© Ram Mudambi, Temple University, Lecture 6 The Strategy of International Business

© Ram Mudambi, Temple University, What is the motivation for competing internationally? Gain access to new customers Capitalize on resource strengths and competencies Need to achieve lower costs Spread business risk across wider market base Obtain access to valuable resources Market-seeking Asset-seeking

© Ram Mudambi, Temple University, The U.K. Continental Europe Australia

© Ram Mudambi, Temple University, Italy Germany Spain Australia The U.K.

© Ram Mudambi, Temple University, Italy Germany Spain Australia The U.K.

© Ram Mudambi, Temple University, The Role of Strategy  Strategy:  Actions managers take to attain the goals of the firm  Identify and take action that lowers the cost of value creation and/or differentiates the firm’s product through superior design, quality, service, or functionality.

© Ram Mudambi, Temple University, Porter’s generic strategies Offers low priced products Offers unique or distinctive products Serves the entire market Serves a specific niche

© Ram Mudambi, Temple University, Profiting from Global Expansion  International firms can:  Earn a greater return from distinctive skills or core competencies – leverage these in foreign markets  Realize location economies by dispersing value creation activities to locations where they can be performed most efficiently.  Realize greater experience curve economies, which reduces the cost of value creation.

© Ram Mudambi, Temple University, Locating activities to build global advantage  Two issues with regard to firm activities:  Whether to concentrate in one or two countries or disperse activities to many nations  Where to locate activities (which country is best location for which activity?)

© Ram Mudambi, Temple University, Global advantage: Concentrating vs. dispersing activities  Activities should be concentrated when  Scale economies or experience curve effects need to be captured  Coordination of related activities is enhanced  Activities should be dispersed when  They need to be performed close to buyers  Transportation costs, scale diseconomies, or trade barriers make centralization expensive  Buffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed

© Ram Mudambi, Temple University, Location and the value chain - 1 Where to locate activity X? Optimal location for X considered independently Importance of the links between X and other activities of the firm Costs and availability of inputs Trade policy Strengths and skills of the firm relative to the location Strategy of the firm – cost vs. differentiation advantages Relative importance of staff and line linkages

© Ram Mudambi, Temple University, Location and the value chain - 2 Identify  key activities in the value chain  principal requirements for each activity  possible locations which meet the requirements Final location decision must consider overall strategic objectives Activities dictate location Linkages dictate location

© Ram Mudambi, Temple University, Inputs MarketsValueAddedR&DKnowledge MarketingKnowledge VALUE CHAIN DISAGGREGATION Location 1Location 2Location 3Location 4 The Smile of Value Creation* * Mudambi, JIBS 2007 Vertically integrated firm

© Ram Mudambi, Temple University, Inputs Markets R&DKnowledge MarketingKnowledge VALUE CHAIN DISAGGREGATION Location 1Location 2Location 3Location 4 The Smile of Value Creation* * Mudambi, JIBS 2007 Rich Countries Rich Countries Rich Countries Rich Countries Poor Countries Poor Countries Intangibles Tangibles Services Manufacturing Catch-up Industry creation Industry creation Industry creation Industry creation

© Ram Mudambi, Temple University, Location Economics Pontiac LeMans Design Germany Parts Singapore Taiwan Japan Assembly South Korea Advertising The U.K. Sales The U.S.

© Ram Mudambi, Temple University, Caveats  The importance of linkages can be enhanced by  Transportation costs  Trade barriers  Political and economic risks  US firms have shifted production from Asia to Mexico due to  Low labor costs.  Proximity to U.S.  NAFTA.

© Ram Mudambi, Temple University, Concept: Profit sanctuaries?  Country markets where firm  Has a strong or protected market position and  Derives substantial profits  Generally, a firm’s most strategically crucial profit sanctuary is its home market Profit sanctuaries are a valuable competitive asset in global industries

© Ram Mudambi, Temple University, Concept: Cross-subsidization  Involves supporting competitive efforts in one market with resources/profits diverted from operations in other markets  Competitive power of cross-subsidization results from a global firm’s ability to  Charge lower prices or otherwise launch a strategic offensive to lure away a domestic firm’s customers and cover losses with profits earned in other critical markets

© Ram Mudambi, Temple University, Concept: Transfer-pricing  Prices charged by one unit of a multinational firm to a unit operating in another country.  Can be used to shift profits from one tax regime to another.  It is the means of operationalizing cross- subsidization.  Can be illegal if undertaken without reference to costs. Subs 1 Subs 2 Goods Payment MNC National Border

© Ram Mudambi, Temple University, MNCs Face Two Conflicting Pressures  Reduce costs  Be responsive to local needs  Examples?

© Ram Mudambi, Temple University, Four Basic Strategies Importance of Local Responsiveness Importance of Scale economies LowHigh Low High INTERNATIONALMULTI-DOMESTIC GLOBALTRANSNATIONAL Late 19 th century European firms Post WW2 US firms Most modern knowledge- intensive multinationals

© Ram Mudambi, Temple University, International Strategy  Go where locals don’t have your skills  Little adaptation. Products developed at home (centralization)  Can be a pure export strategy  Marketing in each location  If local manufacture, usually low-skill assembly  Makes sense where low skills, competition, and costs exist

© Ram Mudambi, Temple University, International Strategy MNC Parent Subsidiaries Pre-dominant Knowledge flow – Parent to subsidiary Minimal local adaptation

© Ram Mudambi, Temple University, Multi-domestic Strategy  High level of local autonomy  Maximize local responsiveness.  Customize the product and marketing strategy to national demands.  Skill and product transfer  Transfer all value-creation activities, no experience curve rewards

© Ram Mudambi, Temple University, Multi-domestic Strategy MNC Parent Subsidiaries Knowledge flows – Parent to subsidiary Very strong local influences

© Ram Mudambi, Temple University, Global Strategy  Theodore Levitt, HBS professor in the ’60s  Best use of the experience curve and location economies  This is the low cost strategy  Utilize product standardization.  Not good where local responsiveness demand is high

© Ram Mudambi, Temple University, Global Strategy MNC Parent Subsidiaries Pre-dominant Knowledge flow – Parent to subsidiary Virtually no local adaptation

© Ram Mudambi, Temple University, Transnational Strategy  Christopher Bartlett and Sumantra Ghoshal  Core competencies can develop in any of the firm’s worldwide operations.  Flow of skills and product offerings occurs throughout the firm - not only from home firm to foreign subsidiary (global learning).  Makes sense where there is pressure for both cost reduction and local responsiveness.

© Ram Mudambi, Temple University, Transnational Strategy MNC Parent Subsidiaries Knowledge flows – Parent to subsidiary Subsidiary to parent Subsidiary to subsidiary Considerable local influences

© Ram Mudambi, Temple University, Linkages are least important in Linkages are most important in MULTI-DOMESTIC STRATEGY TRANSNATIONAL STRATEGY

© Ram Mudambi, Temple University, Characterizing linkages – The source-target specification HomeHost Numeraire knowledge flow (from parent to subsidiary) Learning Spillovers Knowledge transfer 1 2 3

© Ram Mudambi, Temple University, The Evolution of Strategy

© Ram Mudambi, Temple University, The Advantages and Disadvantages of the Four Strategies StrategyAdvantagesDisadvantages GlobalExploit experience curve effects Exploit location economies Lack of local responsiveness International Transfer distinctive competencies to Foreign Markets Lack of local responsiveness Inability to realize location economies Failure to exploit experience curve effects

© Ram Mudambi, Temple University, The Advantages and Disadvantages of the Four Strategies StrategyAdvantagesDisadvantages Multi-domestic Customize product offerings and marketing in accordance with local responsiveness Inability to realize location economies Failure to exploit experience curve effects Failure to transfer distinctive competencies to foreign markets Transnational Exploit experience curve effects Exploit location economies Customize product offerings and marketing in accordance with local responsiveness Reap benefits of global learning Difficult to implement due to organizational problems

© Ram Mudambi, Temple University, Takeaways  The motivation for competing internationally is based on gaining access to markets and/or assets  Location choice is driven by balancing the importance of activities and linkages in the value chain  Overall strategy is driven by balancing the importance of cost (scale economies) and local responsiveness