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- 1. PART FIVE GLOBAL STRATEGY, STRUCTURE,AND IMPLEMENTATION International BusinessChapter Eleven The Strategy ofInternational Business
2. Chapter Objectives
- To examine the idea of industry structure, firm strategy, and value creation
- To profile the features and functions of the value chain framework
- To appreciate how managers configure and coordinate a value chain
- To identify the dimensions that shape how managers develop strategy
- To profile the types of strategies firms use in international business
11- 3. Introduction
- Strategy: the framework that managers apply to determine the competitive moves and business approaches that guide a firm, i.e., the means used to achieve objectives
- Strategy represents managements idea on how to best:
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- attract customers
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- stake out a market position
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- conduct operations
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- compete effectively
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- create value
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- achieve goals
11- 4. Fig. 11.2: The Strategy of International Business 11- 5. Fundamentals of Strategic Management:Basic Concepts
- Perfect competitionpresumes that:
- there are large numbers of fully informed buyers and sellers of an homogeneous product
- buyers and sellers possess perfect information
- there are no obstacles to the entry or exit of firms into or out of the market
- resources are fully mobile
- Anindustryis a group of firms, i.e., competitors, that produce products which are close substitutes.
- Aglobal industryis one in which a firms competitive position in one country is significantly affected by its position in other countries.
11- 6. Fundamentals of Strategic Management: The IO Paradigm
- The industry organization (IO) paradigm: risk-adjusted rates of return should be constant across firms and industries
- O ver time no one firm or industry should consistently outperform others.
- The performance of a firm is a function of its market conduct, which in turn is determined by the structure of its industry.
- Industry effects explain up to 75% of the differencesin average returns for firms within a given industry.
11- 7. Industry Structure:The Five Fundamental Forces
- The Five Fundamental Forces Model: the nature of competition in an industry is the combined out-come of competitive pressures generated by:
- t he moves of rivals battling for market share
- the entry of new rivals seeking market share
- the efforts of firms outside the industry to convince buyers to switch to their substitute products
- the push by suppliers to charge more for their inputs
- the push by buyers to pay less for products
- Markets are not perfectly competitive;some firms consistently outperform industry averages.
11- 8. Fig. 11.3: Industry Structure:The Five Fundamental Forces Model 11- 9.
- The five-forces model defines the structureand competition in an industry in a waythat reveals:
- what forces are driving changes within an industry
- the relative strength of each fundamental force
- which fundamental forces shape strategic conduct
- the strategic moves rivals are likely to make
- Common to each issue is the question of whether thecurrent or future outlook suggests that firms in the industryhave no, some, or great potential to realize profits.
11- 10. Changes in Industry Structure
- Forces that can transform an industrys structure include:
- changes in the long-term industry [market] growth rate
- technological developments
- shifting customer purchase and usage patterns
- manufacturing innovations that revise cost and efficiency frontiers
- changes in government regulations and policies
- the entry or exit of major firms
- the diffusion of business, executive, and technical expertise across countries
11- 11. Strategy and Value Creation
- Strategy: a firms efforts to build and strengthen its competitive position within its industry in order to create value and attain goals
- A firmscore competencymay be a special outlook, skill,capability, or technology that creates unique valueessential to its competitiveness.
- Value: the measure of a firms capability to sell the products it offers for more than the costs it incurs
- Operationally, firms create value either throughcost leadershiporproduct differentiation .
- Differentiationspurs a firm to offer unique,high-value products that are difficult to match or copy.
11- 12. The Firm as a Value Chain
- Value chain: the set of linked, value-creating activities a firm performs to design, produce, market, deliver, and support a product, i.e., the format and interactions amongst the various functions of a firm
- [Value chain analysis explains cost behavior and revealsexisting and potential sources of product differentiation.]
- Primary activities: the classical managerial functions ofthe firm
- Support activities: functions that provide inputs which allow the primary activities to occur
- Profit margins: the differences between total revenues generated and total costs incurred
- Orientation: upstream (in-bound)vs. downstream (out-bound) activities
11- 13. Fig. 11.4: The Value Chain Framework 11- 14. Value Chain Configuration
- Value chain configuration may be influenced by:
- cost factors[wage rates, productivity, inflation, etc.]
- business environments[political & economic risk]
- cluster effects[related value creation activities]
- logistics[value-to-weight ratio, just-in-time practices]
- degree of digitization[virtual value creation]
- economies of scale[unit cost reductions]
- customer needs[buyer-related support activities]
- Configuration [spatial arrangement] should be optimized in lightof prevailing economic, legal, political, and cultural conditions.
11- 15. Map 11.2: Labor Costs and Location Decisions 11- 16. Value Chain Coordination
- Value chain coordination may be influenced by:
- operational obstacles[communication challenges, currencies, and measurement systems]
- national cultural differences[information sharing, time, etc.]
- learning effects[cost savings via performance and quality improvements]
- subsidiary networks[real-time connectivity and functional integration]
- Coordination [the balanced movement of different partsat the same time] should be optimized in waysthat leverage a firms core competencies.
11- 17.
- The value chain serves as a system concept that helps mangers:
- evaluate a firms strengths and weaknesses
- interpret the determinants of the firms internal cost structure, the basis of its core competencies, and its relationships with customers
- link the internal features and functions of a competitor to the content of its marketplace strategy
- The configuration and coordination of a firms value chain should reflect changes in its bases for value creation, including:
- customers and their needs
- competitors
- industries
- environments
11- 18. Countervailing Forces: Global Integration vs. Local Responsiveness
- Pressures for global integration
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- Globalization of markets:the convergence of customer preferences for similar products, minimal costs, and maximum value
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- [A commodity serves a universal need across countries and cultures and is traded strictly on the basis of price.]
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- Globalization of production:efficiency gains via stan-dardization, i.e., the maximization of location economies
- Pressures for local responsiveness
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- Customer divergence: differences in culture, national attitudes, and economic and usage conditions
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- Host government policies: economic freedom, work-place and product regulation, buy-local legislation, etc.
11- 19. The Global Integration/Local Responsiveness Grid
- The integration/responsiveness grid (IR) profiles the interaction of the pressures for global integration and pressures for local responsiveness.
- Integration: the process of combining dif-ferentiated parts into a standardized whole
- Responsiveness: the process of disaggregatinga standardized whole into differentiated parts
- The IR grid reveals how a firms choice of strategy is a function of the relationship between its idea of value creation and the pressures for integration and/or respon-siveness as it looks to international markets for growth opportunities, cost reductions, and risk diversification.
11- 20. Fig. 11.5: The Integration/ Responsiveness Grid and Industry Types 11- 21. Strategic Alternatives:The International Strategy
- International strategy: opportunistic expansion into foreign operations that leverages the firms core (domestic) competencies
- Ultimate control and decision-making reside at headquarters.
- Value is created by transferring core competencies and unique offerings from headquarters into foreign markets where rivals are unable to develop, match, or sustain them.
- International activities are generally secondary to the priorities of the domestic market.
- Headquarters ethnocentric orientation, i.e., its home countryfocus, may lead to significant missed market opportunities.
11- 22. Strategic Alternatives:The Multidomestic Strategy
- Multidomestic strategy: expansion into foreign opera-tions that grants decision-making authority to local managers and emphasizes responsiveness to local conditions
- Decision-making is decentralized so that offerings can be adjusted to meet the needs of individual countries or regions.
- Value is created by giving local managers the authority to respond to unique local cultural, legal, and economic environments.
- The polycentric view holds that people who are close to the market both physically and culturally can best run a business.
- The distribution of decision-making authority to local managers maylead to duplication in activities, significantly higher costs, andunusually powerful (autonomous) local subsidiaries.
11- 23. Strategic Alternatives:The Global Strategy
- Global strategy: expansion into foreign operations that champions worldwide consistency, standard-ization, and cost competitiveness
- Although activities are dispersed to the most favorable global locations, decision-making remains highly cen-tralized at headquarters.
- Value is created by designing products for a world market and manufacturing and marketing them as effectively and efficiently as possible.
- Global firms strive to convert global efficiency into price competitiveness via production and location economies.
- In markets where demand for local responsiveness remains high, global strategies are largely ineffective, and market opportunities are missed.
11- 24. Strategic Alternatives:The Transnational Strategy
- Transnational strategy: expansion into foreign opera-tions that exploits location economies, leverages core competencies, and responds to key local conditions
- The causes of interactive global learning and worldwide information sharing are championed.
- Value is created by the relentless renewal, enhancement, and exchange of ideas, products, and processes across functions and borders.
- The transnational MNE differentiates capabilities and contribu-tions while finding ways to systematically learn and ultimately integrate and diffuse knowledge, thus developing more powerful core competencies.
- Realistically, the transnational firm faces serious challenges to its attempts to efficiently and effectively configure and coordinate its activities.
11- 25. Fig. 11.6: The Integration/ Responsiveness Grid and Strategy Types 11- 26. Implications/Conclusions
- Industry structure explains the functions, form, and interrelationships amongst suppliers, buyers, products, new entrants, and rivals.
- Even though competition is not perfect, industry structure does influence a firms performance.
- Because competition is not perfect, oppor-tunities exist to convert innovative strategies into superior competitiveness.
- [continued]
11- 27.
- Great managers devise great strategies that build great companies that outperform their industry rivals.
- Designing a strategy within the context of the value chain can improve the quality of analyses and decisions by deconstructing value creation opportunities into a series of discrete activities.
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