1

Twelve

C h a p t e rThe Strategy of

International Business

Pa

rt Fiv

e C

om

pe

ting

in a

Glo

bal M

ark

etpla

ce

2

Chapter TwelveTHE STRATEGY OF

INTERNATIONAL BUSINESS

1. Strategy and the Firm

2. Global Expansion Benefits

3. Formulating a Global Strategy

OBJECTIVES

3

THE ROLE OF STRATEGY

Strategy:● Actions managers take to attain the goals of

the firm.● Need to identify and take action that lowers

the cost of value creation and/or differentiates the firm’s product through superior design, quality, service, or functionality.

4

THE FIRM AS A VALUE CHAIN

Sequential process of value-creating activities

Identifies the separate activities and business processes performed to design, produce, market, deliver, and support a product / service.

Firm is profitable to the extent the value it receives exceeds the total costs involved in creating its product or service.

Consists of two types of activitiesPrimary activities Support activities

5

VALUE CHAIN: PRIMARY AND SUPPORT ACTIVITIES

General administration

Human resource management

Technology development

Procurement

Inbound logistics

OperationsOutbound logistics

Marketing and sales

Service

Copyright The McGraw-Hill Companies, Inc. All rights reserved.

6

2. GLOBAL EXPANSION BENEFITS

International firms can:● Earn a greater return from distinctive skills or core

competencies.● Realize location economies by dispersing value

creation activities to locations where they can be performed most efficiently.

● Realize greater experience curve economies, which reduces the cost of value creation.

7

BENEFITS FOR INTERNATIONAL FIRMS

Learning Effects:● Labor productivity increases over time as individuals

learn the most efficient ways to perform particular tasks. Economies of Scale:

● Reductions in unit cost achieved by producing a large volume of a product.

Strategic Significance:● Moving down the experience curve allows a firm to

reduce its cost of creating value.

8

GlobalFirm

GlobalFirm

Domestic Firm

Domestic Firm

ManufacturingManufacturing

Economies of ScaleEconomies of Scale

R & DR & DProcurementProcurement

MarketingMarketing LogisticsLogistics

ECONOMIES OF SCALE FOR GLOBAL FIRMS

9

EXPERIENCE CURVE EFFECTS

Copyright The McGraw-Hill Companies, Inc. All rights reserved.

10

CAVEATS

When making location decisions:● Consider trade barriers and

transportation costs.● Assess political and

economic risks.

11

3. FORMULATING A GLOBAL STRATEGY

OrganizationOrganizationEnvironmentEnvironment Int’lInt’lStrategyStrategy

Int’lInt’lMarketMarket

Success !Success !

• Economic• Socio-cultural• Political/Legal• Local competition

• Firm Resources• Firm Capability• Core competence• Strategic Disadvantages

Generic competitive StrategiesChoice of Entry Modes

Constraints

Opportunity

Constraints

Opportunity

12

$ Cost Reduction

Local Responsiveness

TWO COMPETING FORCES

13

COST REDUCTION

Desire to reduce costs by:

Mass production

Product standardization.

Optimal location production.

Hard to do with commodity-type products.

products serving universal needs.

Also hard where competition is in low cost producing location.

Finally, int’l competition creates price pressures.

$

14

LOCAL RESPONSIVENESS

Different consumer tastes and preferences.

Different infrastructure and practice.

Differences in distribution channels.

Government demands.

15

High

Cost Pressures

Low

Low High

Pressures for Local Responsiveness

GlobalGlobalStrategyStrategy

TransnationalTransnationalStrategyStrategy

MultidomesticMultidomesticStrategyStrategy

CHOICE OF GLOBAL STRATEGY

InternationalInternationalStrategyStrategy

Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

16

INTERNATIONAL STRATEGY

Go where locals don’t have your skills.

Little adaptation. Products developed at home (centralization).

Manufacturing and marketing in each location.

Makes sense where low skills, competition, and costs exist.

17

MULTIDOMESTIC STRATEGY Maximize local responsiveness. Customize the product and marketing strategy to

national demands.

Skill and product transfer.

Transfer all value-creation activities, no experience curve rewards.

Good for high local responsiveness and low cost reduction pressures.

UK Chile

IndiaJapan

USA

HK

Mexico

18

GLOBAL STRATEGY

Best use of the experience curve and location economies.

This is the low cost strategy.

Utilize product standardization.

Not good where local responsiveness demand is high.

B

A

Accumulated output

Unit costsMoving down the curve reduces

the cost of creating valueEconomies of Scale

19

Chile

Japan

Mexico

India

Korea

UK

China

USAUSA

TRANSNATIONAL STRATEGY(Distributed but Networked Organization)

20

TRANSNATIONAL STRATEGY

Makes sense where there is pressure for both cost reduction and local responsiveness.

Global coordination and national flexibility Link local operations to each other, and to center in

flexible systems Flow of skills and product offerings occurs throughout

the firm (global learning). Link diverse org’ perspectives and resources. Organizational characteristics: Reciprocal dependence, sharing resources, ideas, opportunities.

Integrating mechanism: difference solving system, Information system, Forums, HRM, Corporate Identification