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Global Business Today6e

by Charles W.L. Hill

McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 11

The Strategy ofInternational Business

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11-3

Introduction

Question: What actions can managers take tocompete more effectively in a global economy?

Managers must consider

the benefits of expanding into foreignmarkets

which strategies to pursue in foreign markets

the value of collaboration with globalcompetitors

the advantages of strategic alliances

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Strategy and the Firm

Question: What is strategy?

A firms strategy can be defined as the

actions that managers take to attain thegoals of the firmTypically, strategies focus on profitability

and profit growth

Profitabilityrefers to the rate of return thefirm makes on its invested capitalProfit growth is the percentage increase

in net profits over time

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Strategy and the Firm

Determinants of Enterprise Value

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Value Creation

Question: How do you increase the profitabilityof a firm?

To increase profitability, value must be createdfor the consumer

Value creation is measured by the differencebetween V (the price that the firm can chargefor that product given competitive pressures)and C (the costs of producing that product)

The two basic strategies for creating value are1. differentiation2. low cost

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Strategic Positioning

To maximize profitability, a firm mustpick a position on the efficiency frontier that

is viable in the sense that there is enoughdemand to support that choice

configure its internal operations so that theysupport that position

make sure that the firm has the rightorganization structure in place to execute itsstrategy

So, a firms strategy, operations, andorganization must all be consistent with eachother in order to achieve a competitiveadvantage and superior profitability

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Operations: The Firm as aValue Chain

Firms are essentially value chainscomposed of a series of distinct valuecreation activities, including production,

marketing, materials management,R&D, human resources, informationsystems, and the firm infrastructure

Value creation activities can be

categorized as1. primary activities

2. support activities

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1. Primary Activities

involves creating the product, marketingand delivering the product to buyers,and providing support and after-saleservice to the buyers of the product

2. Support Activities

provides the inputs that allow theprimary activities of production andmarketing to occur

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The Value Chain

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Classroom Performance System

All of the following are examples of primaryactivities except

a) Logistics

b) Marketing and sales

c) Customer service

d) Production

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Organization: The Implementationof Strategy

Organization architecturerefers to the totality ofa firms organization (formal organizationalstructure, control systems and incentives,organizational culture, processes, and people)

Organizational structure refers to

the formal division of the organization intosubunits

the location of decision-making

responsibilities within that structurethe establishment of integrating mechanisms

to coordinate the activities of subunitsincluding cross functional teams and or pan-regional committees

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Organization Architecture

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Controls are the metrics used to measure theperformance of subunits and make judgmentsabout how well the subunits are run

Incentives are the devices used to rewardappropriate managerial behavior

Processes are the manner in which decisionsare made and work is performed

Organizational culture is the norms and value

systems that are shared among the employees People refers to employees and the strategy

used to recruit, compensate, and retain thoseindividuals

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In Sum: Strategic Fit

So, to attain superior performance andearn a high return on capital, a firmsstrategy must make sense given marketconditions

The operations of the firm must supportthe firms strategy

The organizational architecture of thefirm must match the firms operations

and strategyIf market conditions shift, so must the

firms strategy, operations, andorganization

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In Sum: Strategic Fit

Strategic Fit

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Global Expansion, Profitabilityand Profit Growth

Firms that operate internationally can1. Expand the market for their domestic product offerings by

selling those products in international markets2. Realize location economies by dispersing individual

value creation activities to locations around the globewhere they can be performed most efficiently andeffectively

3. Realize greater cost economies from experience effectsby serving an expanded global market from a centrallocation, thereby reducing the costs of value creation

4. Earn a greater return by leveraging any valuable skills

developed in foreign operations and transferring them toother entities within the firms global network ofoperations

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Expanding the Market: LeveragingProducts and Competencies

To increase growth, a firm can sell products orservices developed at home in foreign markets

Success depends on the type of goods andservices, and the firms core competencies(skills within the firm that competitors cannoteasily match or imitate)

Core competencies

enable the firm to reduce the costs of value

creationcreate perceived value so that premium

pricing is possible

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Location Economies

Firms should locate value creation activitieswhere economic, political, and culturalconditions are most conducive to theperformance of that activity

Firms that successfully do this can realizelocation economies (the economies that arisefrom performing a value creation activity in theoptimal location for that activity, wherever in theworld that might be)

Locating value creation activities in optimallocationscan lower the costs of value creationcan enable a firm to differentiate its product

offering from those of competitors

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Location Economies

Multinationals that take advantage of locationeconomies create a global web of valuecreation activities

Under this strategy, different stages of the valuechain are dispersed to those locations aroundthe globe where perceived value is maximizedor where the costs of value creation areminimized

However, introducing transportation costsand trade barriers complicates this picture

Political risks must be assessed whenmaking location decisions

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Experience Effects

The experience curve refers to the systematicreductions in production costs that have beenobserved to occur over the life of a product

Studies show that a products productioncosts decline by some quantity about eachtime cumulative output doubles

Learning effects are cost savings that comefrom learning by doing

Labor productivity increases whenindividuals learn the most efficient ways toperform particular tasks and managementlearns how to manage the new operationmore efficiently

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Experience Effects

Economies of scale refer to the reductions inunit cost achieved by producing a large volumeof a product

Sources include

the ability to spread fixed costs over a largevolume

the ability of large firms to employincreasingly specialized equipment or

personnel Serving a global market from a single location is

consistent with moving down the experiencecurve and establishing a low-cost position

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Leveraging Subsidiary Skills

To help increase firm value, managers should

recognize that valuable skills can bedeveloped anywhere within the firms global

network (not just at the corporate center)incentive systems can encourage local

employees to acquire new skills

develop a process to identify when new skills

have been createdact as facilitators to transfer valuable skills

within the firm

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Summary

Firms that expand internationally canincrease their profitability and profitgrowth by

Entering markets where competitorslack similar competencies

Realizing location economies

Exploiting experience curve effectsTransferring valuable skills within the

organization

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When different stages of a value chain aredispersed to those locations around theworld where value added is maximized or

where the costs of value creation areminimized, _____ is (are) created.

a) Experience effects

b) Learning effectsc) Economies of scale

d) A global web

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Cost Pressures and Pressuresfor Local Responsiveness

Firms that compete in the globalmarketplace typically face two types ofcompetitive pressures

1. pressures for cost reductions

2. pressures to be locally responsive

These pressures place conflicting

demands on the firm

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Cost Pressures and Pressuresfor Local Responsiveness

Pressures for Cost Reductions and LocalResponsiveness

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Pressures for Cost Reductions

Pressures for cost reductions are greatestin industries producing commodity type

products that fill universal needs (needs thatexist when the tastes and preferences of

consumers in different nations are similar ifnot identical)when major competitors are based in low

cost locationswhere there is persistent excess capacity

where consumers are powerful and face lowswitching costs

To respond to these pressures, firms need tolower the costs of value creation

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Pressures for Local Responsiveness

Pressures for local responsiveness arise from

1. differences in consumer tastes andpreferences

2. differences in traditional practices andinfrastructure

3. differences in distribution channels

4. host government demands

Firms facing these pressures need todifferentiate their products and marketingstrategy in each country

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1. Differences in Consumer Tastes andPreferences

When consumer tastes and preferences differsignificantly between countries, firms facestrong pressures for local responsiveness

2. Differences in Infrastructure and TraditionalPractices

When there are differences in infrastructureand/or traditional practices between countries,pressures for local responsiveness emerge

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3. Differences in Distribution Channels

A firms marketing strategies may be influenced

by differences in distribution channels betweencountries

4. Host Government Demands

Economic and political demands imposed by

host country governments may necessitate adegree of local responsiveness

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Pressures for local responsiveness comefrom all of the following except

a) Excess capacity

b) Host government demands

c) Differences in consumer tastes andpreferences

d) Differences in distribution channels

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Choosing a Strategy

Question: How do the pressures for cost

reductions and local responsiveness influencea firms choice of strategy?

There are four basic strategies to compete inthe international environment

1. global standardization

2. localization

3. transnational

4. international

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Global Standardization Strategy

Question: When does a global standardizationstrategy make sense?

A global standardization strategyfocuses onincreasing profitability and profit growth by reaping

the cost reductions that come from economies ofscale, learning effects, and location economies

The strategic goal is to pursue a low-cost

strategy on a global scaleThis strategy makes sense when there arestrong pressures for cost reductions and demandsfor local responsiveness are minimal

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Localization Strategy

Question: When does a localization strategy makesense?

A localization strategyfocuses on increasingprofitability by customizing the firms goods or

services so that they provide a good match totastes and preferences in different nationalmarkets

This strategy makes sense when there aresubstantial differences across nations with regardto consumer tastes and preferences, and wherecost pressures are not too intense

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Transnational Strategy

Question: When does a transnational strategymake sense?A transnational strategytries to simultaneously

achieve low costs through location

economies, economies of scale, andlearning effects

differentiate the product offering acrossgeographic markets to account for localdifferences

foster a multidirectional flow of skillsbetween different subsidiaries

This strategy makes sense when there are bothhigh cost pressures and high pressures for localresponsiveness

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International Strategy

Question: When does an internationalstrategy make sense?

An international strategyinvolves takingproducts first produced for the domesticmarket and then selling theminternationally with only minimal localcustomization

This strategy makes sense when thereare low cost pressures and low pressuresfor local responsiveness

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The Evolution of Strategy

Question: Is the choice of strategy static?

As competition increases, international

and localization strategies become lessviable

To survive, firms may need to shift to aglobal standardization strategy or a

transnational strategy in advance ofcompetitors

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When pressures are high for localresponsiveness, but low for costreductions, a _______ makes sense.

a) Global standardization strategyb) International strategy

c) Transnational strategy

d) Localization strategy

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Strategic Alliances

Question: What is a strategic alliance?

Strategic alliances refer to cooperative

agreements between potential or actualcompetitors

Examples include

formal joint ventures

short term contractual arrangements

The number of international strategic allianceshas risen significantly in recent decades

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The Advantages ofStrategic Alliances

Question: Why form a strategic alliance?

Strategic alliances are attractive because they

facilitate entry into a foreign market allow firms to share the fixed costs (and

associated risks) of developing newproducts or processes

bring together complementary skills andassets that neither partner could easilydevelop on its own

can help establish technological standardsfor the industry that will benefit the firm

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The Disadvantages ofStrategic Alliances

Question: What are the drawbacks ofstrategic alliances?

Strategic alliances can give competitorslow-cost routes to new technology andmarkets

Unless a firm is careful, it can give awaymore in a strategic alliance than it receives

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Making Alliances Work

Question: How can firms increase the successof their alliances?

Many international strategic alliances run intoproblems

The success of an alliance seems to be afunction of three main factors

1. partner selection

2. alliance structure

3. the manner in which the alliance ismanaged

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1. Partner Selection

A good partner

helps the firm achieve its strategic

goals and has the capabilities thefirm lacks and that it values

shares the firms vision for thepurpose of the alliance

does not expropriate the firmstechnological know-how while givingaway little in return

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2. Alliance Structure

A good alliance should

be designed to make it difficult to transfer

technology not meant to be transferred have contractual safeguards to guard

against the risk of opportunism by apartner

involve an agreement in advance to swap

skills and technologies to ensure a chancefor equitable gain

extract a significant credible commitmentfrom the partner in advance

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3. Managing the Alliance

A good alliance

requires managers from both

companies to build interpersonalrelationships

should promote learning fromalliance partners

should promote the diffusion oflearned knowledge throughout theorganization

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Critical Discussion Question

1. In a world of zero transportation costs,no trade barriers, and non-trivialdifferences between nations with regard to

factor endowments, firms must expandinternationally if they are to survive.Discuss.

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2. Plot the position of the following firms onFigure 11.8 - Procter & Gamble, IBM,Nokia, Coca-Cola, Dow Chemical, US

Steel, and McDonald's. In each casejustify your answer.

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3. Re-Read the Management Focus box onProcter & Gamble and then answer thefollowing questions:a) What strategy was Procter & Gamblepursuing when it first entered foreignmarkets in the period up until the 1980s?b) Why do you think this strategy becameless viable in the 1990s?

c) What strategy does Procter & Gambleappear to be moving toward? What arethe benefits of this strategy? What are thepotential risks associated with it?

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4. What do you see as the main organizationalproblems that are likely to be associated with theimplementation of a transnational strategy?

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5. Reread the Management Focus box on thealliance between Cisco and Fujitsu. What are thebenefits to Cisco and Fujitsu respectively of thealliance? What are the risks to Cisco? How canCisco mitigate those risks?

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