Chapter 13 The Strategy of International Business ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 1 Learning Objectives LO 13-1 Explain the concept of global strategy. LO 13-2 Recognize how firms can profit by expanding globally. LO 13-3 Understand how pressures for cost reductions and local responsiveness influence strategic choice. LO 13-4 Identify and choose the different global strategies for competing in the global marketplace. ©McGraw-Hill Education. 2 What drives firms to go global - Profit Maximization & Growth ©McGraw-Hill Education. 3 Strategy and the Firm 1 of 7 Learning Objective 13-1 Explain the concept of global strategy. What Is Strategy? A firm’s strategy refers to the actions that managers take to attain the goals of the firm Firms need to pursue strategies that increase profitability and profit growth Profitability is the rate of return the firm makes on its invested capital Profit growth is the percentage increase in net profits over time To increase profitability and profit growth , firms can add value lower costs sell more in existing markets expand internationally ©McGraw-Hill Education. Strategy refers to actions that managers take to attain the goals of the firm. Profitability is a rate of return concept. Profit growth is the percentage increase in net profits over time. 4 Figure 13.1 Determinants of enterprise value Jump to long description in appendix ©McGraw-Hill Education. Profit= Price- Cost =100-95 = 5 Profitability= (Profit/Price)x100 = 5/100x100 = 5% Total Profit= 1 Million Profit Growth= 1 million to 2 millions 5 Strategy and the Firm 2 of 7 Value Creation Measured by the difference between a firm’s costs of production and the quality that consumers perceive in its products The more value customers place on a firm’s products, the higher the price the firm can charge for those products. Measured by the difference between V (value) and C (cost) Two strategies: low cost and differentiation ©McGraw-Hill Education. Value creation refers to performing activities that increase the value of goods or services to customers. 6 Strategy and the Firm 3 of 7 Strategic Positioning Porter A firm should be explicit about its choice of strategic emphasis with regard to value creation (differentiation) and low cost. A firm should configure its internal operations to support that strategic emphasis. Efficiency frontier Diminishing returns ©McGraw-Hill Education. 7 Strategy and the Firm 4 of 7 Strategic Positioning continued To maximize profitability, a firm must: Pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that choice Configure its internal operations, such as manufacturing, m ...

1. Chapter 13
The Strategy of International Business
©McGraw-Hill Education. All rights reserved. Authorized only
for instructor use in the classroom. No reproduction or further
distribution permitted without the prior written consent of
McGraw-Hill Education.
1
Learning Objectives
LO 13-1 Explain the concept of global strategy.
LO 13-2 Recognize how firms can profit by expanding
globally.
LO 13-3 Understand how pressures for cost reductions and
local responsiveness influence strategic choice.
LO 13-4 Identify and choose the different global strategies for
competing in the global marketplace.
©McGraw-Hill Education.
2
What drives firms to go global

2. - Profit Maximization & Growth
©McGraw-Hill Education.
3
Strategy and the Firm 1 of 7
Learning Objective 13-1 Explain the concept of global strategy.
What Is Strategy?
A firm’s strategy refers to the actions that managers take to
attain the goals of the firm
Firms need to pursue strategies that increase profitability and
profit growth
Profitability is the rate of return the firm makes on its invested
capital
Profit growth is the percentage increase in net profits over time
To increase profitability and profit growth , firms can
add value
lower costs
sell more in existing markets
expand internationally
©McGraw-Hill Education.
Strategy refers to actions that managers take to attain the goals
of the firm.

3. Profitability is a rate of return concept.
Profit growth is the percentage increase in net profits over time.
4
Figure 13.1 Determinants of enterprise value
Jump to long description in appendix
©McGraw-Hill Education.
Profit= Price- Cost
=100-95
= 5
Profitability= (Profit/Price)x100
= 5/100x100
= 5%
Total Profit= 1 Million
Profit Growth= 1 million to 2 millions
5
Strategy and the Firm 2 of 7
Value Creation
Measured by the difference between a firm’s costs of production
and the quality that consumers perceive in its products
The more value customers place on a firm’s products, the higher
the price the firm can charge for those products.
Measured by the difference between V (value) and C (cost)
Two strategies: low cost and differentiation

4. ©McGraw-Hill Education.
Value creation refers to performing activities that increase the
value of goods or services to customers.
6
Strategy and the Firm 3 of 7
Strategic Positioning
Porter
A firm should be explicit about its choice of strategic emphasis
with regard to value creation (differentiation) and low cost.
A firm should configure its internal operations to support that
strategic emphasis.
Efficiency frontier
Diminishing returns
©McGraw-Hill Education.
7
Strategy and the Firm 4 of 7
Strategic Positioning continued
To maximize profitability, a firm must:
Pick a position on the efficiency frontier that is viable in the
sense that there is enough demand to support that choice
Configure its internal operations, such as manufacturing,
marketing, logistics, information systems, human resources, and
so on, so that they support that position
Make sure that the firm has the right organization structure in
place to execute its strategy
The strategy, operations, and organization of the firm must all

5. be consistent with each other if it is to attain a competitive
advantage and garner superior profitability
©McGraw-Hill Education.
Operations refers to the different value creation activities a firm
undertakes.
8
Strategic Positioning
FIGURE 13.3 Strategic choice in the international hotel
industry.
©McGraw-Hill Education.
Strategy and the Firm 5 of 7
The Firm as a Value Chain
Value creation activities
Production
Marketing and sales
Materials management
R&D
Human resources
Information systems
Infrastructure

6. ©McGraw-Hill Education.
10
Figure 14.4 The value chain
Jump to long description in appendix
©McGraw-Hill Education.
11
Strategy and the Firm 6 of 7
The Firm as a Value Chain continued
Primary activities
Design, creation, and delivery of the product
Marketing, support, and after-sale service
R&D is concerned with the design and production processes.
Production is concerned with the creation of a good or service.
Marketing and sales can increase the perceived value of a
product and discover customer needs.
Service activity provides after-sale service and support.
©McGraw-Hill Education.
12
Strategy and the Firm 7 of 7

7. The Firm as a Value Chain continued
Support activities
Provide inputs that allow the primary activities to occur
Information systems can alter the efficiency and effectiveness
with which a firm manages its other value creation activities.
Logistics controls the transmission of physical materials
through the value chain.
Human resources ensures that the company has the right mix of
skilled people and ensures training, motivation, and
compensation.
Infrastructure includes the organization structure, control
systems, and culture of the firm.
©McGraw-Hill Education.
13
Global Expansion, Profitability, and Profit Growth 1 of 6
International firms can
Expand their market - sell in international markets.
Realize location economies - disperse value creation activities
to locations where they can be performed most efficiently and
effectively.
Realize greater cost economies from experience effects -serve
an expanded global market from a central location.
Earn a greater return - leverage skills developed in foreign
operations and transfer them elsewhere in the firm.
Learning Objective 13-2 Recognize how firms can profit by
expanding globally.

8. ©McGraw-Hill Education.
Global Expansion, Profitability, and Profit Growth 2 of 6
1. Expanding the Market: Leveraging Products and
Competencies
Firms can increase growth by selling goods or services
internationally that were developed for home market.
The success of firms that expand internationally depends on
the goods or services they sell.
their core competencies - skills within the firm that competitors
cannot easily match or imitate
core competencies enable the firm to reduce the costs of value
creation and/or to create perceived value so that premium
pricing is possible
©McGraw-Hill Education.
Core competence refers to skills within the firm that
competitors cannot easily match or imitate.
15
Global Expansion, Profitability, and Profit Growth 3 of 6
2. Realize Location Economies
Location economies are the economies that arise from
performing a value creation activity in the optimal location for
that activity, wherever in the world that might be
By achieving location economies, firms can
lower the costs of value creation and achieve a low-cost
position
differentiate their product offering

9. Firms that take advantage of location economies in different
parts of the world, create a global web of value creation
activities
different stages of the value chain are dispersed to locati ons
where perceived value is maximized or where the costs of value
creation are minimized
©McGraw-Hill Education.
Location economies are economies that arise from performing a
value creation activity in the optimal location for that activity.
16
Global Expansion, Profitability, and Profit Growth 4 of 6
3.Realize greater cost economies from experience effects
The experience curve refers to the systematic reductions in
production costs that occur over the life of a product
by moving down the experience curve, firms reduce the cost of
creating value
to get down the experience curve quickly, firms can use a single
plant to serve global markets
Learning effects are cost savings that come from learning by
doing
When labor productivity increases
individuals learn the most efficient ways to perform particular
tasks
managers learn how to manage the new operation more
efficiently
©McGraw-Hill Education.

10. Experience curve is systematic reductions in production costs
that have been observed to occur over the life of a product.
Learning effects refer to cost savings that come from learning
by doing.
Economies of scale refer to the reductions in unit cost achieved
by producing a large volume of a product.
17
Figure 13.5 The experience curve
©McGraw-Hill Education.
18
Global Expansion, Profitability, and Profit Growth 5 of 6
Economies of scale refer to the reductions in unit cost achieved
by producing a large volume of a product
Sources of economies of scale include
spreading fixed costs over a large volume
utilizing production facilities more intensively
increasing bargaining power with suppliers
Why Are Experience Effects Important?
©McGraw-Hill Education.
19

11. Global Expansion, Profitability, and Profit Growth 6 of 6
4. Leveraging Subsidiary Skills
Development of valuable skills can occur in foreign
subsidiaries.
Leveraging the skills created within subsidiaries and applying
them to other operations within the firm’s global network may
create value.
Managers must:
Recognize that valuable skills that lead to competencies can
arise anywhere within the firm’s global network, not just at the
corporate center
Establish an incentive system that encourages local employees
to acquire new skills
Have a process for identifying when valuable new skills have
been created in a subsidiary
Act as facilitators, helping transfer valuable skills within the
firm
©McGraw-Hill Education.
20
12-21
What Types of Competitive Pressures Exist in the Global
Marketplace? 1of 3
Firms that compete in the global marketplace face two
conflicting types of competitive pressures
the pressures limit the ability of firms to realize location
economies and experience effects, leverage products, and

12. transfer skills within the firm.
Pressures for cost reductions - force the firm to lower unit costs
Pressures to be locally responsive - require the firm to adapt its
product to meet local demands in each market—a strategy that
raises costs
Learning Objective 13-3 Understand how pressures for cost
reductions and local responsiveness influence strategic choice
21
Firms that compete internationally face two types of
competitive pressures, pressure for cost reductions and
pressures to be locally responsive. Unfortunately, these
pressures usually place conflicting demands on the company!
For example, in the highly competitive cell phone market,
Americans consumers tend to focus on design elements while
European and Asian consumer focus on functions and features.
This means that companies must keep costs low, while at the
same time absorb the costs of designing phones that meet the
demands of individual markets.
When companies face pressure for local responsiveness, they
incur the costs of differentiating their products or strategies.
12-22
When Are Pressures For Cost Reductions Greatest? 2 of 3
Pressures for cost reductions are greatest
In industries producing commodity type products that fill
universal needs (needs that exist when the tastes and

13. preferences of consumers in different nations are similar if not
identical) where price is the main competitive weapon
When major competitors are based in low cost locations
Where there is persistent excess capacity
Where consumers are powerful and face low switching costs
22
Where are pressures for cost reductions greatest?
This type of pressure is usually greatest in industries that
produce commodity type products that fill universal needs like
steel, when major competitors are based in low cost locations,
where excess capacity is persistent, and where consumers are
powerful and face low switching costs.
When a firm faces pressures for cost reductions, it has to try to
lower the cost of value creation.
Firms can try to lower costs by mass-producing standardized
products at optimal locations, or outsourcing to low -cost
suppliers.
Many companies have outsourced their call centers to India for
example, to take advantage of lower wage costs.
In fact, wages in 2007 at Indian call centers were so low
compared to American call centers that companies were able to
offer additional benefits like subsidized food and tuition
assistance.
12-23
When Are Pressures For Local Responsiveness Greatest? 1 of 3
Pressures for local responsiveness arise from
Differences in consumer tastes and preferences
strong pressure emerges when consumer tastes and preferences
differ significantly between countries

14. Differences in traditional practices and infrastructure
strong pressure emerges when there are significant differences
in infrastructure and/or traditional practices between countries
(e.g. MCArabia Family section).
Differences in distribution channels
need to be responsive to differences in distribution channels
between countries. E.g. In India retailing is done through local
shops (Kiryana Stores)
Host government demands
economic and political demands imposed by host country
governments may require local responsiveness. Walmart in
India
23
Where does pressure for local responsiveness come from?
Pressures for local responsiveness come from differences in
consumer tastes and preferences, differences in traditional
practices and infrastructure, differences in distribution
channels, and demands from host governments. Let’s talk about
how each of these can affect the firm.
While many products like Coca-Cola are accepted around the
world, when consumer preferences and tastes differ
significantly between countries, companies have to adapt the
product mix and/or the marketing message. Auto companies
sell a lot of pick-up trucks to individuals in the U.S. for
example, but have to market them as utility vehicles in Europe.
MTV found that while many of the programs it runs in the
United States are popular in other parts of the world, it’s still
important to localize programming as well. You can learn more
about MTV’s global operations in the Management Focus in
your text.
Similarly, differences in infrastructure and traditional practices
between countries can force companies to adapt their strategies.
If you’ve ever traveled to Europe for example, you’ve probably

15. encountered different voltage requirements. These differences
of course, would require companies to sell products designed to
meet the voltage requirements in each country.
Differences in distribution channels also prompt companies to
change.
In Brazil for example, about 36 percent of food retailing takes
place through supermarkets.
In Russia, supermarket sales account for less than 1 percent of
food retailing!
Finally, companies may be required by host governments to be
locally responsive.
In the U.S. for example, pharmaceuticals have to go through
FDA testing, and food products have to be labeled with
nutrition information.
KFC Arabia UK
12-24
12-25
What Types Of Competitive Pressures Exist In The Global
Marketplace?
Pressures for Cost Reductions and Local Responsiveness

16. 25
As you can see, some firms face high pressure for cost
reductions while others face high pressure for local
responsiveness. Some unlucky companies face pressures for
cost reductions and local responsiveness simultaneously.
Dealing with these pressures can be a strategic nightmare for
companies!
Choosing a Strategy 1 of 4
Learning Objective 13-4 Identify and choose the different
global strategies for competing in the global marketplace.
There are four basic strategies to compete in international
markets
the appropriateness of each strategy depends on the pressures
for cost reduction and local responsiveness in the industry
Global standardization - increase profitability and profit growth
by reaping the cost reductions from economies of scale,
learning effects, and location economies
goal is to pursue a low-cost strategy on a global scale
makes sense when there are strong pressures for cost reductions
and demands for local responsiveness are minimal
Localization - increase profitability by customizing goods or
services so that they match tastes and preferences in different
national markets
makes sense when there are substantial differences across
nations regarding consumer tastes and preferences and when
cost pressures are not too intense

17. ©McGraw-Hill Education.
26
12-27
There are four basic strategies to compete in international
markets
the appropriateness of each strategy depends on the pressures
for cost reduction and local responsiveness in the industry
Global standardization - increase profitability and profit growth
by reaping the cost reductions from economies of scale,
learning effects, and location economies
goal is to pursue a low-cost strategy on a global scale
makes sense when there are strong pressures for cost reductions
and demands for local responsiveness are minimal
Localization - increase profitability by customizing goods or
services so that they match tastes and preferences in different
national markets
makes sense when there are substantial differences across
nations with regard to consumer tastes and preferences and
when cost pressures are not too intense
Choosing a Strategy 2 of 4
27
So, given these conflicting pressures, how should companies
compete in foreign markets? Well, there are four basic
strategies, global standardization, localization, transnational,
and international.
Each strategy makes sense in certain situations depending on
which pressures a firm is facing.
Let’s look at each one more closely.

18. The global standardization strategy focuses on increasing
profitability and profit growth by capitalizing on the cost
reductions that come from economies of scale, learning effects,
and location economies.
When should firms pursue global standardization?
This strategy makes sense when pressure is high for cost
reductions, but low for local responsiveness.
The goal is to pursue a low cost strategy on a global scale, so
firms pursuing this type of strategy usually locate in a few
optimal locations and produce standardized products.
Can you think of any firms that might use global
standardization?
Motorola, Texas Instruments, and Intel all fit the profile.
The localization strategy focuses on increasing profitability by
customizing the firm’s goods to meet the needs and preferences
of the local market.
When should firms use a localization strategy?
This strategy is appropriate when consumer tastes are
substantially different between countries, and pressures for cost
reductions are low.
Firms using a localization strategy increase the value of their
product to the local market by better meeting local needs.
Since, costs pressures are low, the additional costs that come
with customization don’t present a problem.
As you’ll recall, MTV followed this type of strategy.
12-28
Choosing a Strategy 3 of 4
Transnational - tries to simultaneously achieve low costs
through location economies, economies of scale, and learning
effects, differentiate the product offering across geographic

19. markets to account for local differences, and foster a
multidirectional flow of skills between different subsidiaries in
the firm’s global network of operations
makes sense when cost pressures are intense and pressures for
local responsiveness are intense
International – take products first produced for the domestic
market and sell them internationally with only minimal local
customization
makes sense when there are low cost pressures and low
pressures for local responsiveness
28
The transnational strategy tries to simultaneously meet demand
for low costs by focusing on location economies, economies of
scale, and learning effects, while at the same time,
differentiates the product to meet the needs of individual
markets.
In addition, a transnational strategy fosters a multidirectional
flow of skills between the subsidiaries within the firm’s global
network.
When does a transnational strategy makes sense? As you’ve
probably already guessed, the transnational strategy makes
sense when a firm is facing both types of pressures.
As you might expect, this type of strategy can be very difficult
to implement as companies like Ford have found out.
One company that has been successful with this type of strategy
is Caterpillar.
Finally, the international strategy involves taking products that
were initially produced for the domestic market and then selling
them internationally.
When does the international strategy make sense?
This type of strategy works when pressure is low for both cost

20. reduction and local responsiveness.
Procter and Gamble has used this strategy and so has Microsoft.
You can read more about Procter and Gamble in the
Management Focus in your text.
12-29
Choosing a Strategy
Four Basic Strategies
29
Here you can see the four basic strategic alternatives.
12-30
How Does Strategy Evolve?
An international strategy may not be viable in the long term
to survive, firms may need to shift to a global standardization
strategy or a transnational strategy in advance of competitors
Localization may give a firm a competitive edge, but if the firm
is simultaneously facing aggressive competitors, the company
will also have to reduce its cost structures
would require a shift toward a transnational strategy
Choosing a Strategy 4 of 4

21. 30
Keep in mind that strategy is not static.
Instead, we think of strategy as evolving over time.
A firm may start out using an international strategy, but then
find that it has to shift to a global standardization strategy or
transnational strategy as competition increases. Similarly, a
localization strategy might initially give a firm a competitive
advantage, but competition might also put pressure on price
prompting the company to move to a transnational strategy.
12-31
How Does Strategy Evolve?
Changes in Strategy over Time
31
Here you can see the evolutionary process of strategy.
Product Development and Market Demand
Product Development
Key differentiating characteristics of the offering
The key differentiating factor for JGJ Inc., cars would be
affordability and reliability. Currently in the market all the
electric cars are expensive and is almost out of reach for an

22. average earning person. This generation kids are very excited or
I can say fascinated about electric cars because it is eco friendly
unlike the conventional gas/diesel cars. Working out a deal with
battery manufacturers like CATL, Panasonic or LG to reduce
the battery prices would work in JGJ Inc., favor as battery
constitutes to the 70% car cost.
Even though electric cars are eco friendly and saves you money
over a period of time, some people are still not completely okay
with buying a electric car because of a couple of factors like
high initial investment than normal Gasoline/Diesel cars, time
taken to charge the batteries and it’s runtime once fully charged
and also the number of recharge stations available while on a
long drive. So, once the initial cost is taken care of JGJ Inc.,
will focus on making turbo charging available so that it would
take at the max 20 odd minutes to fully charge and they can tie
up with electric car manufacturers for recharging stations so
that they wouldn’t have to focus on building charging stations
everywhere. This is how JGJ Inc., go about it’s product
development.
Analysis of demand in the market
Electric vehicles (EVs) are set to make up more than half of
global passenger car sales by 2040 and completely dominate the
bus market according to new research. Sales of diesel and
gasoline vehicles will continue to decline, according to
Bloomberg NEF’s Electric Vehicle Outlook 2019. The report
shows that electrics will take up 57% of the global passenger
car sales by 2040, with electric buses dominating their sector,
holding 81% of municipal bus sales by the same date. Electric
models will also make up 56% of light commercial vehicle sales
– vans and light trucks in Europe, the US and China within the
next two decades, and 31% of the medium commercial market.
Growth rates will still be impressive, however.
BNEF expects passenger EV sales to rise more than tenfold
from 2 million worldwide in 2018 to 28 million in 2030 and 56

23. million by 2040. BNEF calculates that the growth of the EV
market will reduce the demand for road fuel by 13.7 million
barrels per day, almost double its forecast last year. In part this
is because electrification of commercial vehicles will occur
faster than previously forecast and partly, paradoxically,
because fuel efficiency improvements in internal combustion
engines are now set to proceed more slowly than previously
thought, which means that each new EV displaces a higher
amount of fossil fuel. At the same time, BNEF says, electric
vehicles will add 6.8% to global electricity demand in 2040 and
drive a growth in demand for Lithium-ion batteries from 151
GWh in 2019 to 1,748GWh by 2030.
Market Segment Demand
Quantitative data used to determine projected demand
Electric passenger car is the fastest-growing segment in the EV
market and is expected to witness significant growth during the
next decade or so. The availability of a wide range of models,
upgraded technology, increasing customer awareness, and
availability of subsidies and tax rebates are the major factors
driving the market. Major EV manufacturers like Tesla, BYD,
BMW, Volkswagen, Nissan, Toyota, Honda, Hyundai, Daimler,
Volvo, GM, SAIC, etc. have been strong players in the market.
These companies have a strong market for their EV's around the
world. Passenger cars account for the largest share in the
electric vehicle market. The demand for passenger cars has
increased due to the increase in demand for electric vehicl es.
The fast growth of EV chargers has also led to the growth of the
EV passenger car market. Currently, Asia has the highest
number of Superchargers in the world, while Europe stands the
2nd best. This is because people in Asian countries prefer to
fast charge for their vehicles for daily use. Superchargers are
projected to grow at a fast rate in all 3 regions, but mostly in
North American region due to the fast-projected transformation
to EV's in US.

24. Methodology used to determine demand
Electric vehicle use is modelled using of a variety of
approaches in power systems, energy and environmental
analyses as well as in travel demand analysis. For time of day
analysis of demand we identify activity-based modelling (ABM)
as the most attractive because it provides a framework amenable
for integrated cross-sector analyses, required for the emerging
integration of the transport and electricity network. Vehicle
ownership and annual mileage models. VOAMMs(Vehicle
ownership and annual mileage models) have traditionally been
developed and improved by transport demand researchers for
variety of planning purposes of interest to a diverse stakeholder
community. EV ownership and mileage demand models have
some obvious applications. For example utilities are interested
in, forecasting EV ownership to estimate the future size of the
EV stock on the road to estimate the potential additional
demand for electricity for investment planning purposes.
Governments striving to foster EVs’ uptake make use of these
models to testing the effectiveness of incentives (e.g., direct
subsidies on the capital costs, tax rebates or exemptions,
deployment of public charging infrastructure). Vehicle
manufactures are interested in analyzing market potentials of
EVs to devise their production strategies.
References:
1. Electric Models to Dominate Car Sales By 2040, Wiping Out
13m Barrels A Day Of Oil Demand by Mike Scott.
2. Global Electric Vehicle Market (2021 to 2030) - Rising
Demand for Electric Vehicles in the Automotive and
Transportation Sectors Presents Opportunities -
ResearchAndMarkets.com
3. Copper Weekly: The Electric Vehicles Are Coming.
4. Modelling electric vehicles use: a survey on the methods by
Nicolo Daina, Aruna Sivakumar, John W. Polak.
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