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Fourth Edition
InternationalBusiness
CHAPTER 12
The Strategy of International Business
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
12-3
Chapter Focus
Shifting focus from the international environment to the firm.
Actions managers can take to compete more effectively.How firms can increase profitability by expanding to foreign markets.Different international strategies.
Pros and cons of the strategies.Factors affecting strategic choice.Tactics.
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12-4
Firms Profit
Π = Profits = TR – TCProfits (π*Q) = (P*Q) – (ATC*Q)
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12-5
Profitability
Profitability is a rate of return concept:
ROS (return on sale) = (Π/TR)
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12-6
Profitability
Profitability is a rate of return concept:
ROS (return on sale) = (Π/TR)
ROI (return on investment) = (Π /I)
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12-7
Strategy and the Firm
StrategyActions taken by managers
to attain firm’s goals.
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12-8
Firm’s Strategy
Strategy could be to maximize:• Π = Profits = TR – TC• ROS (return on sale) = (Π/TR)• ROI (return on investment) = (Π /I)
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12-9
Value Creation
Figure 12-1
V = Consumer Value: The highest price a consumeris willing to pay for a product
V - P
P - C
V - C
V
P
C
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12-10
Value Creation
Figure 12-1
V = Consumer Value: The highest price a consumeris willing to pay for a productP = Market Price: What actuallya consumer pays for a product
V - P
P - C
V - C
V
P
C
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12-11
Value Creation
Figure 12-1
V = Consumer Value: The highest price a consumeris willing to pay for a productP = Market Price: What actuallya consumer pays for a productC = Cost of Production
V - P
P - C
V - C
V
P
C
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12-12
Value Creation
Figure 12-1
V = Consumer Value: The highest price a consumeris willing to pay for a productP = Market Price: What actuallya consumer pays for a productC = Cost of Production
V-P = Consumer Surplus
V - P
P - C
V - C
V
P
C
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
12-13
Value Creation
Figure 12-1
V = Consumer Value: The highest price a consumeris willing to pay for a productP = Market Price: What actuallya consumer pays for a productC = Cost of Production
V-P = Consumer SurplusP-C = Profit Margin
V - P
P - C
V - C
V
P
C
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12-14
Value Creation
Figure 12-1
V = Consumer Value: The highest price a consumeris willing to pay for a productP = Market Price: What actuallya consumer pays for a productC = Cost of Production
V-P = Consumer SurplusP-C = Profit MarginV-C = Value Added by the firm
V - P
P - C
V - C
V
P
C
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12-15
High Profit Strategy
A firm could choose:Low Cost Strategy: Strategy of lowering cost of production.
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12-16
High Profit Strategy
A firm could choose:Low Cost Strategy: Product Differentiation Strategy: Strategy of increasing the value of the product to consumers by making the product more valuable through superior design, quality, etc.
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The Firm as a Value Chain
A firm could be considered as a value chain composed of a series of distinct value creation activities. It could be categorized as:Primary activities or Support activities.
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Primary Activitieshave to do with design, creation, and delivery of the product.
The Firm as a Value Chain
R & D (design)
Production inmanufacturing
(physical)and in serviceMTV programs
Marketing & Salesthrough brand name
positioning and advertising
“bottled water”value is increased
After saleservice
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Materials Management: controls transmission of physical materials fromProcurement through production.
Support Activities
The Firm as a Value Chain
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Human Resources: Ensures that the company has the right mix of peopleEnsures that people are well trained, well compensated and motivated
Materials Management
Support Activities
The Firm as a Value Chain
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Information Systems: refers to the communication features of theInternet for managing inventories, tracking sales, pricing of the product,
Dealing with customers, etc.
Human Resources
Materials Management
Support Activities
The Firm as a Value Chain
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Company Infrastructure:The environment within which all of the firm’sactivities such as production, marketing, sales, service take place.
It includes organizational structure, control systems, and culture of the firm.
Information Systems
Human Resources
Materials Management
Support Activities
The Firm as a Value Chain
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12-23
Profiting from Global Expansion
Realize location economies. Trade barriers and transportation costs permitting, the firm will benefit from basing each activity that it must perform to deliver a commodity to its customer (given the economic, social, political, cultural conditions are appropriate) at a place where that activity is done most efficiently.
Firms operating internationally are able to:
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Profiting from Global Expansion
Realize location economies.Realize greater cost economies. For example, cloths might be designed in Paris (better designers: They are the most capable designers to add value to cloths), materials could be purchased from India (cheap raw materials: minimize the cost of value creation) , and produced in China (cheap skilled labor: minimize the cost of value creation).
Firms operating internationally are able to:
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Profiting from Global Expansion
Realize location economies.Realize greater cost economies.
Earn a greater return from the firm’s distinctive skills or core competencies (Firm skills that competitors can not easily match or imitate).
Firms operating internationally are able to:
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12-26
Profiting from Global Expansion
Realize location economies.Realize greater cost economies.Earn a greater return from the firm’s distinctive skills or core competencies.
Earn a greater return by leveraging valuable skills developed in foreign operations and transferring them to the firm’s other operations.
Firms operating internationally are able to:
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Profiting from Global Expansion
Profitability is constrained by product customization and imperative of localization
producing unique products to appeal to the local tastes and preferences.
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12-28
Caveats
Needs for consideration:Transportation costs.Trade barriers.Political risks. Economic risks.
1. Low labor costs.2. Proximity to U.S.3. NAFTA.
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12-29
Experience Curve
Cost of production goes down systematically as production increases. Every time production doubles, cost of production decreases to 80% what is was.
Total output Cost of production 4 units $1008 units $8016 units $6432 units $51.2
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Experience Curve
Cost of production goes down systematically because:1-- Learning effects:
Cost savings that come from “learning by doing.”
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Experience Curve
Cost of production goes down systematically because:1-- Learning effects:
Cost savings that come from “learning by doing.”Are more significant in complex tasks.
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Experience Curve
Cost of production goes down systematically because:1-- Learning effects:
Cost savings that come from “learning by doing.”Are more significant in complex tasks.Decline and cease after two – three years.
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Experience Curve
Cost of production goes down systematically because:1-- Learning effects:
Cost savings that come from “learning by doing.”Are more significant in complex tasks.
Decline and cease after two – three years.
2-- Economies of Scale:Reduction in unit cost achieved through volume production.
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Experience Curve
Cost of production goes down systematically because:1-- Learning effects:
Cost savings that come from “learning by doing.”Are more significant in complex tasks.
Decline and cease after two – three years.
2-- Economies of Scale:Reduction in unit cost achieved through volume production.Sources:
Spread fixed costs over volume.
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Experience Curve
Cost of production goes down systematically because:1-- Learning effects:
Cost savings that come from “learning by doing.”Are more significant in complex tasks.
Decline and cease after two – three years.
2-- Economies of Scale:Reduction in unit cost achieved through volume production.Sources:
Spread fixed costs over volume.Employing specialized equipment or personnel
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The Experience Curve
Figure 12.3
B
A
Accumulated Output
Un
it C
osts
Strategic SignificanceMoving down the curve reduces
the cost of creating value.
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Leveraging Core Competencies
core competencies are firm skills that competitorscan not easily match
or imitate.
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Leveraging Core Competencies
core competencies are firm skills that competitorscan not easily match
or imitate.
Value of core competencies are greatest when:1. Skills and products are most unique.
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12-39
Leveraging Core Competencies
core competencies are firm skills that competitorscan not easily match
or imitate.
Value of core competencies are greatest when:1. Skills and products are most unique.2. Value placed by consumers is great.
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12-40
Leveraging Core Competencies
core competencies are firm skills that competitorscan not easily match
or imitate.
Value of core competencies are greatest when:1. Skills and products are most unique.2. Value placed by consumers is great.3. Few capable competitors with skills or products.
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12-41
Leveraging Subsidiary Skills
Note: Skills can be created anywhere in a multinational’s global operations network.
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Leveraging Subsidiary Skills
Note: Skills can be created anywhere in a multinational’s global operations network.
Challenges for managers are:1. To have the humility to recognize valuable skills can
come from anywhere.
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12-43
Leveraging Subsidiary Skills
Note: Skills can be created anywhere in a multinational’s global operations network.
Challenges for managers are:1. To have the humility to recognize valuable skills can
come from anywhere.2. To establish incentives to encourage local employees
to acquire new skills.
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
12-44
Leveraging Subsidiary Skills
Note: Skills can be created anywhere in a multinational’s global operations network.
Challenges for managers are:1. To have the humility to recognize valuable skills can
come from anywhere.2. To establish incentives to encourage local employees
to acquire new skills.3. To create a process to identify new skill development.
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
12-45
Leveraging Subsidiary Skills
Note: Skills can be created anywhere in a multinational’s global operations network.
Challenges for managers are:1. To have the humility to recognize valuable skills can
come from anywhere.2. To establish incentives to encourage local employees
to acquire new skills.3. To create a process to identify new skill development.4. To facilitate transfer of new skills within the firm.
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12-46
Pressures for Cost Reduction and Local Responsiveness
Figure 12.4
CompanyA
CompanyC
CompanyB
High
Cost pressures
LowLow High
Generally reflects the position of most
companies
Pressures for local responsiveness
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Cost ReductionMass producing a standardized product at an optimal location.
Intense: in commodity industries.Where competitors are in low cost locations.Where there is persistent excess capacity.Where there are low switching costs.Because of greater international competition.
Local responsivenessArise from:
Differences in consumer taste and preferences.Differences in infrastructure and traditional practices.Differences in distribution channels.Host government demands.
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Local Responsiveness
Delegate marketing tonational subsidiaries.
Delegate manufacturingand production to foreign
subsidiaries.
Delegate production and marketing to
national subsidiaries
Taste and preference
InfrastructureAnd
practice
Distributionchannels
Manufacture locally.
Hostgovernment
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12-49
Four Basic Strategies
Figure 12.5
High
Cost pressures
Low
Low High
GlobalStrategy
TransnationalStrategy
Multi domesticStrategy
InternationalStrategy
Pressures for local responsiveness
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12-50
Strategic Choices
TransnationalExploit experienced
based cost and location economies, transfer core competencies
within the firm, and pay attention to local
responsiveness needs.
TransnationalExploit experienced
based cost and location economies, transfer core competencies
within the firm, and pay attention to local
responsiveness needs.
Internationalcreate value by
transferring skills to local markets where
skills are not present.
Internationalcreate value by
transferring skills to local markets where
skills are not present.
Multidomesticoriented toward
achieving maximumlocal
responsiveness.
Multidomesticoriented toward
achieving maximumlocal
responsiveness.
Globalincrease profitability
through cost reductions from
experience curve effects and location
economies.
Globalincrease profitability
through cost reductions from
experience curve effects and location
economies.
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12-51
Cost Pressures and Pressures for Local Responsiveness Facing
Caterpillar
Figure 12.6
CaterpillarTractor
High
Cost pressures
Low
Low HighPressures for local responsiveness
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The Advantages and Disadvantages of the
Four Strategies
Table 12.1a
Strategy Advantages Disadvantages
Global Exploit experience curve effects
Exploit location economies
Lack of localresponsiveness
International
Transfer distinctive competencies to
Foreign Markets
Lack of localresponsivenessInability to realizelocation economiesFailure to exploit experience curve effects
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The Advantages and Disadvantages of the Four Strategies
Strategy Advantages Disadvantages
Multi-domestic Customize product offeringsand marketing in accordancewith local responsiveness
Inability to realize locationeconomies
Failure to exploitexperience curve effects
Failure to transferdistinctive competenciesto foreign markets
Transnational Exploit experience curveeffects
Exploit location economiesCustomize product offeringsand marketing in accordancewith local responsiveness
Reap benefits of global learning
Difficult to implement dueto organizationalproblems
Table 12.1
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