International Business Fourth Edition

The Strategy of International Business CHAPTER 12 The Strategy of International Business

Chapter Focus Shifting focus from the international environment to the firm. Actions managers can take to compete more effectively. How firms can increase profitability by expanding to foreign markets. Different international strategies. Pros and cons of the strategies. Factors affecting strategic choice. Tactics.

Strategy and the Firm Profitability Rate of return concept; i.e. return on sales (ROS). ROS=/TR Profit () The difference between total revenue (TR) and total costs (TC): =TR-TC Value Creation Firm as Value Chain Role of Strategy Actions taken by managers to attain firm’s goals. Maximize Long-term profitability

Value Creation V - P P - C V P V - C C V = Consumer Value P = Market Price C = Cost of Production V-P = Consumer Surplus P-C = Profit Margin V-C = Value Added V - P P - C V - C V P C Figure 12-1

The Firm as a Value Chain Figure 12.2 Support Activities Company Infrastructure Information Systems Human Resources Materials Management R & D Production Marketing & Sales Service Primary Activities

The Role of Strategy Identifying and taking actions that will lower costs of value creation and/or differentiate the firm’s product offering through superior design, quality service, functionality, etc.

Profiting from Global Expansion Firms operating internationally are able to: Realize location economies. Realize greater cost economies. Earn a greater return from the firm’s distinctive skills or core competencies. Earn a greater return by leveraging valuable skills developed in foreign operations and transferring them to the firm’s other operations. Profitability is constrained by product customization and the “imperative of localization”.

Location Economies Pontiac LeMans Creating a Global Web Assembly Parts Sales Design Advertising Parts Pontiac LeMans Parts

Caveats Needs for consideration: Transportation costs. Trade barriers. Low labor costs. Proximity to U.S. NAFTA. Needs for consideration: Transportation costs. Trade barriers. Political risks. Economic risks.

Experience Curve Learning effects: Economies of Scale: Cost savings that come from “learning by doing.” More significant in complex tasks. Decline then cease after two years. Decline after this point comes from economies of scale. Economies of Scale: Reduction in unit cost achieved through volume production. Sources: Spread fixed costs over volume. Employing specialized equipment or personnel.

The Experience Curve Strategic Significance Figure 12.3 B A Accumulated Output Unit Costs Strategic Significance Moving down the curve reduces the cost of creating value.

Leveraging Core Competencies Firm skills that competitors can not easily match or imitate. Skills and products are most unique. Value placed by consumers is great. Few capable competitors with skills or products. Value greatest when:

Leveraging Subsidiary Skills New Challenges Humility to recognize valuable skills can come from anywhere. Establish incentives to encourage local employees to acquire new skills. Need a process to identify new skill development. Need to facilitate transfer of new skills within the firm. Skills can be created anywhere in a multinational’s global operations network.

Pressures for Cost Reduction and Local Responsiveness Company A Company C High Cost pressures Low Generally reflects the position of most companies Company B Low High Figure 12.4 Pressures for local responsiveness

Local responsiveness Arise from: Cost Reduction Mass producing a standardized product at an optimal location. Intense: in commodity industries. Where competitors are in low cost locations. Where there is persistent excess capacity. Where there are low switching costs. Because of greater international competition. Local responsiveness Arise from: Differences in consumer taste and preferences. Differences in infrastructure and traditional practices. Differences in distribution channels. Host government demands.

Local Responsiveness Taste and preference Distribution channels Delegate marketing to national subsidiaries. Delegate manufacturing and production to foreign subsidiaries. Delegate production and marketing to national subsidiaries Taste and preference Infrastructure And practice Distribution channels Manufacture locally. Host government

Four Basic Strategies High Cost pressures Low Low High Global Strategy Transnational Multi domestic International Pressures for local responsiveness Figure 12.5

Strategic Choices Transnational Exploit experienced based cost and location economies, transfer core competencies within the firm, and pay attention to local responsiveness needs. International create value by transferring skills to local markets where skills are not present. Multidomestic oriented toward achieving maximum local responsiveness. Global increase profitability through cost reductions from experience curve effects and location economies.

Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar High Cost pressures Low Caterpillar Tractor Figure 12.6 Low High Pressures for local responsiveness

The Advantages and Disadvantages of the Four Strategies Strategy Advantages Disadvantages Global Exploit experience curve effects Exploit location economies Lack of local responsiveness International Transfer distinctive competencies to Foreign Markets Inability to realize location economies Failure to exploit experience curve effects Table 12.1a

The Advantages and Disadvantages of the Four Strategies Strategy Advantages Disadvantages 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 Reap benefits of global learning Difficult to implement due to organizational problems Table 12.1