The strategy of international business

Chapter 12 - The Strategy of International Business

The Strategy of International Business

12-1

12


Learning objectives

Explain the concept of strategy.

Understand how firms can profit from expanding globally.

Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice.

Be familiar with different strategies for competing globally and their pros and cons.

In this chapter the focus shifts from the environment to the firm itself and, in particular, to the actions

managers can take to compete more effectively as an international business.

This chapter looks at how firms can increase their profitability by expanding their operations in foreign markets, the different strategies that firms pursue when competing internationally, and the various factors that affect a firm’s choice of strategy.

Subsequent chapters build on the framework established here to discuss a variety of topics including the design of organization structures and control systems for international businesses, strategies for entering foreign markets, the use and misuse of strategic alliances, strategies for exporting, and the various manufacturing, marketing, R&D, human resource, accounting, and financial strategies that international businesses pursue.

12-2


OUTLINE OF CHAPTER 12: THE STRATEGY OF INTERNATIONAL BUSINESS

Opening Case: MTV Networks

Introduction

Strategy and the FirmValue CreationStrategic PositioningOperations: The Firm as a Value Chain

Global Expansion, Profitability and GrowthExpanding the Market: Leveraging Products and CompetenciesLocation EconomiesExperience EffectsLeveraging Subsidiary SkillsSummary

Cost Pressures and Pressures for Local Responsiveness.Pressures for Cost ReductionsPressures for Local Responsiveness

Choosing a StrategyGlobal Standardization StrategyLocalization StrategyTransnational StrategyInternational Strategy The Evolution of Strategy

Management Focus: Vodafone in JapanManagement Focus: Evolution of Strategy at Proctor & Gamble

Chapter Summary

Critical Thinking and Discussion Questions

Closing Case: IKEA—The Global Retailer

12-3


CLASSROOM DISCUSSION POINT

Pick a few well-known international companies like McDonalds, Nokia, and MTV. Then, ask students to think about the strategies each of the firms use.

Next, ask students to identify the type of industry each firm is operating in, and jot their response on the board. Try to organize the responses using the framework presented in the text.

Then, ask students to outline the basic strategies each firm uses, and organize their responses using the framework on the board.

Finally, try to get students to recognize how each industry influence the type of strategy each firm followed.

OPENING CASE: MTV Networks

The opening case describes MTV’s global strategy. Since its start in 1981, the network has expanded to reach some 330 million customers spread across 140 countries. Interestingly, MTV has found that its global strategy has to be surprisingly local. Consumers in different markets, while enjoying some American programming, prefer to see their own local superstars. To maintain the company’s culture and operating principles, MTV transfers expatriates from elsewhere in the world to new stations, then moves them elsewhere once the local station is well established. Discussion of the case can revolve around the following questions:

1. Using the framework developed in this chapter, how would you describe MTV’s strategy for competing internationally when it originally expanded internationally in 1987? What were the strengths of this strategy? What were the limitations?

2. Why did MTV change its initial strategy in 1995?

3. What strategy did MTV start to pursue in 1995? What were the benefits of this strategy to MTV? What were the drawbacks?

4. Recently MTV has started to take ideas developed in national subsidiaries, and see if it can find ways of leveraging them globally. Does this represent a retreat from its post 1995 strategy, or a refinement of that strategy? What kind of company do you think MTV is striving to become? Why?

12-4


Another Perspective: To clearly get a feel for the differences and similarities in MTV’s programming in various markets, students should go to {www.mtv.com}, the U.S. site, and then to some of the company’s foreign sites, MTV Europe {http://www.mtvne.com/}, MTV Asia {http://www.mtvasia.com/}, and MTV Latin America is at {http://www.mtvla.com/sitewide/includes/country_selector.jhtml?referrerParams=&referrerURL=/index.jhtml&_requestid=172999}

LECTURE OUTLINE FOR CHAPTER

This lecture outline follows the Power Point Presentation (PPT) provided along with this instructor’s manual. The PPT slides include additional notes that can be viewed by clicking on “view”, then on “notes”. The following provides a brief overview of each Power Point slide along with teaching tips, and additional perspectives.

Slide 12-3 Introduction How can firms compete more effectively internationally?

Slides 12-4-12-5 Strategy and the FirmA firm’s strategy can be defined as the actions that managers take to attain the goals of the firm.

Slides 12-6-12-9 Value CreationIf consumers perceive the value of a good to be much higher than the actual cost of producing that good, profit margins will be higher. Porter emphasizes two basic strategies to create value and attain competitive advantage: low cost and differentiation strategy.

Slides 12-10-12-11 Strategic Positioning Not all positions on the efficiency frontier are viable. Firms must choose a strategic position that is viable.

Slides 12-12-12-14 Global Expansion, Profitability, and Profit GrowthExpanding globally allows firms to increase their profitability and rate of profit growth in ways not available to purely domestic enterprises.

Slide 12-16 Expanding the Market: Leveraging Products and CompetenciesThe success of firms that expand internationally depends on the goods or services they sell, and on their core competencies (skills within the firm that competitors cannot easily match or imitate).

Slides 12-17-12-18 Location EconomiesLocation economies are the economies that arise from performing a value creation activity in the optimal location for that activity.

12-5

http://www.mtvla.com/sitewide/includes/country_selector.jhtml?referrerParams=&referrerURL=/index.jhtml&_requestid=172999

http://www.mtvla.com/sitewide/includes/country_selector.jhtml?referrerParams=&referrerURL=/index.jhtml&_requestid=172999

http://www.mtvasia.com/

http://www.mtvne.com/

http://www.mtv.com/


Slide 12-20-12-22 Experience EffectsExperience effects are systematic reductions in production costs over the life of the product. The speed with which a firm moves down the Experience Curve will determine how much advantage it has over its competitors Slide 12-23 Leveraging Subsidiary SkillsA global corporation can find vital skills developed in one foreign subsidiary and leverage them in another part of the world. In order to take advantage of subsidiary skills the company must have sophisticated processes that identify new skills that could be of interest. Once these skills are identified, managers must have the capability to transfer them elsewhere.

Slide 12-24 SummaryManagers need to keep in mind the complex relationship between profitability and profit growth when making strategic decisions about pricing.

Slides 12-25-12-26 Cost Pressures and Pressures for Local ResponsivenessFirms that compete in the global marketplace typically face two types of competitive pressures:

pressures for cost reductions pressures to be locally responsive

Slide 12-27 Pressures for Cost Reduction International businesses often face pressures for cost reductions because of the competitive global market.

Slides 12-28-12-29 Pressures for Local ResponsivenessPressure for local responsiveness comes from differences in consumer tastes, infrastructure, distribution channels, or host government demands.

Slides 12-3-12-32 Choosing a StrategyThere are four basic strategies to compete in the international environment:

global standardization localization transnational International

Slide 12-33 Global Standardization StrategyThe 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.

12-6


Slide 12-34 Localization StrategyThe localization strategy focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets. Slide 12-35 Transnational StrategyThe 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

Slide 12-36 International StrategyThe international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization.

Slides 12-38-12-39 The Evolution of StrategyStrategy is an evolutionary process. Firms need to change their strategic approach as the environment changes. CRITICAL THINKING AND DISCUSSION QUESTIONS

QUESTION 1: In a world of zero transportation costs, no trade barriers, and nontrivial differences between nations with regard to factor conditions, firms must expand internationally if they are to survive. Discuss.

ANSWER 1: The theory of comparative advantage suggests that activities should take place in the countries that can perform them most efficiently, given that different countries are endowed with different factors of production. If there are no barriers or costs to trade, then it is likely that many industries will be based out of the countries that provide the best set of factor endowments. Given location economies, a company can develop a global web of value-creation activities to take advantage of differing factor endowments in differing locations.

12-7


For firms already located in the countries with the most favorable factor endowments for their industry, however, there may not be a need to expand internationally at a certain point in time. As factor endowments evolve, the firm may want to disperse its value-creating activities to those markets that offer comparative advantages. If the firm is in a competitive market (think of the example of Clear Vision), it will benefit from international expansion that includes its value-creating activities because of the Cost position and product differentiation opportunities such expansion can confer. A firm may be able to survive in a local market without international expansion, as long as the local market is not targeted by competitors who have taken advantage of the economies offered by dispersing their value-creation activities internationally. An example is an inefficient, high-priced locally-owned supermarket that has not yet faced the entry of Wal-Mart in its market.

QUESTION 2: Plot the position of the following firms on Figure 12.6: Procter & Gamble, Boeing, Coca Cola, Dow Chemicals, Intel, and McDonald’s. In each case justify your answer.

ANSWER 2: Proctor & Gamble follows an international strategy moving towards transnational. Most of the R&D is done centrally, while the production and marketing is done locally. Their local competition lacks the marketing skills and R&D resources P&G possess. As their local competition becomes more sophisticated, they may move into a transnational strategy. This process has already begun.

Boeing follows a global strategy in that it faces high pressure on cost and exploits location economies in its relatively standardized product.

Coca-Cola follows an international strategy. Its R&D and the general market approachoriginate in Atlanta. Subsidiaries do have some discretion in marketing. One could also argue that because Coca Cola has been acquiring local bottlers, they are pursuing a multidomestic strategy.

Dow Chemical follows a global strategy in that most of its products are commodities, so there is no pressure for localization. Price competition is critical.

Intel follows a global strategy. R&D, production and marketing are located in favorable locations and the product is relatively standardized. Cost pressures are high.

McDonald’s has been placed in the international strategy quadrant historically. It transfers valuable skills and marketing knowledge into other markets, where it has faced limited local competition because the local firms lacked McDonald’s skill and knowledge. There is local adaptation to tastes. Increasingly McDonald’s is facing local competition in international markets from other quick service restaurants and local imitators. McDonald’s localizes marketing other than the brand positioning, its supply chain, its human resources, its real estate strategy, and its production. This place McDonald’s in the multi domestic strategy quadrant.

12-8


QUESTION 3: What do you see as the main organizational problems that are likely to be associated with implementation of a transnational strategy?

ANSWER 3: This is a student judgment question. Implementation difficulties include communication issues, trust issues, multiple roles, flexibility and culture issues, among many others. For example, with GM, some European operations may need to collaborate with operations in Latin America. Actions related to such a loss of autonomy might function as a hurdle to implementation.

QUESTION 4: Reread the Management Focus, Vodafone in Japan, then answer the following questions:

Why do you think that Vodafone was pursuing a global standardization strategy? How did it hope that this strategy would boost profitability and profit growth? Why did the strategy not work in Japan? In retrospect, what should Vodafone have done differently?

ANSWER 4: Vodafone’s vision was to build a global brand using a phone that would work anywhere in the world. To achieve that vision, the company offered consumers a standardized product with the same technology regardless of where they were located. In theory, by offering the same basic product everywhere, Vodafone would not only capitalize on a brand name, it would also capitalize on a streamlined production process. However, the company failed to recognize that consumers in different locations values different features. In Japan, the company was selling primarily to younger people who did not travel much, and did not value the global portability of the company’s phones. Instead, Japanese consumers were more interested in other features like games and cameras. In retrospect, Vodafone probably should have paid more attention to local preferences. The company delayed introduction of phones using 3G technology that would allow users to watch video clips and teleconference because it wanted to launch the technology only when it had a phone that would work inside and outside Japan.

QUESTION 5: Reread the Management Focus on the evolution of strategy at Procter & Gamble, then answer the following questions:What strategy was Procter & Gamble pursuing when it first entered foreign markets in the period up until the early 1990s?Why do you think this strategy became less viable in the 1990s?What strategy does Proctor & Gamble appear to be moving toward? What are the benefits of this strategy? What are the potential risks associated with it?

12-9


ANSWER 5: Many students will probably suggest that Procter & Gamble took a reactive approach to its strategy in the early 1990s, but was more proactive in the late 1990s and early 2000s. The company’s initial reorganization was a reaction to a changing marketplace and sluggish profits, however, when it became apparent that the reorganization attempt was not really fixing the problems that existed, the company embarked on a new strategy. This time, rather than simply trying to adjust its existing strategy as the company had done in 1993, Procter & Gamble completely dismantled the structure that had been in place for a quarter of a century and reorganized as a company ready to operate in a global marketplace. Numerous factors prompted Procter & Gamble to change its strategy. Because of its country-by-country approach to the market, the company had extensive duplication of manufacturing, marketing, and administrative facilities that was driving up costs. In addition, the retailers that the company relied on were operating globally and demanding deeper discounts from Procter & Gamble. With its new strategy, the company has eliminated these problems. Now, Procter & Gamble’s competitors are facing many of the same challenges. Some students will probably suggest that a key element that competitors can learn from Procter & Gamble’s experiences is that operating in a global market is significantly different from selling internationally to individual markets.Today, Procter & Gamble is trying to take a transnational approach to markets. The company has reorganized into business units, each responsible for its own profits. Each unit has been directed to develop global brands where possible, and keep costs low. While this new approach eliminates many of the problems facing the company under its old structure, it does introduce a new challenge in that there is little communication between business units which effectively minimizes the possibility of cross-unit learning and information sharing.

Another Perspective: Students can explore Procter & Gamble’s strategy in more depth by going to the company’s web site at {http://www.pg.com/en_US/index.jhtml}. Click on “P&G Global Operations” to compare the domestic site to those in numerous foreign locations.

CLOSING CASE: IKEA—The Global Retailer

The closing case examines the operations and strategy of Ikea, the household goods and home furnishings retailer. Ikea was established in Sweden in 1943, and now operates 230 stores in 33 countries. Ikea’s strategy is the same everywhere—selling furniture and household items that reflect Swedish style at low prices to the global middle class. So far, the formula is a success. The company generated sales of $17.7 billion in 2005. Ikea relies on a network of 1,300 suppliers located in 53 countries, and while a similar product line is sold everywhere, the company does adapt to meet the needs of consumers in different markets. A discussion of the case can revolve around the following questions:

QUESTION 1: How is IKEA profiting from global expansion? What is the essence of its strategy for creating value by expanding internationally?

12-10

http://www.pg.com/en_US/index.jhtml


ANSWER 1: International expansion has been critical to the success of IKEA, which currently operates 230 stores in 33 countries. IKEA has targeted the global middle class, and hosts some 410 million customers each year. Without expanding into the global marketplace, IKEA’s customer base would have been limited to the relatively small middle class in Sweden.

QUESTION 2: How would you characterize IKEA’s original strategic posture in foreign markets? What were the strengths of this posture? What were its weaknesses?

ANSWER 2: Ikea’s basic strategy is to sell Swedish-inspired furnishings and households goods to middle class consumers across the globe at low prices. To achieve this strategy, the company relies on some 1,300 suppliers located in 53 countries. Because Ikea aims to reduce its prices by 2-3 percent each year, finding the right supplier is critical to the success of the firm. Ikea tries to avoid high shipping costs by working with suppliers in each of its big markets. In addition, the company gains efficiencies by concentrating production of certain items in markets like China. QUESTION 3: How has the strategic posture of IKEA changed as a result of its experiences in the United States? Why did it change its strategy? How would you characterize the strategy of IKEA today?

ANSWER 3: Ikea has been able to learn from its experiences in the U.S. market, where for example, the company had to adapt to American sized beds and kitchen appliances in their effort to meet the needs of U.S. consumers. In China, the company is designing its store layout to reflect the style of Chinese apartments, and is including a balcony section since most Chinese apartments have balconies. Most students will probably suggest that IKEA is following a transnational strategy.

Another Perspective: Students can explore Ikea’s global operations at the company’s web site as {http://www.ikea.com/}.

INTEGRATING iGLOBES

There are several iGLOBE video clips that can be integrated with the material presented in this chapter. In particular, you might consider the following:

Title: Delphi Faces the FutureAutoworkers Prepared to Fight for their Future

Abstract: This video examines the crisis at Delphi, a former GM-owned supplier that is in danger of shutting down.

12-11

http://www.ikea.com/


Key Concepts: unions, globalization, global economy, collective bargaining, strategy

Notes: In Flint, Michigan, workers at the former General Motors (GM) plant, Delphi, are facing a tough choice. Many of the workers who have been with Delphi for most of their working life have recently been told that their pensions will not be paid, their healthcare benefits will be slashed, and their pay cut in half. Now, the Delphi employees are trying to decide whether to strike in an effort to shut down their former parent company. Delphi is a parts supplier that had been owned by GM until it was spun off in 1999. In its glory days, GM employed more than 80,000 people in Flint, and the town prospered. Today, Flint is a depressed area with boarded up storefronts and angry, anxious people. With Delphi in bankruptcy, employment is down to about 16,000 and more lay-offs are in the future.

Delphi is a classic example of a company that has been decimated by the effects of poor management, automation, and globalization. The company currently supplies spark plugs to former parent, GM. Delphi makes the plugs for a couple of dollars but sells them to GM for just $1.50. The fact that the spark plugs are a commodity item that can be bought on the open market for about a dollar each further complicates the picture. Delphi management, in recognition of its troubled state, is focusing on cutting costs--beginning with its labor costs. Workers at the plant are responding with threats of strikes and slowdowns. Many workers recall the famous strike of 1937 that shut down GM for 40 days and envision a similar action. Some workers have already begun to implement a “work to rule” tactic-- a form of slowdown they hope will catch the attention of management. For its part however, the UAW is not pushing for a strike, but rather legal action to force the company to pay the workers the benefits they were promised. According to union representatives, the days when the union went to the bargaining table to negotiate wages are gone. Today, the market determines wages, and the union acts as a sort of collaborative partner with management.

It is not clear that the workers have fully recognized that the 1937 strike occurred at time when GM was at the top of its game. When questioned as to whether they are worried about biting the hand that feeds them, Delphi workers responded that they have no reason to try to save GM, not if it means lowers wages and benefits. In fact, they feel let down by the UAW’s lack of militant action. Yet a former GM employee expressed concern that if Delphi and GM are shut down, the town and its occupants will be in truly dire straits.

Discussion Questions: 1. Discuss how globalization has affected Delphi. Why has the company failed to respond to the market? How does the situation at GM and Delphi differ from the situation at other automakers such as Nissan or Hyundai?

2. Workers at Delphi feel the UAW has let them down. Consider the role of unions today. How has it changed since the glory days of GM in the 1930s? What is the role of collective bargaining today as compared to 1937?

12-12


3. Delphi is currently in bankruptcy and its workers are threatening to strike. The company is losing money on its bread and butter products. What brought Delphi to this point? How, if at all, can the company recover?

4. Delphi is threatening to slash pensions, benefits, and wages for its employees in Flint, Michigan, a town that has been hit hard by the demise of GM. Workers are responding with threats of strikes and slowdowns, and boasts that they will close the doors at GM. Are the workers “living in the real world?” Can Delphi realistically continue to pay its workers their current compensation packages?

INTEGRATING VIDEOS

There are also several longer video clips that can be integrated with the material presented in this chapter. In particular, you might consider the following:

Title 15: DHL

Summary

DHL started in 1969 in San Francisco with a $3,000 investment. Today, the company delivers packages to 120,000 destinations in 200 countries, bringing in over $50 billion in revenues. DHL is a market leader in international express delivery. In fact, the company considers itself to be the inventor of international express shipping. DHL built its global operations by slowly expanding its services over the years. The company followed a backward path around the world from its San Francisco offices into Asia, moving on to Europe and Africa, and finally into North America. Its American operations have been strengthened with its recent acquisition of Airborne.

DHL’s focus on improving its service in the U.S. prompted the company to acquire Airborne rather than take the time to build its own operations. The acquisition gave DHL the infrastructure necessary to become a serious competitor in the market. Now the acquisition is part of the company’s overall operation providing U.S.-based gateways for packages traveling to other parts of the world. All packages traveling outside the U.S. must pass through the U.S. Customs office located within the gateway sites.

This video relates well to the material in Chapter 14 on acquisition versus Greenfield investments, and also to the discussion of strategy in Chapter 12.

Discussion Questions

1. DHL provides door-to-door service for its customers using its own agents. Discuss the service. What are the advantages of having in-house handling of packages when shipping internationally rather than using agents who work for several different companies?

12-13


2. When DHL moved into the U.S. market, it made the decision to acquire Airborne rather than build its own operations. Discuss the advantages and disadvantages of this strategy.

3. DHL’s U.S. gateway system provides on-site customs clearance services. Does this give DHL a competitive advantage? Why or why not?

4. DHL believes that when considering international express delivery services, speed and reliability are key issues for the customer. Using the pressure for costs reduction/pressure for local responsiveness grid, consider the international shipping business. Where do the major players stand relative to one another? Is any one player better positioned to succeed?

globalEDGE™ Exercise Questions

Use the globalEDGE™ site {http://globalEDGE.msu.edu/} to complete the following exercises:

Exercise 1The globalization of multinational corporations impacts the product and service choices available to customers. As such, several classifications and rankings of multinational corporations are prepared by a variety of sources. Find one such ranking system and identify the criteria used in ranking top global companies. Although some of these rankings require subscriptions, find a freely available listing and extract the ranking of the top 25 companies paying particular attention to their home countries.

Exercise 2 The top management of your company, a manufacturer and marketer of laptop computers, has decided to pursue international expansion opportunities in Eastern Europe. In order to achieve some economies of scale, your management is aiming for a strategy of minimum local adaptation. Focusing on an Eastern European country of your choice, prepare an executive summary that features aspects of the product where standardization will simply not work, and adaptation to local conditions will be essential.

Answers to the Exercises

12-14

http://globalEDGE.msu.edu/


Exercise 1There are a variety of surveys that rank multinational corporations. Each of these surveys uses a slightly different method for ranking the companies, although size (assets or revenues) is typically one of the primary criteria. Some of the most influential rankings of this kind are the Financial Times FT Global 500, the Fortune Global 500, Forbes Global 2000, and the Business Week Global 1000. A full list and links to these studies can be accessed by under the “Research: Rankings” category of the globalEDGE Resource Desk. The Forbes 2000 listing, which is freely available is listed below. Be sure to check the “Resource Desk only” checkbox of the search function on the globalEDGE website. globalEDGE™ Category: “Research: Rankings”Resource Name: Forbes Global 2000. Website: {http://www.forbes.com/global2000}

Exercise 2The country specific information can be found in the Country Insights section of globalEDGE. Both summary and detailed information regarding each country can be accessed by using the drop-down menu on the right, or by clicking the “Europe” link. For illustration purposes, we will choose Bulgaria. The synopsis information indicates that the language of the country (Bulgarian) and the voltage used (110/220V) will be two of the critical variables that have to be considered in the adaptation of the product. More detailed analysis by following the external links, such as the Country Commercial Guide, will highlight additional aspects.

12-15

http://www.forbes.com/global2000

Education

The strategy of international business