1. The Strategy of International Business Chapter 13

2. Can be defined as the actions that managers take to attain the goals of the firm. Strategy asks the question, How do competencies and capabilities help create and sustain competitive advantage? Strategy thus articulates the ways in which, the opportunities that are created by the firm’s capabilities, can be exploited. What is Strategy ?

3. Strategy in International Business International business strategy refers to plans that guide commercial transactions taking place between entities in different countries; often concerned with: Identifying and taking actions that will lower the cost of value creation. And/or Differentiate the firm’s product offering through superior design, quality, service, functionality and, so on.

4.  Goal of a firm: Maximize value  Increase long–term profitability (rate or return that the firm makes on its invested capital)  Increase profit growth (percentage increase in net profits over time)  Two basic conditions determine a firm’s profits: The amount of value customers place on the firms goods or services and the firm’s cost of Production.  Value Creation  Measured by the difference between Increased value and Low Cost.  Low cost & Differentiation (Value Creation) are 2 basic strategies to create value and attain competitive advantage (Michael Porter). Strategy and the Firm

5. Value Creation

6. The Strategic Positioning

7. The basic strategy paradigm to maximize its profitability 1. pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that choice 2.Configure its internal operations, such as manufacturing, marketing, logistics, information systems, human resources and so on, so that they support that position. 3.Make sure that the firm has the right organizational structure to execute its strategy. The strategy, operations (value creation activities) and organization of firm must be consistent with each other to attain competitive advantage and superior profitability.

8. The Value Chain

9. Global expansion, profitability and profit growth Firms operate internationally are able to: 1) Expand market for domestic product offerings by selling those products in international markets 2) Realize location economies by dispersing individual value creation activities to those locations around the globe where they can be performed most efficiently and effectively 3) Realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation 4) Earn a greater return by leveraging any valuable skills developing in foreign operations and transferring them to other entities within the firm’s global network of operations The Strategy of International Business

10. Global expansion, profitability and profit growth 1) Expanding market: leveraging products and competencies -companies increase growth rate by taking goods and services developed at home and selling them internationally (P&G, MS) -transfer core competence (firm-specific skills that competitors can not easily imitate) to foreign market that indigenous competitors lack (Toyota in car Production & Delivery, McDonald’s in fast food operations management) 2) Realize location economies -trade barriers and transportation costs permitting, the firm will benefit by basing each value creation activity at optimal location where economic, political, and cultural conditions, including relative factor costs, are most conductive to the performance of that activity (ClearVision) The Strategy of International Business

11. Global expansion, profitability and profit growth 3) Experience effects -systematic reductions in production costs over the product’s life by some quantity about each time cumulative output doubles - In Learning effects (cost savings from learning by doing), production costs decline due to increasing labor productivity and management efficiency and thereby increases firm’s profitability. The Strategy of International Business

12. Global expansion, profitability and profit growth 3) Experience effects cont.. -scale economies (reduction in unit cost achieved by producing a large volume of a product) have a number of sources: (i) Ability to spread fixed costs over large volume by selling worldwide. (ii) Firms may not attain efficient scale of production without serving global markets. (iii) With bigger enterprise size (due to global sale), bargaining power with suppliers increases and bargaining down the cost of key inputs and boosting profitability that way. -strategic significance is, serving a global market from a single (optimal) location allows to move down along the experience curve (as accumulated volume are built quickly) and establish low-cost position, the latter act as a barrier to new competition. eg-Matsushita over Sony and Philips The Strategy of International Business

13. Global expansion, profitability and profit growth 4) Leveraging subsidiary skills Creating and applying such skills to other operations within the firm’s global network may create value (McDonald’s in France). Managers of MNEs are: Managers should have the humility to recognize that valuable skills that lead to competencies can arise anywhere within the firm’s global network, not just at the corporate center. They must establish an incentive system that encourages local employees to acquire new skills-(most challenging part, risky & might not add value). Managers must have a process for indentifying when valuable new skills have been created in a subsidiary. They need to act as facilitators, helping transfer valuable skills within the firm. The Strategy of International Business

14. Pressure for Cost Reductions & Local responsiveness The Strategy of International Business

15. Pressure for Cost Reductions -Universal needs Pressure for Local Responsiveness Differences in Customer Tastes and Preferences ( Food taste, Culture) Differences in Infrastructure and Traditional Practices ( CDMA & GSM) Differences in Distribution Channel (Wholesale and Retail networks) Host Government Demands (Pharmaceutical example) Implications  Local responsiveness may work against low cost strategy. The Strategy of International Business

16. Choosing a Strategy The Strategy of International Business

17. Global Standardization strategy Focuses on low-cost strategy on a global scale Tend to increase profitability and profit growth by reaping cost reductions that come from scale economies, learning effects and location economies Market standardized product worldwide & cost advantage to support aggressive pricing Makes sense in serving universal needs & minimal local responsiveness. Eg-Intel, Motorola The Strategy of International Business

18. Localization strategy Focuses on increasing profitability by customizing goods & services according to local tastes and preferences Tend to raise profitability and profit growth by value creations Makes sense if added value associated with local customization supports higher pricing OR if it leads to substantial local demand (thereby reducing cost by attaining cost economies in local market). Eg- Unilever The Strategy of International Business

19. Transnational strategy Fits best if divergent pressures for both cost reduction & local responsiveness are high Bartlett and Ghosal pointed, core competencies may reside in worldwide operations-so, the flow of skills and product offerings should be -from home country to foreign subsidiary -from foreign subsidiary to home country - from foreign subsidiary to foreign subsidiary Focuses on leveraging subsidiary skills & fosters multidimensional flow of skills Tend to raise profitability and profit growth by value creations-by simultaneously achieving low costs & differentiate product offerings- but difficult to implement Eg-Caterpillar vs Komatsu or Hitachi The Strategy of International Business

20. International strategy Fits best when pressure for neither low-cost nor local responsiveness is present. Producing at domestic market and selling internationally with minimal local customization but they are different from global standardizations strategy, as there is no pressure from competitors or cost reduction Tend to centralize their R&D at home, establish manufacturing & marketing functions in each major region (this duplication raise costs but not an issue for such firm which low pressure of cost reduction) and undertake limited local customization of product offerings & marketing strategies Eg-Xerox photocopier (initial phase) or Microsoft; P&G The Strategy of International Business

21. Assessing Multinational Enterprise’s mentality 1. International/Multinational Firms: Focus still on domestic market 2. Localization/Multinational Firms: Low coordination among units; high degree of national responsiveness. 3. Global/Multinational Firms: Centralised control and coordination; common set of strategies worldwide, treats world as one market. 4. Transnational/Multinational Firms: Attempt to balance global integration and local responsiveness.

22. International Firms HO SBU

23. Localization/Multinational Firms HO SBU

24. Global Standardization Firms HO SBU

25. Transnational Firms HO SBU

26. Strategic Choices International Strategy Tries to create value by transferring valuable skills and products to foreign markets. Centralize product development functions at home Multidomestic Strategy Extensively customize both their product offering and their marketing strategies to match different national conditions. Global Strategy Prefer to market a standardize product worldwide so they can reap the maximum benefits from economies of scale. Transnational Strategy They must transfer core competencies within the firms and also pay attention to pressures for local responsiveness.

27. The Advantage and Disadvantage of the four strategies StrategyAdvantageDisadvantage Global  Exploit location economies.  Exploit experience curve effects.  Lack of local responsiveness. International  Transfer core competencies to foreign markets.  Lack of local responsiveness.  Inability to realize location economies.  Failure to exploit experience curve effects. Localization  Customize product offerings and marketing in accordance with local responsiveness.  Inability to realize location economies.  Failure to transfer core competencies to foreign markets. Transnational  Exploit location economies  Exploit experience curve effects.  Customize product offerings and marketing in accordance with local responsiveness.  Reap benefits of global learning.  Difficult to implement due to organizational problem.

28. The evaluation of strategy As competitors emerge, International or Localization strategy becomes less viable An international strategy may not be viable in the long term, and to survive, firms need to shift toward a global standardization strategy or a transnational strategy in advance of competitors Localization may give a firm a competitive edge, but if it is simultaneously facing aggressive competitors, the company will also have to reduce its cost structure, and the only way to do that may be to shift toward a transnational strategy The Strategy of International Business