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    1. 1. Strategy of International Business CH 11 <ul><li>Focus shift from environment to actions managers can take to compete more effectively in international business </li></ul><ul><li>How firms can increase their can increase their profitability by expanding operations into international markets </li></ul><ul><li>Different strategies firms can use when competing internationally </li></ul><ul><li>Benefits, costs and risks of strategic alliances </li></ul>
    2. 2. Wal-Mart’s experience <ul><li>Moved into other countries </li></ul><ul><ul><li>Growth opportunities at home were becoming constrained </li></ul></ul><ul><ul><li>Create value by transferring core skills to markets where indigenous competitors lacked those skills </li></ul></ul><ul><ul><li>Preempt other retailers who were expanding globally </li></ul></ul><ul><li>Discovered had to change US model </li></ul><ul><ul><li>Differences in local taste, preferences and local infrastructure </li></ul></ul><ul><ul><li>Change store location, layout and stocking practices </li></ul></ul><ul><ul><li>Keep company’s core strategies and operations – emphasize everyday low prices & realize operating efficiencies from world class logistics management and information systems </li></ul></ul><ul><li>Benefits – becoming transnational corporation </li></ul><ul><ul><li>Enhanced bargaining power with suppliers </li></ul></ul><ul><ul><li>Ability to transfer valuable ideas from one country to another </li></ul></ul><ul><ul><li>Balance global standardization with local customization </li></ul></ul>
    3. 3. Terms <ul><li>Strategy - Actions that managers take to attain the firms goals </li></ul><ul><li>Profits – difference between total revenues & total costs TR – TC = II </li></ul><ul><li>Profitability - a ratio or rate of return, e.g. ROS (sales) ROK (invested capital) </li></ul>
    4. 4. Value Creation <ul><li>Profits are determined by amount of value customers place on firm’s goods/services & firm’s costs </li></ul><ul><ul><li>Generally the more value, the higher the price that can be charged </li></ul></ul><ul><ul><li>Price is typically less that the value placed by customer (consumer surplus) because of competition in the market </li></ul></ul><ul><ul><li>Can’t segment the market enough to charge a price that reflects each individual’s assessment (reservation price) </li></ul></ul><ul><li>Company creates value by converting inputs that cost C into a product on which customers place value V </li></ul><ul><ul><li>Can create more value by lowering production costs (C decreases) </li></ul></ul><ul><ul><li>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) </li></ul></ul><ul><ul><li>Higher profits when create more value for customers at lower cost </li></ul></ul>
    5. 5. Value Creation Strategies <ul><li>Low cost strategy – focus primarily on lowering production costs </li></ul><ul><li>Differentiation strategy – focus primarily on increasing attractiveness of product </li></ul><ul><li>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 </li></ul>
    6. 6. Strategic Positioning <ul><li>Important for firm to be explicit about choice of strategic emphasis (differentiation & cost) </li></ul><ul><li>Important to make sure to configure internal operations accordingly & manage them efficiently (efficiency frontier) </li></ul><ul><li>Basic tenet is that to maximize long-run ROK & competitiveness </li></ul><ul><ul><li>Pick a position that has a enough demand to support choice </li></ul></ul><ul><ul><li>Configure internal operations to support position (manufacturing, marketing, logistics, information systems, HR) </li></ul></ul><ul><ul><li>Install right organizational structure to execute strategy </li></ul></ul>
    7. 7. Firm as Value Chain <ul><li>Series of distinct value creation activities </li></ul><ul><li>Primary activities - influence V or C </li></ul><ul><ul><li>Research & development – design of products & production process </li></ul></ul><ul><ul><li>Production – creation of a good or service </li></ul></ul><ul><ul><li>Marketing and sales – brand positioning, advertising; discovering consumer needs & communicating them to R&D </li></ul></ul><ul><ul><li>Customer service – after-sales service & support; solving customer problems </li></ul></ul><ul><li>Support activities – influence competitive advantage </li></ul><ul><ul><li>Logistics – transmission of physical materials through the value chain; procurement -> production -> distribution </li></ul></ul><ul><ul><li>Human resources – right mix of skilled people; ensure that people are adequately trained, motivated & compensated </li></ul></ul><ul><ul><li>Information systems – electronic systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries, etc. </li></ul></ul><ul><ul><li>Company infrastructure – context within which all other value creation activities occur – organizational structure, control systems, and culture of firm </li></ul></ul>
    8. 8. Implementation of Strategy <ul><li>Organization architecture </li></ul><ul><li>Strategy of firm implemented through its organization; Internal consistency among various components & support strategy and operations </li></ul><ul><li>Organizational structure </li></ul><ul><ul><li>Formal division of organization into subunits such as product divisions, national operations, and functions </li></ul></ul><ul><ul><li>Location of decision-making activities in structure </li></ul></ul><ul><ul><li>Establishment of integrating mechanisms to coordinate activities of subunits eg. cross-functional teams & pan-regional committees </li></ul></ul><ul><li>Control system & incentives (linked) </li></ul><ul><ul><li>Metrics used to measure the performance of sub-units </li></ul></ul><ul><ul><li>Devices used to reward appropriate managerial behavior </li></ul></ul><ul><li>Processes </li></ul><ul><ul><li>Manner is which decisions are made & work is performed (formulating strategy, allocating resources, evaluating performance) </li></ul></ul><ul><ul><li>Distinct from location of decision-making activities </li></ul></ul><ul><li>Organizational culture </li></ul><ul><ul><li>Shared norms & value system of firm </li></ul></ul><ul><ul><li>People = employees as well as strategy for recruitment, retention and compensation </li></ul></ul>
    9. 9. Global Expansion <ul><li>Increase profitability </li></ul><ul><li>Realize location economies by dispersing individual value creation activities around the globe – perform efficiently & effectively </li></ul><ul><li>Realize cost economies from experience effects by serving global market from central location </li></ul><ul><li>Earn a greater return from firm’s distinctive skills or core competencies by leveraging & applying to new geographic markets </li></ul><ul><li>Earn a greater return by leveraging any valuable skills developed in foreign operations & transferring them to other locations </li></ul>
    10. 10. Location Economies <ul><li>Countries differ along a range of dimensions (economic, political, legal, cultural) – these differences either raise or lower the cost of doing business. </li></ul><ul><li>Differences in factor costs – certain countries have a comparative advantage in the production of certain products </li></ul><ul><li>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. </li></ul><ul><li>Location economy – economies that arise from performing a value creation activity in the optimal location for that activity </li></ul><ul><ul><li>Lower the cost of value creation and help the firm achieve a low cost position </li></ul></ul><ul><ul><li>Enable the firm to differentiate its product offering from those of its competitors </li></ul></ul><ul><li>Clear Vision </li></ul><ul><li>Strategy to lower cost structure (lower C) </li></ul><ul><ul><li>Shifting from US –> Hong Kong -> China </li></ul></ul><ul><li>Strategy to increase perceived value (increase V) </li></ul><ul><ul><li>Investing in French, Italian & Japanese factories for superior design </li></ul></ul><ul><li>Strategy for premium pricing (increase P) </li></ul><ul><ul><li>Increase value thus profit and profitability </li></ul></ul>
    11. 11. Global Web <ul><li>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 </li></ul><ul><li>In general firm with global web should have competitive advantage by lowering its cost structure & differentiating its product </li></ul><ul><li>Caveats </li></ul><ul><ul><li>Transportation costs & trade barriers complicate the picture – Mexico vs Asia </li></ul></ul><ul><ul><li>Assessing political & economic risks when making location decisions </li></ul></ul>
    12. 12. Experience Effects <ul><li>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) </li></ul><ul><li>Learning effects – Cost savings that come from learning by doing. </li></ul><ul><ul><li>Labor productivity & management </li></ul></ul><ul><ul><li>Only during first 2-3 years </li></ul></ul><ul><li>Economies of Scale – reduction in unit cost achieved by producing a large volume of product </li></ul><ul><ul><li>Ability to spread fixed costs over a large volume of sales </li></ul></ul><ul><ul><li>Ability of large firms to employ increasingly specialized equipment or personnel - -> lower unit cost </li></ul></ul><ul><li>Strategic significance </li></ul><ul><ul><li>Moving down the experience curve allows firm to reduce its cost of creating Value (lower C) </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>Once a firm has established a low-cost position, it can act as a barrier to new competition. </li></ul></ul>
    13. 13. Leveraging Core Competencies <ul><li>Core competencies </li></ul><ul><ul><li>Skills within the firm that competitors cannot easily match or imitate </li></ul></ul><ul><ul><li>Firm’s value creation activities = production, R&D, marketing, human resources, logistics, general management </li></ul></ul><ul><ul><li>Expressed in product offerings that other firms find difficult to match or imitate </li></ul></ul><ul><ul><li>Bedrock of a firm’s competitive advantage </li></ul></ul><ul><li>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 </li></ul>
    14. 14. Leveraging Subsidiary Skills <ul><li>Skills are developed first at home and then transferred to foreign operations </li></ul><ul><li>Skills can be created anywhere within the global network, wherever people have the opportunity and incentive to try new things </li></ul><ul><li>Management implications </li></ul><ul><ul><li>Humility to recognize that valuable skills can arise anywhere </li></ul></ul><ul><ul><li>Establish incentive system that encourages local employees to acquire new skills </li></ul></ul><ul><ul><li>Have a process for identifying when valuable new skills have been created </li></ul></ul><ul><ul><li>Act as facilitators to help transfer valuable skills within the firm </li></ul></ul>
    15. 15. Pressures for cost reduction <ul><li>Minimize unit costs </li></ul><ul><ul><li>Base its productive activities at the most favorable low cost location </li></ul></ul><ul><ul><li>Offer a standardized product to the global marketplace </li></ul></ul><ul><li>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 </li></ul>
    16. 16. Pressures for local responsiveness <ul><li>Recognize national differences in </li></ul><ul><ul><li>consumer tastes & preferences, e.g world cars </li></ul></ul><ul><ul><li>in infrastructure and traditional business practices, e.g. electrical requirements US vs EU </li></ul></ul><ul><ul><li>in distribution channels, e.g. delegation of marketing functions to national subsidiaries </li></ul></ul><ul><ul><li>competitive conditions & host government policies, e.g politics of health care with local clinical testing, registration procedures & pricing restrictions </li></ul></ul><ul><li>Differentiate its product offering & marketing strategy from country to country </li></ul><ul><ul><li>May not be possible to realize the benefits of experience curve & location economies </li></ul></ul><ul><ul><li>Customizing may involve duplication & lack of standardization thereby raising costs </li></ul></ul><ul><ul><li>May not be possible to leverage the skills and products associated with a firm’s core competence from location to location </li></ul></ul>
    17. 17. Strategic Choices <ul><li>Four basic strategies to compete in international environment – appropriateness varies with extent of pressures for cost reduction & local responsiveness </li></ul><ul><li>International Strategy </li></ul><ul><ul><li>Firms create value by transferring valuable skills & products to foreign markets where indigenous competitors lack </li></ul></ul><ul><ul><li>Centralize R&D at home, establish production & marketing in each country, retain control over strategy -> high operating costs </li></ul></ul><ul><ul><li>Relatively weak pressure for cost reduction & local responsiveness (Microsoft) </li></ul></ul><ul><li>Multidomestic Strategy </li></ul><ul><ul><li>Achieving maximum local responsiveness – extensively customize both product offering & marketing strategy </li></ul></ul><ul><ul><li>Establish a complete set of value creation activities in each market - production, marketing and R&D -> realize value from experience curve effects </li></ul></ul><ul><ul><li>High cost structure & poor job of leveraging core competencies </li></ul></ul><ul><ul><li>High pressure for local responsiveness & low pressure for cost reduction </li></ul></ul>
    18. 18. Strategic Choices continued <ul><li>Global Strategy </li></ul><ul><ul><li>Focus on increasing profitability by cost reductions from experience curve effects & location economies (low-cost strategy) </li></ul></ul><ul><ul><li>Production, marketing and R&D in a few key locations – do not customize product offering & marketing </li></ul></ul><ul><ul><li>Standardized product to reap economies of scale from experience curve </li></ul></ul><ul><ul><li>Strong pressure for cost reductions & low demand for local responsiveness (Industrial goods, e.g. Intel) </li></ul></ul><ul><li>Transnational Strategy </li></ul><ul><ul><li>Plan to exploit experienced-based cost and location economies, transfer core competencies within the firm & pay attention to local responsiveness </li></ul></ul><ul><ul><li>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) </li></ul></ul><ul><li>Table 11.1 on page 406 shows advantages & disadvantages of 4 strategies </li></ul>
    19. 19. Strategic Alliances <ul><li>Cooperative agreements between potential or actual competitors </li></ul><ul><li>Advantages </li></ul><ul><ul><li>Facilitate entry into a foreign market </li></ul></ul><ul><ul><li>Allow firms to share fixed costs & risks of developing new products or processes </li></ul></ul><ul><ul><li>Bring together complimentary skills & assets </li></ul></ul><ul><ul><li>Help the firm establish technological standards for the industry that benefit firm </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Give competitors a low cost route to new technology & markets (Japanese) </li></ul></ul><ul><ul><li>If firms not careful they can give away more than they receive </li></ul></ul>
    20. 20. Making Alliances Work <ul><li>Partner Selection </li></ul><ul><ul><li>Helps the firm attain strategic goals – market access, sharing costs & risks of product development, gaining access to critical core competencies </li></ul></ul><ul><ul><li>Shares the firm’s vision for purpose of the alliance </li></ul></ul><ul><ul><li>Fair Play – unlikely to exploit the firm’s technological know-how while giving little away in return </li></ul></ul><ul><li>Research </li></ul><ul><ul><li>Collect as much publicly available info as possible </li></ul></ul><ul><ul><li>Collect data from informed third parties </li></ul></ul><ul><ul><li>Get to know the potential partner </li></ul></ul>
    21. 21. Making Alliances Work <ul><li>Alliance Structure - Risk of giving away too much reduced to acceptable level </li></ul><ul><ul><li>Wall off critical technology to prevent leakage to other party </li></ul></ul><ul><ul><li>Establish contract safeguards in alliance agreement to guard against risk of opportunism (technology or markets) </li></ul></ul><ul><ul><li>Agree in alliance to swap skill and technologies to help ensure equitable gain </li></ul></ul><ul><ul><li>Extract a significant credible commitment from partner in advance (50/50 JV) </li></ul></ul>
    22. 22. Making Alliances Work <ul><li>Managing the Alliance </li></ul><ul><ul><li>Maximize benefits of the alliance by building trust & learning from partners – relational capital </li></ul></ul><ul><ul><li>Personal relationships foster informal management network between partners </li></ul></ul><ul><ul><li>Japanese learn more from alliances than US or EU who view alliance as cost or risk sharing </li></ul></ul>
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