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1. Last Phase of MGNT 4670
►Focus is on the company itself
 What actions must a company take
to compete effectively in the
international business market?
 What are the benefits, costs, and
risks associated with these actions?

2. CHAPTER 12
INTERNATIONAL BUSINESS
STRATEGY

3. Opening Case
►Wal-Mart moved into other countries for three reasons
 Growth opportunities at home were becoming constrained
 It thought it could create value by transferring its business model
to foreign markets
 It wished to preempt other retailers that were also starting to
expand globally
►Wal-Mart initially treated foreign markets much like the US; it did
discover that this was not the correct approach.
►To succeed abroad, Wal-Mart has had to customize its offering to
local conditions while keeping its core strategies and operations the
same in every market
►Going global has yielded additional benefits as well
 Enhanced bargaining power with suppliers
 The ability to transfer valuable ideas from one country to another

4. STRATEGY & THE FIRM:
VALUE CREATION
► Strategy: actions that managers must 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
 Main goal usually to maximize long-term profit (П) П =
TR - TC
► Profitability can be defined as the rate of return that the
firm makes on its invested capital (ROIC), which is
calculated by dividing the net profits of the firm by total
invested capital .
► Profit growth is measured by the percentage increase in net
profits over time

5. Strategy and the Firm
Figure 12.1 p 409

6. VALUE CREATION
► A firm’s profits are determined by two basic
conditions:
 Value customers place on the goods or services
offered by the firm (perception) = V
 Costs of production = C
► Value Creation
 Difference between Value and
Costs or: V-C = level of value
creation

7. STRATEGY in INTERNATIONAL
BUSINESS
► Strategy is concerned with
identifying and taking
actions that will:
 lower costs of value creation
and/or
 differentiate the firm’s
product offering through
superior design, quality
service, functionality, etc. in
order to increase perception
of value by the customer

8. FIRM AS A VALUE CHAIN
► Any firm is composed of a series of distinct value
creating activities
► Primary activities
 Research & development
 Production
 Marketing & sales
 Service
► Support Activities (provide inputs to enable the
primary activities to occur)
 Materials management or logistics
 Human resource
 Information systems
 Company infrastructure

9. The Value Chain
Fig 12.4 p 412

10. STRATEGY in INTERNATIONAL
BUSINESS Example: Clear Vision
► Clear Vision, manufacturer and distributor of
eyewear
► Early 1980’s Clear Vision realized it had to lower
its costs by importing;
► Started by importing from manufacturers in Asia
but was not satisfied with product quality and
delivery;
► Determined it had to have its own facilities, so
settled on Hong Kong as a location due to: low
labor costs, skilled workforce, and tax breaks
offered by Hong Kong government.

11. STRATEGY in INTERNATIONAL
BUSINESS Example: Clear Vision
►After time, industrialization of Hong Kong
caused labor shortage and increase in
wages, so manufacturing plant was moved
to mainland China.
Objective: lower costs
►At same time, Clear Vision sought foreign
eyewear companies specializing in
fashionable, high quality design to broaden
its product line.
Objective: product differentiation
►Clear Vision invested in factories in Japan,
France, and Italy

12. STRATEGY in INTERNATIONAL
BUSINESS Example: Clear Vision
► Clear Vision responded to
threats and opportunities in
the international
marketplace by developing
strategies to increase
profitability through value
creation.
► Today, Clear Vision is an
MNE with over $100 in
gross annual revenues.
► Threat: lower cost imports
from foreign competition
► Response: lower costs by
shifting manufacturing to a
lower cost location
► Threat: competition from
high-end market segment
and need to increase
perceived value of eyewear
► Response: achieve
differentiation and
increase perceived value

13. Advantages of Global Expansion
Expanding globally allows firms to increase profitability in
ways that are not available to purely domestic enterprises.
The international environment can offer:
► Leveraging products and core competencies
► Location economies
► Cost economies from experience effects
► Leveraging subsidiary skills
► Profitability is constrained by product customization and the
“imperative of localization”. Localization: adjustment of one
or more elements of product marketing or distribution to fit
the particular idiosyncrasies of a national market.

14. EXPANDING THE MARKET: LEVERAGING
PRODUCT AND COMPETENCIES
►A company can increase its growth rate by taking goods or
services developed at home and selling them internationally
 Returns from such a strategy are likely to be greater if
indigenous/local competitors in the nations a company
enters lack comparable products
►Success of multinational companies also rest upon the core
competencies that underlie the development, production, and
marketing of goods or services
 Core competencies are skills within the firm that
competitors cannot easily match or imitate
 Core competencies are the bedrock of a firm’s
competitive advantage and enable them to reduce the
costs of value creation

15. EXPANDING THE MARKET: LEVERAGING
PRODUCT AND COMPETENCIES
►Examples of core competencies:
 Toyota – production of cars
 McDonald’s – fast food
operations
 Proctor & Gamble –
development and marketing
of consumer products
 Wal-Mart – information
systems and logistics for
large retail operations
 Can you think of any others?

16. LOCATION ECONOMIES
► Realized by performing a value creation activity in an
optimal location anywhere around the globe
► Often arise due to differences in factor costs
► Due to differences in factor costs, some countries
have comparative advantage in production of
certain products
► It can lower costs of value to enable low cost
strategy and/or help in differentiation of products
from competitors
► Global web: different stages of value chain are
dispersed to those locations where perceived value is
maximized or costs of value creation are minimized

17. ies
Pontiac LeMans
Parts
Parts
Parts
Advertising
Design
Assembly
Creating a Global Web
LocaFin
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Sales

18. COST ECONOMIES from EXPERIENCE
EFFECTS: Recall New Trade Theory
► Experience Effects: The systematic reduction in production
costs that occurs over the life of a product.
 First observed in aircraft industry where unit costs
reduced by 80% each time output was doubled
► How is the reduction brought about?
 Learning effects: cost savings that come from learning by
doing
 Economies of scale: the reductions in unit cost achieved
by producing a large volume of a product

19. Strategic Significance of the
Experience Curve
► The firm that moves down the
experience curve most rapidly
has a cost advantage over its
competitors
► Serving the global market
from a single location helps to
establish low cost strategy
► Aim to rapidly build up sales,
aggressive marketing strategies
and get first-mover advantages.
► The strategic significance of the
experience curve is clear; moving
down the experience curve allows a
firm to reduce its cost of creating
value and increase its profitability
Fig. 12.4, 5th edition

20. LEVERAGING SUBSIDIARY SKILLS
Subsidiary Skills:
•Value created by identifying skills and
applying it to a firm’s global network of
operations. Some Challenges:
•Managers must create an
environment where incentives are
given to take necessary risks and
reward them
•Managers must accept that good
ideas can come from anywhere in
the firm
•Need a process to identify new
skill development
•Need to facilitate transfer of new
skills within the firm
Unique skills and
ideas often
developed in foreign
subsidiaries.
EXAMPLE: Unilever is
divided into
geographical basis
with subsidiaries in
each country for a
particular business.
These subsidiaries
share product
information and
market ideas with
other subsidiaries.
Other examples: idea-
sharing at Hewlett-
Packard; McDonald’s

21. Cost Pressures and Pressures for
Local Responsiveness
►Firms that compete in the
global marketplace typically
face two types of
competitive pressure
 Pressures for cost
reductions
 Pressures to be locally
responsive

22. PRESSURES TO BUILDING AN
INTERNATIONAL STRATEGY
► PRESSURES FOR COST REDUCTIONS
 Intense in industries of standardized, commodity type product that
serve universal needs
 Meaningful differentiation on non-price factors is difficult
 Major competitors are based in low-cost locations
 Consumers are powerful and face low switching costs
 Liberalization of world trade and investment environment
► Examples of industries with cost pressures
 Commodity-type products which usually serve universal needs e.g..
Bulk chemicals, petroleum, steel, semi-conductor chips
 Industries which locate in low-cost locations e.g. tire industry

23. PRESSURES TO BUILDING AN
INTERNATIONAL STRATEGY
►PRESSURES FOR LOCAL RESPONSIVENESS
 Differences in consumer tastes & preferences
►North American families like pickup trucks while in Europe they
are viewed as a utility vehicle for firms
 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 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

24. LOCAL RESPONSIVENESS vs.
STANDARDIZED PRODUCTS
Theodore Levitt: (“The Globalization of
Markets,” HBR May/June 1983)
► Globalization and technology
have brought convergence of
tastes and preferences of
consumers.
► Modern global corporations
must “seek sensibly to force
suitably standardized products
and practices in the entire
globe.”
► Companies which do not
pursue standardized products
will fall behind those that do.
Christopher Bartlett and Sumantra
Ghoshal (Managing Across Borders, HBR
Press, 1989)
► Complete standardization of
products is not appropriate.
► Global preferences still exist and
companies must recognize these
differences.
► In certain industries, some
companies have gained
advantage by emphasizing local
preferences and moving away
from standardized products.

25. STRATEGIC CHOICES
► Four basic strategies to enter and compete in the
international environment:
 International strategy- “Here it is”
 Localization strategy-”Act local” *
 Global standardization strategy- “Be cost-effective” **
 Transnational strategy – “Be cost-effective and Act local”
► Companies may evolve from one strategy to another or they
may use one strategy for one business unit or product
line and a different strategy for another.
► Example: Proctor & Gamble might purse global strategy for
disposable diapers, but multidomestic one for detergents in
Asian markets.
*In 5th edition, this is called “Multidomestic”
** In 5th edition, this is called “Global”

26. Choosing a Strategy
“Low” does not
mean “NO”!
The appropriateness of each strategy depends on the amount of pressures
for cost reductions and local responsiveness.
Fig. 12.7
p 427
!

27. Global Standardization Strategy:
“Be cost-effective”
► Focus is on increasing profitability through a low
cost strategy: maximize cost reductions that come
from experience curve effects and location
economies
► Production, marketing, and R&D concentrated in
few favorable functions
► Market standardized product to keep costs low
► Effective where strong pressures for cost
reductions and low demand for local
responsiveness(emphasis on efficient operations)
► Example: Semiconductor industry, Intel, Texas
Instruments, Motorola.

28. Localization Strategy: “Act local”
► Main aim is maximum local responsiveness
► Customize product offering, market strategy (including
production and R&D) according to national conditions;
compete through localization of products, no standardization
► Generally unable to realize value from experience curve
effects and location economies
► Possess high cost structure due to decentralization
► Strategy effective if firm faces strong pressures for local
responsive and weak pressures for cost reductions
► Examples: many branded processed food and personal care
products, small appliances, any product or service that is
culturally bound e.g. Johnson and Johnson, Proctor &
Gamble (at one point in their evolution), Black & Decker

29. Transnational Strategy: “Be cost-
effective and act local”
► To meet competition firms aim to reduce costs, transfer core
competencies while paying attention to pressures for local
responsiveness. (Bartlett and Ghoshal) Strategy effective if
firm faces strong pressures for local responsiveness and
strong pressures for cost reductions
► Global learning is critical to meet competitive demands
 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 strategy difficult task due to contradictory
demands placed on the organization
 Example : Caterpillar, Mal-Mart (evolving into)

30. International Strategy: “Here it is”
► Create value by transferring valuable core
competencies to foreign markets that indigenous
competitors lack
► Centralize product development functions at home
► Establish manufacturing and marketing functions
in local country but head office exercises tight
control over it
► Limit customization of product offering and market
strategy
 Strategy effective if firm faces weak pressures for local
responsive and cost reductions
► Examples: Toys R Us, Microsoft, Yahoo,
McDonald’s (in early stages)

31. The Evolution of Strategy
►The problem with the international strategy 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
►The problem with localization strategy is that it is costly and a company
can not take full advantage of efficiencies that can be obtained in using
a standardized product
 Over time, the pressures to reduce costs may require a change in
strategy
►As competition intensifies
 International and localization strategies tend to become less viable
 Managers need to orient their companies toward either a global
standardization strategy or a transnational strategy

32. The Evolution of Strategy

33. NAME THAT STRATEGY

34. GENERAL ELECTRIC
►Global technology, service, and finance
company
►HQ fosters change but operational and strategic
decisions are decentralized to achieve cost
effectiveness
►Company maximizes internal resources through
intense sharing
►G.E. is global brand; most products
have minimal adaptation

35. HARLEY-DAVIDSON
►Active in over 75 countries
►Products easy to sell as they represent
symbol of American spirit of independence;
minimal modification
►Produced in U.S.A.
►Little need for changing prices

36. SARA LEE (before latest restructuring)
► Core focus: leading/repeat-purchase branded
consumer goods
► 26 different brands with minimal
adaptation/localization
► Global practices
► Intense control on costs to insure
competitive pricing
► Sara Lee announced in 2005 that it would be
making strategic decisions emphasizing greater
product focus and increasing operational efficiency

37. NESTLE
► Major brand: Nestle with several other well known
brands
► Product line includes: milk products, ice cream,
chocolate, candy, cookies, bottled water, pet food, pet
care products, prepared foods, pasta
► Products adapted on regional or individual market
basis
► Advertising, pricing, and distribution is market by
market basis
► Efforts are being made to coordinate more closely in
regional areas and to rotate managers around the
world in various assignments

38. UNILEVER
► A Global food, cleaning products, toiletries group
► Relationship between parent company and
subsidiaries is changing.
► Strong network of personal manager networks used
as vehicle for global learning and exchange
► Organized by regional business groups
► Production of certain key products regionalized for
cost effectiveness
► Flexibility is core value to achieve balance between
centralized requirements and local adaptability e.g.
Food products grouped into global fast foods,
international foods, local foods

39. BY INDUSTRY
►Bulk chemicals
►Fast food
franchises
►Feature films

40. BY INDUSTRY
►Automobiles
►Packaged food
items (branded)
►Gasoline/Oil
companies

41. BY INDUSTRY
►Pharmaceuticals
►Consulting
►Luxury items
e.g. (caviar,
diamonds, fine
wines)