After mid-term

International Business Strategy def

Refers to the choices managers make to increase value creation goals internationally ​

Profitability

rate of return the firm makes on its invested capital​

Sales growth

the percentage increase in sales & profit over time.​

Four reasons for going international

1. Expand the market

2. Realize location economies

3. Benefit from experience effects that increase scale economies

4. Leverage valuable skills developed in foreign operations

Learning effects

Systematic reductions in production costs over the life of a product​

Economies of scale

Reductions in unit cost achieved by producing a large volume of a product​

Drivers of global standardization/integration

• Product characteristics are uniform, enabling greater standardization​

• Competitive dynamics are strong, demanding greater cost reduction ​

• Buyer power & switching put a pressure on greater cost reduction ​

Drivers of local responsiveness

• Differences in consumer tastes and preferences ​

• Differences in infrastructure and traditional practices

• Differences in distribution channels ​

• Host government demands

Four basic strategies firms use in global markets

• International ​

• Global standardization​

• Localization​

• Transnational ​

2 main determinants of enterprise valuation (per diagram)

• Profitability

• Sales growth

Profitability subdivided into (per determinants of enterprise value diagram)

• Reduce costs

• Add value and raise prices

Sales growth subdivided into (per determinants of enterprise value diagram)

• Sell more in existing markets

• Enter new markets

Total value creation two components:

• Value captured by consumers

• Profit earned by producers ​

Value creation measured as (equation)

V-C

V: Value of product to avg consumer

C: Cost of production per unit

Value captured by consumers (equation)

V-P

V: Value of product to avg consumer

P: price per unit

Profit earned by producers equation

P-C

P: Price per unit

C: Cost of production per unit

Porter’s generic strategies

1. Cost leadership strategy

2. Differentiation strategy

Motives for global expansion: Expanding the market

• To increase growth, firm can sell products or services developed at home in foreign markets​

• Expanding into international markets enables the firm to exploit core competencies

Core competencies

• Skills within the firm competitors cannot easily match or imitate

• Enable the firm to reduce the costs of value creation​

• Create perceived value so that premium pricing is possible​

• Source of a firm’s competitive advantage.​

Motives for global expansion: Location economies

• Can lower costs of value creation

• Enable firm to differentiate its product offering from those of competitors

• Location economies create a global web of value creation activities, with fragmented value chains around the globe.​

Location economies achieved by

• Locating value creation activities in locations where economic, political, and cultural conditions most conducive

Challenges MNEs need to manage when considering location economies

• Transportation costs and trade barriers

• Political and economic risks

Experience curve

refers to systematic reductions in production costs that have been observed to occur over the life of a product

Learning by doing

• Labor productivity increases when individuals learn the most efficient ways to perform particular tasks ​

• Over time, management learns to run things more efficiently.

Sources of economies of scale

• The ability to spread fixed costs over a large volume​

• Going international enables attaining efficient scale of production​

• Bargaining power increases → economies of scale in purchasing ​

Once firm has established low-cost position it can act as a barrier to new competition (e.g., Intel).​

Motives for global expansion: Leveraging subsidiary skills

• Recognize that valuable skills can be developed anywhere within the firm’s global network (not just at the corporate center) (e.g., McDonalds in France)​

• Use incentive systems to encourage local employees to acquire new skills​

• Develop a process to identify when new skills have been created and facilitate their transfer within the firm ​

• There are risks of failure and poor transferability across markets.​

IB strategies: International strategy

• involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization ​

• Applicable when there is low pressure for cost reduction as well as for local responsiveness​

• This is rare but can arise under highly differentiated or patent-protected monopolistic markets ​

IB Strategies: Global standardization strategy

• Low-cost strategy on a global scale through economies of scale, learning effects, and location economies​

• Strong control of headquarters over subsidiaries to avoid duplication & cut costs​

• Applicable when there are strong pressures for cost reductions and demands for local responsiveness are minimal​

• The idea of a fully identical standardized global product is a myth

IB Strategies: Localization strategy

• Involves high level of customization to match local tastes and preferences in national markets​

Applicable where consumer tastes and preferences vary across countries (due to culture, language, law or income level)​

• E.g., Food, consumer products, fashion, retailing, and publishing ​

• Costs increase, but differentiation enables higher prices​

• Competition on a country-by-country basis​

The firm develops subsidiaries or affiliates in each of its foreign markets, and appoints local managers to operate independently and be locally responsive. ​

Also called “Multi-Domestic Strategy”​

IB Strategies: Transnational strategy

• tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects and​

• Differentiate the product offering across geographic markets to account for local differences​

• Seeks to combine the advantages of global standardization and localization ​

• Makes sense when there are both high pressure for cost reduction and local responsiveness​

• Flexible approach: standardize where feasible; localize where appropriate.

• Very hard to implement.​

Changes in IB strategy overtime

As competitors emerge, international and localization strategy become less viable