The Learning Objectives for this chapter are To evaluate industry structure, firm strategy, and value creation To profile the features and functions of the value chain To assess how managers configure and coordinate a value chain To explain global integration and local responsiveness To profile the types of strategies firms use in international business
This Figure shows how a firm’s strategy is influenced by outside forces. In particular, the environment for multinational companies is shaped by cultural, political, legal, economic, trade, monetary, governmental, and institutional forces. The goal for managers is to design a strategy that allows the company to compete successfully in international markets and sustain its growth.
Learning Objective 1: To evaluate industry structure, firm strategy, and value creation.
An industry is composed of those companies engaged in a particular type of enterprise. How an industry is structured influences the profitability of companies, particularly in situations where there is perfect competition. Industry structure involves the relationships among suppliers of inputs, buyers of outputs, substitute products, potential new entrants, and rivalry among competing firms.
Does industry structure change? Yes, many things can prompt a change including new products, new firms, new markets, and new managers. If changes are significant, firms may have to reassess their strategy.
Perfect competition presumes many buyers and sellers such that no individual affects price or quantity, there is perfect information for both producers and consumers, that there are few, if any, barriers to entry and exit, that full mobility of resources exists, and that firms and buyers have perfect knowledge. Do perfect markets exist? Well, most industries aren’t perfect, and companies typically have different levels of profitability. In fact, industries that are most attractive typically have imperfect competition that allows companies to seek above-average profits. It is in these industries that the power of innovative executives becomes so apparent as they devise strategies that create value. Strategy can help managers assess a company’s position, identify where it should go, and determine how to get there.
Companies create value using either a cost leadership strategy or a differentiation strategy. The former reduces costs below those of competitors for a given level of quality, while the latter involves developing products that customers value and that rivals find hard, if not impossible, to match or copy. Another way to think about the two approaches is that a differentiation strategy focuses on innovation while a cost leadership strategy emphasizes efficiency.
Learning Objective 2: To profile the features and functions of the value chain.
Regardless of which strategy a firms uses, cost leadership or differentiation, it can be helpful to think of the value creation process using the value chain. The value chain separates the notion of “creating value” into a series of discrete, sequential activities.
This Figure shows the different primary and support activities in the value chain.
This Table provides details on the different activities that make up the primary and support activities in the value chain.
Learning Objective 3: To assess how managers configure and coordinate a value chain.
Multinational companies have to efficiently distribute value activities and link them effectively. This can be done using a concentrated strategy or using a dispersed approach. The goal is to put value activities in the optimal location in the world to exploit location economies - the economies that arise from performing a value activity in the most productive location or locations given prevailing economic, political, legal, and cultural conditions.
What influences the configuration of the value chain? Several things do including the quality of the business environment, innovation context, resource costs, logistics, digitization, and scale economies. The business environment can affect the ease of doing business. Generally, it easiest to do business in high income countries. Innovation context is important because going forward, the pace of innovation accelerates. In fact, the singularity principle suggests that the change will be so fast that it will seem to be expanding at infinite speed. Resource costs like wage rates, worker productivity, resource availability, inflation rate, Government Regulations, and so on can also affect the configuration of the value chain. Logistics refers to how companies obtain, produce, and exchange material and services in the proper place and in proper quantities for the proper activity. Companies try to minimize the expense associated with logistics. Digitization involves converting an analog product into a string of zeros and ones. Digital activities can be located just about anywhere, and in fact today it’s allowing activities to be dispersed that had always been concentrated in a few locations. X-rays can now be taken in one country and read in another. Similarly, legal services can be outsourced to optimal locations. Finally, firms want to gain economies of scale where possible. This often requires companies to concentrate the value chain.
Once the firm has worked out the best configuration of the value chain, it must work on linking the various activities. This is known as coordination. Several factors influence coordination. Operationally, companies must deal with different languages, time zones, and so on as they pull together the different parts of the global value chain. While still quite challenging, improvements in communication have made this task easier today. A firm’s core competencies also affect coordination. Keep in mind that this special ability, outlook, or skill can emerge from different areas in the firm. For example, a firm’s core competencies may be a result of product development or employee productivity. Similarly, a firm may have core competencies in manufacturing expertise, marketing, or leadership. Finally, it’s important to consider the role of subsidiaries. The Internet and the real time connectivity it provides has changed the nature of this process. Today, information can flow easily between subsidiaries and the different parts of the value chain allowing for much greater and richer coordination. Firms have even embraced the power of social networks as a means of improving coordination.
Once the value chain is configured and coordinated, it’s time to consider change. Managers need to view the value chain and its configuration as a fluid concept – one that could change at any point depending on the factors that influence it. Some managers are able to anticipate change and adapt accordingly. For others, it’s an ongoing struggle.
Learning Objective 4: To explain global integration and local responsiveness.
When firms develop their strategies they face two conflicting pressures. On one hand they have pressure to standardize and concentrate configuration. On the other hand, they face pressure to disperse configuration and adapt coordination.
When there are strong pressures for global integration, firms will need to concentrate configuration and standardize coordination. The globalization of markets along with the efficiency gains that come with standardization are two main drivers of global integration. Standardization is attractive because of the cost savings it creates for both the firm and the consumer.
Despite the benefits of global integration, firms may find that there is considerable pressure to be locally responsive. A major reason to be locally responsive is the need to respond to consumer preferences. Consumers may be willing to pay a premium to get what they really want. In some case, local government policies dictate certain strategies.
This Figure shows how different industries fall in the integration/responsiveness grid. Managers can use the IR grid to determine strategy based on the different pressures they are facing.
Learning Objective 5: To profile the types of strategies firms use in international business.
There are four generic strategies used by multinational companies: the international, multidomestic, global, and transnational strategies.
The international strategy works well when the multinational has a core competency that foreign rivals lack, and pressures for local responsiveness and for global integration are both low. However, because key aspects of the value chain are centralized at headquarters there is little input from foreign markets and opportunities may be missed.
The multidomestic strategy makes sense when pressures for local responsiveness are high, and those for global integration are low. Because it involves adapting value added activities to local market conditions, it is a costly strategy to implement.
The global strategy works well when worldwide standardization is possible. This is usually the case for commodities, for example. However, keep in mind that because it emphasizes cost reductions is does not allow for local responsiveness, a situation that can be problematic if market conditions change.
Companies following a transnational strategy balance the conflicting pressures for local responsiveness with those for global integration. They emphasize global learning and the diffusion of knowledge throughout the organization. Keep in mind that while this strategy seems to allow firms to get the best of both worlds, it’s complicated and difficult to implement.
Module 1The Strategy of International Business 11-1
Learning Objectives To evaluate industry structure, firm strategy, and value creation To profile the features and functions of the value chain To assess how managers configure and coordinate a value chain To explain global integration and local responsiveness To profile the types of strategies firms use in international business 11-2
IntroductionThe Role of Strategy in International Business 11-3
Industry StructureLearning Objective 1:To evaluate industry structure, firmstrategy, and value creation 11-4
Industry Structure Industry structure involves the relationships among Suppliers of inputs Buyers of outputs Substitute products Potential new entrants Rivalry among competing firms 11-5
Industry Change Industry structure changes because of Competitor moves Government policies Shifting preferences Technological developments 11-6
Industry Structure, Strategy, and Value The industry organization (IO) paradigm presumes that markets demonstrate perfect competition where no firm or industry consistently outperforms others The power of innovative executives bright executives exploit market imperfections to outperform rivals Strategy’s hallmarks Value Strategy 11-7
Creating Value Value the measure of a firm’s capability of selling what it makes for more than the costs incurred to make it Create value using A cost leadership strategy make products for a lower cost than competitors A differentiation strategy make products for which consumers are willing to pay a premium price 11-8
The Firm as a Value ChainLearning Objective 2:To profile the features and functions of thevalue chain 11-9
The Firm as a Value Chain The value chain the set of linked activities the company performs to design, produce, market, distribute, and support a product The value chain consists of Primary activities design, make, sell, and deliver the product Support activities implement primary activities Profit Margin (Value = TR-TC) Value Chain Orientation Upstream and Downstream Activities 11-10
The Firm as a Value Chain Primary and Support Activities 11-11
The Firm as a Value Chain Primary and Support Activities of the Value Chain 11-12
Managing the Value ChainLearning Objective 3:To assess how managers configure andcoordinate a value chain 11-13
Managing the Value Chain Configuration distributing value chain activities around the world concentrated putting all value chain activities in one location dispersed performing different value chain activities in different locations location economies 11-14
Managing the Value Chain When configuring the value, consider The business environment Innovation context Resource costs Logistics Digitization Scale economies Cluster effects Customer needs 11-15
Managing the Value Chain Coordination linking the value chain activities Factors that influence coordination Operational obstacles National cultures Core competencies (Learning Effects & Experience Curve) special outlook, skill, capability, or technology that runs through the firm’s operations, threading disconnected activities into an integrated value chain Subsidiary networks social networks 11-16
Change and the Value Chain The configuration and coordination of a value chain responds to changes in customers, competitors, industries, and environments Even a well configured and coordinated value chain can become obsolete So, designing and delivering a strategy should be an ongoing process 11-17
Global Integration vs. Local ResponsivenessLearning Objective 4:To explain global integration and localresponsiveness 11-18
Global Integration vs. Local Responsiveness Firms face two conflicting pressures: Pressures for global integration the process of combining differentiated parts into a standardized whole maximize efficiency Pressures for local responsiveness the process of disaggregating a standardized whole into differentiated parts optimize effectiveness 11-19
Pressures for Global Integration Drivers of global integration The globalization of markets Technology helps standardize consumer preferences Global products have become popular allows for standardization of product design The efficiency gains of standardization Location, scale, and learning effects WTO supports global standards 11-20
Pressures for Local Responsiveness Pressure for local responsiveness is driven by Consumer divergence cultural predisposition historical legacy nationalism Host government policies fiscal, monetary, and business regulations 11-21
When Pressures Interact Integration/Responsiveness (I/R) Grid 11-22
Types of StrategyLearning Objective 5:To profile the types of strategies firms usein international business 11-23
Types of StrategyCharacteristics of the Strategy Type Used by MNEs 11-24
International Strategy International strategy leverage a company’s core competencies into foreign markets critical elements of the value chain are centralized at headquarters The strategy works well when the firm has core competencies that foreign rivals lack there is low pressure for global integration there is low pressure for local responsiveness 11-25
Multidomestic Strategy Multidomestic strategy emphasizes responsiveness to the unique circumstances that prevail in a country’s market value added activities are adapted to local markets The strategy works well when there is high pressure for local responsiveness there is low pressure for global integration 11-26
Global Strategy Global strategy make standardized products that are marketed with little adaptation to local conditions exploit location economies and capture scale economies The strategy works well when the MNE is the cost leader there is low pressure for local responsiveness there is high pressure for global integration 11-27
Transnational Strategy Transnational strategy simultaneously leverages core competencies worldwide, reduces costs by exploiting location economics, and adapts to local conditions The strategy works well when global learning and knowledge flows are emphasized there is high pressure for local responsiveness there is high pressure for global integration 11-28