Chapter 11: The Strategy of International BusinessINTRODUCTION In this chapter, we focus on the firm itself and, in particular, on the actions managers can take to compete more effectively as an international business.

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Chapter 11: The Strategy of International BusinessValue Creation The more value customers place on the firms products, the higher the price the firm can charge for those products The value created by a firm is measured by 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)

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Chapter 11: The Strategy of International BusinessOperations: The Firm as a Value Chain The firm 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 These value creation activities can be categorized as primary activities and support activities

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Primary and Support Activities

Source: From Strategic Management: Concepts and Cases, 13th edition, by J. Thomson and J. Strickland, p. 130. Copyright 2003. Reprinted by permission of the McGraw-Hill Companies.

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Chapter 11: The Strategy of International BusinessPrimary Activities The primary activities of a firm have to do with creating the product, marketing and delivering the product to buyers, and providing support and after-sale service to the buyers of the product Support Activities Support activities provide the inputs that allow the primary activities of production and marketing to occur11 - 5

Chapter 11: The Strategy of International BusinessGLOBAL EXPANSION, PROFITABILITY, AND PROFIT GROWTH Firms that operate internationally are able to: Expand the market for their domestic product offerings by selling those products in international markets Realize location economies by dispersing individual value creation activities to locations around the globe where they can be performed most efficiently and effectively Realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firms global network of operations

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Chapter 11: The Strategy of International BusinessExpanding the Market: Leveraging Products and Competencies A company can increase its growth rate by taking goods or services developed at home and selling them internationally The success of firms that expand in this manner is based not only on the goods or services they sell, but also on 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 in such a way that premium pricing is possible11 - 7

Chapter 11: The Strategy of International BusinessLocation Economies Firms can benefit by basing each value creation activity at that location where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity Firms that pursue such as strategy can realize location economies (the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be)11 - 8

Chapter 11: The Strategy of International BusinessExperience Effects The experience curve refers to the systematic reductions in production costs that have been observed to occur over the life of a product Learning Effects Learning effects are cost savings that come from learning by doing So, when labor productivity increases, individuals learn the most efficient ways to perform particular tasks, and management learns how to manage the new operation more efficiently

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Chapter 11: The Strategy of International BusinessEconomies of Scale Economies of scale refers to the reductions in unit cost achieved by producing a large volume of a product. Sources of economies of scale include: the ability to spread fixed costs over a large volume the ability of large firms to employ increasingly specialized equipment or personnel

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Chapter 11: The Strategy of International BusinessCreating a Global Web By taking advantage of location economies in different parts of the world, multinational firms create a global web of value creation activities Under this strategy, different stages of the value chain are dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized11 - 11

Chapter 11: The Strategy of International BusinessLeveraging Subsidiary Skills Managers must recognize that valuable skills that could be applied elsewhere in the firm can arise anywhere within the firms global network (not just at the corporate center) Managers must also establish an incentive system that encourages local employees to acquire new skills Summary Managers need to keep in mind the complex relationship between profitability and profit growth when making strategic decisions about pricing

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Chapter 11: The Strategy of International BusinessSome Caveats Introducing transportation costs and trade barriers complicates this picture Political risks must be assessed when making location decisions

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Chapter 11: The Strategy of International BusinessCOST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS Firms that compete in the global marketplace typically face two types of competitive pressures: pressures for cost reductions pressures to be locally responsive These pressures place conflicting demands on the firm.

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Chapter 11: The Strategy of International BusinessPressures for Cost Reductions 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 costs11 - 15

Chapter 11: The Strategy of International BusinessFirms facing pressures for cost reductions: must try to lower the costs of value creation by mass-producing a standard product at the optimal locations worldwide

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Chapter 11: The Strategy of International BusinessPressures for Local Responsiveness Pressures for local responsiveness arise from: differences in consumer tastes and preferences differences in traditional practices and infrastructure differences in distribution channels host government demands

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Chapter 11: The Strategy of International BusinessDifferences in Consumer Tastes and Preferences Strong pressures for local responsiveness emerge when consumer tastes and preferences differ significantly between countries Differences in Infrastructure and Traditional Practices Pressures for local responsiveness emerge when there are differences in infrastructure and/or traditional practices between countries11 - 18

Chapter 11: The Strategy of International BusinessDifferences in Distribution Channels A firm's marketing strategies may have to be responsive to differences in distribution channels between countries Host Government Demands Economic and political demands imposed by host country governments may necessitate a degree of local responsiveness

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Chapter 11: The Strategy of International BusinessCHOOSING A STRATEGY Firms use four basic strategies to compete in the international environment: global standardization localization transnational international

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High Cost Reduction (Global Integration) Pressures

Global Standardization

Transnational Strategy

International Strategy Low Low

Localization Strategy

Local Responsiveness Pressures

High

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Chapter 11: The Strategy of International BusinessGlobal Standardization Strategy A global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies The strategic 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 minimal11 - 22

Chapter 11: The Strategy of International BusinessLocalization Strategy A localization strategy focuses on increasing profitability by customizing the firms goods or services so that they provide a good match to tastes and preferences in different national markets Localization is most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense

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Chapter 11: The Strategy of International BusinessTransnational Strategy A transnational strategy 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 foster a multidirectional flow of skills between different subsidiaries in the firms global network of operations A transnational strategy makes sense when cost pressures are intense, and simultaneously, so are pressures for local responsiveness.11 - 24

Chapter 11: The Strategy of International BusinessInternational Strategy An international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization When there are low cost pressures and low pressures for local responsiveness, an international strategy is appropriate

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Chapter 11: The Strategy of International BusinessThe Evolution of Strategy 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 Similarly, 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, and the only way to do that may be to shift toward a transnational strategy

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Chapter 11: The Strategy of International BusinessSTRATEGIC ALLIANCES Strategic alliances refer to cooperative agreements between potential or actual competitors

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Chapter 11: The Strategy of International BusinessThe Advantages of Strategic Alliances Strategic alliances: facilitate entry into a foreign market allow firms to share the fixed costs (and associated risks) of developing new products or processes bring together complementary skills and assets that neither partner could easily develop on its own

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Chapter 11: The Strategy of International BusinessThe Disadvantages of Strategic Alliances Strategic alliances can give competitors low-cost routes to new technology and markets, but unless a firm is careful, it can give away more than it receives

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Chapter 11: The Strategy of International BusinessMaking Alliances Work The success of an alliance seems to be a function of three main factors: partner selection alliance structure the manner in which the alliance is managed

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Chapter 11: The Strategy of International BusinessPartner Selection A good partner has three principal characteristics: a good partner helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values a good partner shares the firms vision for the purpose of the alliance a good partner is unlikely to try to opportunistically exploit the alliance for its own ends: that it, to expropriate the firms technological know-how while giving away little in return

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Chapter 11: The Strategy of International BusinessAlliance Structure Alliances can be designed to make it difficult to transfer technology not meant to be transferred Contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner Both parties can agree in advance to swap skills and technologies to ensure a chance for equitable gain The risk of opportunism by an alliance partner can be reduced if the firm extracts a significant credible commitment from its partner in advance11 - 33

Chapter 11: The Strategy of International BusinessManaging the Alliance Successfully managing an alliance requires managers from both companies to build interpersonal relationships A major determinant of how much a company gains from an alliance is its ability to learn from its alliance partners

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