The Strategy of International Business Chapter 11

The Strategy of International Business

Chapter 11

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McGraw-Hill/IrwinGlobal Business, 6/e

Portions © 2007-2009 The McGraw-Hill Companies, Inc., All Rights Reserved.

Strategy and the Firm

• ‘Strategy’ comes from the Greek word strategos, the “art of the general”

- It deals with the big questions in an organization.

• Strategy can be defined as the actions that managers, especially top managers, take or plan to 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

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Value Creation

• The single most important way to increase profitability is to create more value for customers

- The amount of value a firm creates is measured by the difference between its costs and the value that consumers perceive in its products

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Value Creation

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• Michael Porter argues that there are two basic strategies for creating value

- Low-cost strategy suggests that a firm has high profits when it creates more value for its customers and does so at a lower cost

- Differentiation strategy focuses primarily on increasing the attractiveness of a product (getting customers to think it’s different and better than competitors’)

• This is an oversimplification, but it helps us think about the task of global management

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Strategic Positioning

• It is important for a firm to be explicit about its choice of strategic emphasis

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Strategic Choice in the International Hotel Industry

See text, Fig. 11.3

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Going global to increase profitability and Profit Growth

• Expanding globally allows firms to increase profitability and rate of profit growth in ways not available to one-country enterprises

- Expand the market

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- Realize “location economies” by dispersing value-creation activities

• Do things where they make most sense - Clear Vision makes most of its eyeglass parts in China- Does assembly in Hong Kong- Has high-class design in Japan, France, Italy

• This produces a global web of activities

- Realize greater cost economies from experience effects

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- Bring skills learned abroad back to the home market

• Hewlett-Packard learned total quality skills from its Singapore factory

• Wal-Mart introduces wine departments in U.S. after developing them in Argentina

• French McDonald’s invents the high class McDonald’s restaurant

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Cost Pressures and Pressures for Local Responsiveness

• Firms in the global marketplace face two common types of competitive pressure

- Pressures for cost reductions

- Pressures to be locally responsive

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Pressures for Cost Reductions

• Competition in the global market forces prices lower - Pressures for cost reduction can be particularly intense

in industries producing commodity-type products• products where most customers want something similar• where tastes and preferences of consumers in different

nations are similar

- Cost reduction pressures may also be intense• where major competitors are based in low-cost locations• where there is excess capacity• where customers are powerful and face low switching costs

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Pressures for Local Responsiveness

• Differences in consumer tastes & preferences- North American families like pickup trucks while in Europe they

are viewed as a vehicle for businesses only

• 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 a 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

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Choosing a Strategy

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“International” Strategy

• Create value by transferring valuable core competencies that indigenous competitors lackto foreign markets

• Centralize product development functions at home• Head office exercises tight control• Limit customization of product offering

- This is effective if firm faces weak pressures for local responsiveness and cost reductions

- Starbucks

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Localization Strategy

• Main aim is maximum local responsiveness• Customize product offering, market strategy including

production and R&D according to national conditions• Often unable to realize value from experience curve

effects and location economies• High cost structure

- Frito Lay

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Global Standardization Strategy

• Focus is on achieving low cost – cost reductions from experience curve effects and location economies

• Production, marketing, and R&D concentrated in few favorable locations

• Market standardized product to keep costs low• Effective where strong pressures for cost reductions

and low demand for local responsiveness exist- Semiconductor industry - Intel

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Transnational Strategy

• To meet competition, firms aim to reduce costs, transfer core competencies and at the same time pay attention to pressures for local responsiveness

• Global learning- 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 strategic management is difficult due to contradictory demands placed on the organization

- Caterpillar

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A common path of evolution of strategy

• The big long-term problem of international strategic plans 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

• As competition intensifies- “International” and localization strategies tend to become less

viable- A global standardization strategy becomes more possible - A transnational strategy remains difficult, but powerful if it works.

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Avon

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But…

• What products can a country’s firms successfully produce? • How do we know businesses we’re likely to succeed in

internationally?

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Come back after the break!

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The Strategy of International Business Chapter 11