Daniels11 pp.doc

• 1. PART FIVE GLOBAL STRATEGY, STRUCTURE,AND IMPLEMENTATION International BusinessChapter Eleven The Strategy ofInternational Business

2. Chapter Objectives

• To examine the idea of industry structure, firm strategy, and value creation

• To profile the features and functions of the value chain framework

• To appreciate how managers configure and coordinate a value chain

• To identify the dimensions that shape how managers develop strategy

• To profile the types of strategies firms use in international business

11- 3. Introduction

• Strategy: the framework that managers apply to determine the competitive moves and business approaches that guide a firm, i.e., the means used to achieve objectives

• Strategy represents managements idea on how to best:

• • attract customers

• • stake out a market position

• • conduct operations

• • compete effectively

• • create value

• • achieve goals

11- 4. Fig. 11.2: The Strategy of International Business 11- 5. Fundamentals of Strategic Management:Basic Concepts

• Perfect competitionpresumes 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

• Anindustryis a group of firms, i.e., competitors, that produce products which are close substitutes.

• Aglobal industryis one in which a firms competitive position in one country is significantly affected by its position in other countries.

11- 6. Fundamentals of Strategic Management: The IO Paradigm

• The industry organization (IO) paradigm: risk-adjusted rates of return should be constant across firms and industries

• O ver 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 by the structure of its industry.

• Industry effects explain up to 75% of the differencesin average returns for firms within a given industry.

11- 7. Industry Structure:The Five Fundamental Forces

• The Five Fundamental Forces Model: the nature of competition in an industry is the combined out-come of competitive pressures generated by:

• t he moves of rivals battling for market share

• the entry of new rivals seeking market share

• the efforts of firms outside the industry to convince buyers 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.

11- 8. Fig. 11.3: Industry Structure:The Five Fundamental Forces Model 11- 9.

• 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 make

• Common to each issue is the question of whether thecurrent or future outlook suggests that firms in the industryhave no, some, or great potential to realize profits.

11- 10. Changes in Industry Structure

• Forces that can transform an industrys structure include:

• 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

11- 11. Strategy and Value Creation

• Strategy: a firms efforts to build and strengthen its competitive position within its industry in order to create value and attain goals

• A firmscore competencymay be a special outlook, skill,capability, or technology that creates unique valueessential to its competitiveness.

• Value: the measure of a firms capability to sell the products it offers for more than the costs it incurs

• Operationally, firms create value either throughcost leadershiporproduct differentiation .

• Differentiationspurs a firm to offer unique,high-value products that are difficult to match or copy.

11- 12. The Firm as a Value Chain

• Value chain: the set of linked, value-creating activities a firm performs to design, produce, market, deliver, and support a product, i.e., the format and interactions amongst 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 occur

• Profit margins: the differences between total revenues generated and total costs incurred

• Orientation: upstream (in-bound)vs. downstream (out-bound) activities

11- 13. Fig. 11.4: The Value Chain Framework 11- 14. Value Chain Configuration

• Value chain configuration may be influenced by:

• 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.

11- 15. Map 11.2: Labor Costs and Location Decisions 11- 16. 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 and quality improvements]

• subsidiary networks[real-time connectivity and functional integration]

• Coordination [the balanced movement of different partsat the same time] should be optimized in waysthat leverage a firms core competencies.

11- 17.

• 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 its relationships with customers

• link the internal features and functions of a competitor to the content of its marketplace strategy

• The configuration and coordination of a firms value chain should reflect changes in its bases for value creation, including:

• customers and their needs

• competitors

• industries

• environments

11- 18. Countervailing Forces: Global Integration vs. Local Responsiveness

• Pressures for global integration

• • Globalization of markets:the convergence of customer preferences for similar products, minimal costs, and maximum value

• • [A commodity serves a universal need across countries and cultures 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, national attitudes, and economic and usage conditions

• • Host government policies: economic freedom, work-place and product regulation, buy-local legislation, etc.

11- 19. The Global Integration/Local Responsiveness Grid

• The integration/responsiveness grid (IR) profiles the interaction of the pressures for global integration and 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 a function of the relationship between its idea of value creation and the pressures for integration and/or respon-siveness as it looks to international markets for growth opportunities, cost reductions, and risk diversification.

11- 20. Fig. 11.5: The Integration/ Responsiveness Grid and Industry Types 11- 21. Strategic Alternatives:The International Strategy

• International strategy: opportunistic expansion into foreign operations that leverages the firms core (domestic) competencies

• Ultimate control and decision-making reside at headquarters.

• Value is created by transferring core competencies and unique offerings from headquarters into foreign markets where rivals are unable to develop, match, or sustain them.

• International activities are generally secondary to the priorities of the domestic market.

• Headquarters ethnocentric orientation, i.e., its home countryfocus, may lead to significant missed market opportunities.

11- 22. Strategic Alternatives:The Multidomestic Strategy

• Multidomestic strategy: expansion into foreign opera-tions that grants decision-making authority to local managers 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 economic environments.

• The polycentric view holds that people who are close to the market 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, andunusually powerful (autonomous) local subsidiaries.

11- 23. Strategic Alternatives:The Global Strategy

• Global strategy: expansion into foreign operations that champions worldwide consistency, standard-ization, and cost competitiveness

• Although activities are dispersed to the most favorable global locations, decision-making remains highly cen-tralized at headquarters.

• Value is created by designing products for a world market and manufacturing and marketing them as effectively and efficiently as possible.

• Global firms strive to convert global efficiency into price competitiveness via production and location economies.

• In markets where demand for local responsiveness remains high, global strategies are largely ineffective, and market opportunities are missed.

11- 24. Strategic Alternatives:The Transnational Strategy

• Transnational strategy: expansion into foreign opera-tions that exploits location economies, leverages core competencies, and responds to key local conditions

• The causes of interactive global learning and worldwide information sharing are championed.

• Value is created by the relentless renewal, enhancement, and exchange of ideas, products, and processes across functions and borders.

• The transnational MNE differentiates capabilities and contribu-tions while finding ways to systematically learn and ultimately integrate and diffuse knowledge, thus developing more powerful core competencies.

• Realistically, the transnational firm faces serious challenges to its attempts to efficiently and effectively configure and coordinate its activities.

11- 25. Fig. 11.6: The Integration/ Responsiveness Grid and Strategy Types 11- 26. Implications/Conclusions

• Industry structure explains the functions, form, and interrelationships amongst suppliers, buyers, products, new entrants, and rivals.

• Even though competition is not perfect, industry structure does influence a firms performance.

• Because competition is not perfect, oppor-tunities exist to convert innovative strategies into superior competitiveness.

• [continued]

11- 27.

• Great managers devise great strategies that build great companies that outperform their industry rivals.

• Designing a strategy within the context of the value chain can improve the quality of analyses and decisions by deconstructing value creation opportunities into a series of discrete activities.

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