THE STRATEGY OF INTERNATIONAL BUSINESS

INTERNATIONAL
UNIT 3 SECTION
BUSINESS
1
Unit 3, section 1: The strategy of international business

The vision of every firm or business is to be the worldwide market-leader in

its chosen industry. But the fundamental purpose of any business firm is to
grow and to make profit. A firm makes a profit if the price it can charge for
its output is greater than the cost of providing that output. To do this, the
firm must produce a product that is valued by its customers or consumers, or
that has utility in economic parlance.

By the end of this Section, you should be able to:

 explain the term strategy in business
 identify what is meant by the firm as a value chain
 identify the primary and secondary activities of the firm.

What is meant by Strategy of the Firm?

Strategy can be defined as the series of actions that managers take to attain
the goals of the firm. Markets are now extremely competitive due to
globalization and liberalization of the world trade and investment
environment. To be profitable in such an environment, a firm must pay
continual attention to both reducing the costs of value creation, and to
differentiate its product offering so that consumers will be willing to pay
more for the product than it cost to produce it. Thus, strategy is often
concerned with identifying and taking actions that will:
Lower the costs of value creation and / or
Will differentiate the firm’s product through superior design, quality,
service, functionality etc. etc.

The International Business Firm as a Value Chain

The firm as a value chain is composed of a series of distinct value creation
activities including product and process design and development, financial
management, materials management, production, marketing, research and
development, human resource management, information systems and
infrastructure management. These activities can be grouped into two,
namely primary activities and support activities.

Primary Activities of the International Business Firm

The primary activities of the firm include creating the product, marketing
and delivering the product to consumers and providing support and after
sale services to customers. The physical creation of the product or service is
known as production, and the processes involved in delivering the product
to the final consumer is known as marketing. Other primary activities of the
firm include:
 Inbound Logistics: This consist of the activities, costs, and assets
associated with obtaining raw materials, part components, consumable
stores, fuel, energy and other items from vendors; inspection, receiving,
storing, and issuing materials for production.

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 Operations: This consists of activities, costs, and assets associated with

converting or transforming inputs into outputs or final products (either
from fabrication, installation, work-in-process, production, assembly,
packaging, plant and equipment maintenance, quality assurance, and
environmental protection).
 Outbound Logistics: This consists of activities, costs, and assets that
deal with the physical distribution of the product to consumers (finished
goods packaging, warehousing, order processing, order picking and
packing, air, rail, and shipping delivery, and vehicle distribution).
 Marketing and Sales: This consists of activities, costs, and assets
related to the sales force efforts, advertising and promotion, marketing
research and planning, and product-dealer/product-distributor support.
 After-Sales Service: This consists of activities, costs, and assets
associated with the provision of assistance to buyers, such as
installation, spare parts delivery, maintenance and repairs, technical
assistance buyers’ enquiry, and complaints management.

Support Activities of the International Business Firm

The inputs that allow the primary activities of production and marketing to
occur are provided by support activities. Support activities include: strategic
management, finance, materials management, research and development,
human resources, information systems and infrastructure.
 Materials Management Function: This controls the transmission of
physical materials through the value chain from procurement through
production and into distribution. An effective materials management
function can monitor the quality of inputs into the production process.
 Research and Development Function: This develops new product and
process technologies. Technological developments can reduce
production costs, and can result in the creation of more useful and more
attractive products that can demand a premium price.
 Human Resource Management: This ensures that the firm has an
optimal mix of labour to perform its primary production and marketing
activities; that the staffing requirements of the support activities are met
and the employees are well trained for their tasks and compensated
accordingly.
 Information System Management: This makes sure that management
has the requisite information needed to maximize the efficiency of its
value chain and to exploit information-based competitive advantages in
the marketplace.
 Infrastructure Management: This consists of the organizational
structures, general management, planning, and legal affairs. An efficient
infrastructure helps both to create value and to reduce the costs of
creating value.

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Choice of Strategy by the International Business Firm

As has already been stated in paragraph 1.1 above, there are two basic
strategies for improving the international business firm’s profitability and
growth, namely:
 A differentiation strategy, and
 A low cost strategy.
 It is instructive to note at this juncture, that firms use four basic
strategies to enter and compete in the international business
environment. These strategies are:
 A multi-domestic strategy
 An International strategy
 A global strategy
 A transactional strategy

Each of the above strategy has its own advantages and disadvantages. And
the appropriateness of each strategy varies with the extent of pressures for
cost reductions and or local responsiveness.

Multi-Domestic Strategy of the Firm

Firms pursuing domestic strategy orient themselves towards achieving
maximum local responsiveness. The most distinguishing feature of multi
domestic firms is that they extensively customize both their product offering
and their marketing strategy to match national conditions. They also tend to
establish a complete set of value creation activities including production,
marketing, and R & D, in each major national market in which they operate.
As a consequence, they are generally unable to realize value from
experience curve effects and location economies. Accordingly, much of
multi-domestic strategy makes most sense when there are high pressures for
local responsiveness and low pressures for cost reductions.

Another weaknesses associated with this strategy is that many multi-

domestic firms have developed into decentralized federations in which each
national subsidiary functions in a largely autonomous manner. As a result,
after some time they begin to lack the ability to transfer the skills and
products derived from their core competences to their various national
subsidiaries.

International Strategy of the Firm

Firms that pursue an international strategy try to create value by transferring
valuable skills and products to foreign markets where indigenous
competitors lack those skills and products. Most international firms have
created value by transferring differentiated product offerings developed at
home to overseas markets. These international firms tend to centralise
product development function such as research and development (R & D) at
home.

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However, firms pursuing international strategy also tend to establish

manufacturing and marketing functions in each major country in which they
do business. While they undertake some local customization of product
offering and marketing strategy, this tends to be limited. Ultimately, the
Home/Head Office retains tight control over marketing and product strategy
in most international firms.
An international strategy makes sense if a firm has a valuable core
competence that indigenous competitors in host countries or markets lack.
Also, if the firm faces relatively weak pressures of local responsiveness and
cost reductions, an international strategy can be very profitable.

However, when pressures for local responsiveness are high, firms pursuing
this strategy lose to firms that place a greater emphasis on customizing the
product offering and market strategy to local conditions. Due to the
duplication of manufacturing facilities, firms that pursue an international
strategy tend to suffer from high operating costs. This makes the strategy
inappropriate in manufacturing industries where cost pressures are high.

Global Strategy of the Firm

International firms’ global strategy focus on increasing profitability and
growth by reaping the benefits of the cost reductions that comes from
experience curve effects and location economies. That is to say, such firms
pursue a low-cost strategy. International strategy deals with only one host
country or market operations by the firm. Global strategy occurs when the
firm operates in three or more host countries or markets.

The production, marketing, and R & D activities of firms pursuing a global

strategy are sometimes concentrated in a few favourable locations around
the globe. Global firms tend not to customise their product offering and
marketing strategies to local conditions because customization raises cost.
Instead, global firms prefer to market a standardized product worldwide so
that they can reap the maximum benefits from the economies of scale that
underlie the experience curve. They also tend to use their low-cost
advantage to support aggressive pricing in world markets. Such a strategy
makes most sense where there are strong pressures for cost reductions, and
where demands for local responsiveness are very minimal.

Transnational Strategy of the Firm

A transnational business strategy seeks experienced-based cost reduction
and location economies. It transfers distinctive competencies within the
firm, and pays attention to pressures for local responsiveness.
A transnational strategy makes sense when a firm faces high pressures for
cost reductions and high pressures for local responsiveness. Firms that
pursue a transnational strategy try to simultaneously achieve low-cost and
differentiation advantages.

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We have discussed the need for strategy in achieving business success in a

competitive global market. To stay above the competition, however,
businesses must create and differentiate their products through quality
product and process design and development, superior technologies, good
customer care, quality assurance, after-sales delivery, and waste disposal
etc.

Please, refer to other texts in the references provided for further information
on the meaning and importance of this topic. Put down any important notes
you come across in the blank sheet provided below for face-to-face
discussions with your course lecturer.

Now assess your understanding of this Section by answering the following

Self-Assessment Questions (SAQs). Good luck!

Activity 5.1
 What are the primary activities of a firm?
 State the strategies that can be adopted by the firm.
 Name the support activities of the firm as a value chain

Did you score all? That’s great! Keep it up.

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