1. International Business An Asian PerspectiveBy
Charles W.L. Hill
Chow-Hou Wee
Krishna Udayasankar
Welcome to International Business, An Asian Perspective, by Charles W.L. Hill, Chow-Hou Wee and Krishna Udayasankar

2. The Strategy of International Business
Chapter 12
The Strategy of International Business
Chapter 12: The Strategy of International Business
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

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
To increase profitability and profit growth , firms can
add value
lower costs
sell more in existing markets
expand internationally
When you think about strategy, you focus on the firm itself, and the actions managers take to compete more effectively in international markets.
Why for example, did MTV originally try to use its American format and programming in foreign markets, and then change to a more localized strategy?
Let’s start our discussion with some basic definitions, then we’ll look at the strategies firms use and what factors might affect the choice of strategy.
A firm’s strategy can be defined as the actions that managers take to attain the goals of the firm.
Profitability is the rate of return the firm makes on its invested capital, while profit growth is the percentage increase in net profits over time.
You already know that shareholders expect high profitability and high profit growth.
So, how can managers achieve those goals?

4. Determinants of Enterprise Value
What Is Strategy?
Determinants of Enterprise Value
Here you can see the determinants of enterprise value.

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) and C (the costs of producing that product)
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
Firm can achieve higher profitability and higher profit growth rates through value creation.
The more customers value a product, the more they’ll be willing to pay for it!
So, we say that the value created by a firm is measured by the difference between what it can charge for the product given the competitive environment, and the cost of producing the product.
How can a firm increase profits?
Firms can increase their profits by adding value to a product so that customers are willing to pay more for it, or by lowering their costs.
The strategies used by firms are the differentiation strategy where the focus is on increasing the attractiveness of the product, and through a low cost strategy where the focus is on lowering costs.
You can probably think of countless products that are differentiated.
Take the soft drink industry for example. You can buy cola with caffeine, without caffeine, with sugar or with sugar substitutes, with lemon flavoring, or cherry flavoring, and so on.
In contrast, companies like Air Asia, rather than offering extra frills, are focused on providing a service at a lower cost than competitors, and so it flies to smaller airports that have lower costs as a means of keeping prices low.

6. How Is Value Created? Value Creation
In this figure, you can seen an illustration of value creation.

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
For a firm to maximize its profitability it has to pick a viable point on the efficiency frontier where there is enough demand, then the firm has to configure its internal operations to support that position, and it has to put the right type of organizational structure in place to implement the strategy.
In other words, because the Four Seasons hotel chain has positioned itself as a luxury chain, its costs are higher than a Marriott which is positioned as a mid-level hotel.
So, the Four Seasons hotel must be able to charge a higher price, and customers must see the added value they’re getting, in order to justify the price.

8. Why Is Strategic Positioning Important?
Strategic Choice in the International Hotel Industry
In this figure, you can see the strategic choices in the international hotel industry.

9. How Are A Firm’s Operations Configured?
A firm’s operations can be thought of a value chain composed of a series of distinct value creation activities including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure
Value creation activities can be categorized as
Primary activities
R&D, production, marketing and sales, customer service
Support activities
information systems, logistics, human resources
You can think of the firm as a value chain composed of distinct value creation activities like production, marketing, materials management, R&D, human resources, and so on. Each of these activities has to be managed efficiently.
We can categorize these activities as primary activities and support activities.
Primary activities are those that involve creating the product, marketing and delivering it to buyers, and providing support and after-sales service to customers.
Usually we divide primary activities into four functions, R&D, production, marketing and sales, and customer service.
Support activities are just what you’d think, activities that allow the primary activities to occur. They include things like information systems that manage inventory or track sales, logistics, and human resources.
While you might think they’re not as important as primary activities, in fact they are! Without support activities, Dell Computer for example, would be lost!

10. How Are A Firm’s Operations Configured?
The Value Chain
Here you can see the different parts of the value chain.

11. 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
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
Why do firms go global? What does global expansion offer to firms?
Well, there are many benefits of expanding internationally.
Firms that operate internationally expand the market for their products, realize location economies by locating value creation activities where they can be performed most efficiently, realize greater cost economies from experience effects, and earn a greater return by leveraging skills developed in foreign markets by transferring them to other parts of the organization.
Let’s look at these benefits more closely.

12. How Can Firms Leverage Their Products And Competencies?
Firms can increase growth by selling goods or services developed at home internationally
The success of firms that expand internationally depends on
the goods or services they sell
their core competencies - skills within the firm that competitors cannot easily match or imitate
core competencies enable the firm to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible
Most multinationals that sell in global markets began their international expansion by taking products that were developed for the home market and selling them in foreign markets.
Procter and Gamble for example, developed Pampers for the U.S. market, but then found a market for them in other parts of the world.
How well a company can do this depends not only on what it’s selling, but also on its core competencies or skills within the firm that competitors can’t easily match or duplicate.
These core competencies are the basis for competitive advantage because they enable the firm to reduce the costs of value creation, or create value in a way that justifies premium pricing.
McDonald’s for example, has a core competence in managing fast-food operations that has allowed it to set up shop in more than 120 countries, and rely on the foreign markets for more than half its revenues!
Toyota has a core competence in the production of cars.

13. 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
What are location economies and why are they important?
Location economies come from performing value creation activities in the optimal location for that activity, wherever in the world that might be.
You already know from earlier chapters that countries differ in terms of economic, political, legal, and cultural factors.
What firms have to do is identify where each value creation should be located to best take advantage of location economies.
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 in Mexico, and so on.
By locating value creation activities in their optimal locations, firms will either lower the costs of value creation which can help them achieve a low cost position, or firms will be able to differentiate their product from others.
Firms that are able to take advantage of location economies in different parts of the world, create a global web of value creation activities where different stages of the value chain are dispersed to those locations where perceived value is maximized or where the costs of value creation are minimized.

14. 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
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
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.
Moving down the experience curve is also strategically significant for companies.
By doing this, companies can lower their costs of creating value. 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!
Similarly, firms pursue learning effects or the cost savings that come from learning by doing.
For example, when labor productivity increases, employees learn the most efficient ways to perform tasks, and managers learn how to manage operations more efficiently.

15. Why Are Experience Effects Important?
The Experience Curve
Here you can see the experience curve relationship between unit production costs and cumulative output.

16. Why Are Experience Effects Important?
Economies of scale refer to 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
Economies of scale, reductions in unit costs that are achieved by producing in large volumes, can also be a reason to expand internationally.
Companies that achieve economies of scale are able to spread fixed costs over large volumes and/or use specialized equipment or personnel.
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.

17. 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
Finally, it’s important for managers to recognize that skills developed in the home market can be transferred to other markets like MTV did when it transferred its format to other markets, and valuable skills can be developed elsewhere in the firm and be transferred to the corporate office.
McDonald’s for example, has found that its foreign stores often have ideas that can be incorporated elsewhere in the organization.
In France for example, slow sales recently prompted a shift toward a more inviting atmosphere with an upgraded menu.
The company is currently considering using this format at other locations where sales are sluggish.

18. 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
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
Firms that compete internationally face two types of competitive pressures, pressure for cost reductions and pressures to be locally responsive. Unfortunately, these pressures usually place conflicting demands on the company!
For example, in the highly competitive cell phone market, Americans consumers tend to focus on design elements while European and Asian consumer focus on functions and features. This means that companies must keep costs low, while at the same time absorb the costs of designing phones that meet the demands of individual markets.
When companies face pressure for local responsiveness, they incur the costs of differentiating their products or strategies.

19. What Types Of Competitive Pressures Exist In The Global Marketplace?
Pressures for Cost Reductions and Local Responsiveness
As you can see, some firms face high pressure for cost reductions while others face high pressure for local responsiveness. Some unlucky companies face pressures for cost reductions and local responsiveness simultaneously. Dealing with these pressures can be a strategic nightmare for companies!

20. 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
Where are pressures for cost reductions greatest?
This type of pressure is usually greatest in industries that produce commodity type products that fill universal needs like steel, when major competitors are based in low cost locations, where excess capacity is persistent, and where consumers are powerful and face low switching costs.
When a firm faces pressures for cost reductions, it has to try to lower the cost of value creation.
Firms can try to lower costs by mass-producing standardized products at optimal locations, or outsourcing to low-cost suppliers.
Many companies have outsourced their call centers to India for example, to take advantage of lower wage costs.
In fact, wages in 2007 at Indian call centers were so low compared to American call centers that companies were able to offer additional benefits like subsidized food and tuition assistance.

21. 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
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
Where does pressure for local responsiveness come from?
Pressures for local responsiveness come from differences in consumer tastes and preferences, differences in traditional practices and infrastructure, differences in distribution channels, and demands from host governments. Let’s talk about how each of these can affect the firm.
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.
Similarly, differences in infrastructure and traditional practices between countries can force companies to adapt their strategies.
If you’ve ever traveled to Europe for example, you’ve probably encountered different voltage requirements. These differences of course, would require companies to sell products designed to meet the voltage requirements in each country.
Differences in distribution channels also prompt companies to change.
In Brazil for example, about 36 percent of food retailing takes place through supermarkets.
In Russia, supermarket sales account for less than 1 percent of food retailing!
Finally, companies may be required by host governments to be locally responsive.
In the U.S. for example, pharmaceuticals have to go through FDA testing, and food products have to be labeled with nutrition information.

22. 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 - 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
makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal
Localization - increase profitability by customizing goods or services so that they match tastes and preferences in different national markets
makes sense when there are substantial differences across nations with regard to consumer tastes and preferences and when cost pressures are not too intense
So, given these conflicting pressures, how should companies compete in foreign markets? Well, there are four basic strategies, global standardization, localization, transnational, and international.
Each strategy makes sense in certain situations depending on which pressures a firm is facing.
Let’s look at each one more closely.
The global standardization strategy focuses on increasing profitability and profit growth by capitalizing on the cost reductions that come from economies of scale, learning effects, and location economies.
When should firms pursue global standardization?
This strategy makes sense when pressure is high for cost reductions, but low for local responsiveness.
The goal is to pursue a low cost strategy on a global scale, so firms pursuing this type of strategy usually locate in a few optimal locations and produce standardized products.
Can you think of any firms that might use global standardization?
Motorola, Texas Instruments, and Intel all fit the profile.
The localization strategy focuses on increasing profitability by customizing the firm’s goods to meet the needs and preferences of the local market.
When should firms use a localization strategy?
This strategy is appropriate when consumer tastes are substantially different between countries, and pressures for cost reductions are low.
Firms using a localization strategy increase the value of their product to the local market by better meeting local needs.
Since, costs pressures are low, the additional costs that come with customization don’t present a problem.
MTV followed this type of strategy.

23. Which Strategy Should A Firm Choose?
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
makes sense when cost pressures are intense and pressures for local responsiveness are intense
International – take products first produced for the domestic market and sell them internationally with only minimal local customization
makes sense when there are low cost pressures and low pressures for local responsiveness
The transnational strategy tries to simultaneously meet demand for low costs by focusing on location economies, economies of scale, and learning effects, while at the same time, differentiates the product to meet the needs of individual markets.
In addition, a transnational strategy fosters a multidirectional flow of skills between the subsidiaries within the firm’s global network.
When does a transnational strategy makes sense? As you’ve probably already guessed, the transnational strategy makes sense when a firm is facing both types of pressures.
As you might expect, this type of strategy can be very difficult to implement as companies like Ford have found out.
One company that has been successful with this type of strategy is Caterpillar.
Finally, the international strategy involves taking products that were initially produced for the domestic market and then selling them internationally.
When does the international strategy make sense?
This type of strategy works when pressure is low for both cost reduction and local responsiveness.
Procter and Gamble has used this strategy and so has Microsoft.
You can read more about Procter and Gamble in the Management Focus in your text.

24. Which Strategy Should A Firm Choose?
Four Basic Strategies
Here you can see the four basic strategic alternatives.

25. 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
Keep in mind that strategy is not static.
Instead, we think of strategy as evolving over time.
A firm may start out using an international strategy, but then find that it has to shift to a global standardization strategy or transnational strategy as competition increases. Similarly, a localization strategy might initially give a firm a competitive advantage, but competition might also put pressure on price prompting the company to move to a transnational strategy.

26. How Does Strategy Evolve?
Changes in Strategy over Time
Here you can see the evolutionary process of strategy.

27. Review Question What is the rate of return the firm makes on
its invested capital?
a) Profit growth
b) Profitability
c) Net return
d) Value created
Now, let’s see how well you understand the material in this chapter. I’ll ask you a few questions. See if you can get them right. Ready?
What is the rate of return the firm makes on its invested capital?
a) Profit growth
b) Profitability
c) Net return
d) Value created
The answer is b.

28. Review Question Which of the following is not an example of a
primary activity?
a) Logistics
b) Marketing and sales
c) Customer service
d) Production
Which of the following is not an example of a primary activity?
a) Logistics
b) Marketing and sales
c) Customer service
d) Production
The answer is a.

29. Review Question What is created when different stages of a
value chain are dispersed to locations where value
added is maximized or where the costs of value
creation are minimized?
a) Experience effects
b) Learning effects
c) Economies of scale
d) A global web
What is created when different stages of a value chain are dispersed to locations where value added is maximized or where the costs of value creation are minimized?
a) Experience effects
b) Learning effects
c) Economies of scale
d) A global web
The answer is d.

30. Review Question Which of the following is not a pressure for
local responsiveness?
a) Excess capacity
b) Host government demands
c) Differences in consumer tastes and preferences
d) Differences in distribution channels
Which of the following is not a pressure for local responsiveness?
a) Excess capacity
b) Host government demands
c) Differences in consumer tastes and preferences
d) Differences in distribution channels
The answer is a.

31. Review Question Which strategy tries to simultaneously achieve low
costs through location economies, economies of
scale, and learning effects, and differentiate the
product offering across geographic markets to account for
local differences?
a) Internationalization
b) Localization
c) Global standardization
d) Transnational
Which strategy tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects, and differentiate the product offering across geographic markets to account for local differences?
a) Internationalization
b) Localization
c) Global standardization
d) Transnational
The answer is d.

32. Review Question Which strategy makes sense when pressures
are high for local responsiveness, but low for
cost reductions?
a) Global standardization strategy
b) International strategy
c) Transnational strategy
d) Localization strategy
Which strategy makes sense when pressures are high for local responsiveness, but low for cost reductions?
a) Global standardization strategy
b) International strategy
c) Transnational strategy
d) Localization strategy
The answer is d.