The Strategy of International Business Chapter 13 The Strategy of International Business By: Ms. Adina Malik (ALK)

Learning Objectives Explain the concept of strategy Understand how firms can profit by expanding globally Understand how pressures for cost reductions and local responsiveness influence strategic choices Be familiar with different strategies for competing globally and their pros and cons Explain the pros and cons of using strategic alliances to support global strategies

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 To increase profitability and profit growth , firms can add value lower costs sell more in existing markets expand internationally

What is Strategy?

How is value created? The firm’s value creation is the difference between V (the price that the firm can charge for that product given competitive pressures/value of a product to an average customer) and C (the costs of producing that product)

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 the higher the value customers place on a firm’s products, the higher the price the firm can charge for those products Using a low cost strategy - lowering costs

How is value created? A company can create more value (V-C) either by lowering the production costs, C, or by making the product more attractive so that customers place a greater value on it (V increases). Michael Porter has argued that low cost and differentiation are two basic strategies for creating value and attaining competitive advantage in an industry. Superior value creation implies that the gap between V-C should be greater than the gap competitors attain. It does not necessarily mean that firms need to have the lowest cost structure or most valuable product in the industry.

Why is ‘Strategic Positioning’ important? Strategic Choice in the International Hotel Industry

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 and manage efficiently to ensure that the firm is operating on the efficiency frontier. However, not all positions on the efficiency frontier are viable. 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 Internal operations: manufacturing, marketing, logistics, IS, HR, supply chain, etc.

How Are A Firm’s Operations Configured? A firm’s operations can be thought of a value chain composed of a series of distinct value creation activities including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure Value creation activities can be categorized as Primary activities R&D, production, marketing and sales, customer service Support activities information systems, logistics, human resources Primary activities are those that involve creating the product, marketing and delivering it to buyers, and providing support and after-sales service to customers. Support activities are just what you’d think, activities that allow the primary activities to occur. They include things like information systems that manage inventory or track sales, logistics, and human resources. While you might think they’re not as important as primary activities, in fact they are! Without support activities, Dell Computer for example, would be lost!

The Value Chain Example: Banking Industry, Dell Computer

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 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 goods or services developed at home internationally The success of firms that expand internationally depends on the goods or services they sell their core competencies - skills within the firm that competitors cannot easily match or imitate core competencies enable the firm to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible E.g.: Procter & Gamble, Microsoft, McDonalds, Toyota Procter & Gamble: disposable diapers ‘Pampers’ and Ivory Soap developed in the US and then sold elsewhere in the world. The return from such a strategy is greater if the indigenous competitors in the nations that a firm enters lack comparable products. Thus, Toyota has increased its profits by entering into the large automobile markets of North America and Europe, offering products that are of superior quality and reliability than those products offered by local rivals, such as Ford and GM.

Why Are Location Economies Important? Location economies are the 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 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 Comparative Advantage (India-IT service, China-apparel, US-biotechnology, financial services, computer software, Switzerland-pharmaceuticals, Japan-automobiles and consumer electronics, etc.) So, if the best programmers are in Silicon Valley, then programming activities should be located there. If the best assembly operations are in Mexico, then locate assembly operations in Mexico. If the best designers are in France, then locate the designing activities in France. If the best marketers are in the US, formulate a marketing strategy there.

Why Are Location Economies Important? Example of Global Web: Lenovo’s ThinkPad laptop computers The product is designed in the US (basic design work) The case, keyboard and hard drive are made in Thailand Display screen and memory are made in South Korea Built-in wireless card from Malaysia Microprocessor from the US Assemble operation in Mexico Final sale in the US

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 and it is also strategically significant for companies to gain competitive advantage. Two things explain this relationship: 1) Learning Effects and 2) Economies of Scale. Another reason why firms might pursue an international expansion strategy is to take advantage of experience curve effects or systematic reductions in production costs that have been observed to occur over the life of a product. Firms that can move down the experience curve the fastest will have a competitive advantage. So, a firm will be motivated to produce, using a single plant to serve the global market, as a means of getting down the curve rapidly. Matsushita did this in the late 1970s and early 1980s. The company wanted to be the leader in the videocassette market, so it increased production substantially at a single location in Japan, and then served the world from this plant. Doing this, allowed Matsushita to drop its prices by half in just five years, and gain about 45 percent of the global market!

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 Economies of scale refer to 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 So, for example, in the auto industry, a factory is efficient when it produces about 200,000 cars a year, preferably of the same model. If domestic demand is not large enough to warrant this level of production, firms might still be able to achieve it by exporting cars to foreign markets. Matsushita in Japan, in the early 1960s and late 1970s-to develop commercially viable video cassette recorder, alongside Sony and Philips

How Can Managers Leverage Subsidiary Skills? Managers should Recognize that valuable skills that lead to competencies 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 Finally, it’s important for managers to recognize that skills developed in the home market can be transferred to other markets like MTV did when it transferred its format to other markets, and valuable skills can be developed elsewhere in the firm and be transferred to the corporate office. McDonald’s for example, has found that its foreign stores often have ideas that can be incorporated elsewhere in the organization. In France for example, slow sales recently prompted a shift toward a more inviting atmosphere with an upgraded menu. The company is currently considering using this format at other locations where sales are sluggish.

How Can Managers Leverage Subsidiary Skills? Example: McDonalds - In France for example, slow sales recently prompted a shift toward a more inviting atmosphere with an upgraded menu. The company is currently considering using this format at other locations where sales are sluggish.

What Types Of Competitive Pressures Exist In The Global Marketplace? Firms that compete in the global marketplace face two conflicting types of 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—a strategy that raises costs The pressures limit the ability of firms to realize location economies and experience effects, leverage products, and transfer skills within the firm. There are national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions and government policies.

What Types Of Competitive Pressures Exist In The Global Marketplace?

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. E.g. steel, sugar, bulk chemicals, petroleum, etc. When major competitors are based in low cost locations, where there is persistent excess capacity and where consumers are powerful & face low switching costs.

When Are Pressures For Local Responsiveness Greatest? Pressures for local responsiveness arise from: 1. Differences in consumer tastes and preferences North American consumers have a strong demand for pick-up cars, whereas such cars are seen as utility vehicles by the Europeans. When selling cell phones to the US consumers, manufacturers focused more on slim good looks and less on advanced functions and features. But, consumers in Asia and Europe preferred text messaging and web browsing features. 2. Differences in traditional practices and infrastructure In North America, consumer electrical systems are based on 110 volts, while in European countries 240-volt systems are standard. While many products like Coca-Cola are accepted around the world, when consumer preferences and tastes differ significantly between countries, companies have to adapt the product mix and/or the marketing message. Auto companies sell a lot of pick-up trucks to individuals in the U.S. for example, but have to market them as utility vehicles in Europe. MTV found that while many of the programs it runs in the United States are popular in other parts of the world, it’s still important to localize programming as well. You can learn more about MTV’s global operations in the Management Focus in your text.

When Are Pressures For Local Responsiveness Greatest? 3. Differences in distribution channels The differences in distribution channels require that countries adapt their own distribution and marketing strategy. In Brazil supermarkets account for 36% of food retailing, in Poland is 18%, and in Russia less than 1%. 4. Host government demands Economic and political demands imposed by host country governments may require local responsiveness For example, pharmaceutical companies are subject to local clinical testing, registration procedures and pricing restrictions which vary from countries to countries. All these make it necessary that manufacturing and marketing of a drug meet local requirements.

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 1. 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 It makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal Firms prefer to market standardized products or products which serve universal needs. This strategy is appropriate for industrial goods, not consumer goods.

Which Strategy Should A Firm Choose? 2. Localization - increase profitability by customizing goods or services so that they match tastes and preferences in different national markets It makes sense when there are substantial differences across nations with regard to consumer tastes and preferences and when cost pressures are not too intense E.g. US (pick-up trucks); Europe & Japan (small fuel efficient cars) 3.International – take products first produced for the domestic market and sell them internationally with only minimal local customization It makes sense when there are low cost pressures and low pressures for local responsiveness E.g.: Xerox, Procter & Gamble, Microsoft

Which Strategy Should A Firm Choose? Transnational - tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects, differentiate the product offering 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 It makes sense when cost pressures are intense and pressures for local responsiveness are intense. This strategy is not easy to pursue as it places conflicting demands on the company. E.g.: Ford found it difficult to implement. E.g. Caterpillar started to pursue this strategy in 1979 and by 1990s had succeeded in doubling output per employee, significantly reducing its overall cost structure in the process. Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.

Which Strategy Should A Firm Choose?

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?