International Business 11e By Charles W.L. Hill

The Strategy of International Business Chapter 13 The Strategy of International Business

What Is Strategy? A firm’s strategy refers to the actions that managers take to attain the goals of the firm Firms need to pursue strategies that increase profitability and profit growth Profitability is the rate of return the firm makes on its invested capital Profit growth is the percentage increase in net profits over time LO 13-1: Explain the concept of strategy.

What Is Strategy? To increase profitability and profit growth, firms can add value lower costs sell more in existing markets expand internationally Managers can increase the profitability of the firm by pursuing strategies that lower costs or by pursuing strategies that add value to the firm’s products, which enables the firm to raise prices. Managers can increase the rate at which the firm’s profits grow over time by pursuing strategies to sell more products in existing markets or by pursuing strategies to enter new markets. As we shall see, expanding internationally can help managers boost the firm’s profitability and increase the rate of profit growth over time.

Determinants of Enterprise Value What Is Strategy? Determinants of Enterprise Value

How Is Value Created? To increase profitability, a firm needs to create more value The firm’s value creation is the difference between V (the price that the firm can charge for a product given competitive pressures) and C (the costs of producing that product) a firm has high profits when it creates more value for its customers and does so at a lower cost

How Is Value Created? Value Creation The value of a product to an average consumer is V; the average price that the firm can charge a consumer for that product given competitive pressures and its ability to segment the market is P; and the average unit cost of producing that product is C (C comprises all relevant costs, including the firm’s cost of capital). The firm’s profit per unit sold (p) is equal to P – C, while the consumer surplus per unit is equal to V – P (another way of thinking of the consumer surplus is as “value for the money”; the greater the consumer surplus, the greater the value for the money the consumer gets). The firm makes a profit so long as P is greater than C, and its profit will be greater the lower C is relative to P. The difference between V and P is in part determined by the intensity of competitive pressure in the marketplace; the lower the intensity of competitive pressure, the higher the price charged relative to V. In general, the higher the firm’s profit per unit sold is, the greater its profitability will be, all else being equal.

How Is Value Created? Profits can be increased by Using a differentiation strategy adding value to a product so that customers are willing to pay more for it Using a low cost strategy lowering costs

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 So, to maximize long run return on invested capital, firms must pick a viable position on the efficiency frontier configure internal operations to support that position have the right organization structure in place to execute the strategy The strategy, operations, and organization of the firm must all be consistent with each other if it is to attain a competitive advantage and garner superior profitability. Operations refers to the different value creation activities a firm undertakes.

Why Is Strategic Positioning Important? Strategic Choice in the International Hotel Industry The convex curve is what economists refer to as an efficiency frontier. The efficiency frontier shows all of the different positions that a firm can adopt with regard to adding value to the product (V) and low cost (C) assuming that its internal operations are configured efficiently to support a particular position (note that the horizontal axis is reverse scaled—moving along the axis to the right implies lower costs). The efficiency frontier has a convex shape because of diminishing returns. Diminishing returns imply that when a firm already has significant value built into its product offering, increasing value by a relatively small amount requires significant additional costs. The converse also holds, when a firm already has a low-cost structure, it has to give up a lot of value in its product offering to get additional cost reductions.

How Are a Firm’s Operations Configured? A firm’s operations are like a value chain composed of a series of distinct value creation activities: production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure All of these activities must be managed effectively and be consistent with firm strategy

How Are a Firm’s Operations Configured? Value creation activities can be categorized as Primary activities R&D Production marketing and sales customer service Support activities information systems logistics human resources

How Are a Firm’s Operations Configured? The Value Chain The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities including production, marketing and sales, materials management, R&D, human resources, information systems, and the firm infrastructure. We can categorize these value creation activities, or operations, as primary activities and support activities (see Figure 13.4). If a firm is to implement its strategy efficiently and position itself on the efficiency frontier shown, it must manage these activities effectively and in a manner that is consistent with its strategy.

How Can Firms Increase Profits Through International Expansion? International firms can Expand their market sell in international markets Realize location economies disperse value creation activities to locations where they can be performed most efficiently and effectively LO 13-2: Recognize how firms can profit by expanding globally.

How Can Firms Increase Profits Through International Expansion? Realize greater cost economies from experience effects serve an expanded global market from a central location Earn a greater return leverage skills developed in foreign operations and transfer them elsewhere in the firm

How Can Firms Leverage Their Products and Competencies? Firms can increase growth by selling internationally goods or services developed at home The success of firms that expand internationally depends on the goods or services sold the firm’s core competencies

How Can Firms Leverage Their Products and Competencies? Core competencies - skills within the firm that competitors cannot easily match or imitate can exist in any value creation activity Core competencies allow firms to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible

Why Are Location Economies Important? Location economies are economies that 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

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

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

Why Are Experience Effects Important? 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

Why Are Experience Effects Important? The Experience Curve

Why Are Experience Effects Important? Economies of scale - the reductions in unit cost achieved by producing a large volume of a product Sources of economies of scale include spreading fixed costs over a large volume utilizing production facilities more intensively increasing bargaining power with suppliers

How Can Managers Leverage Subsidiary Skills? Managers should Recognize that valuable skills that could be applied elsewhere in the firm can arise anywhere within the firm’s 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

What Types of Competitive Pressures Exist in the Global Marketplace? Firms that compete in the global marketplace face two conflicting types of competitive pressures the pressures limit the ability of firms to realize location economies and experience effects, leverage products, and transfer skills within the firm Dealing with both pressures is challenging LO 13-3: Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice.

What Types of Competitive Pressures Exist in the Global Marketplace? Two competitive pressures: Pressures for cost reductions force the firm to lower unit costs Pressures to be locally responsive require the firm to adapt its product to meet local demands in each market but, this strategy can raise costs

What Types of Competitive Pressures Exist in the Global Marketplace? Pressures for Cost Reductions and Local Responsiveness

When Are Pressures for Cost Reductions Greatest? Pressures for cost reductions are greatest In industries producing commodity-type products that fill universal needs (needs that exist when the tastes and preferences of consumers in different nations are similar if not identical) where price is the main competitive weapon When major competitors are based in low cost locations Where there is persistent excess capacity Where consumers are powerful and face low switching costs

When Are Pressures for Local Responsiveness Greatest? Pressures for local responsiveness arise from Differences in consumer tastes and preferences strong pressure emerges when consumer tastes and preferences differ significantly between countries Differences in traditional practices and infrastructure strong pressure emerges when there are significant differences in infrastructure and/or traditional practices between countries Management Focus: Local Responsiveness at MTV Networks describes MTV’s global strategy. Established in 1981, the U.S.-based TV network has been expanding outside of its North American base since 1987, when it opened MTV Europe. Interestingly, MTV has found that its global strategy has to be surprisingly local. Consumers in different markets, while enjoying some American programming, prefer to see their own local superstars.

When Are Pressures for Local Responsiveness Greatest? Differences in distribution channels need to be responsive to differences in distribution channels between countries Host government demands economic and political demands imposed by host country governments may require local responsiveness

Which Strategy Should a Firm Choose? There are four basic strategies to compete in international markets the appropriateness of each strategy depends on the pressures for cost reduction and local responsiveness in the industry LO 13-4: Identify the different strategies for competing globally and their pros and cons.

Which Strategy Should a Firm Choose? Four Basic Strategies The Closing Case: Global Strategy Levers explores the five global strategy “levers,” or dimensions, that determine how local or global a company is on the international marketplace. The five levers are market participation, products/services, supply chain management, marketing, and competitive moves. A well-balanced approach to global competition requires paying relatively equal attention to each of these five dimensions, though businesses tend to emphasize one or two dimensions based on their organizational strengths and weaknesses.

Think Like a Manager Imagine that you are the manager of a foreign subsidiary of a major U.S. apparel company. Consumer tastes in your location require a high degree of local responsiveness, while declining sales in the United States require significant cost reductions. Which of the four main strategic postures (global standardization, localization, transnational, or international) would you adopt to address these pressures? What advantages or disadvantages would that strategy provide? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13-33

Which Strategy Should a Firm Choose? Global standardization - increase profitability and profit growth by reaping the cost reductions from economies of scale, learning effects, and location economies goal is to pursue a low-cost strategy on a global scale This strategy makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal

Which Strategy Should a Firm Choose? Localization - increase profitability by customizing goods or services so that they match tastes and preferences in different national markets This strategy makes sense when there are substantial differences across nations with regard to consumer tastes and preferences and cost pressures are not too intense

Which Strategy Should a Firm Choose? Transnational - tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects firms differentiate their product across geographic markets to account for local differences and foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations This strategy makes sense when both cost pressures and pressures for local responsiveness are intense Management Focus: Evolution of Strategy at Procter & Gamble explores the evolution of Procter & Gamble’s global strategy. In 1915, Procter & Gamble opened its first foreign operation in Canada. In the 1950s and 1960s, Procter & Gamble expanded into Western Europe, and then, in the 1970s, into Japan and other parts of Asia. Throughout this expansion, the company maintained all product development at its Cincinnati, Ohio headquarters, while each subsidiary took on the responsibility for manufacturing, marketing, and distributing the products. Procter & Gamble shifted its strategy in the 1990s, closing several foreign locations and moving to a more regional approach to global markets. More recently, the company implemented a business unit approach whereby different units are entirely responsible for generating profits for a product group.

Which Strategy Should a Firm Choose? International – take products first produced for the domestic market and sell them internationally with only minimal local customization This strategy makes sense when there are low cost pressures and low pressures for local responsiveness

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 would require a shift toward a transnational strategy

How Does Strategy Evolve? Changes in Strategy over Time