The Strategy of International Business

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• The Strategy of International Business

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The Strategy of International Business

• INTRODUCTION
• The focus is on the firm itself and, in
  particular, on the actions managers can take to
  compete more effectively as an international
  business.

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The Strategy of International Business

• STRATEGY AND THE FIRM
• A firms strategy can be defined as the actions
  that managers take to attain the goals of the
  firm.
• Profitability can be defined as the rate of
  return the firm makes on its invested capital.
• Profit growth is the percentage increase in net
  profits over time.

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The Strategy of International Business

• Value Creation
• The more value customers place on the firms
  products, the higher the price the firm can
  charge for those products
• The value created by a firm is measured by the
  difference between V (the price that the firm can
  charge for that product given competitive
  pressures) and C (the costs of producing that
  product)

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The Strategy of International Business

• Firms can increase their profits
• by adding value to a product so that customers
  are willing to pay more for it
• by lowering the costs
• There are two basic strategies for improving a
  firms profitability
• a differentiation strategy
• a low cost strategy

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The Strategy of International Business

• Strategic Positioning
• A central tenet of the basic strategy paradigm is
  that in order to maximize its long run return on
  invested capital, a firm must
• Pick a position on the efficiency frontier that
  is viable in the sense that there is enough
  demand to support that choice
• Configure its internal operations so that they
  support that position
• Make sure that the firm has the right
  organization structure in place to execute its
  strategy

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The Strategy of International Business

• Operations The Firm as a Value Chain
• The firm can be thought of a value chain
  composed of a series of distinct value creation
  activities, including production, marketing,
  materials management, RD, human resources,
  information systems, and the firm infrastructure
• These value creation activities can be
  categorized as primary activities and support
  activities

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The Strategy of International Business

• Primary Activities
• The primary activities of a firm have to do with
  creating the product, marketing and delivering
  the product to buyers, and providing support and
  after-sale service to the buyers of the product
• Support Activities
• Support activities provide the inputs that allow
  the primary activities of production and
  marketing to occur

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The Strategy of International Business

• Organization The Implementation of Strategy
• The term organization architecture can be used to
  refer to the totality of a firms organization,
  including formal organizational structure,
  control systems and incentives, organizational
  culture, processes, and people.

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The Strategy of International Business

• Organizational structure refers to
• the formal division of the organization into
  subunits
• the location of decision-making responsibilities
  within that structure
• the establishment of integrating mechanisms to
  coordinate the activities of subunits including
  cross functional teams and or pan-regional
  committees

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The Strategy of International Business

• Controls are the metrics used to measure the
  performance of subunits and make judgments about
  how well managers are running those subunits
• Incentives are the devices used to reward
  appropriate managerial behavior
• Processes are the manner in which decisions are
  made and work is performed within the
  organization
• Organizational culture is the norms and value
  systems that are shared among the employees of an
  organization
• By people we mean not just the employees of the
  organization, but also the strategy used to
  recruit, compensate, and retain those individuals
  and the type of people that they are in terms of
  their skills, values, and orientation

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The Strategy of International Business

• In Sum Strategic Fit
• In sum, for a firm to attain superior performance
  and earn a high return on capital, its strategy
  must make sense given market conditions.

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The Strategy of International Business

• GLOBAL EXPANSION, PROFITABILITY, AND PROFIT
  GROWTH
• Firms that operate internationally are able to
• Expand the market for their domestic product
  offerings by selling those products in
  international markets
• Realize location economies by dispersing
  individual value creation activities to locations
  around the globe where they can be performed most
  efficiently and effectively
• Realize greater cost economies from experience
  effects by serving an expanded global market from
  a central location, thereby reducing the costs of
  value creation
• Earn a greater return by leveraging any valuable
  skills developed in foreign operations and
  transferring them to other entities within the
  firms global network of operations

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The Strategy of International Business

• Expanding the Market Leveraging Products and
  Competencies
• A company can increase its growth rate by taking
  goods or services developed at home and selling
  them internationally
• The success of firms that expand in this manner
  is based not only on the goods or services they
  sell, but also on their core competencies (skills
  within the firm that competitors cannot easily
  match or imitate)
• Core competencies enable the firm to reduce the
  costs of value creation and/or to create
  perceived value in such a way that premium
  pricing is possible

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The Strategy of International Business

• Location Economies
• Firms can benefit by basing each value creation
  activity at that location where economic,
  political, and cultural conditions, including
  relative factor costs, are most conducive to the
  performance of that activity
• Firms that pursue such as strategy can realize
  location economies (the economies that arise from
  performing a value creation activity in the
  optimal location for that activity, wherever in
  the world that might be)

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The Strategy of International Business

• Locating a value creation activity in the optimal
  location for that activity can have one of two
  effects
• It can lower the costs of value creation and
  help the firm to achieve a low cost position
• It can enable a firm to differentiate its
  product offering from the offerings of
  competitors

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The Strategy of International Business

• Creating a Global Web
• By taking advantage of location economies in
  different parts of the world, multinational firms
  create a global web of value creation activities
• Under this strategy, different stages of the
  value chain are dispersed to those locations
  around the globe where perceived value is
  maximized or where the costs of value creation
  are minimized

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The Strategy of International Business

• Some Caveats
• Introducing transportation costs and trade
  barriers complicates this picture
• Political risks must be assessed when making
  location decisions

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The Strategy of International Business

• Experience Effects
• The experience curve refers to the systematic
  reductions in production costs that have been
  observed to occur over the life of a product
• Learning Effects
• Learning effects are cost savings that come from
  learning by doing
• So, when labor productivity increases,
  individuals learn the most efficient ways to
  perform particular tasks, and management learns
  how to manage the new operation more efficiently

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The Strategy of International Business

• Economies of Scale
• Economies of scale refers to the reductions in
  unit cost achieved by producing a large volume of
  a product.
• Sources of economies of scale include
• the ability to spread fixed costs over a large
  volume
• the ability of large firms to employ
  increasingly specialized equipment or personnel

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The Strategy of International Business

• Strategic Significance
• Moving down the experience curve allows a firm
  to reduce its cost of creating value
• Serving a global market from a single location
  is consistent with moving down the experience
  curve and establishing a low-cost position

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The Strategy of International Business

• Leveraging Subsidiary Skills
• Managers must recognize that valuable skills
  that could be applied elsewhere in the firm can
  arise anywhere within the firms global network
  (not just at the corporate center)
• Managers must also establish an incentive system
  that encourages local employees to acquire new
  skills
• Summary
• Managers need to keep in mind the complex
  relationship between profitability and profit
  growth when making strategic decisions about
  pricing

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The Strategy of International Business

• COST PRESSURES AND PRESSURES FOR LOCAL
  RESPONSIVENESS
• Firms that compete in the global marketplace
  typically face two types of competitive
  pressures
• pressures for cost reductions
• pressures to be locally responsive
• These pressures place conflicting demands on the
  firm.

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The Strategy of International Business

• Pressures for cost reductions and pressures to be
  locally responsive

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The Strategy of International Business

• Pressures for Cost Reductions
• Pressures for cost reductions are greatest
• in industries producing commodity type products
  that fill universal needs (needs that exist when
  the tastes and preferences of consumers in
  different nations are similar if not identical)
  where price is the main competitive weapon
• when major competitors are based in low cost
  locations
• where there is persistent excess capacity
• where consumers are powerful and face low
  switching costs

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The Strategy of International Business

• Firms facing pressures for cost reductions
• must try to lower the costs of value creation by
  mass-producing a standard product at the optimal
  locations worldwide

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The Strategy of International Business

• Pressures for Local Responsiveness
• Pressures for local responsiveness arise from
• differences in consumer tastes and preferences
• differences in traditional practices and
  infrastructure
• differences in distribution channels
• host government demands

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The Strategy of International Business

• Differences in Consumer Tastes and Preferences
• Strong pressures for local responsiveness emerge
  when consumer tastes and preferences differ
  significantly between countries
• Differences in Infrastructure and Traditional
  Practices
• Pressures for local responsiveness emerge when
  there are differences in infrastructure and/or
  traditional practices between countries

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The Strategy of International Business

• Differences in Distribution Channels
• A firm's marketing strategies may have to be
  responsive to differences in distribution
  channels between countries
• Host Government Demands
• Economic and political demands imposed by host
  country governments may necessitate a degree of
  local responsiveness

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The Strategy of International Business

• CHOOSING A STRATEGY
• Firms use four basic strategies to compete in the
  international environment
• global standardization
• localization
• transnational
• international

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The Strategy of International Business

• Global Standardization Strategy
• A global standardization strategy focuses on
  increasing profitability and profit growth by
  reaping the cost reductions that come from
  economies of scale, learning effects, and
  location economies
• The strategic goal is to pursue a low-cost
  strategy on a global scale
• This strategy makes sense when there are strong
  pressures for cost reductions and demands for
  local responsiveness are minimal

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The Strategy of International Business

• Localization Strategy
• A localization strategy focuses on increasing
  profitability by customizing the firms goods or
  services so that they provide a good match to
  tastes and preferences in different national
  markets
• Localization is most appropriate when there are
  substantial differences across nations with
  regard to consumer tastes and preferences, and
  where cost pressures are not too intense

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The Strategy of International Business

• Transnational Strategy
• A transnational strategy tries to simultaneously
• achieve low costs through location economies,
  economies of scale, and learning effects
• differentiate the product offering across
  geographic markets to account for local
  differences
• foster a multidirectional flow of skills between
  different subsidiaries in the firms global
  network of operations
• A transnational strategy makes sense when cost
  pressures are intense, and simultaneously, so are
  pressures for local responsiveness.

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The Strategy of International Business

• International Strategy
• An international strategy involves taking
  products first produced for the domestic market
  and then selling them internationally with only
  minimal local customization
• When there are low cost pressures and low
  pressures for local responsiveness, an
  international strategy is appropriate

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The Strategy of International Business

• The Evolution of Strategy
• An international strategy may not be viable in
  the long term
• To survive, firms may need to shift to a global
  standardization strategy or a transnational
  strategy in advance of competitors
• Similarly, localization may give a firm a
  competitive edge, but if the firm is
  simultaneously facing aggressive competitors, the
  company will also have to reduce its cost
  structures, and the only way to do that may be to
  shift toward a transnational strategy

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The Strategy of International Business
HIGH
PRESSION FOR COST REDUCTION
As competitors emerge these strategies become
less viable
LOW
LOW
HIGH
PRESSION FOR LOCAL RESPONSIVENESS
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The Strategy of International Business

• STRATEGIC ALLIANCES
• Strategic alliances refer to cooperative
  agreements between potential or actual competitors

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The Strategy of International Business

• The Advantages of Strategic Alliances
• Strategic alliances
• facilitate entry into a foreign market
• allow firms to share the fixed costs (and
  associated risks) of developing new products or
  processes
• bring together complementary skills and assets
  that neither partner could easily develop on its
  own

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The Strategy of International Business

• The Disadvantages of Strategic Alliances
• Strategic alliances can give competitors
  low-cost routes to new technology and markets,
  but unless a firm is careful, it can give away
  more than it receives

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The Strategy of International Business

• Making Alliances Work
• The success of an alliance seems to be a function
  of three main factors
• partner selection
• alliance structure
• the manner in which the alliance is managed

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The Strategy of International Business

• Partner Selection
• A good partner has three principal
  characteristics
• a good partner helps the firm achieve its
  strategic goals and has the capabilities the firm
  lacks and that it values
• a good partner shares the firms vision for the
  purpose of the alliance
• a good partner is unlikely to try to
  opportunistically exploit the alliance for its
  own ends that it, to expropriate the firms
  technological know-how while giving away little
  in return

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The Strategy of International Business

• Alliance Structure
• Alliances can be designed to make it difficult
  to transfer technology not meant to be
  transferred
• Contractual safeguards can be written into an
  alliance agreement to guard against the risk of
  opportunism by a partner
• Both parties can agree in advance to swap skills
  and technologies to ensure a chance for equitable
  gain
• The risk of opportunism by an alliance partner
  can be reduced if the firm extracts a significant
  credible commitment from its partner in advance

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The Strategy of International Business

• Managing the Alliance
• Successfully managing an alliance requires
  managers from both companies to build
  interpersonal relationships
• A major determinant of how much a company gains
  from an alliance is its ability to learn from its
  alliance partners