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PART FIVEGLOBAL STRATEGY, STRUCTURE,
AND IMPLEMENTATION
International Business
Chapter Eleven
The Strategy ofInternational Business
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Chapter Objectives
To examine the idea of industry structure, firmstrategy, and value creation
To profile the features and functions of thevalue chain framework
To appreciate how managers configure andcoordinate a value chain
To identify the dimensions that shape howmanagers develop strategy
To profile the types of strategies firms use ininternational business
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Introduction
Strategy: the framework that managers apply todetermine the competitive moves and businessapproaches that guide a firm, i.e., the means
used to achieve objectives Strategy represents managements idea on how tobest: attract customers stake out a market position
conduct operations compete effectively create value achieve goals
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Fig. 11.2: The Strategy of
International Business
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Fundamentals of Strategic
Management: Basic ConceptsPerfect competition presumes that: there are large numbers of fully informed buyers and
sellers of an homogeneous product
buyers and sellers possess perfect information there are no obstacles to the entry or exit of firms into
or out of the market resources are fully mobile
An industry is a group of firms, i.e., competitors, thatproduce products which are close substitutes.
A global industry is one in which a firms competitiveposition in one country is significantly affected by itsposition in other countries.
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Fundamentals of Strategic
Management: The IO ParadigmThe industry organization (IO) paradigm: risk-
adjusted rates of return should be constant
across firms and industries Over time no one firm or industry should
consistently outperform others.
The performance of a firm is a function of its
market conduct, which in turn is determined bythe structure of its industry.
Industry effects explain up to 75% of the differencesin average returns for firms within a given industry.
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Industry Structure:
The Five Fundamental ForcesThe Five Fundamental Forces Model: the nature of
competition in an industry is the combined out-come of competitive pressures generated by:
the moves of rivals battling for market share
the entry of new rivals seeking market share
the efforts of firms outside the industry to convincebuyers to switch to their substitute products
the push by suppliers to charge more for their inputs the push by buyers to pay less for products
Markets are not perfectly competitive;some firms consistently outperform industry averages.
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Fig. 11.3: Industry Structure: The
Five Fundamental Forces Model
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The five-forces model defines the structureand competition in an industry in a waythat reveals:
what forces are driving changes within an
industry the relative strength of each fundamental force which fundamental forces shape strategic
conduct
the strategic moves rivals are likely to makeCommon to each issue is the question of whether the
current or future outlook suggests that firms in the industryhave no, some, or great potential to realize profits.
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Changes in Industry Structure
Forces that can transform an industrys structureinclude:
changes in the long-term industry [market] growth rate
technological developments shifting customer purchase and usage patterns manufacturing innovations that revise cost and efficiency
frontiers
changes in government regulations and policies the entry or exit of major firms the diffusion of business, executive, and technical
expertise across countries
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Strategy and Value Creation
Strategy: a firms efforts to build and strengthenits competitive position within its industry inorder to create value and attain goals
A firms core competency may be a special outlook, skill,capability, or technology that creates unique value
essential to its competitiveness.
Value: the measure of a firms capability to sell theproducts it offers for more than the costs it incurs
Operationally, firms create value either throughcost leadership or product differentiation.
Differentiation spurs a firm to offer unique,high-value products that are difficult to match or copy.
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The Firm as a Value Chain
Value chain: the set of linked, value-creating activities afirm performs to design, produce, market, deliver, andsupport a product, i.e., the format and interactionsamongst the various functions of a firm
[Value chain analysis explains cost behavior and revealsexisting and potential sources of product differentiation.]
Primary activities: the classical managerial functions ofthe firm
Support activities: functions that provide inputs which
allow the primary activities to occurProfit margins: the differences between total revenues
generated and total costs incurredOrientation: upstream (in-bound) vs. downstream (out-
bound) activities
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Fig. 11.4: The Value Chain
Framework
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Value Chain Configuration
Value chain configuration may be influencedby:
cost factors [wage rates, productivity, inflation, etc.] business environments [political & economic risk] cluster effects [related value creation activities] logistics [value-to-weight ratio, just-in-time practices] degree of digitization [virtual value creation] economies of scale [unit cost reductions] customer needs [buyer-related support activities]
Configuration [spatial arrangement] should be optimized in lightof prevailing economic, legal, political, and cultural conditions.
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Map 11.2: Labor Costs and
Location Decisions
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Value Chain Coordination
Value chain coordination may be influenced by: operational obstacles [communication challenges,
currencies, and measurement systems]
national cultural differences [information sharing,time, etc.]
learning effects [cost savings via performance andquality improvements]
subsidiary networks [real-time connectivity andfunctional integration]Coordination [the balanced movement of different parts
at the same time] should be optimized in waysthat leverage a firms core competencies.
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The value chain serves as a system concept that
helps mangers: evaluate a firms strengths and weaknesses interpret the determinants of the firms internal cost
structure, the basis of its core competencies, and itsrelationships with customers
link the internal features and functions of a competitorto the content of its marketplace strategy
The configuration and coordination of a firmsvalue chain should reflect changes in its basesfor value creation, including:
customers and their needs competitors industries environments
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Countervailing Forces: Global
Integration vs. Local Responsiveness Pressures for global integration
Globalization of markets: the convergence of customerpreferences for similar products, minimal costs, andmaximum value
[A commodity serves a universal need across countries andcultures and is traded strictly on the basis of price.]
Globalization of production: efficiency gains via stan-dardization, i.e., the maximization of location economies
Pressures for local responsiveness Customer divergence: differences in culture, nationalattitudes, and economic and usage conditions
Host government policies: economic freedom, work-place and product regulation, buy-local legislation, etc.
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The Global Integration/
Local Responsiveness GridThe integration/responsiveness grid (IR) profiles the
interaction of the pressures for global integrationand pressures for local responsiveness.
Integration: the process of combining dif-ferentiated parts into a standardized whole
Responsiveness: the process of disaggregatinga standardized whole into differentiated parts
The IR grid reveals how a firms choice of strategy is afunction of the relationship between its idea of valuecreation and the pressures for integration and/or respon-siveness as it looks to international markets for growthopportunities, cost reductions, and risk diversification.
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Fig. 11.5: The Integration/
Responsiveness Grid and Industry Types
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Strategic Alternatives:
The International StrategyInternational strategy: opportunistic expansion
into foreign operations that leverages the firmscore (domestic) competencies
Ultimate control and decision-making reside atheadquarters.
Value is created by transferring core competencies andunique offerings from headquarters into foreign marketswhere rivals are unable to develop, match, or sustain
them. International activities are generally secondary to thepriorities of the domestic market.
Headquarters ethnocentric orientation, i.e., its home countryfocus, may lead to significant missed market opportunities.
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Strategic Alternatives:
The Multidomestic StrategyMultidomestic strategy: expansion into foreign opera-
tions that grants decision-making authority to localmanagers and emphasizes responsiveness to local
conditions Decision-making is decentralized so that offerings can be
adjusted to meet the needs of individual countries or regions. Value is created by giving local managers the authority to
respond to unique local cultural, legal, and economicenvironments.
The polycentric view holds that people who are close to themarket both physically and culturally can best run a business.
The distribution of decision-making authority to local managers maylead to duplication in activities, significantly higher costs, and
unusually powerful (autonomous) local subsidiaries.
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Strategic Alternatives:
The Global StrategyGlobal strategy: expansion into foreign operations
that champions worldwide consistency, standard-ization, and cost competitiveness
Although activities are dispersed to the most favorableglobal locations, decision-making remains highly cen-tralized at headquarters.
Value is created by designing products for a worldmarket and manufacturing and marketing them as
effectively and efficiently as possible. Global firms strive to convert global efficiency into pricecompetitiveness via production and location economies.
In markets where demand for local responsiveness remains high, globalstrategies are largely ineffective, and market opportunities are missed.
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Strategic Alternatives:
The Transnational StrategyTransnational strategy: expansion into foreign opera-
tions that exploits location economies, leverages corecompetencies, and responds to key local conditions
The causes of interactive global learning and worldwideinformation sharing are championed. Value is created by the relentless renewal, enhancement, and
exchange of ideas, products, and processes across functionsand borders.
The transnational MNE differentiates capabilities and contribu-tions while finding ways to systematically learn and ultimatelyintegrate and diffuse knowledge, thus developing morepowerful core competencies.
Realistically, the transnational firm faces serious challenges to its attemptsto efficiently and effectively configure and coordinate its activities.
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Fig. 11.6: The Integration/
Responsiveness Grid and Strategy Types
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Implications/Conclusions
Industry structure explains the functions, form,
and interrelationships amongst suppliers,buyers, products, new entrants, and rivals.
Even though competition is not perfect, industrystructure does influence a firms performance.
Because competition is not perfect, oppor-tunities exist to convert innovative strategiesinto superior competitiveness.
[continued]
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Great managers devise great strategies thatbuild great companies that outperform theirindustry rivals.
Designing a strategy within the context of thevalue chain can improve the quality of analysesand decisions by deconstructing value creationopportunities into a series of discrete activities.