Chapter 13

Implementing Strategy in Companies That Compete Across Industries

and Countries

STRATEGIC MANAGEMENT

Lecture 13

Dr. John Kraft

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Managing Corporate Strategy Through the Multidivisional Structure A company competing across industries and countnes confronts a new set of problems and has to make a new series of orQanizational design decisions for a global and multmational business.

The Multidivisional Structure 1. Divisions

Responsible for day..f:o..c:Jay operations Self-contained - with a full set of value-chain functions May share value-chain functions with other divisions

2. Corporate headquarters staff Monitor divisional activities Exercise financial control over each division Strategic responsibilities

managing the handoffs between value-chain I Addresses the problems and economizes the costs of I

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Multidivisional Structure

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PtlllrmaceufQla dlylslon (producI,.!Qamctructuro)

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Figure 13.1

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3 5

Opening Case

+!+Avon is Calling

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Managing Corporate Strategy Through the Multidivisional Structure

+!+Functional or product structures are not sufficient when a company enters new industries

+!+Multidivisional structure innovations • Divisions (operating responsibility) • Corporate headquarters staff to monitor

divisions (strategic responsibility) • Each division may be organized differently

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Strategy in Action

+!+ SAP's ERP Systems

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1

(

Global Matrix Structure

EUrOPea.n >":1 I ' SBU:, , " ,,'SBlJ~ "",,'

! Prnd~d>.! . 'oroup2.' r-, --1r-----+------t--'-'-'-"

~ 'Produtt I i ~~.u~3 :if--+-----... -----<~--'--'-' • Individual operating companll!:!J

317

Corporate Strategy and Structure and Control

Table 13.1

TyplllliColl1roJ

CorpDI'All:! Ajlpmprilltt Nedfof Fiultial BehlrlWr Or1f1DlmtiDll1I1

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bO!Wllcn diyiJinns)

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ra,Ocuru t,g'liln bud~elJI ondvll!uu} IfllIlslerd ptieilllll

nllbUld !.1tJ1ilf.'Vwnnnl '!I!1lllochiu:nO Utllau311 G,catt'lIll!.g.. GrntlUlI'lu.g... di~,nmCft111l11 IYnergieeboMoen ro!lI£,t\1l!seb) lIotm;, v~llln.

CMslon~by (ammon 111lllgiDUnilrolul blllgll3Jje)

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Strategy in Action

·:·Nestle's Global Structure

Nestle

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Related Diversification Principle benefits of related diversification come from transferrinf[, sharing, or leveraging functional resources or sktlls and some exchange of distinctive competencies across divisions . • :. Gains derived from the transfer, sharing, or leveraging

across divisions • R&D knowledge • Industry infonnation • Customer bases

.:. Output control difficult as businesses share resources • Not easy to measure perfonnance of individual divisions

.:. Integration and control at divisional level required

.:. Incentives and rewards for cooperation necessary High bureaucratic costs

The aim is to desi~n structure and control systems to maximize strategic enefits while economizing on costs.

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Running Case

·:·How Wal-Mart Implemented Global Expansion

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Implementing Strategy Across Countries

.:. Multidomestic strategy • Local responsiveness; decentralized control

.:. International strategy • Centralized R&D and marketing; other

functions are decentralized .:. Global strategy

• Cost reductions; centralized functions .:. Transnational strategy

• Local responsiveness and cost reduction

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2

Global Strategy/Structure Relationships

Table 13.2

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""""" ... ,'" StndtllY ''''''''' lDw~ NctdforCoordbwrinn ... lIllIh

'"" . BIII'MlIu.ticCmb . lII.!1h

Centtallmtlon Doccml'1lliledt.!'l Qltetllmpt\l:fltll!$ CtrtJlllucll'at S:lmu/!lInellu~ ofAu1l1orilY nlllillnaluM cllmret,ml,&;tI\t" OFlImalllJobel celllrt&!edand

dcctntrulutdlo IDtltion dtctllu!rJed IUltiOllalurlu!

flClrilllnllll Global·.rea lr.1tntGtiuna!·uillisiu!\ Glcbclprudutt. GIo!::J:!·mtUi" Dlntfcnll.tlon 51ruct::rn IittUttutc IIrnupstruCtl:re sttuclUre,fl'jillrix

i:llhQmind NndforCr:tmpID. """ Mc:lrum High VcrylUg.'l b;lI!gl1l till!l Mecllenbm. Oli~nhlllillul t~lItlmpllrumt tlui-.alm~t;t1nnt irr.Pllnllnl Vcryimponant CIIhof1.

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Global-Area Structure

Figure 13.2

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area _c:t'wr'tll~,,~;~,;~~!~/i'shlin!g overseas regions or c .:. Value creation activities duplicated in every region or

country of operation .:. Decentralized authority in each overseas division .:. Managers at global headquarters evaluate

performance of overseas divisions .:. No integrating mechanisms needed .:. No global organizational culture

.:. Duplication of specialist activities raises costs

Implementing International Strategy

.:. International division structure Used when a company sells domestically made products in markets abroad Foreign sales organization added to existing structure; same control system Customization is minimal SUbsidiary handles local sales and distribution Behavior controls keep the home office informed International division coordinates flow of different products across different countries . Domestic and overseas managers may compete for control of strategy making

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International Division Structure Global Division Structure

United t States :

._---_!

United Kingdom

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Global division

Japan France

3 ,.

3

Global-Matrix Structure

No<th ~o~';n ! .' .. Eui:~·n I ..' P;~jc:' i ---'"-"-~ i : .• ','. '<j

Pr6duct f wo~p.1. 1-\ -+-----<;----+--

:~~~uct ~'___;_-__ +--_-;_­.9":,up2 ,~

PrOduct l : group 3 ;-, -+-----<t----+--

• Individual operating companlos

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Strategy in Action

·:·Oracle's New Approach to Control

ORACLE'

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Closing Case

·:·Ford CEO

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Figure 13.5

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Global Product-Division Structure

Strategy in Action

·:·Li & Fung's Global Supply Chain Management

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Real World

·:·"HK John Waynes on New Battlefield"

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4

End of Lecture 13

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. ·;"·::T:#M be~li:b.~~~d()lip~9i:m:arketilig:knQivleqge~'· \: .'.Ii1,l\von's .. rteWs:o,;ucture, all new maj :·.:{:·t'\:Wi.th']ittl~ cP.ri.c:~ftt f6,1:; qp~.ra ting¢osts; bec::l,'!lse :,: 'product· . development is'. now centralized ':\';::~;.J:heiiJiqal',~~s,~o in~reaietheirdiVisi6ri\;'sale~ j" the tJrii~ed' $tates;Whi!e the inPlltfrom

:,.' ';;",/~i ~·~.f~st4s,'·po$sible .. When too ,rrnich 'author-1'manag~rs'is used tocustorillze prQducts to . '.:. ':'~,' itt\j~dec·eiltr.aJ,iz<::d tb':InanagerS:l6.weJ; rrtan:': hl<es of each. cOlliltry,.for example, .LLa·5~'Ll1\ .. C,

'.;:>! ;" ""~':9f~~iti~a.#p~;s.,:Pi~~Pichy, the manag~r~ otten ~'. packagllig and so on, the more than 1,000 "; ::" .. ::, . . . ~'<:t,e¢fuit.rri<?:re;in~l1;lgetS whelp t):Ieiri. PiIi,ld. their .~ ,products ~ year Avon introduces are "C;/;;;;':::': " : ",. ;i:'t9lh,itij '~:~ii}:p.rres:" TJ:ieresUltwas. i'4at1\.yqn's .. ~. in' its Vnited . States REicD laboratories. '·;,·>;~:··gicibai':6~g~iQik.tionai h.iei:ar~hy. Bad, expl~ded: : .'.l¥ly, toieduce co~ts~~ll marketing .... , :UU.J.,Id.l!:!.U:;:

:,'i;,;;{:,,:, .. :,,\,) .:, ::':;i':#'l1asr:~is~#ij'6~ 7 t,o' .lS1evelS::'pfIi,larla,geh iTf:' t~J:gete4 tovta,rd the average "global"

'."·::"·":';:;':':::!~;~·!:;·:··'::·":';·":i:"}' ,::li;:~~f~~$~r~!~~~d' '~~9~~~s~:g~r-b:iF:i:~~~' :.: :.~::·t~~~t~~e~v~~;·P:Itb~· ~!~t~ .:. ":' ,-:::" '.- ,.' '. Y Avcip.'s·pidfits were rising, f~st, 'lung and herized io' a particularcouiitry or world

.:;" .',::', . ~. top :management team: had. 'r!.,ot . paid' enough " 'by, !o;( 'example, using the appropriate. , " ·':.'1·aj:i:entibn·"i:o:',tJ:le, way\l\voii~s'orgaIiizatibrial ':gliagebrthe riati'on~litY' of the models .'

.... ~ .. ·s4ticth.t;eVlafhe~0iill¥g .. ta.ll~~:.:..:.just·as··~t wasket the product~ Other initiatives have .' g¢1:1;iiig;. Wi~e;r :'a,~ itt'!~tded,rhorec6lliltrles to' .. increase the m~mey spent on global

~xp~hdcosrri~t:ics salesi\'':;,' •. :' ....•. '... . which ha,d not kept pace with its rapid. ·,::<this;;~~i.:lii:gh~~resC:~tia,r1o;Jl,lnghad to. expansion,ahd a major push to .

corifJ;8~t'th¢:~~~4 t6'liiY:offthbus~~ds of global 'number of Avon· salespeople in 'rn~ui.~gers"~~~, i~~tHicture:,#~~(':c)]:ganizational ... nations, who number in the millions,

.' .. ' ' .. ': '... hi~rii:chytor:educe ~osts aridbqostpr'ofitabil- more customers.3

.' ....\ •. ;'itr.S~e~iP:barked orr kj)rog~fin,ito take away.. Country .. level managers now are . ' ·theallthoi:ity'of.Av6n's'~buritl;y~levd.manag- sible for managing this army of Avon :,:; ;'. er,;(an~'tran'sferauthodty't~;~egi9hal and cor.. . for making sure that marketing

.porateheaclquartersJ:n:aI?-agers'to .strearD.1ine being directed toward the right .~ecisio.nmalcirtgandi:educe20iii:s:She cut oui maximum impact. However, they

. ',;~'~ev.!!h levels' of niaml.gementand .... eliminated have the authority to engage in ,. Z5% of itf:l global manag~is in itf:l 1J 4 world- uct development or huild new lUC'UUU,~~ : wide. ~;1r,k!'!ts. TJ:1en, using t;e'~'s.:.of expert j,;capacity-or hire new managers ~'nianagei~frolIicorpo.i:ate headq~act,:ers; she permission ofregibnal or corporate .'

. 1e¢patked orui detailed eXanllnati6n of aU of 'agers who ar~ nQwfocused on red . ;, . A:yon)i; fUD.c:tional activities, colintry by COllil~ .. cost structure. The. i:najor changes : ' try, to ;find out why costs had risen so. q~ckly' to Avon's organiZational structure

.arid'vrrhatcoulqpe done to bring~em ,uIider· has totally changed the balance .~9ntr0L, The'duplical10ri' of mark~tingefforts . changed the way the company·

.;, ~)n.tci~tries~·rQiID,d~he world wil!i one soutce. web of global strategies. Today, . ~. ofthes.~ 4'ighcQsts. Iii'Mexico, one te~m. foimd her managers are focusing on !.th?-·t't:04i:ttiY: managers; desire t6eXJ?~llld their egies that strengthen the business

eD.ipii~s had l~d to the develoPnle.rit '9£ a stag- eritrre company, not just its :geJ,irig13,OOO different products .. Not. only.. divisions. .

CHAPTER 13 Implementing Strategy in Companies That Compete Across Industries and Countries

Strategy in Action 13.2 SAP's ERP, Systems

SAP is the, world's leading supplier of enterpris~ resources" ,functions insicle each diVision. This means that managers planning (ERP) software; it introduced the world's first ,"" ,inall functions of a division have access to other func­ERPsystem in 1973. So great w~s the demand for its soft- ' tions' expertsystern:s,and SAP's software is designed to ware that it had to train thousands of IT consultants from alert managers when' ili,eirfunctional operations are af­companies like IBM,' HP, Accenture, and Cap Gemini to • 'fected by changes taking, place in another function. Thus, install and customize its software to meet the needs of 'SAP's ERP allows ma~agers'across a division to better coor­companies around the globe. SAP;;' ERP system is popu.- >dirzatetheiractivities, which is a major source of competi-lar becaus,e it manages functiqnal activities at all stages6f ,,' tiveadvantage." "",,, ' a company'syalue chain, as well as resource transfersb'e-' ,,' 'Moreover, SAP software, rurtning on corporate main­tween a company's different ,divisions.', .'", #ime cOlI1puters,'takes the information 'from all the

First, SAP's software has modules spedfi.cally de-, different expert systerns ill the ,divisions and creates a signed toinanage each core functional actiyity. Each ,(:9'rnpf\nywjdeERPsyst~inthatprovides corpoiateman- , module contains the set of best practices that ~AP's IT;ager(wifu alloyerviewofthe operations of8iIacom­engineers have found works best to build compet~ncies in'pcu:1y's4ivisic)ns.Jnessence,SAP's ERP system creates a efficiency, quality, innovation, and responsiveness to clls~, 'sophistkatd'corjJorate~h;velexpert system that can rea- , tomers. Each function inputs its data irito, itsfunctionaJ, ""son through,the buge,.vohnne,ofinformation being pro- ' module in the way specified by SAP. For example"sales ' ,'viCied brall its diVision~~d functions. The ERP system ' inputs all the information about customer needs required, "'" cauthen iecognize'anddiagnose common issues,and by SAP's sales module, and materials managerrientinputs'" pr()blems andrecoimnendorganization-wide solutions, information about the product specifications it requires " such as by stiggestingnewways to leverage,transfer, and from suppliers into SAP's materials-management mod- " ·'share competenciesand,resc)Ufces. Top managers; armed ule. Each SAP module functions as an expert system that , ' ," with the kn.owledge theirERP provides, can also use it to can reason through the information that functional man: adjust their ',~llsinessrl1odel With the changing environ­agers put into it. It then provides man,agers withreiU-ment: The result,Sl\P claiins, is that when a multidivisional time feedback about the current state of vital ftirictiohal ", c6:rIlp~Y'implementfits c6rpotatewide ERP software, it operations-and gives recommendations thatallowlIlCin- "can'achieve productivity gains of 30 to 50 percent, which

, agers to improve them. However, the magic ofERP does· amounts to billions of dollars of savings for large multi-not stop there. SAP's ERP software then connects acrOss . national companies likeNestle and Exxon.

Chapter 13 Implementing Strategy in Companies That Compete across Industries and Countries 439

RUNNING CASE

How Walmart Implements Global Expansion

Retailing giant Walmart has been aggressively expand­ing globally in recent years to boost its profitability. After moving into Mexico and Europe and establishing two global product groups in these regions, its manag­ers turned their focus to Japan, where the supermar­ket business is extremely lucrative. They envisaged creating a highly profitable Japanese global product group that would benefit from the fact that, although Japanese customers pay some of the highest prices for food in the world, its supermarket chains are highly inefficient. Why?

Unlike efficient Japanese carmakers, which employ state-of-the-art IT materials-management systems to

, collect the detailed information needed to increase , the quality and efficiency of their operations, Japan's retailers had lagged behind in adopting these systems. A major reason was that until the 1990s, Japan's Large Scale Retail Store Law allowed small Japanese retail-ers to block large supermarket chains from opening

, large, efficient new stores in their neighborhoods for ; 10 years or more. Although the Japanese government weakened the law so that local storeowners could 'delay a store opening for only 18 months, there was

,'no history of low-cost competition in the Japanese ,;retail market . . <:-. ", A second factor that led to low supermarket

.,' efficiency related to the way products such as groceries distributed and sold in Japan. Traditionally,

manufacturers sold their products only to wnn'I"""'lers, with which they had developed long­

business relationships, not directly to retailers. rs add their own price markup and control

bution, making it much more difficult for, super­"",,"',';'_1.,_._ to compete on price and lowered competition.

result, there were few incentives for Japanese ?"'.I,I:I(811Iers to invest in expensive materials-management

to increase their efficiency. '.' contrast, Walmart's focus on developing a , histicated global supply chain to lower the costs "" purchasing, shipping, and sales activities has

made it the mo~tefficierit global d.i'scount retailer an~ " grocer. In ?ddition! Walmart's l5upply chain inanage~; ment eliminates the ne,ed for wholesalers becauseth'e , company is such a huge, powerful buyer.. So. \i\lalmart.' managers thought that entering the Japariese ' super-', ' market industry might be very profitable indeecLThey bought a significant stake in Seiyu Ltd.';.Japan~sfqurth-~: largest superm!3rket, to gain a foothold ihth~Japanese '. market. An opportunity to expand ands~rehgth~ni1s"" base arose when Japan's third-Iargesis'uperm'arket ' chain, Daiei, which had been 10sing'rnoneyfOrYElars-;' was put up for sale. ' " ",', " "" ,.,!, ;.;",:

Walmart's Japanese sfrat~gywastci ~cq,u.ireD~iei. ' and then combine it with its Seiyu operatiOris'tocreate , a strong Japanese global product group. Its'product, group managers believed that if Waimart 'could lever- " age its IT-based global supply chain acrqss all.exparded " chain of Japanese supermarkets, it would sigriificaqtly increase Seiyu's and Daiei's efficiencyand,rriake'tHe product group highly profitable, AI~o, as in)heUnited, States, they hoped that over tirne; theJElp~n~se , group's growing com'petitive advantage would,~ither. force other Japanese supermarket 'chairiseither t6go ,. out of business or sell out to Walmartso that it would eventually dominate the Japanese supe'rmarket indus>< try. To accomplish this, product group,managersput into motion major plans to identifY,lower-pri.cedgro_c:;ei-~' ies from abroad that would be atiractiveto Japanes'e', customers and then use its IT system to purchase these groceries efficiently from producers arouhdthe world. '~ ",' ., '" ',' ", ,'::},;', ,

To Walmart's annoyance, Japan's,lndustdarRevi~' talization Corp., which had the poWer to decide which company could buy Daiei,dedded it'did ,not', want Walrnart to establish a powerful prpduct'grdup and become one of the largest r~tailers"in Japan.' It ' rejected Walmart's bid for Daiei; however,the world's largest retailer is still watching fo(other'opPQrtuf)i~: ties to expand its presence in the lucrative Japanese market.', ",'"

r CHAPTER 13 Implementing Strategy in Companies That Compete Across Industries and Countries

Strategy in Action 13.3 Using IT to Make Nestle's Global Structure Work

Nestle, based in Vevey, Switzerland, is the world's biggest food company, with global sales in excess of $65 billion in 2004. The company has been pursuing an ambitious pro­gram of global expansion by acquiring many famous companies-for instance, Perrier, the French mineral water producer, and Rowntree, the British candy maker. In the United States, Nestle boughtth~ giant Carnation Company, Stouffer Foods, Conta.dina, Ralston . Purina; and Dreyer's Grand Ice Cream.

Traditionally, Nestle pursued a localization strategy and managed its operating companies through a global­area structure. In each country, each individual division (such as its Carnation division) was responsible for man- . ' aging all aspects of its business-level strategy: in other words, companies were free to control their own product development and marketing and to manage alliocal op­erations. Nestle's corporate executivesdedded acquisi­tions, expansions, and corporate resource decisions such as capital investment at the Vevey headquarters. :t;3ecause all important decisions were made centrally, the size of, the corporate staff increased dramatically. In the 1990s,

, Nestle realized it had major problems. Corporate managers had. become remote from the

difficulties experienced by the individual operating divi­sions or companies, and the centralized structure slowed decision making and made it difficult for Nestle to re­spond quickly to the changing environment. Moreover, the company was forfeiting all the possible benefits from sharing and leveraging its distinctive competencies in food product development and marketing, both between divisions in aproduct group ahd between product groups and world regions. Because each product group operated separately, corporate executives could not integrate prod­uct-group activities around the world. To raise corporate performance, Nestle's managers sought to find a new way of organizing its activities;

Its CEO at the time, Helmut Maucher, started re­structuring Nestle from the top down. He stripped away· the power of corporate managers by decentralizing au­thority to the managers of seven global product groups that he created to oversee the company's major product lines (for example, coffee, milk, and candy). Each global product group was to integrate the activities of all the op­erating divisions in its group to transfer and leverage dis­tinctive competencies to create value. After the change,

managers in the candy product group, for instance, began orchestrating the marketing arid sale of Rowntree candy products such as After Eight Mints and Smarties through­out Europe and the United States, ~nd sales climbed.by 60 percent. . . Maucher then grouped all divisions within a country

or world region into. one national or regional strategic business unit (SBU) and created a team ofSBU inanagers to link, coordinate, and oversee their activities. When the different divisions started to share jointpufchasing, niar- . keting; and sales activities, major cost savings resulted. In the United States, the SBUinanagement team reduced the humber of sales officersnationwidefrom 115to 22 and decreased the number of suppliers of packaging from 43 to 3.

. Finally,. Maucher decided to use a"matrix structure to , integrate the activiti,es of .the seven global~produci groups . with the operations of Nestle's country~based SBUs. The gOal of this matrix structure is to have the company pursue. a transnational strategy .that allows it to obtain the gains froW both differentiation through global learning and cost reduction. For example, regional SBU managers now~pend considerable time in Veveywith product-group executives discussing,ways of exploiting and sharing the resources of the company on a global basis.' .

Although the new decentralized matrix stru.cture im­. proyed Nestle's ability to coordinate its structure, byJ998 it was clear thatit still was not providing enough integra-

. tion and coordination. Although more coordination was taking place between product groups inside a regiori such, as the United States, little coordination was taking place across world regions. Nestle's top managers searched for ways to improve integration on a global scale. Their con­clusion was that more output and behavior control was needed so that different product groups and regional SBUs could learn from aild understand what everyone else was doing-for example; what their product devel­opment plans were or how each product group handled its global supply chain.

Nestle's solution was to sign a $300 million contract with SAP in 2002 to install and maintain a companywide

. ERP system to integrate across all its global operations, Top managers hoped this system would give them the in­formation they needed to exert centralized control over operations, which the matrix structure. apparently did

PART 4 Implementing Strategy

" hiliic)lls 'of dollars find'16werecHtsco'si'strliCture:Af'llie ': those of its competitors. b ": ",' .". "," , :";'. :.' .' , .: '::',; '.; :,' '". '., '" y':. . .. : .. ' :,',', ':.'",: "

PART 4 Implementing Strategy

Strategy in Action 13.4 ",',::." .," .. ,-.;

· •.......... : ....••. the se~oridlargest1ridepel1dertt softw-ar~cbin~. ,.'.; :'a~ailabiet() managers throughout the companywith one .' }panY'after' Microsoft Like Bill Gates(Microsoft'schair:.: :.' tlickofa mouse; In addition, he instructed managers to in- .•... ,

man/Oracle's cofounder and chairrriart, Latiy Ellison, '. vestigatlwhichkindsof activities were beingnionitored ..•.. · ... recognized in 1999 that his company had a, majot .prob- ···.·andcoIitr()lled by.people and, Wherever possible, to substi-. . leIIi:,'ifwas not using. the ~oftware it had. developed to . ..,rute Intemet~based control. Fof exaInple, previously Orade

'controlitsownactivities~' even though its customers were! .' had over three hundred people respoIisible for monitoring As· a, result; Oracle was having a . difficult time .. under.: ... arid managing such tasks as paper-based travel planning standing its customers' needs,andinternally it was not ~ . and expense report systems. These tasks were automated

· experiencing the cost savings that could, result from im~. .. into software systems and put online, and employees were · plementing its own database and financial control soft-· .. made responsible for filing their own reports. These three ware. Ellison . moved quickly to change .Otacle's·coritrol htihdredpeopkwerethel1 transferred into sales and con-

'. systemsso thatthey.w~relnternet based. .. ..... . . ,.. sU1tingpo~itions';The'saV1llgswas over$l billion a year. : One of the main advantages of Internet-based controi, .;J~y . using internet software-based control systems,

.'. software is that it permits the c:entraliiedmanagement of.Orade's managers' are also able togetdoser to their cus-

... aCQmpany's Widespread operations. COfporate managers tomers. In 1999,Orac1e gaveall its salespeople new customer · :. can easily comp'are and contrast the perforrriance of differ-: . relati011ship management software and instructed them

•.• ·:ent divisions spread throughout the globe in real time and . to enter into. the system detailed information' about cus-· canquicld'y identify ptoblemsand take corrective action. 't6:niers'purchases;future plans, Web orders, and service

. However; to: his embarrassment,' Ellisondiscoveredthat:requests. As ~ result,headquarters managers can now '. 'Oracleis financiai and human resource ihformatiort was .... . tratk 'sales ord~rs easily, and if they see problems such as · ····located 'dn over seventy different computirJ.g 'systems lost saiesorn:'iultiple service requests, they can quickly ' .. across the world; It to()ka lot of time and effort t6track·. 'c()ntact customers to solve those problems. This speed · •. 'such basicthings'as the size of the company's workf()rce. . builds better customer relations. . . 'and the 'sciles of its leading products;Asa'result; it took a· ,:. SD.amazedhas Ellison been at.the result ofirnple-'longthne to take.corrective actioh;aiid many 6pporturlities111eritirig Internet· software. systerIis that he. has radically were bemg missed. . .. '. .... . . ····rethought Orade's control systems. He now believes that

. .." Recognizing the irortyofthe situation; Ellison ()rdered . . because of the advances ofmoderIi computer information /hismcinagers to change_the waythecorripany conttoned~ .'.' systems, Oracle's' employees should be doing only one of · that is, monitored and evaluated...:-itsactivities and to im.: three things: buildmg its products, servicing its products,

· plementits new Internet-based,control systems as quickly ··or selling its products. All other activities should be auto­"as possible. His goalwas to have all of Oracle's sales, cost; .' matedby developing. new information cOhtrol systems, . profit; and huinan resource'information systems consoli- . and it should be the IIianager'sjob to use control only to · dated in two locations and to make this. information facilitate one of these three front-line activities.

Strategy in Action 13.5

.. "6if~f,;th¥Jd~~st ~";:;\~:Y~rn~n1cuiuf~ctuterinVieb1am to make 'the yarn; then ., iinp.oitiul!t¥sk::".~hip:the'yarn·toa C.hirt~sesuppliet to weave it irtto cloth;

',_ . . '. . ' " .. : sup~:.:::a~dtl1entoseverardifferehtfactories in Malaysia and the :. pliers are located irt "', Philippmes to cut the cloth and sew the shirts. Another

. aroUnd', tile' :worldi so' ffudirtg ·them' is ()ften ' ," comp~y might take responsibility for packagirtg and . 'glohalj:oiIipailiesuseth'eservicesofforeigrijriterriiecli~ • ':shlppmgtheshirts to whereverirt the world they are re­.' ... 'arles'bibrolCeis;located nefu:thesesupplier~i 'to' lilid.the· '.' '.quired;·Sirtcea companylike Target has thousands of dif­.i6ri~ th~tbes(nieets their fuputteqtiirements. :Li&Fiing,.: ferent' d0tliirtgprbducts . under production and these ·ri6wrun:bY·btothersViCtotand William Fungj is one of .' 'changeaUthetime,theproblems of managirtg such a

···these:brokersthat haveheIped hundreds of global com.: .' ·supply.chairt to get the full cost savirtgs from global ex-." . pamesto locate stiitableforeign suppliers; espe~ially sup-' , pansion are clear. '; :pIlersirtmainIandChirta;. . .. ' ......... . ·····:<This:i.stheopportunity that Li &: Funghas capitalized ':i.In'the '2000s/mariagirtgglobal ,companies'·$upply .~ •. 6n: Realizirtgthat many global companies do not have the " 'chairts':h:ecame'anev'en'moretomplicated task because . tirilecii' expertise to find such specialized low-price suppli-

overseas' . suppliers" were irtcreasirtgly' specializirtg' m just' .ersitheY moved quickly to provide such a service. Li & Fung : one part 'of . '.the .. task .of producing· a ,productfutheir:.· . employs .3,600 agents who travel across thirty-seven coun-searchJorw-aystoreduce:c6~ts.For example, in the pa.st, a • ·.tries to find. new suppliers andirtspect existing suppliers to

.> compariy:such'as Target niighthaveneg6tiated with. afin.dnewways to help .their clients; global companies, get ':,'sripplieii,to Il1ariufa~ure lmpJi6ri tinitsof a shirtat;1' cer- 'lo-wefpiices()r higher-qualit}' products. Global companies ···tam ,cost perlmiLButwith':specialization,. Target might.. . are happy to.outSourcetheir supply-cham management to .Jirid~tciu1redlice thecosts9.(produ~irtg the shirt ·~ven,. 'Li & Fungbecause they realize significant cost savirtgs. And ..• :;furiherby splitting the bper~tions involvedirt producirtg· ; although they pay a hefty fee to' Li&Fung, they avoid the . :theshITtind liaVirtgdifferentsuppliers, ·ofteniI1different· .' . costs of employing their own agents. As the complexity of

c9untries, perfoimeach operation. For e:icam]Jl~, to. get supply-cham management continues toirtcrease, more and . the iowest costpe(Unit, Target might first negotiate with . ". more Companies like Li 8{ Fuiig are.appearirtg.

. ',' ," , ..... ", . ," '". . . .. . . .

Part 4 Implementing Strategy

Ford's CEO Designs a New Global Structure

Designing a global organization structure to oper­ate efficiently across many countries is a critical issue for multinational companies, as Ford has discovered over time. Ford realized early in its history that a major opportunity to increase its profitability was to take its American car-manufacturing skills and apply them in countries abroad. Over time, it established car-manufacturing divisions in different countries in Europe, Asia, and Australia. Ford decentralized decision-making authority to each global division, which controlled its own activities and developed cars suited to the local market. The result was that each division came to operate independently from its United States parent company. Ford of Europe, for example, became the largest and most profitable carmaker in Europe.

Ford remained a highly profitable company until Japanese carmakers began to flood the world with their small, reliable, low-priced cars in the 1980s. As car buyers began to buy the Japanese imports in large numbers, Ford tried to draw on the skills of its European unit to help build smaller, more fuel­efficient cars for the United States market. But it had never before tried to get its United States and Euro­pean design and manufacturing units to cooperate; this proved difficult to achieve because its decentral­ized global organizational structure did not encour­age them to cooperate. In the 1990s, Ford embarked on a massive project to create a new global-matrix structure that would solve the decentralized task and authority problems that were preventing it from utilizing its resources. effectively.

In the 2000 plan, Ford laid out a timetable of how all its global carmaking units would learn to cooperate using one set of global support functions, such as design, purchasing, and so on. Country managers continued to resist the changes, however, to preserve their country empires and forced Ford to redesign its proposed global structure again and again. By the mid-2000s, Ford's United States, Euro­pean, and AsiaIPacific divisions were still operating as a collection of different autonomous "empires." Ford had failed to lower its cost structure or design and make a profitable "world car" that could be sold to customers around the globe.

Once again, Ford decided to restructure itself. It moved to a "world structure," in which one set of managers was given authority over the whole of a specific global operation such as manufacturing or car design. Then Ford began to design cars for the global market . .Its new structure never worked to speed car design and production, even as it con­stantly changed global lines of authority and the locations in which it operated to increase profit­ability. Ford went through multiple reorganizations to try to meet the Japanese challenge, but nothing worked. Losing billions of dollars, Ford announced in 2006 a revamped "Way Forward" plan to turn around its United States and global operations, a plan that called for cutting 44,000 jobs; closing 16 plants; and freshening 70% of the company's Ford, Mercury, and Lincoln car lineup.

In October 2006, Ford also appointed a new president and CEO, Alan Mulally, an expert in orga­nizational design, to help turn around its operations. Mulally, a former Boeing executive, had led that company's global reorganization effort. He began' to work out how to change Ford's global structure;:, to reduce costs and speed product development. the structure Mulally inherited, Ford's unit reported to the CEO, but its other global functional operations reported to the next two senior executives, Mark Fields, president of . Americas operation, and Mark Schulz, president .' international operations. Mulally decided that 'downsizing should be accompanied by a major ganization of its hierarchy, and he decided to Ford's structure and recentralize control. At the '. time, however, he put the focus on teamwork: adopted a cross-functional approach to ll<1J·Ju.u~·l enormous value chain challenges that still the organization.

The position of president of international tions was eliminated, and Mark Fields report to Mulally but so also do the heads .' other two world regions: Lewis Booth, head '" of Europe, and John Parker, head of Ford .. Pacific and Africa and Mazda. Two levels in archy are gone, and Mulally's new design clearly defines each global ~.r~,r"i·I'

Chapter 13 Implementing Strategy in Companies That Compete across Industries and Countries 455

in the company's hierarchy. Ford can begin acting like one company instead of separate global units, each with their own interests.33 In addition, the heads of its global value chain functions also now report directly to Mulally, not to Fields. These heads include Tony Brown, global head of purchasing; Nick Smither, head of IT; Richard Parry-Jones, chief technical officer; and Bennie Fowler, head of quality and advanced manufacturing engineering. Mulally's goal is to provide a centralized focus on using the company's global functional assets to better support its carmaking business units.

At the same time, Mulally also took a major restructuring step, announcing the creation of a new position, global product development chief, who is responsible for overseeing the development of Ford's entire global lines of vehicles. He appointed Derrick Kuzak, head of product development in the Americas, to head Ford's new global engineering design effort, and he also reports directly to Mulally. Kuzak oversees efforts to streamline product devel­opment and engineering systems around the world. As Mulally commented, "An integrated, global prod­

... uct development team supporting our automotive .;, business units will enable us to make the best use . of our global assets and capabilities and accelerate dev'elc)pnlerlt of the new vehicles our customers pre­

and do so more efficiently."34 Mulally's goal was to force a cross-functional

l.DDlrOflcn on all his top managers-one that he will

personally oversee-to standardize its global car­making and allow functional units to continuously improve quality, productivity, and the speed at which new products can be introduced. But beyond stream­lining and standardizing its approach, its new-product development group must also ensure that its new vehicles are customized to better meet the needs of regional customers. All Ford's executives now under­stand the company's very survival was at stake; they had to work together to accelerate efforts to reduce costs and catch up to more efficient competitors such as Toyota.

Despite the fact that in 2009 Ford was still losing billions of dollars as the 2008 recession continued, its new global organizational structure did seem to be working. Ford was in the best competitive position of any United States carmaker, and it had not needed to borrow billions of dollars from the United States government so that it could continue to operate. Only time will tell, but Mulally remains confident.35

Case Discussion Questions 1. What kind of global strategy did Ford pursue at

the beginning? What kind of global strategy does it pursue now?

2. In what main ways has Ford changed its global structure to allow it to coordinate the production and sale of its products more effectively around the world? In particular, what different forms of organizational structure has it adopted?

. !;";'':''.';''-:':'''-l>1' .• ,:~.",,, ••

qK·Wj~":W::.',~~$~ii~~is;:·mbri·t~\W·.Q a ttl~ficld:·~ & Fung ate ente~ing the domestic inipo~ sed~~~f.~~~ic\othin.? industry wit,p.Jevi Strauss deal, writes len Cheng e Fung brothers are fond design, manufacturing and customers ITom Toys R Us to reduced the chance of arbit- the past five years. "They

pugnacious business' getting into marketing in the Crn.:;a-Col;\!: .Its fortunes rose raging on specialist supplier are running on a treadmill agery. Victor Fung, chair- US, and delivery to the ware- ;- and stock;price soared - as Iu;lowledge. just to stay in the same 111 of Li & Fung, the Hong house of Wal-Mart. It's a dif- buyers increased: their reli- . ,The past two years have place," says Da"id Cui, ana­ng-based consumer goods ferent type of margin," Mr ance on outsourced manu- b~en particularly brutal. Iystat Merrill Lynch in Jrcing group, once said he Fung explained_ facturing and demanded Fl\:!rcecompetition ill the Hong Kong_ Jught of .his company's The'deal shows the pres- extra services, from US, sPW:red by the "every- The company is hoping lior managers as little sure on traditional exporters low-level design to vendor' day low prtcing" strategy of the Levi's agreement will be 10 Waynes "shooting at to move into value-added financing. . retail giants like Wal-Mart the first of several direct-to-

the bad guys". He has services to survive. It also But the company's operat- has led to ongoing price market deals this year that o described his ideal sour- reflects how eager some ing margins have remained deflation of about 7 per cent will raise margins and help Ig agent as a machete- manUfactUrers' and retailers low, stuck at 2 to 4 per cent per year_ At .the same time, meet a self-imposed target of ?lding executive "fighting are t{t"outsource more of for the past two decades. buyers have. become more doubling underlying earn­'ough the underbrush" of their supply chains to spe- The' struggle to improve demanding, asking for ings from their 2001 level to 7eloping countries. cialistswith faster and more margins has been hampered smaller, less cost-efficient HKS1.9bn (US$243.6m) by ..ast week, his brother Wi!- "'i1exible production. by trends such as the excess orders with tumround times next year.

, rn; who runs the venera- "For Levi's to go this route capacity caused by the as short as 30 days. As for margin growth," . family business is quite new," said Ravi growth of Asian manufactur- Li & Fung has had to work opinions are mixed as to {-to-day, announced their Kumar of University .of ing - estimated at 25 per hard simply to maintain its how much the Levi's deal est strategic development Southern California's busi- cent by one executive - and margins while achieving will help. V"'hile some expect , major licensing deal with ness school, adding that the IT revolution, which has strong revenue growth for Li & Fung to grab a healthy vi Strauss, the apparel apparel-makers are now " chunk of the double-digit ker - in similar vein.· copying the value·added out- 'U 8, F ", e. "t', margin available on tbe It's a new battlefield for sourcing patterns perfected ;~ : .• " .. ':In8,·: ." '- '.:.,' O~rating margin (%) import side of the supply ," said Mr Fung, referring by elej;tronics manufactur- •. ~,·.· .. :'4·0·!;S.:.\lJK$b.r ;i1Y ....: .... ~ .. : ... ~ .. : ..... :.. chain, the overall effect OJ. the company's potentially ers in the early 1990s. -" :it;; margins could be negligibl(.' lund-breaking move from When the Fung brothers ",:;,,; in the short term. ! offshore export. to the, took over Li & Fung in the Mr Cui, of Merrill Lynch. nestic import side of the: late 19705, friends warned 3: who estimates the compa-{Jbn US apparel industry. i that· export trading. was a ny's 2003 margin at 3.1 per lnder the deal, Li & Fung dying business, with. pain- cent, thinks the deal will .I sell its own Levi's- fully shrinking margins. But .~ lead to at most an additional l11ded tops directly to US. the Fungs spotted a growth 0.1 per cent in the margin ailers. The company business in value-added sup- "'1. next year. Jes jumping up the supply ply chain management. But given the difficult lin will allow it to Today, the 97-year-old industry conditions. even a ?rove margins and meet company is a mUlti-billion 0 small improvement might be :ressive growth targets. dollar business that manages .; considered a victory in Li & We are not just being an a global network. of 7,50.0 .. ,. ' . : ..• ,.,.."': .... ;;~!.; .• ,... Fung's century-old campaign mt. We are involved in suppliers for hundreds of to move up the value chain.