1. The Strategy of International Business
Chapter 13
The Strategy of International Business
Md. Afnan Hossain
Lecturer, School of Business & Economics

2. 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
Return on its invested capital (ROIC) – Dividing the net profits of the firm by total invested capital.
Product/Market Expansion Grid.
Managers can increase the profitability of the firm by pursuing strategies
add value
lower costs
sell more products in existing markets
Enter new markets

3. Determinants of Enterprise Value
Strategy And The Firm
Determinants of Enterprise Value
Determinants of Enterprise Value

4. How Is Value Created?
To increase profitability, firms need to create more value
The firm’s value creation is the difference between V (value of product to an average consumer) and C (cost of production per unit)
a firm has high profits when it creates more value for its customers and does so at a lower cost.

5. Value Creation

6. 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
Using a low cost strategy
lowering costs

7. 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
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
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.

8. Strategic Positioning
Strategic Choice in the International Hotel Industry
The convex curve 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 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.

9. How Are A Firm’s Operations Configured?
A value chain composed of a series of distinct value creation activities.
Value creation activities can be categorized as:
Primary activities
R&D
Production
marketing and sales
customer service
Support activities
information systems
logistics
human resources

10. Primary Activities
Activities related to the design, creation and delivery of the product
R&D is concerned with the design of products and production processes.
R&D may result in more efficient productions processes
The production activity of a firm creates value by performing its activities efficiently to lower costs and producing higher-quality product
Marketing can also create value by identifying customer needs and communicating them back to the R&D function of the company
Through brand positioning and advertising, the marketing function can increase the value that customers perceive in a firm’s product.
The role of service activity is to provide after-sale service and support. This can create a perception of superior value in the minds of customers

11. Support Activities
Support activities provide inputs that allow primary activities to occur
Information systems, when coupled with the communications features of the Internet, can alter the efficiency and effectiveness with which a firm manages its other value creation activities.
The final support activity is the company infrastructure, or the context within which all the other value creation activities occur. The infrastructure includes organizational structure, control systems and culture of the firm.
The logistics function controls the transmission of physical materials through the value chain, form procurement through production and into distribution.
The HR function ensures that the company has the right mix of skilled people to perform its value creation activities effectively.
ensures that people are adequately trained, motivated and compensated to perform their value creation tasks.

12. Global Expansion Profitability & Profit Growth
Firms that operate internationally are able to:
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

13. Expand The Market
Firms can increase international growth by selling goods or services that developed at home. The success of firms that expand internationally depends on - the goods or services sold - the firm’s core competencies Core competencies - skills within the firm that competitors cannot easily match or imitate Core competencies allow firms to reduce the costs of value creation and to create perceived value so that premium pricing is possible

14. Location Economies
Economies that arise from performing a value creation activity in the optimal location for that activity
By achieving location economies, firms can
lower the costs of value creation and achieve a low cost position
differentiate their product offering
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 (Example of Lenovo on pg. 388)

15. Experience Effects
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 & firms can use a single plant to serve global markets
Economies of scale - the reductions in unit cost achieved by producing a large volume of a product
Learning effects - are cost savings that come from learning by doing
When labour productivity increases
individuals learn the most efficient ways to perform particular tasks
managers learn how to manage the new operation more efficiently

16. Greater Return: Leveraging Subsidiary Skills
Skills can be created anywhere within a multinational’s global network of operations
Managers must have the humility to recognize that valuable skills can arise anywhere within the firm’s global network, not just the corporate centre
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

17. 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
There are national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions and government policies. 17

18. What Types Of Competitive Pressures Exist In The Global Marketplace?

19. 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.

20. 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. 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. 20

21. 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.

22. Which Strategy Should A Firm Choose?
There are four basic strategies to compete in international markets
1. Global standardization
2. Localization
3. International
4. Transnational
The appropriateness of each strategy depends on the pressures for cost reduction and local responsiveness in the industry
LO4: Identify the different strategies for competing globally and their pros and cons.

23. Which Strategy Should A Firm Choose?
Four Basic Strategies
The Case: Avon Products explores the competitive pressures Avon felt in the company, which relies on foreign sales for a significant portion of its overall earnings, was forced to implement a new strategy that emphasized the costs savings associated with global products. Avon’s new strategy was a success.

24. Which Strategy Should A Firm Choose?
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
This strategy makes sense when
there are strong pressures for cost reductions and demands for local responsiveness are minimal

25. Which Strategy Should A Firm Choose?
Localization - increase profitability by customizing goods or services so that they match tastes and preferences in different national markets
This strategy makes sense when
there are substantial differences across nations with regard to consumer tastes and preferences and cost pressures are not too intense

26. Which Strategy Should A Firm Choose?
Transnational - tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects
firms differentiate their product 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
This strategy makes sense when
both cost pressures and pressures for local responsiveness are intense

27. Which Strategy Should A Firm Choose?
International – take products first produced for the domestic market and sell them internationally with only minimal local customization
This strategy makes sense when
there are low cost pressures and low pressures for local responsiveness

28. 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

29. How Does Strategy Evolve?
Changes in Strategy over Time