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Lecture 6 The Strategy of International Business. Market-seeking. Asset-seeking. Asset-seeking. Asset-seeking. Market-seeking. What is the motivation for competing internationally?. Gain access to new customers. Obtain access to valuable resources. Need to achieve lower costs. - PowerPoint PPT Presentation
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© Ram Mudambi, Temple University, 2007 1
Lecture 6The Strategy of International
Business
© Ram Mudambi, Temple University, 2007 2
What is the motivation for competing internationally?
Gain access to
new customers
Capitalizeon resource
strengths andcompetencies
Need toachieve
lower costsSpread business risk across wider
market base
Obtain access to valuable
resourcesMarket-seeking
Market-seeking
Asset-seekingAsset-seeking
Asset-seeking
© Ram Mudambi, Temple University, 2007 3
The U.K.The U.K. Continental EuropeContinental Europe
AustraliaAustralia
© Ram Mudambi, Temple University, 2007 4
ItalyItaly
GermanyGermany
SpainSpain
AustraliaAustralia
The U.K.The U.K.
© Ram Mudambi, Temple University, 2007 5
ItalyItaly
GermanyGermany
SpainSpain
AustraliaAustralia
The U.K.The U.K.
© Ram Mudambi, Temple University, 2007 6
The Role of Strategy
Strategy: Actions managers take to attain the goals
of the firm 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.
7 © Ram Mudambi, Temple University, 2007
Porter’s generic strategies
What Competitive DimensionWho Cost Differentiation
Competitive Broad Cost leadership Differentiation leadership
Scope Narrow Cost focus Differentiation focus
Offers low priced products
Offers unique or distinctive products
Serves the entire market Serves a specific niche
© Ram Mudambi, Temple University, 2007 8
Profiting from Global Expansion
International firms can: Earn a greater return from
distinctive skills or core competencies – leverage these in foreign markets
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.
© Ram Mudambi, Temple University, 2007 9
Locating activities to build global advantage
Two issues with regard to firm activities: Whether to concentrate in one or
two countries or disperse activities to many nations
Where to locate activities (which country is best location for which activity?)
© Ram Mudambi, Temple University, 2007 10
Global advantage: Concentrating vs. dispersing activities
Activities should be concentrated when Scale economies or experience curve effects need to be
captured Coordination of related activities is enhanced
Activities should be dispersed when They need to be performed close to buyers Transportation costs, scale diseconomies, or trade barriers
make centralization expensive Buffers for fluctuating exchange rates, supply interruptions,
and adverse politics are needed
© Ram Mudambi, Temple University, 2007 11
Location and the value chain - 1
Where to locateactivity X?
Optimal location for X considered independently
Importance of the links between X and other activities of the firm
Costs and availability
of inputs Trade policy
Strengths and skills of the firm relative
to the location
Strategy of the firm – cost vs. differentiation
advantages
Relative importance of
staff and line linkages
© Ram Mudambi, Temple University, 2007 12
Location and the value chain - 2Identify
key activities in the value chain principal requirements for each activity possible locations which meet the requirements
Final location decision must consider overall strategic objectives
Activities dictate location
Activities dictate location
Linkages dictate location
Linkages dictate location
© Ram Mudambi, Temple University, 2007 13
Inputs Markets
Value Value AddedAdded
R&DR&DKnowledgeKnowledge
MarketingMarketingKnowledgeKnowledge
VALUE CHAIN DISAGGREGATIONVALUE CHAIN DISAGGREGATION
Location 1 Location 2 Location 3 Location 4
The Smile of Value Creation** Mudambi, JIBS 2007* Mudambi, JIBS 2007
Vertically integrated firmVertically integrated firm
© Ram Mudambi, Temple University, 2007 14
Inputs Markets
R&DR&DKnowledgeKnowledge
MarketingMarketingKnowledgeKnowledge
VALUE CHAIN DISAGGREGATIONVALUE CHAIN DISAGGREGATION
Location 1 Location 2 Location 3 Location 4
The Smile of Value Creation*
* Mudambi, JIBS 2007* Mudambi, JIBS 2007
• Rich Countries
• Rich Countries
• Rich Countries
• Rich Countries
• PoorCountries
• PoorCountries
• Intangibles• Intangibles • Intangibles• Intangibles
• Tangibles• Tangibles
• Services• Services • Services• Services
• Manufacturing• Manufacturing
Catch-upCatch-up Catch-upCatch-up
Industry creation
Industry creation
Industry creation
Industry creation
© Ram Mudambi, Temple University, 2007 15
Location Economics
Pontiac LeMans
Design
GermanyGermany
Parts
Parts
Parts
SingaporeSingaporeTaiwanTaiwan
JapanJapan
Assembly
South KoreaSouth Korea
Advertising
The U.K.The U.K.
Sales
The U.S.The U.S.
© Ram Mudambi, Temple University, 2007 16
Caveats
The importance of linkages can be enhanced by Transportation costs Trade barriers Political and economic risks
US firms have shifted production from Asia to Mexico due to Low labor costs. Proximity to U.S. NAFTA.
© Ram Mudambi, Temple University, 2007 17
Concept: Profit sanctuaries?
Country markets where firm Has a strong or protected market position and
Derives substantial profits
Generally, a firm’s most strategically crucial profit sanctuary is its home market
Profit sanctuaries are a valuable competitive asset in global industries
© Ram Mudambi, Temple University, 2007 18
Concept: Cross-subsidization Involves supporting competitive efforts in
one market with resources/profits diverted from operations in other markets
Competitive power of cross-subsidization results from a global firm’s ability to Charge lower prices or otherwise launch a strategic
offensive to lure away a domestic firm’s customers and cover losses with profits earned in other critical markets
© Ram Mudambi, Temple University, 2007 19
Concept: Transfer-pricing Prices charged by one unit of a multinational firm
to a unit operating in another country. Can be used to shift profits from one tax regime to
another. It is the means of operationalizing cross-
subsidization. Can be illegal if undertaken without reference to
costs.
Subs 1Subs 1 Subs 2Subs 2GoodsGoods
PaymentPayment
MNCMNC
National BorderNational Border
© Ram Mudambi, Temple University, 2007 20
MNCs Face Two Conflicting Pressures
Reduce costs Be responsive to local
needs Examples?Examples?
© Ram Mudambi, Temple University, 2007 21
Four Basic Strategies
Importance of Local Responsiveness
Imp
ort
ance
of
Sca
le e
con
om
ies
Low High
Low
High
INTERNATIONAL MULTI-DOMESTIC
GLOBAL TRANSNATIONAL
Late 19Late 19thth century European century Europeanfirmsfirms
Post WW2 US firmsPost WW2 US firms Most modern knowledge-Most modern knowledge-intensive multinationalsintensive multinationals
© Ram Mudambi, Temple University, 2007 22
International Strategy Go where locals don’t have your skills Little adaptation. Products developed at home
(centralization) Can be a pure export strategy Marketing in each location If local manufacture, usually low-skill assembly
Makes sense where low skills, competition, and costs exist
© Ram Mudambi, Temple University, 2007 23
International Strategy
MNC Parent
Subsidiaries
Pre-dominant Knowledge flow – • Parent to subsidiary• Minimal local adaptation
© Ram Mudambi, Temple University, 2007 24
Multi-domestic Strategy High level of local autonomy 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
© Ram Mudambi, Temple University, 2007 25
Multi-domestic Strategy
MNC Parent
Subsidiaries
Knowledge flows – • Parent to subsidiary• Very strong local influences
© Ram Mudambi, Temple University, 2007 26
Global Strategy
Theodore Levitt, HBS professor in the ’60s
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
© Ram Mudambi, Temple University, 2007 27
Global Strategy
MNC Parent
Subsidiaries
Pre-dominant Knowledge flow – • Parent to subsidiary• Virtually no local adaptation
© Ram Mudambi, Temple University, 2007 28
Transnational Strategy
Christopher Bartlett and Sumantra Ghoshal Core competencies can develop in any of the
firm’s worldwide operations. Flow of skills and product offerings occurs
throughout the firm - not only from home firm to foreign subsidiary (global learning).
Makes sense where there is pressure for both cost reduction and local responsiveness.
© Ram Mudambi, Temple University, 2007 29
Transnational Strategy
MNC Parent
Subsidiaries
Knowledge flows – • Parent to subsidiary• Subsidiary to parent• Subsidiary to subsidiary• Considerable local influences
© Ram Mudambi, Temple University, 2007 30
Linkages are least important in
Linkages are most important in
© Ram Mudambi, Temple University, 2007 31
Characterizing linkages –The source-target specification
Home Host
Numeraire knowledge flow(from parent to subsidiary)
Learning
SpilloversKnowledgetransfer
1
2
3
© Ram Mudambi, Temple University, 2007 32
The Evolution of Strategy
© Ram Mudambi, Temple University, 2007 33
The Advantages and Disadvantages of the Four Strategies
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
© Ram Mudambi, Temple University, 2007 34
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
© Ram Mudambi, Temple University, 2007 35
Takeaways The motivation for competing
internationally is based on gaining access to markets and/or assets
Location choice is driven by balancing the importance of activities and linkages in the value chain
Overall strategy is driven by balancing the importance of cost (scale economies) and local responsiveness