. Establishing a global network entails organizing task and reporting relationships among managers, functions, and divisions that connect value creation activities. Q. How can a company lower costs? A. Production can occur in a country with low labor costs. The costs of labor, land, taxes, and raw materials are factor costs. A global network connects activities from various countries and links distributors who sell and service products. Sales volume increases, creating economies of scale that enhance a low-cost advantage. Gaining access to global resources and skills gives an organization a competitive advantage. U.S. companies have Japanese divisions to benefit from total quality management and lean production. Using Global Learning to Enhance Core Competences New skills learned abroad are transferred to the United States and improved; enhanced competences are sent back to foreign operations. After World War II, Japanese companies learned production methods from the United States, improved them, and used this competence to compete globally. Four Levels of Strategy

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Strategy formulation occurs at the functional, business, corporate, and global levels. Creating value at one level impacts the others. Functional-level strategy is a plan to create core competences to enhance functional and organizational resources, and coordination abilities. Functional managers analyze the functional environment to be aware of activities surrounding the company’s domain. (Fig. 8.2) Merging functional core competences to achieve competitive advantage is business-level strategy. The top-management formulates business-level strategy by positioning the company to compete for resources. Functional- and business-level strategies protect and enlarge the existing domain, but corporate-level strategies expand into new domains. Corporate-level managers combine value creation skills to improve the company and divisional competitive position. Strategies create more value collectively than independently. Notes________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 8.2 Functional-Level Strategy Each function aims to create a core competence for a competitive advantage, achieved by performing activities at a cost lower than competitors’ or providing unique products. Strategies to Lower Costs or Differentiate Products Q. How can functions add value by lowering costs? A. Manufacturing can develop flexible manufacturing. Human resources can reduce turnover and absenteeism. Materials management can use just-in-time inventory and develop long-term relationships with customers and suppliers. Sales and marketing can increase demand, which lowers production costs. R&D can improve manufacturing efficiency. (Table 8.1) A. How can functions add value through differentiation? Q. Manufacturing can improve product quality and reliability. Human resources can hire and train skilled personnel. Materials management can develop long-term relationships to ensure high-quality inputs. Sales and marketing can promote brands and target customer groups. R&D can create new and improved products. (Table 8.1)

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Functional-Level Strategy and Structure Structure and culture are important to functional-level strategy because coordination abilities, leading to core competence, result from structure. Lawrence and Lorsch found that functional differentiation and integration impact performance. Each department develops an orientation specific to its tasks and responds to its particular environment. Contingency theory proposes that each function creates a structure to match its resources. (Fig. 8.3) Q. Describe the best structure for R&D. A. R&D needs an organic structure, flat and decentralized with mutual adjustment to facilitate innovation. Norms and values are based on self-control and team control. American manufacturing uses a mechanistic structure, a tall hierarchy with centralized decision-making; work is controlled by the speed of the production line and standardization achieved through rules. Q. Has this structure led to a core competence? A. No. Japan, a country with a core competence in manufacturing, has a more organic structure and allows workers to participate in decision-making and make incremental improvements. Q. Describe the structure of the sales function. A. Sales has a flat, decentralized hierarchy, because it uses incentive pay and standardization to control salespeople. Mutual adjustment is unimportant because salespeople work alone. This structure is less mechanistic than for manufacturing, but more than for R&D. Notes________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Functional-Level Strategy and Culture Q. Why is culture important for functional-level strategy? A. Culture, shared values that control behavior, is significant because it is hard to copy, making it a competitive advantage. Structure can be duplicated, but culture becomes ingrained in employee behavior. To achieve core competence, firms must select property rights, functional structure, and functional managers that improve coordination ability. R&D uses a flat structure and

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small teams to stress cooperation. Employees can be given the property right of profit sharing, and people with similar values can be hired. Q. How does culture affect coordination abilities in manufacturing? A. In the U.S., emphasis is on reducing the skill level, giving managers control, and creating a mechanistic hierarchy. This structure fosters a culture that decreases production costs. Empowering workers and promoting cooperative values give Japanese companies improved product quality. Culture develops core competences. Managerial Implications: Functional-Level Strategy A functional manager should identify functional resources or coordination abilities that lead to a core competence. Managers should study competitors to see what methods are used to control functional activities. Managers should consider how functional structure and culture affect resources and abilities. Notes________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 8.3 Business-Level Strategy Business-level strategists combine functional core competences to seek environmental opportunities. They choose and manage the domain in which the company uses its core competences for a competitive advantage, which in turn allows the firm to protect and enlarge its domain. Strategies to Lower Costs or Differentiate Products After selecting its domain, an organization positions itself to compete, using low cost or differentiation. Low-cost value creation provides customers with low-priced goods or services. Differentiation provides unique products for customers who are willing to pay top prices. Q. What companies pursue a low-cost strategy? A. Taco Bell, Wal-Mart, and Nucor Q. What companies pursue a different ion strategy? A. Neiman-Marcus and the Ritz-Carlton Hotel The strategy selected determines direct competitors. Wal-Mart pursues a low-cost strategy and directly competes with K-mart. Some organizations pursue both strategies, but achieving both low costs and differentiation requires strong core competences. Focus on New Information Technology: Amazon.com, Part 4

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Jeff Bezos used Internet information technology to sell books online, making it possible to develop both a low-cost and differentiation strategy and outperform existing bookstore competitors. Q. Describe Amazon’s differentiation strategy. A. The ability of a computerized online catalogue to describe and make available every book in English offered customers a selection that could not be rivaled, even by large bookstores. Q. Describe Amazon’s low-cost strategy. A. The use of information technology to interface inexpensively with book publishers, distributors, and customers, allowed Amazon to offer customers books at discounted prices. Notes________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________________________________________________________________________________________________________________·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _3_ _h_e_r_e_ _f_o_r_ _e_x_a_m_p_l_e_s_ _o_f_ _c_o_m_p_a_n_i_e_s_ _u_s_i_n_g_ _l_o_w_-_c_o_s_t_ _a_n_d_ _d_i_f_f_e_r_e_n_t_i_a_t_i_o_n_ _s_t_r_a_t_e_g_i_e_s_._ ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Strategies to Enlarge the Organizational Domain (Fig. 8.4) 1. Market penetration uses current products to increase market share in the existing domain. Q. How can a firm sell more existing products to current customers? A. It can increase advertising, marketing, or the number of retail outlets. Competitors use this strategy to increase uncertainty for those without a low-cost or differentiation strategy. The environment becomes poorer, more complex, and more dynamic, and competitors battle for resources. Dominant organizations use interorganizational strategies to merge or take over competitors.

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Q. What interorganizational strategies are used? A. Forming alliances with suppliers gains control over inputs. Weak competitors form alliances to develop core competences. 2. A product development strategy uses core competences to provide new products for its existing domain. Improved products attract customers and cost less. 3. A marketing development strategy involves finding new domains for existing products. Q. What companies pursue a market development strategy? A. Arm & Hammer promotes noncooking uses of baking soda. Honda sells cars in foreign markets. Q. What interorganizational strategies help enter new markets? A. Strategic alliances 4. A diversification strategy entails entering a new domain with new products. Diversifying offers new competitors in a new environment. Focus strategy, another business-level strategy, uses resources to concentrate on one market segment. Q. What companies pursue a focus strategy? A. Rolls Royce and Pizza Hut Q. What are the advantages of a focus strategy? A. A company increases customer responsiveness and avoids direct competition with large low-cost or differentiated companies. Notes________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _2_ _h_e_r_e_ _t_o_ _g_i_v_e_ _e_x_a_m_p_l_e_s_ _o_f_ _s_t_r_a_t_e_g_i_e_s_ _t_o_ _e_n_l_a_r_g_e_ _a_ _f_i_r_m__ s_ _d_o_m_a_i_n_._ ___________________________________________________________________________________________________________________________________________________________________

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_______________________________________________________________________________________________________________________________________________________ _ _Organizational Insight 8.1: PepsiCo Chooses a New Structure To battle against Coca-Cola, PepsiCo decided to change its strategy and structure. Q. Describe the changes at PepsiCo. A. It spun off the restaurant business to focus on the soft-drink business. The CEO decided to reengineer the company with a new pattern of horizontal differentiation, instead of a geographic structure, with customers in each region serviced by representatives from bottling operations. Q. What new structural additions were made? A. PepsiCo created a marketing research and development function responsible for coordinating all marketing activities throughout all regions. Bottling follows the lead of marketing. Decisions are centralized, yet the new structure is flatter and more streamlined. As a result, profits have increased. Business-Level Strategy and Structure Using core competences to achieve a competitive advantage depends on structural design. (Fig. 8.5) A differentiation strategy requires the skills for unique products, developed and marketed ahead of competitors. Q. What structure does a differentiator have? A. An organic structure permits decentralization and cross-functional teams. A low-cost strategy monitors functional activities to decrease product development costs. Manufacturing and materials management are central functions. Other functions tailor skills to the goal of low-cost production. New or improved products are developed when customers demand it; low-cost producers stay behind differentiators to reduce costs. Q. Describe the structure of a low-cost organization. A. It has a mechanistic structure with centralized decision-making for control over functional activities and costs. A mechanistic structure offers adequate coordination as rapid response is unnecessary. Q. Which type of company operates in an uncertain environment?

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A. Differentiators compete in a complex, dynamic, uncertain environment, whereas low-cost companies compete in a stable environment. Differentiators have a higher level of differentiation and integration. Because integration and differentiation are expensive, low-cost companies use the simplest structure possible. Three factors affect structural choice: 1. Offering a wide product range requires more control over product development, marketing, and production. 2. Attracting new customer groups requires a structure able to meet customer needs. 3. Increasing new product development requires a structure with increased functional coordination. Low-cost companies concentrate on a few products and imitate differentiators, so they need the simplest structure possible, a functional structure. Differentiators produce many products to satisfy many customer groups, so they need a structure that facilitates cross-functional cooperation, a product structure. Q. What type of structure satisfies many customer groups? A. A market or geographic structure is appropriate to meet customer needs. For rapid product development and quick customer responsiveness, a product team or matrix structure is appropriate. Business-level strategy must match structure to use resources for a competitive advantage. Business-Level Strategy and Culture At the business level a company needs values and specific norms and rules to use resources effectively. Different functions have subunit orientations, yet values bridge communication and coordination issues. Q. What are the values of a low-cost company? A. Emphasis is on frugality and economy, and goals would reflect these values. Marketing would attract new customers efficiently. Q. What values would a differentiator have? A. Values would foster innovation, quality, and excellence with product development and marketing as key functions. Notes_______________________________________________________________________________________________________________________________________

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_________________________________________________________________________________________________________________ Organizational Insight 8.2: How Culture Derailed the Merger between AHP and Monsanto Two pharmaceutical companies, American Home Products (AHP) and Monsanto, were to merge but the cultures were too different. Q. Why did AHP want to buy Monsanto? A. Industry analysts felt that the merger would provide important differentiation and low-cost advantages for the combined firm. Specifically, the product range would be broader. Q. Why did the merger fail? A. AHP has a culture characterized by a short-term focus on bottom-line profits. Managers are cost conscious and invest in products with a short-term payoff. Monsanto has a long-term orientation driven by a desire to produce innovative products, which only pay off in the long run. Managerial Implications: Business-Level Strategy Members of different functions should examine interactions to reduce costs or develop differentiation. Managers should look for opportunities to protect and enlarge the firm’s domain. Managers should assure that structure and culture are congruent with strategy. Notes____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ _ _·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _1_ _h_e_r_e_ _t_o_ _d_i_s_c_u_s_s_ _d_esigning a structure and culture for core competence. __________________________________________________________________________________________________________________________________________________________________ 8.4 Corporate-Level Strategy

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Corporate-level strategy searches for new domains to use low-cost or differentiation core competences. Existing competences are employed in new domains, so corporate-level strategy builds on business-level strategy. (Figs. 8.7 and 8.8) Vertical integration involves entering new domains that overlap the core domain as an input or output. Q. Name the advantages of acquiring suppliers or distributors. A. Profits retained when earned by suppliers; lower production costs; control over reliability and quality; control over inputs for product uniqueness; and opportunism avoided faced with few suppliers. Controlling distribution results in lower costs or differentiation. Q. Name the disadvantages of vertical integration. A. Bureaucratic costs rise, and a larger, vertically integrated company experiences communication and coordination problems. Q. What are alternatives to vertical integration? A. There are interorganizational strategies such as minority ownership, strategic alliances, and long-term contracts to manage supplier and distributor relationships. The benefits from any strategy should outweigh costs. Related diversification creates value by using an existing core competence to create a low-cost or differentiation advantage in a domain related to the core domain. The B.A.R and Grille opened up a pizza restaurant. Unrelated diversification takes advantage of one specific core competence: a management team’s ability to control a group of organizations. Inefficient companies are restructured to create value. Designing an efficient structure is crucial because poor performance can result from high bureaucratic costs. Unrelated diversification involves managing from a profit perspective; businesses are bought and sold based on return on investment. Seeking ways to enter new domains, companies pursue all three corporate-level strategies: vertical integration, related diversification, and unrelated diversification. When pursuing opportunities, companies expand and digress from the original domain. Corporate-Level Strategy and Structure Corporate-level strategies must be tied to the right structure. Operating in more than one domain requires a multidivisional structure, self-contained divisions and a corporate headquarters staff. Variants of this structure fit related and unrelated diversification.

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Conglomerate Structure and Unrelated Diversification Unrelated diversification does not involve managers in routine operations. After restructuring, management monitors each company’s performance, acts only when necessary, and uses a conglomerate structure. A conglomerate structure makes each business a self-contained division with a small headquarters staff because activities between divisions need no coordination. Communication flows from top down and pertain to bureaucratic costs. (Fig 8.8) Structures for Related Diversification Related diversification involves sharing resources, requiring a high level of coordination and integration. Information flows laterally between divisions and vertically between corporate headquarters and divisions; more complex integrating mechanisms, such as integrating roles and teams, are needed. Coordination is difficult, because of conflict over resources. To achieve gains, the organization needs a large corporate headquarters staff to coordinate interdivisional activities. Notes________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________________________________________________________________________________________________________·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _5_ _h_e_r_e_ _t_o_ _d_i_s_c_u_s_s_ _s_t_r_a_t_e_g_i_e_s_ _f_o_r_ _e_n_t_e_r_i_n_g_ _n_e_w_ _d_o_m_a_i_n_s_._ _ _____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ _ _O_r_g_a_n_izational Insight 8.3: Hitachi Ltd. Hitachi, a major computer company, has 28 related divisions, which depend on electronic and computer technology. Each division has R&D and decision-making authority. Hitachi believes that the benefits of related diversification outweigh the high bureaucratic costs. Q. How does Hitachi manage related diversification? A. Hitachi uses integrating mechanisms to coordinate activities. Executives in integrating roles control information among divisions, and a corporate R&D keeps divisional R&D labs informed. Telecommunications and teleconferencing allow

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scientists to share information. The company has a strong culture based on cooperation and teamwork. Related diversifiers may choose a multidivisional matrix structure by coordinating divisions and corporate headquarters. Related diversification requires coordination, so bureaucratic costs are much higher. Bureaucratic costs associated with unrelated diversification are low, because divisions do not coordinate. Corporate-Level Strategy and Culture Culture can reduce bureaucratic costs, and values can help manage corporate strategy. A company pursuing unrelated diversification values economy. Q. What values help manage related diversification? A. Related diversifiers promote cooperation, and divisions use common corporate language with each other. Each division has a culture, but the corporate culture overcomes differences. Q. How can a company achieve an innovative and cooperative culture? A. Members can be socialized to the innovative culture through promotions. Managers who share resources can be rewarded. Culture must reinforce strategy and structure. A common corporate culture would not fit a conglomerate structure, as no exchanges among divisions occur, but it would fit a multidivisional matrix structure. Interorganizational strategies allow for gains from related diversification and vertical integration without bureaucratic costs. A joint venture allows two companies to share resources without bureaucratic costs. Long-term contracts provide the benefits of vertical integration. Managerial Implications: Corporate-Level Strategy Managers must analyze the environment to protect existing domains and exploit the firm’s core competences. Managers should evaluate costs and benefits associated with entering a new domain and the costs and benefits of various strategies. Managers must match the firm’s structure and culture to strategy. Notes________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 8.5 Implementing Strategy Across Countries Four basic strategies are used to enter and compete in the international environment: multidomestic, international, global, and transnational. Each takes a different approach

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to creating value. These strategies are classified on two dimensions: pressures for local responsiveness and pressures for global integration. (Fig. 8.3) Multidomestic strategy is a reaction to high pressures for local responsiveness; products are tailored to meet customer needs in each country of operation. Wholly owned foreign divisions are created, and core competences are transferred from the home country. Each division has value creation activities, including manufacturing, product design, and marketing, and each has strategic control. Transferring profits and dividends is often the only link between a foreign division and the parent company. Q. Name the advantages of a multidomestic strategy. A. Advantages: Access to resources and skills; a differentiation advantage through combined core competences; becoming the dominant competitor; increased profits; and reduced bureaucratic costs. Disadvantages: Lack of global learning due to little interaction among divisions; missed opportunities for long-term value creation. International strategy does not respond to high pressures for local responsiveness or global integration. It merely duplicates domestic operations abroad. Core competences in manufacturing and distribution are transferred; R&D, product development, and marketing are centralized. Foreign divisions do not customize products, so customers get a standardized product. Coca-Cola uses this strategy. Q. Name the disadvantages of an international strategy. A. Limited local responsiveness; higher production costs because manufacturing is located in many countries; no global learning; no access to foreign resources and skills because core competences are exported; and higher bureaucratic costs because resource transfers are coordinated. This strategy, used by U.S. leaders in mass production and marketing, leads to low-cost and differentiation advantages. Environmental change has brought about new value creating strategies—a global and a transnational strategy. Global strategy responds to pressures for global integration. A standardized product is manufactured at a few low-cost locations and sold globally with limited customization. Q. Describe the advantages of this strategy. A. Economies of scale with decreased costs and prices, and the competitive advantage of a high quality product; and a network with value creation functions established in low-cost markets plus long-term contracts with low-cost suppliers Q. Describe the disadvantages of this strategy.

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A. High bureaucratic costs because of centralization; controlled resource transfers by corporate headquarters; lack of local responsiveness, decreasing product demand; no learning to differentiate products; no differentiation Transnational strategy responds to pressures for global integration and local responsiveness, combining the advantages of global strategy (value creation activities located in countries with low factor costs) and multidomestic strategy (value creation activities located in foreign countries for customization). Low-cost and differentiation advantages are achieved by transferring core competences to countries with low-cost and differentiation advantages and by creating a network for skill transfer among domestic and foreign divisions. Divisions build on skills received and transfer improved products and processes. Global coordination results in low-cost, high-quality products. Q. What are the disadvantages? A. Higher bureaucratic costs, complex design structure and control systems due to a high level of coordination and customization Implementing Strategies There are various structures suitable to each strategy (Table 8.1) Multidomestic strategies typically use global-geographic structures. (Fig.8.9). International strategies typically use global product group structures with a product group headquarters. (Fig. 8.10) Global strategies typically use global product group structures. (Fig. 8.10) Transnational strategies typically use a global matrix structure. (Fig. 8.10) DISCUSSION QUESTIONS AND ANSWERS 1. How should an organization design its structure and culture to obtain a core competence in manufacturing and in research and development? Successful R&D requires skills to be used in innovative ways; coordination is needed to develop new products. Obtaining a core competence in R&D requires a flat, decentralized, organic structure with mutual adjustment among teams. The culture should promote self-control, team control, cooperation, and innovation.

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A core competence in manufacturing requires cost control, so a tall, centralized, mechanistic structure is typical, with standardization for control. Still, a more organic structure allows workers to participate in decision-making, improves quality, and reduces costs, leading to a core competence. The company could use performance-based pay. 2. Pick an organization like a restaurant or a department store and analyze how it might pursue (a) a market penetration strategy (b) a product development strategy, and (c) a market development strategy. Answers will vary. A restaurant offers American food, such as chicken, in a nice atmosphere. a. This restaurant decides on a market penetration strategy by increasing advertising and promotion. It offers buy-one-get-one-free coupons to attract customers. b. This restaurant chooses a product development strategy by improving the food. It offers new items, such as spicier chicken, to retain its customers and improves service. c. This restaurant chooses a market development strategy by expanding into new regions. The restaurant is popular in the Southwest and might expand to the Midwest and to Mexico. 3. What is the difference between a low-cost strategy and a differentiation strategy? How should a differentiated biotechnology organization and a low-cost fast-food organization design their structures and cultures to promote their respective competitive advantages? A low-cost strategy uses core competences for low-cost products targeted at customers who want low prices. New products are developed according to consumer demand. A differentiation strategy uses core competences for products with unique features for customers who value uniqueness and pay top price. Differentiation requires strong competences in development and marketing and entails rapid innovation to introduce products in advance of competitors. To maintain its differentiated advantage, a biotechnology company needs a flat, decentralized, organic structure with mutual adjustment as the primary integrating mechanism. The culture should foster cooperation, innovation, and quality and reward employees for teamwork and new ideas. To maintain its cost advantage, a low-cost fast-food restaurant needs a mechanistic structure to control costs with standardization. The culture should foster economy and frugality and reward employees for lowering costs. 4. Compare the competitive advantages enjoyed by a large restaurant chain, such as Steak and Ale or Red Lobster, and the sources of competitive advantages enjoyed by a small, local restaurant.

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Red Lobster’s competitive advantage is based on differentiation, with a core competence in marketing to achieve name recognition. Costs are controlled through volume buying. All functions contribute to this differentiation. Cooks ensure high quality food. Human resources hires and trains competent personnel. Marketing targets seafood lovers. Red Lobster has the resources to introduce new products. A small local restaurant’s competitive advantages stem from quick response to customers. By pursuing a small market segment, the restaurant remains close to customers and has the flexibility to change the menu and decor. A large restaurant conforms to company standards. The restaurant avoids direct competition with large differentiators or low-cost competitors by focusing on one market segment. 5. Why would an organization choose a corporate-level strategy to expand its value-creation activities beyond its core domain? Discuss how an organization’s structure and culture might change as the organization begins to enter new domains. Expanding makes sense if more value creation cannot occur in the core domain, and resources are available to enter new domains. In new domains, a firm needs a complex structure such as the multidivisional structure. Structure and culture depend on the strategy pursued. Unrelated diversification fosters economic values; related diversification fosters cooperation. Expansion increases bureaucratic costs, resulting in a taller structure that could stifle innovation. Structure and culture must be reevaluated as a firm changes strategies. 6. How and why do bureaucratic costs increase as a company goes from a multidomestic to an international to a global to a transnational strategy? Bureaucratic costs depend on pressures for global integration and local responsiveness. A multidomestic strategy has low bureaucratic costs due to lack of coordination among divisions and headquarters. With an international strategy, costs rise to coordinate activities with divisions. With a global strategy, costs rise more due to centralized decision-making and resource transfers in the global network. The transnational strategy has the highest bureaucratic costs because of coordinating resources and customizing products. Coordinating activities require a complex structure with costly complex integrating mechanisms. ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory: What Kind of Supermarket? In small groups, a team of investors is planning to open a new supermarket. Each group lists the current supermarket chains, their strategies, and functional strengths and weaknesses. Each group recommends a strategy. The Ethical Dimension

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Students examine the issue of bribery, and why the U.S. adopts the stance that it is illegal, even if other cultures accept this as a norm. Making the Connection Students will find an example of a company pursuing a business-level or a corporate-level strategy and explain why the strategy was chosen. They will determine whether or not the strategy created value and describe the effects of the strategy on structure and culture. CASE FOR ANALYSIS Levi Strauss’s Goes Global This case demonstrates how a company can pursue a transnational strategy. Levi Strauss has located production facilities around the globe and customizes its products to local tastes. Foreign subsidiaries are responsible for marketing. It is also transferring knowledge abroad. To implement its strategy, Levi’s established a network structure. Design is performed in the U.S. and foreign partners produce and distribute products. 1. What global strategy is Levi Strauss pursuing? Is it effective? Levi Strauss is pursuing a transnational strategy. Levi’s is seeking to both reduce costs and provide customer responsiveness. Production facilities are located around the world to take advantage of low cost foreign labor. However, Levi’s wants to tailor its jeans to local customers; foreign subsidiaries are responsible for marketing. For example, Asia may offer more smaller size jeans. Other countries desire various colors. Moreover, Levi’s transfers knowledge to its subsidiaries. For example, marketing knowledge learned on Decker’s in the U.S. was transferred to Europe. 2. What structure does Levi Strauss use to implement its strategy? To implement its transnational strategy, Levi Strauss uses a network structure. Design is performed in the U.S. and foreign partners produce and distribute products. A partner will be replaced if it doesn’t meet Levi’s standards. Analyzing the Organization Students will examine the domain that the organization serves, the market that it competes in, and the strategies used to create value for its stakeholders. TEACHING SUGGESTIONS 1. To illustrate how each function is responsible for developing core competences, divide the class into the five functions: manufacturing, human resource management, materials management, sales and marketing, and research and development. These functions work for a fast-food restaurant that specializes in hamburgers and is pursuing a low-cost strategy. Each develops core competences that lead to a low-cost competitive advantage. (Table 8.1 ) Students should give specific examples such as selling hamburgers for 49 cents.

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2. Combining competences can protect or enlarge a company’s domain. The class is divided into four groups; each group works for a low-cost fast-food restaurant and uses one of the four strategies to enlarge its domain: market penetration, market development, product development, and diversification. Each group lists a specific way to enlarge its domain (e.g., market penetration through increased advertising). 3. In six groups, functional, product division, product team, geographic, conglomerate, and multidivisional, students match structure to strategy. The groups must be specific. If the strategy is differentiation, each states how the company differentiates (e.g., products or customers). 4. Invite a manager from a local company to speak to the class about the company’ strategies, culture and structure. If the company is large, have students get information from the company web site before the presentation (consider FedEx, UPS, or Wal-Mart). 5. A role-play with five students demonstrates the difficulties of a transnational strategy. One student is the CEO of the parent company and stresses divisional cooperation, low costs, and local responsiveness. One student is a foreign manager for France and one for England. One student is a product manager for Europe and one an individual business division manager. The product manager expects the division manager to coordinate resources globally. The manager for England wants to do what is good for England. England refuses to cooperate with France. This conflict prevents the organization from achieving the benefits of a transnational strategy, yet this structure increases bureaucratic costs. What can the company do? The class explains that an international culture and manager network could remedy the situation. 6. The class is divided into eight groups to show that strategies are chosen to respond to pressures for global integration and local responsiveness, and that structure and culture matched strategies. There are four companies, each assigned to two groups. Each group de_t_e_r_m_i_n_e_s_ _t_h_e_ _m_o_s_t_ _a_p_p_r_o_p_r_i_a_t_e_ _s_t_r_a_t_e_g_y_,_ _s_t_r_u_c_t_u_r_e_,_ _a_n_d_ _c_u_l_t_u_r_e_ _f_o_r_ _i_t_s_ _c_o_m_p_a_n_y_._ _ _ _·ð _T_h_e_ _f_i_r_s_t_ _c_o_m_p_a_n_y_ _o_p_e_r_a_t_e_s_ _i_n_ _a_ _f_a_i_r_l_y_ _s_t_a_b_l_e_ _i_n_d_u_s_t_r_y_,_ _b_u_t_ _f_o_r_e_i_g_n_ _c_u_s_t_o_m_e_r_s_ _d_e_m_a_n_d_ _r_e_s_p_o_n_s_e_ _t_o_ _l_o_c_a_l_ _c_o_n_d_i_t_i_o_n_s_ _(_a_ _m_u_l_t_i_d_o_m_e_s_t_i_c_ _s_t_r_a_t_e_g_y_ _a_n_d_ _a_ _g_l_o_b_a_l_ _g_e_o_g_r_a_p_h_i_c_ _s_t_r_u_c_t_u_r_e_)_._ _·ð _T_h_e_ _s_e_c_o_n_d_ _c_o_m_p_a_n_y_ _o_p_e_r_a_t_e_s_ _i_n_ _a_n_ _i_n_d_u_s_t_r_y_ _i_n_ _w_h_i_c_h_ _c_o_m_p_e_t_i_t_i_o_n_ _i_s_ _f_i_e_r_c_e_ _a_n_d_ _g_l_o_b_a_l_ _(_g_l_o_b_a_l_ _s_t_r_a_t_e_g_y_ _a_n_d_ _p_r_o_d_u_c_t_ _g_r_o_u_p_ _s_t_r_u_c_t_u_r_e_)_._ _·ð _T_h_e_ _t_h_i_r_d_ _c_o_m_p_a_n_y_ _w_a_n_t_s_ _t_e_c_h_n_o_l_o_g_y_ _t_o_ _t_r_a_n_s_f_e_r_ _t_o_ _f_o_r_e_i_g_n_ _d_i_v_i_s_i_o_n_s_ _(_a_n_ _i_n_t_e_r_n_a_t_i_o_n_a_l_ _s_t_r_a_t_e_g_y_ _a_n_d_ _a_ _g_l_o_b_a_l_ _p_r_o_d_u_c_t_ _s_t_r_u_c_t_u_r_e_)_._ _·ð _T_h_e_ _f_o_u_r_t_h_ _c_o_m_p_a_n_y_ _o_p_e_r_a_t_e_s_ _i_n_ _m_a_n_y_ _c_o_u_n_t_r_i_e_s_ _a_n_d_ _i_n_ _a_ _d_y_n_a_m_i_c_,_

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_c_o_m_p_e_t_i_t_i_v_e_ _i_n_d_u_s_t_r_y_;_ _c_u_s_t_o_m_e_r_s_ _w_a_n_t_ _t_a_i_l_o_r_e_d_ _p_r_o_d_u_c_t_s_ _(_a_ _t_r_a_n_s_n_a_t_i_o_n_a_l_ _s_t_r_a_t_e_g_y_ _a_n_d_ _a_ _g_l_o_b_a_l_ _m_a_t_r_i_x_ _s_t_r_u_c_t_u_r_e_)_._ _7_._ _S_t_u_d_e_n_t_s_ _w_i_l_l_ _l_o_o_k_ _a_t_ _t_h_e_ _w_e_b_ _s_i_t_e_s_ _f_o_r_ _A_T_&_T_,_ _C_o_c_a_-_C_o_l_a_,_ _a_n_d_ _Dell Computers. How do these companies handle foreign operations? Report findings to the class.