IBG - The Strategy of International Business

8/10/2019 IBG - The Strategy of International Business

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The Strategy of

International Business


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Overview

Strategy and the firm Drivers of cost reduction Cost pressure and pressure for local

responsiveness Choosing a strategy Strategic alliances

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Maximise Profit

To maximize the value of a firm, managers must pursuestrategies that increase the profitability of the enterpriseand its rate of profit growth over time.

Profitability can be defined as the rate of return the firmmakes on its invested capital .

Profit growth is the percentage increase in net profits

over time.

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Determinants of Value

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A Marketing Strategy and the Firm

So in the framework: Firms can increasetheir profits by: adding value to a productso that customers are willing to paymore for itlowering the costs

And thus there are two basic strategiesfor improving a firms profitability: a

differentiation strategya low cost strategy

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Value Creation

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Strategic Choice

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Value Chain

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Benefits of Global Expansion

Earn greater return from distinctive skills, corecompetences Inimitable or difficult to imitate skills in value

chain

Realize location economies Choice of FDI location Create multinational network of activities

(global web)

Realize greater experience curve economies,which reduce the cost of value creation Learning effects, economies of scale

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Drivers of cost reduction

Learning curve Economies of scale

Economies of scope

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(1)Months

(2)Output per

month

(3)Accumulated

Output

(4)TotalCosts

(5)Average Labour

Cost per unit

1 1 1 250 250.02 2 3 500 166.7

3 3 6 750 125.04 4 10 1,000 100.05 4.5 14.5 1,250 86.26 5.5 20 1,500 75.0

7 6 26 1,750 67.38 6.5 32.5 2,000 61.59 7.5 40 2,250 56.3


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U-Shaped Average Cost Curve


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L-Shaped Cost Curve

In reality, cost curves are closer to being L-shaped than U-shaped (Johnston)

Large firms are rarely at a costdisadvantage relative to smaller firms

A minimum efficient size (MES) beyondwhich average costs are identical acrossfirms


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L-Shaped Cost Curve


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Some Sources of Economies ofScale/Scope

Spreading of fixed costs Increased productivity of variable inputs

Saving on inventories The cube-square rule


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Fixed Costs

Indivisibilities : Certain inputs can not bescaled down below a minimum

Indivisibilities lead to fixed costs and thus

economies of scale and scope Scale and scope economies may obtain at

various levels Product level Plant level Multi plant level


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Product Specific Fixed Costs

Research and development Specialized equipment for production Set up costs for production Training expenses


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Economies of Scale andSpecialization

The division of labor is limited to the extentof the market

As markets increase in size, economies ofscale enables specialization

Larger markets support an array ofspecialized activities


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Inventories

Firms carry inventory to avoid stock-outs In addition to lost sales, stock-outs can

adversely affect customer loyalty

Bigger firms can afford to keep smallerinventories (relative to sales volume)compared with smaller firms


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Cube-Square Rule

Doubling the diameter of a hollow sphereincreases its volume eightfold, but thesurface area only fourfold

In production processes, the cost of a vesselmay vary with surface area and its capacitywith volume


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Other Sources of Economies ofScale/Scope

Purchasing Advertising

Research and development


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Diseconomies of Scale

Beyond a certain size, bigger maynot always be better

The sources of such diseconomies Increasing labor costs Spreading specialized resources too

thin

Conflicting out Incentive and coordination effects


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Learning Curve and ScaleEconomies

Learning reduces unit cost throughexperience

Capital intensive technologies can offerscale economies even if there is no learning

Complex labor intensive processes mayoffer learning economies without scale

economies

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Cost and Local ResponsivenessPressure

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Pressure for Cost Reduction

In industries producing commodity-type products

that fill universal needs (needs that exist

when the tastes and preferences ofconsumers in different nations are similarif not identical)

where price is the main competitiveweapon

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Pressure for Cost Reduction

When major competitors are based in lowcost locationsWhere there is persistent excess capacityWhere consumers are powerful and facelow switching costs

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Pressure for Local Responsiveness

Differences in consumer tastes and preferencesDifferences in traditional practices andinfrastructureDifferences in distribution channels

Host government demands

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Four Basic Strategies

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The Evolution of Strategy

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Critical thinking In a world of zero transportation costs, no trade

barriers, and non-trivial differences between nationswith regard to factor endowments, firms must expandinternationally if they are to survive. Discuss.

2. Plot the position of the following firms on Figure11.8 - Procter & Gamble, IBM, Nokia, Coca-Cola, DowChemical, US Steel, and McDonald's. In each case

justify your answer.

3. What do you see as the main organizationalproblems that are likely to be associated with theimplementation of a transnational strategy?

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Documents

IBG - The Strategy of International Business