The Strategy of International Business Chapter 11

Strategy and the Firm ‘Strategy’ comes from the Greek word strategos, the “art of the general” It deals with the big questions in an organization. Strategy can be defined as the actions that managers, especially top managers, take or plan to take to attain the goals of the firm For most firms, the preeminent goal is to maximize the value of the firm for its owners 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. For example, by expanding into foreign markets,

Value Creation The single most important way to increase profitability is to create more value for customers The amount of value a firm creates is measured by the difference between its costs and the value that consumers perceive in its products

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 () 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.4 In general, the higher the firm’s profit per unit sold is, the greater its profitability will be, all else being equal. Figure 12.2, p. 410

Michael Porter argues that there are two basic strategies for creating value Low-cost strategy suggests that a firm has high profits when it creates more value for its customers and does so at a lower cost Differentiation strategy focuses primarily on increasing the attractiveness of a product (getting customers to think it’s different and better than competitors’) This is an oversimplification, but it helps us think about the task of global management

Strategic Positioning It is important for a firm to be explicit about its choice of strategic emphasis 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, which we shall review next.

Strategic Choice in the International Hotel Industry Note these don’t include the possibility that you may do something really new. The convex curve in Figure 12.3 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 in Figure 12.3 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. Figure 12.3, p. 411 See text, Fig. 11 .3

Going global to increase profitability and Profit Growth Expanding globally allows firms to increase profitability and rate of profit growth in ways not available to one-country enterprises Expand the market

Realize “location economies” by dispersing value-creation activities Do things where they make most sense Clear Vision makes most of its eyeglass parts in China Does assembly in Hong Kong Has high-class design in Japan, France, Italy This produces a global web of activities Realize greater cost economies from experience effects

Bring skills learned abroad back to the home market Hewlett-Packard learned total quality skills from its Singapore factory Wal-Mart introduces wine departments in U.S. after developing them in Argentina French McDonald’s invents the high class McDonald’s restaurant

Cost Pressures and Pressures for Local Responsiveness Firms in the global marketplace face two common types of competitive pressure Pressures for cost reductions Pressures to be locally responsive Figure 12.6, p. 422

Pressures for Cost Reductions Competition in the global market forces prices lower Pressures for cost reduction can be particularly intense in industries producing commodity-type products products where most customers want something similar where tastes and preferences of consumers in different nations are similar Cost reduction pressures may also be intense where major competitors are based in low-cost locations where there is excess capacity where customers are powerful and face low switching costs

Pressures for Local Responsiveness Differences in consumer tastes & preferences North American families like pickup trucks while in Europe they are viewed as a vehicle for businesses only Differences in infrastructure & traditional practices Consumer electrical system in North America is based on 110 volts; in Europe on 240 volts Differences in distribution channels Germany has a few retailers dominating the food market, while in Italy it is fragmented Host-government demands Health care system differences between countries require pharmaceutical firms to change operating procedures

Choosing a Strategy How do differences in the strength of pressures for cost reductions versus those for local responsiveness affect the firm’s choice of strategy? Firms typical choose among four main strategic postures when competing internationally. These can be characterized as a global standardization strategy, a localization strategy, a transnational strategy, and an international strategy.31 The appropriateness of each strategy varies given the extent of pressures for cost reductions and local responsiveness. Figure 12.7 illustrates the conditions under which each of these strategies is most appropriate. p.427

“International” Strategy Create value by transferring valuable core competencies that indigenous competitors lack to foreign markets Centralize product development functions at home Head office exercises tight control Limit customization of product offering This is effective if firm faces weak pressures for local responsiveness and cost reductions Starbucks

Localization Strategy Main aim is maximum local responsiveness Customize product offering, market strategy including production and R&D according to national conditions Often unable to realize value from experience curve effects and location economies High cost structure Frito Lay

Global Standardization Strategy Focus is on achieving low cost – cost reductions from experience curve effects and location economies Production, marketing, and R&D concentrated in few favorable locations Market standardized product to keep costs low Effective where strong pressures for cost reductions and low demand for local responsiveness exist Semiconductor industry - Intel

Transnational Strategy To meet competition, firms aim to reduce costs, transfer core competencies and at the same time pay attention to pressures for local responsiveness Global learning Valuable skills can develop in any of the firm’s world wide operations Transfer of knowledge from foreign subsidiary to home country, to other foreign subsidiaries Transnational strategic management is difficult due to contradictory demands placed on the organization Caterpillar

A common path of evolution of strategy The big long-term problem of international strategic plans is that over time competitors inevitably emerge An “international” strategy may not be viable in the long-term, so firms need to shift toward a global standardization strategy or a transnational strategy in advance of competitors As competition intensifies “International” and localization strategies tend to become less viable A global standardization strategy becomes more possible A transnational strategy remains difficult, but powerful if it works.

Avon

But… What products can a country’s firms successfully produce? How do we know businesses we’re likely to succeed in internationally? Come back after the break!