The Strategy of International Business
Chapter 13: The Strategy of International Business
Learning Objectives
13-1 Explain the concept of global strategy.
13-2 Recognize how firms can profit by expanding globally.
13-3 Understand how pressures for cost reductions and local responsiveness influence strategic choice.
13-4 Identify and choose the different global strategies for competing in the global marketplace.
Introduction
Focus Shift: From macro environment to firm-level aspects. - International business strategy encompasses strategy, the international environment, and firm performance. - Aim: Increase profitability by expanding operations into foreign markets. - Discuss pros and cons of various international strategies.
Strategy and the Firm 1: Basic Principles of Strategy
Definition of Strategy: Actions taken by managers to attain firm goals. - Goal: Maximize firm value for owners and shareholders. - Profitability: Rate of return on invested capital. - Profit Growth: Percentage increase in net profits over time.
Strategy and the Firm 2: Value Creation
Definition of Value Creation: Difference between a firm’s production costs and the perceived quality of its products by consumers. - Higher customer value allows higher pricing of products. - Expressed as: - Porter’s Strategies: - Low Cost: Reduce costs to increase profitability. - Differentiation: Enhance value to justify higher prices.
Strategy and the Firm 3: Strategic Positioning
Key Points from Porter: - Explicit choice of strategic emphasis (differentiation vs. low cost). - Align internal operations to support selected strategy.
Efficiency Frontier: Illustrates potential positions for value addition and cost management.
Strategy and the Firm 4: Maximizing Profitability
Requirements for maximization: 1. Select a viable position on the efficiency frontier with sufficient demand. 2. Configure internal operations (manufacturing, marketing, logistics, etc.) to support this position. 3. Establish appropriate organizational structure for strategy execution.
Strategy and the Firm 5: Operations as a Value Chain
Value-Creation Activities: Include production, marketing and sales, materials management, R&D, human resources, information systems, firm infrastructure, logistics.
Strategy and the Firm 6: Primary and Support Activities
Primary Activities: Design, creation, and delivery of products; marketing; support and after-sale service.
Support Activities: - Provide necessary inputs for primary activities. - Information Systems: Improve efficiency and manage other activities. - Logistics: Control physical material flow. - Human Resources: Ensure skilled workforce and employee development. - Infrastructure: Consists of organizational structure and control systems.
Global Expansion, Profitability, and Profit Growth 1: Advantages of International Firms
Firms can: - Expand market size for domestic products. - Realize location economies. - Achieve greater cost economies from experience effects. - Attain higher returns on investment.
Global Expansion, Profitability, and Profit Growth 2: Market Expansion Strategy
Definition: Taking domestically developed goods/services and selling them internationally based on core competencies. - Competencies can exist in any part of the firm’s value chain.
Global Expansion, Profitability, and Profit Growth 3: Location Economies
Definition: Cost benefits from performing activities in optimal locations, allowing leverage for cost reduction or differentiation.
Global Expansion, Profitability, and Profit Growth 4: Global Web Creation
Concept: Dispersion of value chain stages globally to maximize value and minimize costs. - Caveats: - Transportation costs, trade barriers, and political/economic risks complicate location benefits.
Global Expansion, Profitability, and Profit Growth 5: Experience Effects
Experience Curve: Systematic reduction in production costs over product lifespan. - Indicates learning effects on labor productivity; management efficiency. - Economies of Scale: Reduction in unit costs across large production volumes.
Global Expansion, Profitability, and Profit Growth 6: Strategic Significance of Experience Effects
Benefits: Reduced costs, increased profitability, accumulated volume for quick growth, and strengthening competitive position against new entrants.
Global Expansion, Profitability, and Profit Growth 7: Leveraging Subsidiary Skills
Valuable skills can arise in foreign subsidiaries; these can be leveraged across the firm.
Global Expansion, Profitability, and Profit Growth 8: Management Imperative
Multinational managers must: - Acknowledge that valuable skills can be created anywhere in the global network. - Provide incentives for skill acquisition and establish mechanisms for recognizing and sharing these skills.
Global Expansion, Profitability, and Profit Growth 9: Summary of Profitability Growth
Expansion enables: - Entering new markets with less competition. - Cost savings and value addition through location economies. - Exploitation of experience curve effects. - Skill transfer among subsidiaries.
Cost Pressures and Pressures for Local Responsiveness 1: Cost Reduction Pressures
Firms must seek to reduce value creation costs, especially in commodity-type industries and those facing powerful consumers.
Cost Pressures and Pressures for Local Responsiveness 2: Pressures for Local Responsiveness
Customization Demands: Differences in tastes and preferences may require local adaptations, though some markets show decreasing demand for custom products.
Cost Pressures and Pressures for Local Responsiveness 3: Additional Local Responsiveness Factors
Distribution Channels: May require marketing function delegation to subsidiaries. - Host Government Demands: Economic/political pressures may necessitate local manufacturing.
Cost Pressures and Pressures for Local Responsiveness 4: Regionalism
Movement towards convergence in tastes and practices among cultures in a region strengthens abilities for standardization and cost reduction.
Choosing a Strategy 1: Balancing Local Needs
The need for customization may complicate the implementation of a global standardization strategy, requiring a cost/benefit analysis.
Choosing a Strategy 2: Four International Strategies
Categories: - Global Standardization Strategy - Localization Strategy - Transnational Strategy - International Strategy
Choosing a Strategy 3: Global Standardization Strategy
Focuses on achieving cost reductions through scale and minimizes customization. Valid when cost pressures are high and local responsiveness is low.
Choosing a Strategy 4: Localization Strategy
Customizes products to match national market preferences when significant differences exist and cost pressures are moderate.
Choosing a Strategy 5: Transnational Strategy
Attempts to achieve low costs and product differentiation simultaneously. Common when local responsiveness demands are high with moderate cost pressures; complex to implement.
Choosing a Strategy 6: International Strategy
Sells domestically developed products overseas with minimal customization; generally centralizes R&D but may duplicate functions, increasing costs.
Choosing a Strategy 7: Strategy Evolution
Challenges: Competitors may emerge requiring shifts to more effective strategies.
International and localization strategies become less viable over time.
360° View: Impact of the Macro Environment 1: Trade and Investment Rules
Changes in trade regulations can influence strategic viability, enhancing the appeal of global strategies.
360° View: Impact of the Macro Environment 2: Increased Trade Barriers
Recent U.S. policy shifts have raised trade barriers, complicating the implementation of global strategies.
360° View: Impact of the Macro Environment 3: External Shocks
Factors like wars and pandemics can disrupt supply chains, increasing the value of localization strategies based on national or regional trading blocs.