Chapter 12

The Strategy of International Business

McGraw-Hill/Irwin Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

STRATEGY
STRATEGY: focuses on the firm itself, and the actions managers take to compete more effectively in international markets. GLOBAL OPERATIONS due to: The globalization of the world economy The global nature of customers Emergence of competition in emerging markets
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What Is Strategy?
A firms strategy refers to the actions that managers take to attain the goals of the firm
Firms need to pursue strategies that increase:

Profitability is the rate of return the firm makes on its invested capital Profit growth is the percentage increase in net profits over time
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What Is Strategy?
To increase profitability and profit growth, firms can

add value lower costs sell more in existing markets expand internationally

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What Is Strategy?
Determinants of Enterprise Value

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What Is Strategy?
If profitability is the rate of return the firm

makes on its invested capital, then why is profit growth (the percentage increase in net profits over time) important? Would profit growth occur automatically???

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Sonys Strategy

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How Is Value Created?

The product can still be of good quality, but no longer valuable

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How Is Value Created?

The firms value creation is the difference between V (the price that the firm can charge for that product given competitive pressures) and C (the costs of producing that product)

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How Is Value Created?

Profits can be increased by:
1.Using a differentiation strategy = adding value to a product so that customers are willing to pay more for it
the higher the value customers place on a firms products, the higher the price the firm can charge

2.Using a low cost strategy = lowering costs

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Differentiation

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Variation on Value PHILLIES!

Pre-season?

Mid-season?

Post-season?

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Variation on Value Toyota

Japanese brand seen as valuable

Recall

Repositioning

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Variation on Value Hummer

Prior to rise in oil prices

Oil prices stabilize

Economic downturn

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Physical or Mandatory Requirements and Adaptation

How Is Value Created?

Value Creation

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How Is Value Created?

Value Creation

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How Is Value Created?

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Progression of Economic Value

Progression of Economic Value

Why Is Strategic Positioning Important?

Michael Porter argues that firms need to choose either differentiation or low cost, and then configure internal operations to support the choice.

To maximize long run return on invested capital, firms must:

1. pick a viable position on the efficiency frontier 2. configure internal operations to support that position 3. have the right organization structure in place to execute the strategy

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How Are A Firms Operations Configured?

A firms operations can be thought of a value chain composed of a series of distinct value creation activities
including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure

Value creation activities can be categorized as: 1. Primary activities (product creation)
R&D, production, marketing and sales, customer service information systems, logistics, human resources
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2. Support activities (allow creation to occur)

How Are A Firms Operations Configured?

The Value Chain

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How Can Firms Increase Profits Through International Expansion?

International firms can:
1. Expand their market - sell in international markets 2. Realize location economies - disperse value creation activities to locations where they can be performed most efficiently and effectively 3. Realize greater cost economies from experience effects -serve an expanded global market from a central location 4. Earn a greater return - leverage skills developed in foreign operations and transfer them elsewhere in the firm

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Why Are Location Economies Important?

Location economies: arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be

By achieving location economies, firms can lower the costs of value creation and achieve a low cost position differentiate their product offering
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Why Are Location Economies Important?

Firms that take advantage of location economies in different parts of the world, create a global web of value creation activities
different stages of the value chain are dispersed to locations where perceived value is maximized or where the costs of value creation are minimized

The Case of Clear Vision

Why did Clear Vision set up production in Hong Kong and also France, Italy and Japan??

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Why Are Experience Effects Important?

The experience curve refers to the systematic reductions in production costs that occur over the life of a product
by moving down the experience curve, firms reduce the cost of creating value to get down the experience curve quickly, firms can use a single plant to serve global markets

Learning effects are cost savings that come from learning by doing When labor productivity increases
individuals learn the most efficient ways to perform particular tasks managers learn how to manage the new operation more efficiently
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Why Are Experience Effects Important?

The Experience Curve

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Why Are Experience Effects Important?

The Experience Curve

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Why Are Experience Effects Important?

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Why Are Experience Effects Important?

Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product

Sources of economies of scale include 1. spreading fixed costs over a large volume 2. utilizing production facilities more intensively 3. increasing bargaining power with suppliers

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How Can Managers Leverage Subsidiary Skills?

Recognize that valuable skills that could be applied can arise anywhere within the firms global network - not just at the corporate center Establish an incentive system that encourages local employees to acquire new skills

Have a process for identifying when valuable new skills have been created in a subsidiary

Act as facilitators to help transfer skills within the firm

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What Types Of Competitive Pressures Exist In The Global Marketplace?

Firms that compete in the global marketplace face two conflicting types of competitive pressures: 1. Pressures for cost reductions - force the firm to lower unit costs 2. Pressures to be locally responsive - require the firm to adapt its product to meet local demands in each marketa strategy that raises costs
Mac vs PC http://www.youtube.com/watch?v=TAtXJEHr1Mw

the pressures limit the ability of firms to realize location economies and experience effects, leverage products, and transfer skills within the firm

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What Types Of Competitive Pressures Exist In The Global Marketplace?

In the cell phone market:
Americans consumers tend to focus on design elements. European and Asian consumer focus on functions and features.

Companies must keep costs low, while at the same time absorb the costs of designing phones that meet demands.
When companies face pressure for local responsiveness, they incur the costs of differentiating their products or strategies.

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What Types Of Competitive Pressures Exist In The Global Marketplace?

Pressures for Cost Reductions and Local Responsiveness

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When Are Pressures For Cost Reductions Greatest?

1. In industries producing commodity type products that fill universal needs where price is the main competitive weapon (ie steel)
needs that exist when the tastes and preferences of consumers in different nations are similar if not identical

2. When major competitors are based in low cost locations

http://www.cnbc.com/id/15840232?play=1&video=1398792562

3. Where there is persistent excess capacity 4. Where consumers are powerful and face low switching costs

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Pressures for local responsiveness arise from

1. Differences in consumer tastes and preferences

When Are Pressures For Local Responsiveness Greatest?

2.

strong pressure when consumer tastes differ significantly

Differences in traditional practices and infrastructure

3.

strong pressure emerges when there are significant differences in infrastructure and/or traditional practices between countries (ie cell phones, electrical systems)
Differences in distribution channels

4.

need to be responsive to differences in distribution channels between countries (ie climate change in shipment, sales force)
Host government demands economic and political demands imposed by host country (ie local content laws, state testing) 1241

Which Strategy Should A Firm Choose?

There are 4 basic strategies to compete in international markets

Global standardization Localization Transnational International

the appropriateness of each strategy depends on the pressures for cost reduction and local responsiveness in the industry
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Global Standardization
1. Global standardization - increase profitability and profit growth through cost reductions from economies of scale, learning effects, and location economies

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
2. Localization - increase profitability by customizing goods or services so that they match tastes and preferences in different national markets

makes sense when there are substantial differences across nations with regard to consumer tastes and preferences and when cost pressures are not too intense Yahoo! Answers
http://answers.yahoo.com/

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Transnational
3.

Transnational - tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects.
Differentiate the product offering across geographic markets to account for local differences, Foster a multidirectional flow of skills between different subsidiaries in the firms global network of operations

makes sense when cost pressures AND local responsiveness pressures are intense

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Which Strategy Should A Firm Choose?

4. International take products first produced for the domestic market and sell them internationally with only minimal local customization

makes sense when pressure is low for both cost reduction and local responsiveness

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Which Strategy Should A Firm Choose?

Four Basic Strategies

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How Does Strategy Evolve?

An international strategy may not be viable in the long term to survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors Localization may give a firm a competitive edge, but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures which would require a shift toward a transnational strategy

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How Does Strategy Evolve?

Changes in Strategy over Time

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Product Component Model

Strategies for Expansion

Aim - a chocolate manufacturer wishes to break into a new overseas market Objectives:
Develop relationships with overseas suppliers Identify network of retail outlets Conduct market research to identify consumer needs Find location for overseas sales team HQ

How Does Strategy Evolve?

The chocolate shop is up and running in an overseas market. It is open from 9am to 4pm, Monday to Friday, offering a variety of high-end chocolates.
HOWEVER, sales are slow and competition from a nearby supermarket and outlet center seems to be preventing the business from growing.

What action could the chocolate shop take to increase sales?

The key issue to identify is why customers are choosing other outlets. Is it because of location, price, or product quality?
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Quality is defined by the Buyer

One important dimension of quality is how well a product meets the specific needs of the buyer. The price-quality relationship is an important factor Product design must be viewed from all aspects of use

How Does Strategy Evolve?

Effective strategic business decisions bring together:

the right resources for the right markets at the right time.
Timing is crucial.
Tesco developed its online ordering and delivery service as internet shopping expanded. Virgin sold off its music stores as downloading music became more popular.

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Vodafone in Japan
1. How did Vodafone enter the Japanese market? 2. Why was Vodaphone pursuing a global standardization strategy? 3. Why didnt it work in Japan? 4. What advantage did Vodaphones competitors have. 5. What should Vodaphone have done differently?
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ZARA
http://video.ft.com/v/62436030001/IeseCrossing-borders-successfully

Is Zara a global company? What are the three strategies the speaker talks about AAA???

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