Last Phase of MGNT 4670

►Focus is on the company itself

 What actions must a company
take to compete effectively in
the international business
market?
 What are the benefits, costs,
and risks associated with these
actions?
 CHAPTER 12
INTERNATIONAL BUSINESS
STRATEGY
 Opening Case
► Wal-Mart moved into other countries for three reasons
 Growth opportunities at home were becoming constrained
 It thought it could create value by transferring its business model
to foreign markets
 It wished to preempt other retailers that were also starting to
expand globally
► Wal-Mart initially treated foreign markets much like the US; it
did discover that this was not the correct approach.
► To succeed abroad, Wal-Mart has had to customize its
offering to local conditions while keeping its core strategies
and operations the same in every market
► Going global has yielded additional benefits as well
 Enhanced bargaining power with suppliers
 The ability to transfer valuable ideas from one country to another
 STRATEGY & THE FIRM:
VALUE CREATION
► Strategy: actions that managers must take to
attain the goals of the firm
 For most firms, the preeminent goal is to maximize the
value of the firm for its owners
 Main goal usually to maximize long-term profit
(П) П = TR - TC
► Profitability can be defined as the rate of return that
the firm makes on its invested capital (ROIC), which
is calculated by dividing the net profits of the firm
by total invested capital .
► Profit growth is measured by the percentage
increase in net profits over time
 Strategy and the Firm

Figure 12.1 p 409

 VALUE CREATION
►A firm’s profits are determined by two
basic conditions:
 Value customers place on the goods or
services offered by the firm (perception) =
V
 Costs of production = C
► Value Creation
 Difference between Value and Costs or:
V-C = level of value creation
 STRATEGY in INTERNATIONAL
BUSINESS
► Strategyis concerned
with identifying and
taking actions that will:
 lower costs of value
creation and/or
 differentiate the firm’s
product offering through
superior design, quality
service, functionality, etc.
in order to increase
perception of value by the
customer
 FIRM AS A VALUE CHAIN
► Any firm is composed of a series of distinct
value creating activities
► Primary activities
 Research & development
 Production
 Marketing & sales
 Service
► Support Activities (provide inputs to enable
the primary activities to occur)
 Materials management or logistics
 Human resource
 Information systems
 Company infrastructure
 The Value Chain

Fig 12.4 p 412

 STRATEGY in INTERNATIONAL
BUSINESS Example: Clear Vision
► Clear Vision, manufacturer and distributor
of eyewear
► Early 1980’s Clear Vision realized it had to
lower its costs by importing;
► Started by importing from manufacturers
in Asia but was not satisfied with product
quality and delivery;
► Determined it had to have its own
facilities, so settled on Hong Kong as a
location due to: low labor costs, skilled
workforce, and tax breaks offered by Hong
Kong government.
 STRATEGY in INTERNATIONAL
BUSINESS Example: Clear Vision
► After time, industrialization of Hong
Kong caused labor shortage and
increase in wages, so manufacturing
plant was moved to mainland China.
Objective: lower costs
► At same time, Clear Vision sought
foreign eyewear companies
specializing in fashionable, high
quality design to broaden its product
line.
Objective: product differentiation
► Clear Vision invested in factories in
 STRATEGY in INTERNATIONAL
BUSINESS Example: Clear Vision
► Clear Vision responded ► Threat: lower cost
to threats and imports from foreign
opportunities in the competition
international ► Response: lower costs
marketplace by by shifting
developing strategies ► manufacturing to a
Threat: competition
to increase profitability lower cost location
from high-end market
through value creation. segment and need to
increase perceived
► Today, Clear Vision is value of eyewear
an MNE with over $100 ► Response: achieve
in gross annual differentiation and
revenues. increase perceived
 Advantages of Global
Expansion
Expanding globally allows firms to increase
profitability in ways that are not available to purely
domestic enterprises. The international
environment can offer:
► Leveraging products and core competencies
► Location economies
► Cost economies from experience effects
► Leveraging subsidiary skills

► Profitability is constrained by product customization

and the “imperative of localization”. Localization:
adjustment of one or more elements of product
marketing or distribution to fit the particular
idiosyncrasies of a national market.
EXPANDING THE MARKET: LEVERAGING
PRODUCT AND COMPETENCIES

►A company can increase its growth rate by taking

goods or services developed at home and selling
them internationally
 Returns from such a strategy are likely to be greater if
indigenous/local competitors in the nations a company
enters lack comparable products
►Success of multinational companies also rest upon
the core competencies that underlie the
development, production, and marketing of goods or
services
 Core competencies are skills within the firm that
competitors cannot easily match or imitate
 Core competencies are the bedrock of a firm’s
competitive advantage and enable them to reduce the
EXPANDING THE MARKET: LEVERAGING
PRODUCT AND COMPETENCIES
► Examples of core
competencies:
 Toyota – production of cars
 McDonald’s – fast food
operations
 Proctor & Gamble –
development and marketing
of consumer products
 Wal-Mart – information
systems and logistics for
large retail operations
 Can you think of any others?
LOCATION ECONOMIES
► Realized by performing a value creation
activity in an optimal location anywhere
around the globe
► Often arise due to differences in factor costs
► Due to differences in factor costs, some
countries have comparative advantage in
production of certain products
► It can lower costs of value to enable low cost
strategy and/or help in differentiation of
products from competitors
► Global web: different stages of value chain
are dispersed to those locations where
perceived value is maximized or costs of
value creation are minimized
 Location Economies
Finding the “right” location

Assembly
Creating a Global Web

Sales Parts

Advertising
Design

Parts
Parts
Pontiac LeMans
 COST ECONOMIES from
EXPERIENCE EFFECTS: Recall
New Trade Theory
► Experience Effects: The systematic reduction in
production costs that occurs over the life of a
product.
 First observed in aircraft industry where unit
costs reduced by 80% each time output was
doubled
► How is the reduction brought about?
 Learning effects: cost savings that come from
learning by doing
 Economies of scale: the reductions in unit cost
achieved by producing a large volume of a product
 Strategic Significance of the
Experience Curve
► The firm that moves down
the experience curve most
rapidly has a cost advantage
over its competitors
► Serving the global market
from a single location helps to
establish low cost strategy
► Aim to rapidly build up sales,
aggressive marketing
strategies and get first-mover
advantages.
► The strategic significance of the
experience curve is clear;
moving down the experience
curve allows a firm to reduce its
cost of creating value and
increase its profitability
Fig. 12.4, 5th edition
LEVERAGING SUBSIDIARY SKILLS
Subsidiary Skills:
•Value created by identifying Unique skills and
ideas often
skills and applying it to a firm’s developed in
global network of operations. foreign
Some Challenges: subsidiaries.
•Managers must create an EXAMPLE: Unilever
is divided into
environment where incentives geographical
are given to take necessary basis with
subsidiaries in
risks and reward them each country for a
•Managers must accept that particular
good ideas can come from business. These
subsidiaries share
anywhere in the firm product
•Need a process to identify information and
new skill development market ideas with
other subsidiaries.
•Need to facilitate transfer of Other examples:
new skills within the firm idea-sharing at
Cost Pressures and Pressures for

►Firms Local Responsiveness

that compete in
the global marketplace
typically face two types
of competitive pressure
 Pressures for cost
reductions
 Pressures to be locally
responsive
 PRESSURES TO BUILDING AN
INTERNATIONAL STRATEGY
► PRESSURES FOR COST REDUCTIONS
 Intense in industries of standardized, commodity type
product that serve universal needs
 Meaningful differentiation on non-price factors is difficult
 Major competitors are based in low-cost locations
 Consumers are powerful and face low switching costs
 Liberalization of world trade and investment environment
► Examples of industries with cost pressures
 Commodity-type products which usually serve universal
needs e.g.. Bulk chemicals, petroleum, steel, semi-
conductor chips
 Industries which locate in low-cost locations e.g. tire
industry
 PRESSURES TO BUILDING AN
INTERNATIONAL STRATEGY
►PRESSURES FOR LOCAL RESPONSIVENESS
 Differences in consumer tastes & preferences
► North American families like pickup trucks while in Europe they
are viewed as a utility vehicle for firms
 Differences in infrastructure & traditional
practices
► Consumer electrical system in North America is based on 110
volts; in Europe on 240 volts
 Differences in distribution channels
► Germany has few retailers dominating the food market, while in
Italy it is fragmented
 Host-Government demands
► Health care system differences between countries require
pharmaceutical firms to change operating procedures
 LOCAL RESPONSIVENESS vs.
STANDARDIZED PRODUCTS
Theodore Levitt: (“The Globalization
of Markets,” HBR May/June 1983)
► Globalization and
technology have brought
convergence of tastes and
preferences of consumers.
► Modern global corporations
must “seek sensibly to
force suitably standardized
products and practices in
the entire globe.”
► Companies which do not
pursue standardized
products will fall behind
those that do.
Christopher Bartlett and
Sumantra Ghoshal (Managing
Across Borders, HBR Press, 1989)
► Complete standardization of
products is not appropriate.
► Global preferences still exist
and companies must
recognize these differences.
► In certain industries, some
companies have gained
advantage by emphasizing
local preferences and
moving away from
standardized products.
 STRATEGIC CHOICES
► Four basic strategies to enter and compete in the
international environment:
 International strategy- “Here it is”
 Localization strategy-”Act local” *
 Global standardization strategy- “Be cost-effective” **
 Transnational strategy – “Be cost-effective and Act local”
► Companies may evolve from one strategy to
another or they may use one strategy for one
business unit or product line and a different
strategy for another.
► Example: Proctor & Gamble might purse global
strategy for disposable diapers, but multidomestic
one for detergents in Asian markets.
*In 5th edition, this is called “Multidomestic”
** In 5th edition, this is called “Global”
 Choosing a Strategy
Fig. 12.7
p 427

!
“Low” does not
mean “NO”!
The appropriateness of each strategy depends on the amount of pressures
for cost reductions and local responsiveness.
Global Standardization Strategy:

► Focus is “Be cost-effective”

on increasing profitability through a
low cost strategy: maximize cost reductions
that come from experience curve effects
and location economies
► Production, marketing, and R&D
concentrated in few favorable functions
► Market standardized product to keep costs
low
► Effective where strong pressures for cost
reductions and low demand for local
responsiveness (emphasis on efficient
operations)
► Example: Semiconductor industry, Intel,
Texas Instruments, Motorola.
Localization Strategy: “Act
local”
► Main aim is maximum local responsiveness
► Customize product offering, market strategy
(including production and R&D) according to
national conditions; compete through localization of
products, no standardization
► Generally unable to realize value from experience
curve effects and location economies
► Possess high cost structure due to decentralization
► Strategy effective if firm faces strong pressures for
local responsive and weak pressures for cost
reductions
► Examples: many branded processed food and
personal care products, small appliances, any
product or service that is culturally bound e.g.
Johnson and Johnson, Proctor & Gamble (at one
point in their evolution), Black & Decker
 Transnational Strategy: “Be
cost-effective and act local”
► To meet competition firms aim to reduce costs,
transfer core competencies while paying attention
to pressures for local responsiveness. (Bartlett and
Ghoshal) Strategy effective if firm faces strong
pressures for local responsiveness and strong
pressures for cost reductions
► Global learning is critical to meet competitive
demands
 Valuable skills can develop in any of the firm’s world
wide operations
 Transfer of knowledge from foreign subsidiary to home
country, to other foreign subsidiaries
► Transnational strategy difficult task due to
contradictory demands placed on the organization
 Example : Caterpillar, Mal-Mart (evolving into)
 International Strategy: “Here it
is”
► Create value by transferring valuable core
competencies to foreign markets that
indigenous competitors lack
► Centralize product development functions at
home
► Establish manufacturing and marketing
functions in local country but head office
exercises tight control over it
► Limit customization of product offering and
market strategy
 Strategy effective if firm faces weak pressures
for local responsive and cost reductions
► Examples:
Toys R Us, Microsoft, Yahoo,
McDonald’s (in early stages)
 The Evolution of Strategy
► The problem with the international strategy is that over time
competitors inevitably emerge
 An international strategy may not be viable in the long-term so firms
need to shift toward a global standardization strategy or a
transnational strategy in advance of competitors
► The problem with localization strategy is that it is costly and a company
can not take full advantage of efficiencies that can be obtained in using
a standardized product
 Over time, the pressures to reduce costs may require a change in
strategy
► As competition intensifies
 International and localization strategies tend to become less viable
 Managers need to orient their companies toward either a global
standardization strategy or a transnational strategy
The Evolution of Strategy
NAME THAT STRATEGY
 GENERAL ELECTRIC
► Global technology, service, and finance
company
► HQ fosters change but operational and
strategic decisions are decentralized to
achieve cost effectiveness
► Company maximizes internal resources
through intense sharing
► G.E. is global brand; most products
have minimal adaptation
 HARLEY-DAVIDSON
► Active in over 75 countries
► Products easy to sell as they represent
symbol of American spirit of
independence; minimal modification
► Produced in U.S.A.
► Little need for changing prices
 SARA LEE (before latest
restructuring)
► Core focus: leading/repeat-purchase
branded consumer goods
► 26 different brands with minimal
adaptation/localization
► Global practices
► Intense control on costs to insure
competitive pricing
► Sara Lee announced in 2005 that it would be
making strategic decisions emphasizing
greater product focus and increasing
operational efficiency
 NESTLE
► Major brand: Nestle with several other well
known brands
► Product line includes: milk products, ice cream,
chocolate, candy, cookies, bottled water, pet
food, pet care products, prepared foods, pasta
► Products adapted on regional or individual
market basis
► Advertising, pricing, and distribution is market
by market basis
► Efforts are being made to coordinate more
closely in regional areas and to rotate
managers around the world in various
assignments
 UNILEVER

► A Global food, cleaning products, toiletries

group
► Relationship between parent company and
subsidiaries is changing.
► Strong network of personal manager networks
used as vehicle for global learning and
exchange
► Organized by regional business groups
► Production of certain key products
regionalized for cost effectiveness
► Flexibility is core value to achieve balance
between centralized requirements and local
adaptability e.g. Food products grouped into
 BY INDUSTRY
►Bulk chemicals

►Fast food
franchises

►Feature films
 BY INDUSTRY

► Automobiles

► Packaged food
items (branded)

► Gasoline/Oil
companies
 BY INDUSTRY

►Pharmaceuticals
►Consulting
►Luxury items
e.g. (caviar,
diamonds, fine
wines)