1. International Business 11e
By Charles W.L. Hill

2. The Strategy of International Business
Chapter 13
The Strategy of International Business

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
LO 13-1: Explain the concept of strategy.

4. What Is Strategy?
To increase profitability and profit growth, firms can
add value
lower costs
sell more in existing markets
expand internationally
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.

5. Determinants of Enterprise Value
What Is Strategy?
Determinants of Enterprise Value

6. How Is Value Created?
To increase profitability, a firm needs to create more value
The firm’s value creation is the difference between V (the price that the firm can charge for a product given competitive pressures) and C (the costs of producing that product)
a firm has high profits when it creates more value for its customers and does so at a lower cost

7. How Is Value Created? 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 (p) 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. In general, the higher the firm’s profit per unit sold is, the greater its profitability will be, all else being equal.

8. 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

9. 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.

10. Why Is Strategic Positioning Important?
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.

11. How Are a Firm’s Operations Configured?
A firm’s operations are like a value chain composed of a series of distinct value creation activities:
production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure
All of these activities must be managed effectively and be consistent with firm strategy

12. How Are a Firm’s Operations Configured?
Value creation activities can be categorized as
Primary activities
R&D
Production
marketing and sales
customer service
Support activities
information systems
logistics
human resources

13. How Are a Firm’s Operations Configured?
The Value Chain
The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities including production, marketing and sales, materials management, R&D, human resources, information systems, and the firm infrastructure. We can categorize these value creation activities, or operations, as primary activities and support activities (see Figure 13.4). If a firm is to implement its strategy efficiently and position itself on the efficiency frontier shown, it must manage these activities effectively and in a manner that is consistent with its strategy.

14. How Can Firms Increase Profits Through International Expansion?
International firms can
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
LO 13-2: Recognize how firms can profit by expanding globally.

15. How Can Firms Increase Profits Through International Expansion?
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

16. How Can Firms Leverage Their Products and Competencies?
Firms can increase growth by selling internationally goods or services developed at home
The success of firms that expand internationally depends on
the goods or services sold
the firm’s core competencies

17. How Can Firms Leverage Their Products and Competencies?
Core competencies - skills within the firm that competitors cannot easily match or imitate
can exist in any value creation activity
Core competencies allow firms to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible

18. Why Are Location Economies Important?
Location economies are 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

19. Why Are Location Economies Important?
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

20. 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
to get down the experience curve quickly, firms can use a single plant to serve global markets

21. 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

22. Why Are Experience Effects Important?
The Experience Curve

23. Why Are Experience Effects Important?
Economies of scale - the reductions in unit cost achieved by producing a large volume of a product
Sources of economies of scale include
spreading fixed costs over a large volume
utilizing production facilities more intensively
increasing bargaining power with suppliers

24. How Can Managers Leverage Subsidiary Skills?
Managers should
Recognize that valuable skills that could be applied elsewhere in the firm can arise anywhere within the firm’s global network - not just at the corporate center
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

25. What Types of Competitive Pressures Exist in the Global Marketplace?
Firms that compete in the global marketplace face two conflicting types of competitive pressures
the pressures limit the ability of firms to realize location economies and experience effects, leverage products, and transfer skills within the firm
Dealing with both pressures is challenging
LO 13-3: Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice.

26. What Types of Competitive Pressures Exist in the Global Marketplace?
Two 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
but, this strategy can raise costs

27. What Types of Competitive Pressures Exist in the Global Marketplace?
Pressures for Cost Reductions and Local Responsiveness

28. 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
When major competitors are based in low cost locations
Where there is persistent excess capacity
Where consumers are powerful and face low switching costs

29. When Are Pressures for Local Responsiveness Greatest?
Pressures for local responsiveness arise from
Differences in consumer tastes and preferences
strong pressure emerges when consumer tastes and preferences differ significantly between countries
Differences in traditional practices and infrastructure
strong pressure emerges when there are significant differences in infrastructure and/or traditional practices between countries
Management Focus: Local Responsiveness at MTV Networks describes MTV’s global strategy. Established in 1981, the U.S.-based TV network has been expanding outside of its North American base since 1987, when it opened MTV Europe. Interestingly, MTV has found that its global strategy has to be surprisingly local. Consumers in different markets, while enjoying some American programming, prefer to see their own local superstars.

30. When Are Pressures for Local Responsiveness Greatest?
Differences in distribution channels
need to be responsive to differences in distribution channels between countries
Host government demands
economic and political demands imposed by host country governments may require local responsiveness

31. 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
LO 13-4: Identify the different strategies for competing globally and their pros and cons.

32. Which Strategy Should a Firm Choose?
Four Basic Strategies
The Closing Case: Global Strategy Levers explores the five global strategy “levers,” or dimensions, that determine how local or global a company is on the international marketplace. The five levers are market participation, products/services, supply chain management, marketing, and competitive moves. A well-balanced approach to global competition requires paying relatively equal attention to each of these five dimensions, though businesses tend to emphasize one or two dimensions based on their organizational strengths and weaknesses.

33. Think Like a Manager
Imagine that you are the manager of a foreign subsidiary of a major U.S. apparel company. Consumer tastes in your location require a high degree of local responsiveness, while declining sales in the United States require significant cost reductions. Which of the four main strategic postures (global standardization, localization, transnational, or international) would you adopt to address these pressures? What advantages or disadvantages would that strategy provide?
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34. 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

35. 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

36. 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
Management Focus: Evolution of Strategy at Procter & Gamble explores the evolution of Procter & Gamble’s global strategy. In 1915, Procter & Gamble opened its first foreign operation in Canada. In the 1950s and 1960s, Procter & Gamble expanded into Western Europe, and then, in the 1970s, into Japan and other parts of Asia. Throughout this expansion, the company maintained all product development at its Cincinnati, Ohio headquarters, while each subsidiary took on the responsibility for manufacturing, marketing, and distributing the products. Procter & Gamble shifted its strategy in the 1990s, closing several foreign locations and moving to a more regional approach to global markets. More recently, the company implemented a business unit approach whereby different units are entirely responsible for generating profits for a product group.

37. 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

38. 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

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