Strategic Analysis: Internationalization Strategy Notes

Strategic Analysis: Internationalization Strategy

Global Expansion, Profitability, and Profit Growth

  • Expanding globally enables firms to increase profitability and profit growth beyond what's possible domestically.
  • Firms operating internationally can:
    • Expand the market for domestic products.
    • Realize location economies.
    • Achieve greater cost economies from experience effects.
    • Earn greater returns by leveraging valuable skills developed in foreign operations and transferring them within the firm's global network.

Expanding the Market

  • Firms can increase growth by selling domestically developed goods and services internationally.
  • The success of multinational companies relies on core competencies that underlie the development, production, and marketing of goods/services.
  • CORE COMPETENCIES: Skills within a firm that competitors cannot easily match or imitate, crucial for creating a competitive advantage.
  • Successful global expansion is based on transferring core competencies to foreign markets where indigenous competitors lack them.

Location Economies

  • Countries differ in economic, political, legal, and social factors that influence the cost of doing business.
  • International trade theories suggest that differences in factor costs give certain countries a comparative advantage in producing specific products.
  • Firms can benefit by basing each value creation activity in a location where external factors are most conducive to its performance, trade barriers, and transportation costs permitting.
  • Location economies: Economies that arise from performing a value-creating activity in the optimal location for that activity, considering transportation costs and trade barriers.
  • Locating a value creation activity in its optimal location has two effects:
    • Lowers the cost of value creation, leading to a low-cost position.
    • Differentiates the product offering from competitors.
  • Illustration of Value, Price and Cost:
    • VV = Value of product to an average consumer
    • PP = Price per unit
    • CC = Cost of production per unit
    • V−PV - P = Consumer surplus per unit
    • P−CP - C = Profit per unit sold
    • V−CV - C = Value created per unit
  • Examples:
    • Shifting to low priced imports (Hong Kong) may result in low quality products.
    • Partnering with a Chinese firm and opening a facility in Hong Kong to benefit from low labor costs, skilled workforce, and tax breaks.
    • Moving manufacturing to China when Hong Kong's costs increased.
    • Launching a line of high-quality, differentiated products by investing in countries where specific capabilities can be acquired (e.g., Italy).

Creating a Global Web

  • Firms may need to create a global web of value creation activities, dispersing stages of the value chain to locations that maximize perceived value or minimize value creation costs.

Drawbacks of Location Economies

  • Location economies assume favorable transportation costs and trade barriers.
  • Location economies assume no political and economic risk.
  • Challenges within Established Democracies:
    • Undermining the Rule of Law
    • Attacking Media Freedom
    • Perverting Elections
    • Discrimination and Mistreatment of Migrants

Experience Effects

  • The experience curve shows systematic reductions in production costs over a product's life.
  • Studies show that production costs decline by a specific quantity each time cumulative output doubles shown by unit costs over cumulative output curve diagram.

Learning Effects and Economies of Scale

  • LEARNING EFFECTS: Cost savings from learning by doing.
    • Learning effects are most significant during the start-up of a new process and diminish after two or three years.
  • ECONOMIES OF SCALE: Reduction in unit cost achieved by producing a large volume of a product.
    • Sources of economies of scale:
      1. Spreading fixed costs over a larger volume.
      2. Presence in the global market.
      3. Increased bargaining power with suppliers.

Strategic Significance of the Experience Curve

  • Moving down the experience curve reduces costs of value creation and increases profitability.
  • Plant-based strategies: Increase production volume in a single plant as rapidly as possible.
  • Firms serving the global market from one location can build accumulated volume more quickly than those serving only their home market or multiple markets from multiple locations.
  • Aggressive pricing and marketing can expand demand rapidly.
  • Achieving a low-cost position builds barriers to new competitors.

Leveraging Subsidiary Skills

  • Development of skills and core competencies can occur not only from the home country to subsidiaries but also from subsidiaries to the home country.
  • Managers should leverage skills created in subsidiaries:
    1. Acknowledge the value created in subsidiaries.
    2. Establish an appropriate system of incentives to encourage local employees to acquire new skills (though this is risky).
    3. Act as facilitators to help transfer valuable skills within the firm.

Cost Pressures and Pressures for Local Responsiveness

  • Firms competing globally face two types of competitive pressures:
    • PRESSURES FOR COST REDUCTIONS: Firms aim to minimize unit costs.
    • PRESSURES TO BE LOCALLY RESPONSIVE: Firms differentiate product offerings from country to country to accommodate different demands arising from different national environments.

Pressures for Cost Reductions

  • GOAL: Lower costs of value creation.
  • Particularly important for products that serve universal needs.
  • UNIVERSAL NEEDS: Common needs arising when tastes and preferences of consumers in different countries are similar or identical (e.g., sugar).

Pressures for Local Responsiveness

  • Pressures for local responsiveness arise from national differences in:
    • Consumer tastes and preferences
    • Infrastructures and practices
    • Distribution channels
    • Government requirements

Differences in Consumer Tastes and Preferences

  • Focus on culture.
  • Culture: The set of attitudes, values, beliefs, and behaviors shared by a group of people, but different for each individual, communicated from one generation to the next.
  • Culture is learned, not inherited; derived from one’s social environment, not genes.
  • Culture differs from human nature and individual personality.