1. The Strategy of International Business
Chapter 13
The Strategy of International Business
By: Ms. Adina Malik (ALK)

2. Learning Objectives Explain the concept of strategy
Understand how firms can profit by expanding globally
Understand how pressures for cost reductions and local responsiveness influence strategic choices
Be familiar with different strategies for competing globally

3. 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

4. What is Strategy?

5. How is value created?
The firm’s value creation is the difference between V (the price that the firm can charge for that product given competitive pressures/value of a product to an average customer) and C (the costs of producing that product)

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
the higher the value customers place on a firm’s products, the higher the price the firm can charge for those products
Using a low cost strategy - lowering costs

7. Why Are Location Economies Important?
Location economies are the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be
By achieving location economies, firms can
lower the costs of value creation and achieve a low cost position
differentiate their product offering
Firms that take advantage of location economies in different parts of the world, 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
Comparative Advantage (India-IT service, China-apparel, US-biotechnology, financial services, computer software, Switzerland-pharmaceuticals, Japan-automobiles and consumer electronics, etc.)
So, if the best programmers are in Silicon Valley, then programming activities should be located there. If the best assembly operations are in Mexico, then locate assembly operations in Mexico. If the best designers are in France, then locate the designing activities in France. If the best marketers are in the US, formulate a marketing strategy there.

8. Why Are Location Economies Important?
Example of Global Web: Lenovo’s ThinkPad laptop computers
The product is designed in the US (basic design work)
The case, keyboard and hard drive are made in Thailand
Display screen and memory are made in South Korea
Built-in wireless card from Malaysia
Microprocessor from the US
Assemble operation in Mexico
Final sale in the US

9. Why Are Experience Effects Important?
The experience curve refers to the 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 and it is also strategically significant for companies to gain competitive advantage.
Two things explain this relationship: 1) Learning Effects and 2) Economies of Scale.
Another reason why firms might pursue an international expansion strategy is to take advantage of experience curve effects or systematic reductions in production costs that have been observed to occur over the life of a product.
Firms that can move down the experience curve the fastest will have a competitive advantage.
So, a firm will be motivated to produce, using a single plant to serve the global market, as a means of getting down the curve rapidly. Matsushita did this in the late 1970s and early 1980s. The company wanted to be the leader in the videocassette market, so it increased production substantially at a single location in Japan, and then served the world from this plant. Doing this, allowed Matsushita to drop its prices by half in just five years, and gain about 45 percent of the global market!

10. Why Are Experience Effects Important?
Learning effects are cost savings that come from learning by doing
When labor productivity increases
individuals learn the most efficient ways to perform particular tasks
managers learn how to manage the new operation more efficiently
Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product
So, for example, in the auto industry, a factory is efficient when it produces about 200,000 cars a year, preferably of the same model.
If domestic demand is not large enough to warrant this level of production, firms might still be able to achieve it by exporting cars to foreign markets.
Matsushita in Japan, in the early 1960s and late 1970s-to develop commercially viable video cassette recorder, alongside Sony and Philips

11. 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.

12. 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.
2. When major competitors are based in low cost locations, where there is persistent excess capacity and where consumers are powerful & face low switching costs.

13. 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 and less on advanced functions and features. But, consumers in Asia and Europe preferred text messaging and web browsing features.
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.

14. When Are Pressures For Local Responsiveness Greatest?
Pressures for local responsiveness arise from:
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.
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%.

15. When Are Pressures For Local Responsiveness Greatest?
Pressures for local responsiveness arise from:
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.

16. Which Strategy Should A Firm Choose?
There are four basic strategies to compete in international markets
the appropriateness of each strategy depends on the pressures for cost reduction and local responsiveness in the industry
Global Standardization, Localization, International and Transnational Business Strategy

17. Which Strategy Should A Firm Choose?

18. Which Strategy Should A Firm Choose?
1. 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
It makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal
Firms prefer to market standardized products or products which serve universal needs. This strategy is appropriate for industrial goods, not consumer goods.

19. Which Strategy Should A Firm Choose?
2. Localization - increase profitability by customizing goods or services so that they match tastes and preferences in different national markets
It makes sense when there are substantial differences across nations with regard to consumer tastes and preferences and when cost pressures are not too intense
E.g. US (pick-up trucks); Europe & Japan (small fuel efficient cars)

20. Which Strategy Should A Firm Choose?
3. International – take products first produced for the domestic market and sell them internationally with only minimal local customization
It makes sense when there are low cost pressures and low pressures for local responsiveness
E.g.: Xerox, Procter & Gamble, Microsoft

21. Which Strategy Should A Firm Choose?
4. Transnational - tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects, differentiate the product offering 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
It makes sense when cost pressures are intense and pressures for local responsiveness are intense.
This strategy is not easy to pursue as it places conflicting demands on the company.
E.g.: Ford, Caterpillar
Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.

22. 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’

23. How Does Strategy Evolve?