unit iv ib

7/27/2019 UNIT IV IB

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Copyri ght 2011 by The McGraw-H il l Companies, Inc. All ri ghts reserved.McGraw-Hill/Irwin

Global Business Today7e

by Charles W.L. Hill


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Chapter 11

The Strategy of

International Business


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Introduction

Question: What actions can managers take to compete

more effectively in a global economy?

Answer:Managers must consider

the benefits of expanding into foreign markets

which strategies to pursue in foreign markets

the value of collaboration with global competitorsthe advantages of strategic alliances


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Strategy and the Firm

Question: What is strategy?

Answer:

A firms strategy can be defined as the actions that

managers take to attain the goals of the firmTypically, strategies focus on profitability and profit

growth

Profitabilityrefers to the rate of return the firm makes onits invested capital

Profit growth is the percentage increase in net profitsover time


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Value Creation

Question: How do you increase the profitability of a firm?

Answer:

To increase profitability, value must be created for the

consumer Value creation is measured by the difference

between V (the price that the firm can charge for thatproduct given competitive pressures) and C (thecosts of producing that product)

The two basic strategies for creating value are1. differentiation

2. low cost


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Strategy and the Firm

Figure 11.1: Determinants of Enterprise Value


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Strategic Positioning

To maximize profitability, a firm must

pick a position on the efficiency frontier that is viablein the sense that there is enough demand to supportthat choice

configure its internal operations so that they supportthat position

make sure that the firm has the right organizationstructure in place to execute its strategy

So, a firms strategy, operations, and organization must

all be consistent with each other in order to achieve acompetitive advantage and superior profitability


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The Firm as a Value Chain

Firms are essentially value chains composed of aseries of distinct value creation activities, includingproduction, marketing, materials management, R&D,human resources, information systems, and the firm

infrastructure Value creation activities can be categorized as

1. primary activities

2. support activities


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1. Primary Activities

involves creating the product, marketing and delivering

the product to buyers, and providing support and after-

sale service to the buyers of the product

2. Support Activities

provides the inputs that allow the primary activities of

production and marketing to occur


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Figure 11.4: The Value Chain


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The Implementation of Strategy

Organization architecture- the totality of a firmsorganization - formal organizational structure, controlsystems and incentives, organizational culture,processes, and people

Organizational structure -the formal division of the organization into subunits

the location of decision-making responsibilities withinthat structure

the establishment of integrating mechanisms tocoordinate the activities of subunits including crossfunctional teams and or pan-regional committees


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Figure 11.5: Organization Architecture


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Controls - the metrics used to measure the performanceof subunits and make judgments about how well the

subunits are run

Incentives - the devices used to reward appropriate

managerial behaviorProcesses - the manner in which decisions are made

and work is performed

Organizational culture - the norms and value systems

that are shared among the employeesPeople - employees and the strategy used to recruit,

compensate, and retain those individuals


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In Sum: Strategic Fit

So, to attain superior performance and earn a high returnon capital, a firms strategy must make sense givenmarket conditions

The operations of the firm must support the firmsstrategy

The organizational architecture of the firm must matchthe firms operations and strategy

if market conditions shift, so must the firms strategy,operations, and organization


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In Sum: Strategic Fit

Figure 11.6: Strategic Fit


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Global Expansion and Profits

Firms that operate internationally can

1. Expand the market for their domestic product offeringsby selling those products in international markets

2. 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 skillsdeveloped in foreign operations and transferring them toother entities within the firms global network ofoperations


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Leveraging Products and Competencies

To increase growth, a firm can sell products or servicesdeveloped at home in foreign markets

Success depends on the type of goods and services,and the firms 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

create perceived value so that premium pricing is

possible


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Location Economies

Firms should locate value creation activities whereeconomic, political, and cultural conditions are mostconducive to the performance of that activity

Firms that successfully do this can realize locationeconomies - the economies that arise from performing avalue creation activity in the optimal location for thatactivity, wherever in the world that might be

Locating value creation activities in optimal locations

can lower the costs of value creation

can enable a firm to differentiate its product offeringfrom those of competitors


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Location Economies

Multinationals that take advantage of location economiescreate a global web of value creation activities

Under this strategy, different stages of the value chainare dispersed to those locations around the globe where

perceived value is maximized or where the costs ofvalue creation are minimized

introducing transportation costs and trade barrierscomplicates this picture

political risks must be assessed when making locationdecisions


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Experience Effects

The experience curve - the systematic reductions in

production costs that have been observed to occur over

the life of a product

a products production costs decline by some quantity

about each time cumulative output doubles

Learning effects - cost savings that come from learning

by doing

labor productivity increases when 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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Experience Effects

Economies of scale - the reductions in unit cost achievedby producing a large volume of a product

Sources include

the ability to spread fixed costs over a large volume

the ability of large firms to employ increasinglyspecialized equipment or personnel

Serving a global market from a single location isconsistent with moving down the experience curve 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 be developed

anywhere within the firms global network (not just at

the corporate center)

use incentive systems to encourage local employees

to acquire new skills

develop a process to identify when new skills have

been created

act as facilitators to transfer valuable skills within the

firm


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Summary

Firms that expand internationally can increase their

profitability and profit growth by

1. Entering markets where competitors lack similar

competencies

2. Realizing location economies

3. Exploiting experience curve effects

4. Transferring valuable skills within the organization


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Competitive Pressures

Firms that compete in the global marketplace typically

face two types of competitive pressures

1. pressures for cost reductions

2. pressures to be locally responsive

These pressures place conflicting demands on the firm


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Competitive Pressures

Figure 11.8: Pressures for Cost Reductions and

Local Responsiveness


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Pressures for Cost Reductions

Pressures for cost reductions are greatest

in industries producing commodity type products thatfill universal needs - needs that exist when the tastesand preferences of consumers in different nations aresimilar if not identical

when major competitors are based in low costlocations

where there is persistent excess capacity

where consumers are powerful and face lowswitching costs

To respond to these pressures, firms need to lower thecosts of value creation


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Pressures for Local Responsiveness

Pressures for local responsiveness arise from

1. differences in consumer tastes and preferences

2. differences in traditional practices and infrastructure

3. differences in distribution channels4. host government demands

Firms facing these pressures need to differentiate their

products and marketing strategy in each country


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1. Differences in Consumer Tastes and Preferences When consumer tastes and preferences differ significantly

between countries, firms face strong pressures for localresponsiveness

2. Differences in Infrastructure and Traditional Practices

When there are differences in infrastructure and/ortraditional practices between countries, pressures for localresponsiveness emerge


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3. Differences in Distribution Channels A firms marketing strategies may be influenced by

differences in distribution channels between countries

4. Host Government Demands

Economic and political demands imposed by host countrygovernments may necessitate a degree of local

responsiveness


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Choosing a Strategy

Question: How do the pressures for cost reductions and

local responsiveness influence a firms choice of

strategy?

Answer:

There are four basic strategies to compete in the

international environment

1. global standardization

2. localization

3. transnational

4. international


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Global Standardization Strategy

Question: When does a global standardization strategymake sense?

Answer:

A global standardization strategyfocuses on increasing

profitability and profit growth by reaping the cost reductionsthat come from economies of scale, learning effects, and

location economies

the goal is to pursue a low-cost strategy on a global

scale makes sense when there are strong pressures for

cost reductions and demands for local

responsiveness are minimal


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Localization Strategy

Question: When does a localization strategy make sense?

Answer:

A localization strategyfocuses on increasing profitability

by customizing the firms goods or services so that theyprovide a good match to tastes and preferences in differentnational markets

makes sense when there are substantial

differences across nations with regard to consumertastes and preferences, and where cost pressuresare not too intense


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Transnational Strategy

Question: When does a transnational strategy makesense?

Answer:

A transnational strategytries to simultaneously

achieve low costs through location economies,economies of scale, and learning effects

differentiate the product offering across geographicmarkets to account for local differences

foster a multidirectional flow of skills between

different subsidiariesmakes sense when there are both high cost pressuresand high pressures for local responsiveness


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International Strategy

Question: When does an international strategy makesense?

Answer:

An international strategyinvolves taking products firstproduced for the domestic market and then selling them

internationally with only minimal local customization

makes sense when there are low cost pressuresand low pressures for local responsiveness


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The Evolution of Strategy

Question: Is the choice of strategy static?

Answer:

As competition increases, international and localization

strategies become less viableTo survive, firms may need to shift to a globalstandardization strategy or a transnational strategy inadvance of competitors


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Strategic Alliances

Question: What are strategic alliances?

Answer:

Strategic alliances - cooperative agreements between

potential or actual competitorsExamples

formal joint ventures

short term contractual arrangements

The number of international strategic alliances has risen

significantly in recent decades


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Advantages of Strategic Alliances

Question: Why form a strategic alliance?

Answer:

Strategic alliances are attractive because they

facilitate entry into a foreign market

allow firms to share the fixed costs (and associatedrisks) of developing new products or processes

bring together complementary skills and assets that

neither partner could easily develop on its own can help establish technological standards for the

industry that will benefit the firm


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Disadvantages of Strategic Alliances

Question: What are the drawbacks of strategic alliances?

Answer:

Strategic alliances can give competitors low-cost routesto new technology and markets

Unless a firm is careful, it can give away more in a

strategic alliance than it receives


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Making Alliances Work

Question: How can firms increase the success of theiralliances?

Answer:

Many international strategic alliances run into problems The success of an alliance seems to be a function of

three main factors

1. partner selection

2. alliance structure3. the manner in which the alliance is managed


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1. Partner Selection

A good partner

helps the firm achieve its strategic goals and hasthe capabilities the firm lacks and that it values

shares the firms vision for the purpose of thealliance

does not expropriate the firms technological know-how while giving away little in return


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2. Alliance Structure

A good alliance should

be designed to make it difficult to transfertechnology not meant to be transferred

have contractual safeguards to guard against therisk of opportunism by a partner

involve an agreement in advance to swap skills andtechnologies to ensure a chance for equitable gain

extract a significant credible commitment from thepartner in advance


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3. Managing the Alliance

A good alliance

requires managers from both companies to buildinterpersonal relationships

should promote learning from alliance partners should promote the diffusion of learned knowledge

throughout the organization


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Classroom Performance System

All of the following are examples of primary activities

except

a) Logistics

b) Marketing and sales

c) Customer service

d) Production


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When different stages of a value chain are dispersed to

those locations around the world where value added is

maximized or where the costs of value creation are

minimized, _____ is (are) created.

a) Experience effects

b) Learning effects

c) Economies of scale

d) A global web


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Pressures for local responsiveness come from all of the

following except

a) Excess capacity

b) Host government demands

c) Differences in consumer tastes and preferences

d) Differences in distribution channels


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When pressures are high for local responsiveness, but lowfor cost reductions, a _______ makes sense.

a) Global standardization strategy

b) International strategy

c) Transnational strategyd) Localization strategy

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