Fourth Edition

InternationalBusiness

CHAPTER 12

The Strategy of International Business

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12-3

Chapter Focus

Shifting focus from the international environment to the firm.

Actions managers can take to compete more effectively.How firms can increase profitability by expanding to foreign markets.Different international strategies.

Pros and cons of the strategies.Factors affecting strategic choice.Tactics.

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Firms Profit

Π = Profits = TR – TCProfits (π*Q) = (P*Q) – (ATC*Q)

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Profitability

Profitability is a rate of return concept:

ROS (return on sale) = (Π/TR)

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Profitability

Profitability is a rate of return concept:

ROS (return on sale) = (Π/TR)

ROI (return on investment) = (Π /I)

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Strategy and the Firm

StrategyActions taken by managers

to attain firm’s goals.

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Firm’s Strategy

Strategy could be to maximize:• Π = Profits = TR – TC• ROS (return on sale) = (Π/TR)• ROI (return on investment) = (Π /I)

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Value Creation

Figure 12-1

V = Consumer Value: The highest price a consumeris willing to pay for a product

V - P

P - C

V - C

V

P

C

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Value Creation

Figure 12-1

V = Consumer Value: The highest price a consumeris willing to pay for a productP = Market Price: What actuallya consumer pays for a product

V - P

P - C

V - C

V

P

C

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Value Creation

Figure 12-1

V = Consumer Value: The highest price a consumeris willing to pay for a productP = Market Price: What actuallya consumer pays for a productC = Cost of Production

V - P

P - C

V - C

V

P

C

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Value Creation

Figure 12-1

V = Consumer Value: The highest price a consumeris willing to pay for a productP = Market Price: What actuallya consumer pays for a productC = Cost of Production

V-P = Consumer Surplus

V - P

P - C

V - C

V

P

C

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Value Creation

Figure 12-1

V = Consumer Value: The highest price a consumeris willing to pay for a productP = Market Price: What actuallya consumer pays for a productC = Cost of Production

V-P = Consumer SurplusP-C = Profit Margin

V - P

P - C

V - C

V

P

C

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Value Creation

Figure 12-1

V = Consumer Value: The highest price a consumeris willing to pay for a productP = Market Price: What actuallya consumer pays for a productC = Cost of Production

V-P = Consumer SurplusP-C = Profit MarginV-C = Value Added by the firm

V - P

P - C

V - C

V

P

C

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High Profit Strategy

A firm could choose:Low Cost Strategy: Strategy of lowering cost of production.

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High Profit Strategy

A firm could choose:Low Cost Strategy: Product Differentiation Strategy: Strategy of increasing the value of the product to consumers by making the product more valuable through superior design, quality, etc.

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The Firm as a Value Chain

A firm could be considered as a value chain composed of a series of distinct value creation activities. It could be categorized as:Primary activities or Support activities.

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Primary Activitieshave to do with design, creation, and delivery of the product.

The Firm as a Value Chain

R & D (design)

Production inmanufacturing

(physical)and in serviceMTV programs

Marketing & Salesthrough brand name

positioning and advertising

“bottled water”value is increased

After saleservice

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Materials Management: controls transmission of physical materials fromProcurement through production.

Support Activities

The Firm as a Value Chain

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Human Resources: Ensures that the company has the right mix of peopleEnsures that people are well trained, well compensated and motivated

Materials Management

Support Activities

The Firm as a Value Chain

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Information Systems: refers to the communication features of theInternet for managing inventories, tracking sales, pricing of the product,

Dealing with customers, etc.

Human Resources

Materials Management

Support Activities

The Firm as a Value Chain

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Company Infrastructure:The environment within which all of the firm’sactivities such as production, marketing, sales, service take place.

It includes organizational structure, control systems, and culture of the firm.

Information Systems

Human Resources

Materials Management

Support Activities

The Firm as a Value Chain

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Profiting from Global Expansion

Realize location economies. Trade barriers and transportation costs permitting, the firm will benefit from basing each activity that it must perform to deliver a commodity to its customer (given the economic, social, political, cultural conditions are appropriate) at a place where that activity is done most efficiently.

Firms operating internationally are able to:

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Profiting from Global Expansion

Realize location economies.Realize greater cost economies. For example, cloths might be designed in Paris (better designers: They are the most capable designers to add value to cloths), materials could be purchased from India (cheap raw materials: minimize the cost of value creation) , and produced in China (cheap skilled labor: minimize the cost of value creation).

Firms operating internationally are able to:

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Profiting from Global Expansion

Realize location economies.Realize greater cost economies.

Earn a greater return from the firm’s distinctive skills or core competencies (Firm skills that competitors can not easily match or imitate).

Firms operating internationally are able to:

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Profiting from Global Expansion

Realize location economies.Realize greater cost economies.Earn a greater return from the firm’s distinctive skills or core competencies.

Earn a greater return by leveraging valuable skills developed in foreign operations and transferring them to the firm’s other operations.

Firms operating internationally are able to:

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Profiting from Global Expansion

Profitability is constrained by product customization and imperative of localization

producing unique products to appeal to the local tastes and preferences.

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Caveats

Needs for consideration:Transportation costs.Trade barriers.Political risks. Economic risks.

1. Low labor costs.2. Proximity to U.S.3. NAFTA.

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Experience Curve

Cost of production goes down systematically as production increases. Every time production doubles, cost of production decreases to 80% what is was.

Total output Cost of production 4 units $1008 units $8016 units $6432 units $51.2

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Experience Curve

Cost of production goes down systematically because:1-- Learning effects:

Cost savings that come from “learning by doing.”

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Experience Curve

Cost of production goes down systematically because:1-- Learning effects:

Cost savings that come from “learning by doing.”Are more significant in complex tasks.

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Experience Curve

Cost of production goes down systematically because:1-- Learning effects:

Cost savings that come from “learning by doing.”Are more significant in complex tasks.Decline and cease after two – three years.

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Experience Curve

Cost of production goes down systematically because:1-- Learning effects:

Cost savings that come from “learning by doing.”Are more significant in complex tasks.

Decline and cease after two – three years.

2-- Economies of Scale:Reduction in unit cost achieved through volume production.

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Experience Curve

Cost of production goes down systematically because:1-- Learning effects:

Cost savings that come from “learning by doing.”Are more significant in complex tasks.

Decline and cease after two – three years.

2-- Economies of Scale:Reduction in unit cost achieved through volume production.Sources:

Spread fixed costs over volume.

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Experience Curve

Cost of production goes down systematically because:1-- Learning effects:

Cost savings that come from “learning by doing.”Are more significant in complex tasks.

Decline and cease after two – three years.

2-- Economies of Scale:Reduction in unit cost achieved through volume production.Sources:

Spread fixed costs over volume.Employing specialized equipment or personnel

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The Experience Curve

Figure 12.3

B

A

Accumulated Output

Un

it C

osts

Strategic SignificanceMoving down the curve reduces

the cost of creating value.

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Leveraging Core Competencies

core competencies are firm skills that competitorscan not easily match

or imitate.

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Leveraging Core Competencies

core competencies are firm skills that competitorscan not easily match

or imitate.

Value of core competencies are greatest when:1. Skills and products are most unique.

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Leveraging Core Competencies

core competencies are firm skills that competitorscan not easily match

or imitate.

Value of core competencies are greatest when:1. Skills and products are most unique.2. Value placed by consumers is great.

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Leveraging Core Competencies

core competencies are firm skills that competitorscan not easily match

or imitate.

Value of core competencies are greatest when:1. Skills and products are most unique.2. Value placed by consumers is great.3. Few capable competitors with skills or products.

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Leveraging Subsidiary Skills

Note: Skills can be created anywhere in a multinational’s global operations network.

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Leveraging Subsidiary Skills

Note: Skills can be created anywhere in a multinational’s global operations network.

Challenges for managers are:1. To have the humility to recognize valuable skills can

come from anywhere.

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Leveraging Subsidiary Skills

Note: Skills can be created anywhere in a multinational’s global operations network.

Challenges for managers are:1. To have the humility to recognize valuable skills can

come from anywhere.2. To establish incentives to encourage local employees

to acquire new skills.

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Leveraging Subsidiary Skills

Note: Skills can be created anywhere in a multinational’s global operations network.

Challenges for managers are:1. To have the humility to recognize valuable skills can

come from anywhere.2. To establish incentives to encourage local employees

to acquire new skills.3. To create a process to identify new skill development.

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Leveraging Subsidiary Skills

Note: Skills can be created anywhere in a multinational’s global operations network.

Challenges for managers are:1. To have the humility to recognize valuable skills can

come from anywhere.2. To establish incentives to encourage local employees

to acquire new skills.3. To create a process to identify new skill development.4. To facilitate transfer of new skills within the firm.

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Pressures for Cost Reduction and Local Responsiveness

Figure 12.4

CompanyA

CompanyC

CompanyB

High

Cost pressures

LowLow High

Generally reflects the position of most

companies

Pressures for local responsiveness

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Cost ReductionMass producing a standardized product at an optimal location.

Intense: in commodity industries.Where competitors are in low cost locations.Where there is persistent excess capacity.Where there are low switching costs.Because of greater international competition.

Local responsivenessArise from:

Differences in consumer taste and preferences.Differences in infrastructure and traditional practices.Differences in distribution channels.Host government demands.

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Local Responsiveness

Delegate marketing tonational subsidiaries.

Delegate manufacturingand production to foreign

subsidiaries.

Delegate production and marketing to

national subsidiaries

Taste and preference

InfrastructureAnd

practice

Distributionchannels

Manufacture locally.

Hostgovernment

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Four Basic Strategies

Figure 12.5

High

Cost pressures

Low

Low High

GlobalStrategy

TransnationalStrategy

Multi domesticStrategy

InternationalStrategy

Pressures for local responsiveness

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Strategic Choices

TransnationalExploit experienced

based cost and location economies, transfer core competencies

within the firm, and pay attention to local

responsiveness needs.

TransnationalExploit experienced

based cost and location economies, transfer core competencies

within the firm, and pay attention to local

responsiveness needs.

Internationalcreate value by

transferring skills to local markets where

skills are not present.

Internationalcreate value by

transferring skills to local markets where

skills are not present.

Multidomesticoriented toward

achieving maximumlocal

responsiveness.

Multidomesticoriented toward

achieving maximumlocal

responsiveness.

Globalincrease profitability

through cost reductions from

experience curve effects and location

economies.

Globalincrease profitability

through cost reductions from

experience curve effects and location

economies.

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Cost Pressures and Pressures for Local Responsiveness Facing

Caterpillar

Figure 12.6

CaterpillarTractor

High

Cost pressures

Low

Low HighPressures for local responsiveness

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The Advantages and Disadvantages of the

Four Strategies

Table 12.1a

Strategy Advantages Disadvantages

Global Exploit experience curve effects

Exploit location economies

Lack of localresponsiveness

International

Transfer distinctive competencies to

Foreign Markets

Lack of localresponsivenessInability to realizelocation economiesFailure to exploit experience curve effects

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The Advantages and Disadvantages of the Four Strategies

Strategy Advantages Disadvantages

Multi-domestic Customize product offeringsand marketing in accordancewith local responsiveness

Inability to realize locationeconomies

Failure to exploitexperience curve effects

Failure to transferdistinctive competenciesto foreign markets

Transnational Exploit experience curveeffects

Exploit location economiesCustomize product offeringsand marketing in accordancewith local responsiveness

Reap benefits of global learning

Difficult to implement dueto organizationalproblems

Table 12.1