C.7- STRATEGY IB

Chapter 7: The Strategy of International Business

7.1 Learning Objectives

• Explain the concept of Strategy.

• Understand how firms can profit by expanding globally.

• Comprehend how pressures for cost reduction and local responsiveness influence strategic choices.

7.2 What Is Strategy?

• Definition: Strategy involves actions taken by managers to achieve firm goals.

• Key Goals: Increase profitability and profit growth.

  • Profitability: Rate of return on invested capital.

  • Profit Growth: Percentage increase in net profits over time.

• Methods to Increase Profitability and Profit Growth:

  • Add value.

  • Lower costs.

  • Sell more in existing markets.

  • Expand internationally.

7.3 Determinants of Enterprise Value

• Reduce Costs

• Add Value and Raise Prices

• Sell More in Existing Markets

• Profit Growth

• Enter New Markets

7.4 How Is Value Created?

• Value Creation: Difference between the price (V) a firm can charge for its product and the costs (C) of producing that product.

  1. Differentiation Strategy: Adding value so customers are willing to pay more.

  2. Low Cost Strategy: Lowering costs can increase profits.

7.5 Importance of Strategic Positioning

• Michael Porter’s Theory:

  • Firms must choose between differentiation or low cost and configure internal operations accordingly.

  • Efficiency Frontier: Choose a viable position and align internal operations.

  • Have the correct organization structure to execute the strategy.

7.6 Configuration of a Firm’s Operations

• Operations viewed as a Value Chain with distinct value creation activities.

• Primary Activities: R&D, Production, Marketing & Sales, Customer Service.

• Support Activities: Information Systems, Logistics, Human Resources.

7.7 Increasing Profits Through International Expansion

1. Expand Markets: Sell in international markets.

2. Realize Location Economies: Perform value creation activities in optimal locations.

3. Leverage Skills: Use skills developed in foreign operations elsewhere in the firm.

4. Cost Economies: Achieve greater economies from experience effects.

7.8 Leveraging Products and Competencies

• International Growth: Sell home-developed goods/services internationally.

• Core Competencies: Unique skills enabling cost reduction or perceived value creation.

7.9 Importance of Location Economies

• Definition: Economies arising from optimal location for value creation activities.

• Benefits include:

  • Cost reduction and low-cost positioning.

  • Product differentiation.

• Firms can create a global web of value creation activities to maximize perceived value and minimize costs.

7.10 Importance of Experience Effects

• Experience Curve: Reductions in production costs over time while moving down the curve.

• Learning Effects: Cost savings from increased efficiency through experience.

• Economies of Scale: Reduced unit costs from large volume production:

  • Spreading fixed costs.

  • Intensive use of facilities.

  • Increased bargaining power with suppliers.

7.11 Leveraging Subsidiary Skills

Key Managerial Strategies:

1. Recognize skills from anywhere in the global network.

2. Establish incentives for skill acquisition.

3. Identify valuable new skills in subsidiaries.

4. Facilitate skill transfer across the firm.

7.12 Pressures in Global Markets

• Pressures for Cost Reductions: Encourage firms to lower unit costs but can conflict with local adaptations.

• Pressures for Local Responsiveness: Require firms to adapt to local demands, increasing costs.

7.13 Situations of Cost Pressure

• Greatest in:

  1. Commodity markets with universal needs.

  2. Industries with major competitors in low-cost locations.

  3. Areas of persistent excess capacity.

  4. Markets with powerful consumers facing low switching costs.

7.14 Situations of Local Responsiveness Pressure

• Arises from:

1. Differences in consumer tastes/preferences.

2. Variations in traditional practices/infrastructure.

3. Discrepancies in distribution channels.

4. Economic and political demands from host governments.

7.15 Strategic Decision Factors

• Choosing a Strategy:

  • Customization: Increase profitability by adjusting products/services to local tastes.

  • Localization: Balance low costs with product differentiation across markets.

  • Transnational Strategy: Combine low-cost strategy on a global scale with local responsiveness.

  • Global Standardization: Minimize local customization when pressures are low.

7.16 Strategy Evolution Over Time

• Strategies may need to transition as market conditions change.

• Companies facing aggressive competition may need to adopt more cost-effective transnational strategies.