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Strategy of International Business CH 11

Focus shift from environment to actions managers can take to compete more effectively in international business

How firms can increase their can increase their profitability by expanding operations into international markets

Different strategies firms can use when competing internationally

Benefits, costs and risks of strategic alliances

Wal-Mart’s experience Moved into other countries

Growth opportunities at home were becoming constrained Create value by transferring core skills to markets where indigenous

competitors lacked those skills Preempt other retailers who were expanding globally

Discovered had to change US model Differences in local taste, preferences and local infrastructure Change store location, layout and stocking practices Keep company’s core strategies and operations – emphasize everyday low

prices & realize operating efficiencies from world class logistics management and information systems

Benefits – becoming transnational corporation Enhanced bargaining power with suppliers Ability to transfer valuable ideas from one country to another Balance global standardization with local customization

Terms Strategy - Actions that managers

take to attain the firms goals

Profits – difference between total revenues & total costs TR – TC = II

Profitability - a ratio or rate of return, e.g. ROS (sales) ROK (invested capital)

Value Creation Profits are determined by amount of value customers place on

firm’s goods/services & firm’s costs Generally the more value, the higher the price that can be

charged Price is typically less that the value placed by customer

(consumer surplus) because of competition in the market Can’t segment the market enough to charge a price that reflects

each individual’s assessment (reservation price)

Company creates value by converting inputs that cost C into a product on which customers place value V

Can create more value by lowering production costs (C decreases)

Can create more value by making product more attractive with superior design, functionality, features, quality, etc. (V increases so willing to pay a higher P)

Higher profits when create more value for customers at lower cost

Value Creation Strategies Low cost strategy – focus primarily on

lowering production costs

Differentiation strategy – focus primarily on increasing attractiveness of product

Way to create superior value is to drive down the cost structure and/or differentiate product so consumers value more and willing to pay premium price

Strategic Positioning Important for firm to be explicit about choice of strategic

emphasis (differentiation & cost)

Important to make sure to configure internal operations accordingly & manage them efficiently (efficiency frontier)

Basic tenet is that to maximize long-run ROK & competitiveness

Pick a position that has a enough demand to support choice

Configure internal operations to support position (manufacturing, marketing, logistics, information systems, HR)

Install right organizational structure to execute strategy

Firm as Value Chain Series of distinct value creation activities

Primary activities - influence V or C Research & development – design of products & production process Production – creation of a good or service Marketing and sales – brand positioning, advertising; discovering consumer

needs & communicating them to R&D Customer service – after-sales service & support; solving customer problems

Support activities – influence competitive advantage Logistics – transmission of physical materials through the value chain;

procurement -> production -> distribution Human resources – right mix of skilled people; ensure that people are

adequately trained, motivated & compensated Information systems – electronic systems for managing inventory, tracking

sales, pricing products, selling products, dealing with customer service inquiries, etc.

Company infrastructure – context within which all other value creation activities occur – organizational structure, control systems, and culture of firm

Implementation of StrategyOrganization architecture Strategy of firm implemented through its organization; Internal consistency among various

components & support strategy and operations

Organizational structure Formal division of organization into subunits such as product divisions, national

operations, and functions Location of decision-making activities in structure Establishment of integrating mechanisms to coordinate activities of subunits eg. cross-

functional teams & pan-regional committees

Control system & incentives (linked) Metrics used to measure the performance of sub-units Devices used to reward appropriate managerial behavior

Processes Manner is which decisions are made & work is performed (formulating strategy,

allocating resources, evaluating performance) Distinct from location of decision-making activities

Organizational culture Shared norms & value system of firm People = employees as well as strategy for recruitment, retention and compensation

Global Expansion Increase profitability

Realize location economies by dispersing individual value creation activities around the globe – perform efficiently & effectively

Realize cost economies from experience effects by serving global market from central location

Earn a greater return from firm’s distinctive skills or core competencies by leveraging & applying to new geographic markets

Earn a greater return by leveraging any valuable skills developed in foreign operations & transferring them to other locations

Location Economies Countries differ along a range of dimensions (economic, political, legal, cultural) – these

differences either raise or lower the cost of doing business.

Differences in factor costs – certain countries have a comparative advantage in the production of certain products

Trade barriers and transportation costs permitting – firm will benefit from basing each value creation activity at that location where the economic, political , cultural, factor costs, etc. are most conducive to the performance of the activity.

Location economy – economies that arise from performing a value creation activity in the optimal location for that activity

Lower the cost of value creation and help the firm achieve a low cost position Enable the firm to differentiate its product offering from those of its competitors

Clear Vision Strategy to lower cost structure (lower C)

Shifting from US –> Hong Kong -> China Strategy to increase perceived value (increase V)

Investing in French, Italian & Japanese factories for superior design Strategy for premium pricing (increase P)

Increase value thus profit and profitability

Global Web Different stages of the value chain are dispersed to

those locations around the globe where value added is maximized or where cost of value creation is minimized

In general firm with global web should have competitive advantage by lowering its cost structure & differentiating its product

Caveats Transportation costs & trade barriers complicate the

picture – Mexico vs Asia Assessing political & economic risks when making location

decisions

Experience Effects Experience curve – systematic reduction in production costs that occur over the

life of a product – observed production costs decline each time cumulative output (not period output) doubles (aircraft industry)

Learning effects – Cost savings that come from learning by doing. Labor productivity & management Only during first 2-3 years

Economies of Scale – reduction in unit cost achieved by producing a large volume of product

Ability to spread fixed costs over a large volume of sales Ability of large firms to employ increasingly specialized equipment or

personnel - -> lower unit cost

Strategic significance Moving down the experience curve allows firm to reduce its cost of creating

Value (lower C) One key is to increase the volume in a single plant as quickly as possible -

Serving global market from single location allows building accumulated volume more quickly

Once a firm has established a low-cost position, it can act as a barrier to new competition.

Leveraging Core Competencies Core competencies

Skills within the firm that competitors cannot easily match or imitate

Firm’s value creation activities = production, R&D, marketing, human resources, logistics, general management

Expressed in product offerings that other firms find difficult to match or imitate

Bedrock of a firm’s competitive advantage

Global expansion is a way of further exploring the value creation potential of their skills and product offerings by applying to a larger market & where indigenous competitors lack similar skills and products

Leveraging Subsidiary Skills Skills are developed first at home and then transferred

to foreign operations

Skills can be created anywhere within the global network, wherever people have the opportunity and incentive to try new things

Management implications Humility to recognize that valuable skills can arise

anywhere Establish incentive system that encourages local

employees to acquire new skills Have a process for identifying when valuable new skills

have been created Act as facilitators to help transfer valuable skills within the

firm

Pressures for cost reduction Minimize unit costs

Base its productive activities at the most favorable low cost location

Offer a standardized product to the global marketplace

Particularly intense in commodity industries with competitors in low cost locations, persistent excess capacity & consumers are powerful & face low switching costs – products serve universal needs, e.g. tires

Pressures for local responsiveness Recognize national differences in

consumer tastes & preferences, e.g world cars in infrastructure and traditional business practices, e.g. electrical

requirements US vs EU in distribution channels, e.g. delegation of marketing functions to

national subsidiaries competitive conditions & host government policies, e.g politics of

health care with local clinical testing, registration procedures & pricing restrictions

Differentiate its product offering & marketing strategy from country to country

May not be possible to realize the benefits of experience curve & location economies

Customizing may involve duplication & lack of standardization thereby raising costs

May not be possible to leverage the skills and products associated with a firm’s core competence from location to location

Strategic Choices Four basic strategies to compete in international environment –

appropriateness varies with extent of pressures for cost reduction & local responsiveness

International Strategy Firms create value by transferring valuable skills & products to foreign

markets where indigenous competitors lack Centralize R&D at home, establish production & marketing in each country,

retain control over strategy -> high operating costs Relatively weak pressure for cost reduction & local responsiveness

(Microsoft)

Multidomestic Strategy Achieving maximum local responsiveness – extensively customize both

product offering & marketing strategy Establish a complete set of value creation activities in each market -

production, marketing and R&D -> realize value from experience curve effects

High cost structure & poor job of leveraging core competencies High pressure for local responsiveness & low pressure for cost reduction

Strategic Choices continued Global Strategy

Focus on increasing profitability by cost reductions from experience curve effects & location economies (low-cost strategy)

Production, marketing and R&D in a few key locations – do not customize product offering & marketing

Standardized product to reap economies of scale from experience curve Strong pressure for cost reductions & low demand for local responsiveness

(Industrial goods, e.g. Intel)

Transnational Strategy Plan to exploit experienced-based cost and location economies, transfer

core competencies within the firm & pay attention to local responsiveness High pressure for cost reduction, high pressure for local responsiveness &

significant opportunities for leveraging valuable skills with the global network of operations – simultaneously achieve cost & differentiation strategies (conflicting demands - Caterpillar)

Table 11.1 on page 406 shows advantages & disadvantages of 4 strategies

Strategic Alliances Cooperative agreements between potential or actual

competitors

Advantages Facilitate entry into a foreign market Allow firms to share fixed costs & risks of developing new

products or processes Bring together complimentary skills & assets Help the firm establish technological standards for the

industry that benefit firm

Disadvantages Give competitors a low cost route to new technology &

markets (Japanese) If firms not careful they can give away more than they

receive

Making Alliances Work Partner Selection

Helps the firm attain strategic goals – market access, sharing costs & risks of product development, gaining access to critical core competencies

Shares the firm’s vision for purpose of the alliance Fair Play – unlikely to exploit the firm’s technological

know-how while giving little away in return

Research Collect as much publicly available info as possible Collect data from informed third parties Get to know the potential partner

Making Alliances Work Alliance Structure - Risk of giving away

too much reduced to acceptable level Wall off critical technology to prevent leakage

to other party Establish contract safeguards in alliance

agreement to guard against risk of opportunism (technology or markets)

Agree in alliance to swap skill and technologies to help ensure equitable gain

Extract a significant credible commitment from partner in advance (50/50 JV)

Making Alliances Work Managing the Alliance

Maximize benefits of the alliance by building trust & learning from partners – relational capital

Personal relationships foster informal management network between partners

Japanese learn more from alliances than US or EU who view alliance as cost or risk sharing