Internationalization - Business Strategy and Structure

Internationalization - Business Strategy and Structure

International Business Final Exam Part 1 - Internationalization Strategy and Structure

Author: Bhaskar Chitraju

Internationalization can provide firms numerous benefits, including the ability to sell to a larger market, utilization of location economies, using experiences learned in various markets to enhance core competencies, and development and transfer of skills between subsidiaries and headquarters.

Although Internationalization provides all the above mentioned advantages, these advantages themselves bring in certain problems that constraint the ability of a firm to fully reap its benefits. For example, a company might have successfully developed a product for the domestic market, and believes that there is a large consumer base for the product across the globe. Even though the product may have a large consumer base, the tastes and preferences of consumers may vary across nations to force the company to customize its product in order to be successful. Differentiation of products would lead to cost escalation, and result in erosion of profit margins. Since localization leads to higher costs, companies wishing to internationalize with a generic or a commodity product would be at a significant disadvantage. Another problem arising out of internationalization is the use of location economies to maximize production element of global value chain. India along with China may seem like an ideal location for placing production part of the value chain, but there are some caveats with these choices as well. India for example has a vast labor pool and low costs, but its archaic labor laws, excessive bureaucracy, and indifferent government makes it a poor choice. Internationalization can also lead to headquarters and subsidiary conflict. A Headquarters with a fully centralized decision making process would allow for a streamlined and coordinated decision making process, but at the same time would also inhibit subsidiaries from innovating and taking risks which could have benefitted the corporation. A decentralized decision making on the other hand would allow subsidiaries to respond quickly to the needs of their local market, but at same time could also lead to lack of coordination among various parts of value chain, and might even cause subsidiaries to carry out activities that might run counter to the benefit of the firm as a whole.

It can be stated that Procter & Gamble historically followed a "localization" strategy while internationalizing. As stated by its first vice-president of overseas operations Walter Lingle, "We must tailor our products to meet consumer demands in each nation." Such customization and country-specific divisions meant that the company would have numerous subsidiaries, which would also end up duplicating numerous elements of the value chain process.

Although the localization strategy was successful in its earlier, a combination of events, including the fall of trade barriers in Europe meant that the nature of the competitive market also changed making localization strategy being pursued by Procter & Gamble prohibitively expensive for the firm. Since the structure and strategy of the company were inconsistent with the nature of the market, the company's CEO Jager introduce a vision that would align the company's strategy and structure with the new realities of the market. Along with alignment of strategy and structure, the vision - Organization 2005 (O2005) would attempt to change the way the company innovated, produced, and marketed its products. The Organizational 2005 vision could be described as the movement of the company from localization strategy to transnational strategy. Since the implementation of vision O2005 was a work in progress during the events of the case, I will discuss numerous measures that the company could have implemented to strengthen the vision.

In case of Procter & Gamble, the process through which the SK-II product was created can be described as an excellent path for the company to follow to maximize global value chain activities, and at the same time provide tailored products to individual markets. The SK-II development process utilized globally standardized "shells" or "chassis" cleansing product that would allow for utilization of economies of scale and location economies. The creation of SK-II product involved a global development process which was created once a consumer researcher found that despite regional differences, there was an opportunity worldwide for facial cleansing. A technology team was assembled drawing personnel from various divisions of the company throughout the world. This technology team developed a new facial cleansing product that would serve as a foundation for Procter & Gamble to customize and market in various nations. For example, the Japanese team added attributes to the foundation or "chassis" product that would satisfy the needs of the Japanese consumers. The U.S. developing team on the other hand added attributes to the "chassis" product that would meet the requirements of the American consumers. This development process essentially allowed the company to build 1 globally standardized product - the "chassis", which utilized location and economies of scale to reduce costs, and at the same the time allowed for the differentiation of the product through addition of various attributes suitable to the local market. The adoption of this strategy throughout Procter & Gamble would allow the company to find a balance between localization and standardization.

Since the competitive nature of the market changed, the prior organizational structure Procter & Gamble followed became a liability. A new organizational structure would require the company's strategy and organizational culture to be aligned with the demands of the new competitive market. The current organizational structure of Procter & Gamble revolved around the 4 regional organizations which were tasked with profit responsibility. Under vision O2005, the profit responsibility shifted from regional organizations to global business units (GBUs), who were also tasked with managing of product development, manufacturing, and marketing of their respective categories worldwide. Under this structure, the cosmetics business unit would be entirely responsible for profitability, manufacturing, and marketing of products under its unit worldwide. The product based divisional structure would streamline the decision making process, by placing decision making authority under those who are focused only on that product division, as opposed to a country a manager who has a broader scope. The problem with this organizational structure is that it reduces the role of national managers who could have provided the company the best input in terms of customization of a product for the local market. One of the ways that Procter & Gamble could balance the problem is by involving country managers in the post-chassis development process. With the foundation "chassis" product on hand, the product division managers could involve country managers in providing input that would allow the "chassis" product to be adapted to the local needs. Procter & Gamble could also establish a knowledge network where informal contacts are encouraged and maintained throughout the company to allow free transmitting of ideas. For example, a country manager may realize that there is a need that is not being satisfied by current products in the market. A knowledge network or informal web of network may allow a country manager to get in touch with other relevant members in the organization more quickly cutting through bureaucratic hurdles, and pave the way for a development process that would lead to creation of new products.

As has been stated in the case, Procter & Gamble had numerous issues in dealing with its various subsidiaries. One of the problems that arise during internationalization is the subsidiary-headquarter conflict. Procter & Gamble has to balance between decentralization that would lead to innovation and risk taking, and centralization that would lead to greater coordination among various divisions of the firm. In order to ensure innovation, risk taking, efficient coordination, and buy-in by the various subsidiaries, Procter & Gamble could project its headquarters as "first among equals", rather than the absolute authority in all decision making process. Since SK-II was an endeavor of the Japanese division, Procter & Gamble would be well advised to realize that new product innovations don't have to come just from the headquarters, but could also come from other divisions. Encouraging initiatives like internationalization of SK-II would also encourage greater organizational buy-in from other subsidiaries. Upward mobilization of personnel throughout the firm rather than being restricted to one geographic region would also encourage the belief among subsidiaries that they are part of a larger "organism", rather than an isolated entity. Encouraging and nurturing informal networks across subsidiaries, and at the same time creating interdependence - whether in terms of production or R&D process would allow the subsidiaries and employees to look at the best interests of the firm rather than their immediate division.

Since the organizational culture, and culture of the nation the firm is located in affects the performance of the firm, Procter & Gamble would be well encouraged to recruit employees that are a "fit" to culture being encouraged by the firm. A strong organizational culture would ensure that employees have a strong identity regarding the values, ideals, rituals, and goals of the firm.