PART FIVEGLOBAL STRATEGY, STRUCTURE,

AND IMPLEMENTATION

International Business

Chapter Eleven

The Strategy of International Business

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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

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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 management’s idea on how to best:– attract customers– stake out a market position– conduct operations– compete effectively– create value– achieve goals

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Fig. 11.2: The Strategy of International Business

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Fundamentals of Strategic Management: Basic ConceptsPerfect competition presumes 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 An industry is a group of firms, i.e., competitors,

that produce products which are close substitutes.

A global industry is one in which a firm’s competitive position in one country is significantly affected by its position in other countries.

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Fundamentals of Strategic Management: The IO Paradigm

The industry organization (IO) paradigm: risk-adjusted rates of return should be constant across firms and industries

• Over 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 differences

in average returns for firms within a given industry.

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Industry Structure: The Five Fundamental ForcesThe Five Fundamental Forces Model: the nature of

competition in an industry is the combined out-come of competitive pressures generated by:

• the 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.

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Fig. 11.3: Industry Structure: The Five Fundamental Forces

Model

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The five-forces model defines the structure and competition in an industry in a way that 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 makeCommon to each issue is the question of whether the

current or future outlook suggests that firms in the industry have no, some, or great potential to realize profits.

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Changes in Industry StructureForces that can transform an industry’s

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

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Strategy and Value Creation

Strategy: a firm’s efforts to build and strengthen its competitive position within its industry in order to create value and attain goalsA firm’s core competency may be a special outlook, skill,

capability, or technology that creates unique value essential to its competitiveness.

Value: the measure of a firm’s capability to sell the products it offers for more than the costs it incurs

• Operationally, firms create value either through cost leadership or product differentiation.

Differentiation spurs a firm to offer unique, high-value products that are difficult to match or copy.

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The Firm as a Value ChainValue 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 reveals

existing and potential sources of product differentiation.]

Primary activities: the classical managerial functions of the 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

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Fig. 11.4: The Value Chain Framework

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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 light of prevailing economic, legal, political, and cultural conditions.

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Map 11.2: Labor Costs and Location Decisions

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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 parts at the same time] should be optimized in ways

that leverage a firm’s core competencies.

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The value chain serves as a system concept that helps mangers:

• evaluate a firm’s strengths and weaknesses• interpret the determinants of the firm’s 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 firm’s value chain should reflect changes in its bases for value creation, including:

• customers and their needs• competitors• industries• environments

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Countervailing Forces: Global Integration vs. Local Responsiveness• Pressures for global integration

– Globalization of markets: the convergence of customer preferences for similar products, minimal costs, and maximum value

[A commodity serves a universal need across countries and cultures and is traded strictly on the basis of price.]

– Globalization of production: efficiency gains via stan-dardization, i.e., the maximization of location economies

• Pressures for local responsiveness– Customer divergence: differences in culture,

national attitudes, and economic and usage conditions– Host government policies: economic freedom, work-

place and product regulation, buy-local legislation, etc.

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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 disaggregating a standardized whole into differentiated parts

• The IR grid reveals how a firm’s 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.

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Fig. 11.5: The Integration/ Responsiveness Grid and Industry

Types

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Strategic Alternatives: The International StrategyInternational strategy: opportunistic

expansion into foreign operations that leverages the firm’s 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.Headquarter’s ethnocentric orientation, i.e., its home country focus, may lead to significant missed market opportunities.

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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 may lead to duplication in activities, significantly higher costs, and

unusually powerful (autonomous) local subsidiaries.

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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.

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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.

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Fig. 11.6: The Integration/ Responsiveness Grid and Strategy

Types

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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 firm’s performance.

• Because competition is not perfect, oppor-tunities exist to convert innovative strategies into superior competitiveness.

[continued]

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• 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.