1. The Strategy of International Business
Chapter 11

2. Strategy and the Firm
‘Strategy’ comes from the Greek word strategos, the “art of the general”
It deals with the big questions in an organization.
Strategy can be defined as the actions that managers, especially top managers, take or plan to take to attain the goals of the firm
For most firms, the preeminent goal is to maximize the value of the firm for its owners
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. For example, by expanding into foreign markets,

3. Value Creation
The single most important way to increase profitability is to create more value for customers
The amount of value a firm creates is measured by the difference between its costs and the value that consumers perceive in its products

4. 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 () 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.4 In general, the higher the firm’s profit per unit sold is, the greater its profitability will be, all else being equal.
Figure 12.2, p. 410

5. Michael Porter argues that there are two basic strategies for creating value
Low-cost strategy suggests that a firm has high profits when it creates more value for its customers and does so at a lower cost
Differentiation strategy focuses primarily on increasing the attractiveness of a product (getting customers to think it’s different and better than competitors’)
This is an oversimplification, but it helps us think about the task of global management

6. Strategic Positioning
It is important for a firm to be explicit about its choice of strategic emphasis
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, which we shall review next.

7. Strategic Choice in the International Hotel Industry
Note these don’t include the possibility that you may do something really new.
The convex curve in Figure 12.3 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 in Figure 12.3 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.
Figure 12.3, p. 411
See text, Fig. 11 .3

9. Going global to increase profitability and Profit Growth
Expanding globally allows firms to increase profitability and rate of profit growth in ways not available to one-country enterprises
Expand the market

10. Realize “location economies” by dispersing value-creation activities
Do things where they make most sense
Clear Vision makes most of its eyeglass parts in China
Does assembly in Hong Kong
Has high-class design in Japan, France, Italy
This produces a global web of activities
Realize greater cost economies from experience effects

11. Bring skills learned abroad back to the home market
Hewlett-Packard learned total quality skills from its Singapore factory
Wal-Mart introduces wine departments in U.S. after developing them in Argentina
French McDonald’s invents the high class McDonald’s restaurant

13. Cost Pressures and Pressures for Local Responsiveness
Firms in the global marketplace face two common types of competitive pressure
Pressures for cost reductions
Pressures to be locally responsive
Figure 12.6, p. 422

14. Pressures for Cost Reductions
Competition in the global market forces prices lower
Pressures for cost reduction can be particularly intense in industries producing commodity-type products
products where most customers want something similar
where tastes and preferences of consumers in different nations are similar
Cost reduction pressures may also be intense
where major competitors are based in low-cost locations
where there is excess capacity
where customers are powerful and face low switching costs

15. Pressures for Local Responsiveness
Differences in consumer tastes & preferences
North American families like pickup trucks while in Europe they are viewed as a vehicle for businesses only
Differences in infrastructure & traditional practices
Consumer electrical system in North America is based on 110 volts; in Europe on 240 volts
Differences in distribution channels
Germany has a few retailers dominating the food market, while in Italy it is fragmented
Host-government demands
Health care system differences between countries require pharmaceutical firms to change operating procedures

16. Choosing a Strategy
How do differences in the strength of pressures for cost reductions versus those for local responsiveness affect the firm’s choice of strategy? Firms typical choose among four main strategic postures when competing internationally. These can be characterized as a global standardization strategy, a localization strategy, a transnational strategy, and an international strategy.31 The appropriateness of each strategy varies given the extent of pressures for cost reductions and local responsiveness. Figure 12.7 illustrates the conditions under which each of these strategies is most appropriate.
p.427

17. “International” Strategy
Create value by transferring valuable core competencies that indigenous competitors lack to foreign markets
Centralize product development functions at home
Head office exercises tight control
Limit customization of product offering
This is effective if firm faces weak pressures for local responsiveness and cost reductions
Starbucks

18. Localization Strategy
Main aim is maximum local responsiveness
Customize product offering, market strategy including production and R&D according to national conditions
Often unable to realize value from experience curve effects and location economies
High cost structure
Frito Lay

19. Global Standardization Strategy
Focus is on achieving low cost – cost reductions from experience curve effects and location economies
Production, marketing, and R&D concentrated in few favorable locations
Market standardized product to keep costs low
Effective where strong pressures for cost reductions and low demand for local responsiveness exist
Semiconductor industry - Intel

20. Transnational Strategy
To meet competition, firms aim to reduce costs, transfer core competencies and at the same time pay attention to pressures for local responsiveness
Global learning
Valuable skills can develop in any of the firm’s world wide operations
Transfer of knowledge from foreign subsidiary to home country, to other foreign subsidiaries
Transnational strategic management is difficult due to contradictory demands placed on the organization
Caterpillar

22. A common path of evolution of strategy
The big long-term problem of international strategic plans is that over time competitors inevitably emerge
An “international” strategy may not be viable in the long-term, so firms need to shift toward a global standardization strategy or a transnational strategy in advance of competitors
As competition intensifies
“International” and localization strategies tend to become less viable
A global standardization strategy becomes more possible
A transnational strategy remains difficult, but powerful if it works.

23. Avon

25. But… What products can a country’s firms successfully produce?
How do we know businesses we’re likely to succeed in internationally?
Come back after the break!