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
Strategy
Organization 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