The Strategy and Structure of International Business

1. The Strategy and Structure of International Business
Sudhanshu Bhatt (https://www.linkedin.com/in/sudhanshu-bhatt-b3665115/)
MBA –IBA
11.05.2023
References
Bulatov, A. (2023). World Economy and International Business Theories, Trends, and Challenges. In Springer. https://doi.org/10.12737/16614
Hill, C. W. L. (2022). Global Business Today 12e Charles.
Hill, C. W. L. (2023). International Business: Competing in Global Marketplace. In McGraw Hill LLC. https://doi.org/10.4324/9780203879412
Shenkar, O., Luo, Y., & Chi, T. (2022). International Business, Routledge. Routledge.
Images sourced from the internet

2. What is Global Strategy in terms of IB
A firm’s global strategy refers to the actions and decisions that
managers take to expand their operations in foreign markets in order
to increase profitability and achieve the goals of the firm.
The primary objective of global strategy is to maximize the value of
the firm for its owners and shareholders while operating in a legal,
ethical, and socially responsible manner.
1. Profitability can be measured in a number of as the rate of return that the firm
makes on its invested capital (ROI), which is calculated by dividing the net profits
of the firm by total invested capital.
2. Profit growth is measured by the percentage increase in net profits over time.
Increase in above indices will increase the value of an enterprise and thus the
returns garnered by its owners, the shareholders.

3. Determinants of Enterprise Value
Source: Hill, C. W. L. (2023)

4. What strategies can managers pursue?
• Managers can pursue different strategies when competing
internationally, and these strategies have their own advantages and
disadvantages.
1. LOWER COSTS - strategies focus on lowering costs (can be achieved
through various means such as economies of scale, outsourcing, or
optimizing the supply chain)
2. ADD VALUE - Add value to the firm's products or services (involves
differentiating them from competitors through factors like quality, branding,
or unique features)
3. SELL MORE - sell more products in existing markets
4. INTERNATIONAL EXPANSION - enter new markets to increase the rate
of profit growth over time. (Expanding internationally allows firms to tap into
new customer bases, access emerging markets, or leverage their core
competencies in different regions).

5. What are key consideration before formulating
global strategy
• To implement a global strategy effectively, managers need to consider various
factors such as
1. organizational structure,
2. Organizational controls,
3. management culture,
4. production strategy,
5. marketing strategy,
6. human relations strategy,
7. financial management.
• These aspects are crucial in aligning the firm's internal operations with its
strategic objectives in the international context.
• It's important to note that the COVID-19 pandemic and other unforeseen
changes in the macro environment may require strategic adaptation to
ensure the long-term success of the firm.
• Strategic flexibility and the ability to respond to dynamic market conditions
are key considerations in formulating and adjusting global strategies.

6. Value Creation
Source: Hill, C. W. L. (2023)

7. How Is Value Created?
The firm’s value creation is the difference between V and C
• a firm has high profits when it creates more value for its customers and does
so at a lower cost
• Profits can be increased by
1.Using a Increasing value/ differentiation strategy (V)
2.Using a low cost strategy (C)

8. Efficiency Frontier
• Efficiency frontier (or production possibility frontier) shows all of the
different positions a firm can adopt with regard to adding value to the
product (V) and low cost (C), assuming that its internal operations are
configured efficiently to support a particular position.
• The efficiency frontier has a convex shape because of diminishing returns.
• Diminishing returns imply that when a firm already has significant value
built into its product offering, increasing value by a relatively small
amount requires significant additional costs.
• The converse also holds, when a firm already has a low-cost structure, it
has to give up a lot of value in its product offering to get additional cost
reductions.

9. Strategic positioning
Source: Hill, C. W. L. (2023)

10. Why strategic positioning is important?
Michael Porter argues that the firms need to choose either differentiation or
low cost and then configure internal operations to support their choice
By operations we mean the different value creation activities a firm
undertakes
So to maximise long run return on invested capital, firms must
1. Pick a viable position on the efficiency frontier
2. Configure internal operations to support that position
3. Have the right organization structure in place to execute the strategy

11. How are a firm’s operations configured?
Operations in a firm can be visualized as a value chain consisting of primary and
support activities.
• Primary activities include research and development (R&D), production,
marketing and sales, and customer service. R&D focuses on product and
process design, while production creates goods or delivers services efficiently.
Marketing and sales enhance perceived value through branding and customer
needs analysis. Customer service provides after-sale support, reinforcing
customer value perception.
• Support activities provide inputs for primary activities. Information systems
streamline processes, improve inventory management, and enable real-time
communication. Logistics optimizes material flow, reducing costs. Human
resources ensure a skilled workforce and facilitate recruitment across borders.
Company infrastructure, including organization structure, control systems, and
culture, establishes the context for value creation.
Effectively managing these activities aligned with the firm's strategy is crucial to
position the firm on the efficiency frontier and increase profitability.

12. Operations: The firm as a value chain
Source: Hill, C. W. L. (2023)

13. How can firms increase profits through
international expansion?
Expanding globally gives firms opportunities to increase their profitability and rate
of profit growth in ways not available to purely domestic enterprises.
Firms that operate internationally are able to
1. Expand the potential size of the market for their domestic products by selling
those products (or services) in the global marketplace.
2. Realize location economies by dispersing value creation activities to those
world-wide locations where they can be performed most efficiently and
effectively.
3. Realize greater cost economies from experience effects by serving an
expanded global market from a geographically central location.
4. Earn a greater return-on-investment by leveraging valuable skills developed in
international operations and transferring them to other entities within the
firm.

14. How can firms leverage their core
competencies?
• Core competencies, unique skills within a company that are difficult to imitate,
play a crucial role in global expansion.
• Core competencies allow firms to reduce the cost of value creation and/or to
create perceived value so that premium pricing is possible.
• Core competencies can exist in various value creation activities and are the
foundation of a firm's competitive advantage.
 Examples of core competencies include Toyota's production efficiency, IKEA's stylish
and affordable furniture design, McDonald's fast-food operations management, and
Procter & Gamble's consumer product development and marketing.
• Global expansion involves transferring core competencies to foreign markets
where local competitors lack comparable capabilities.
• Service sector companies, such as financial institutions, restaurant chains, and
hotels, can replicate their business models in foreign markets to expand their
services.
 Starbucks and Subway have successfully used their home market business models as
blueprints for international operations.

15. Why are location economies important?
• Location economies arise from performing value creation
activities in the most favorable location in terms of economic,
political, legal, and cultural conditions, including relative factor
costs.
• Companies can leverage location economies by basing each
value creation activity in the optimal location, taking into
account factors such as design, labor force, marketing, and
more.
• Leveraging location economies can
1. lower costs of value creation
2. help achieve a low-cost position
3. enable product differentiation compared to competitors

16. What is experience effect and what role does it play?
• The experience curve refers to systematic reductions in production costs that
have been observed to occur over the life of a product.
• Two things explain this: learning effects and economies of scale.
1. Learning effects - cost savings that come from learning by doing
2. Economies of scale - the reductions in unit cost achieved by producing a large volume of
a product
Source: Hill, C. W. L. (2023)

17. What are the sources of economies of scale?
• Spreading fixed costs over a large volume
• Utilising production facilities more intensively
• Increasing bargaining power with suppliers

18. Strategic Significance of Experience Effect
• Moving down the experience curve allows a firm to reduce its cost of
creating value and increase its profitability.
• The firm that moves down the experience curve most rapidly will
have a cost advantage vis-á-vis its competitors.
• Serving a global market from a single location accelerates
progress on the experience curve.
• Aggressive pricing, marketing, and capacity building are
necessary for rapid movement down the experience curve.
• Optimal location for value creation activities enhances cost
advantages.
• Establishing a low-cost position acts as a barrier to new
competition.

19. What are subsidiary skills and how can
managers leverage them?
• Subsidiary skills refer to valuable skills that are developed within
foreign subsidiary operations of a multinational company.
• These skills can contribute to lowering production costs, enhancing
perceived value, and supporting higher product pricing.
• Valuable skills can be created anywhere within the global network of a
multinational company, not just at the corporate center.
• Leveraging subsidiary skills and applying them to other operations within
the company's global network can create value.
• Managers can leverage subsidiary skills by:
1. identifying valuable new skills in subsidiaries
2. facilitating the transfer of skills within the company
3. establishing incentive systems to encourage skill acquisition
4. managing risks and rewarding successes

20. What types of competitive pressures exist in the
global marketplaces?
• Firms competing in global marketplaces face 2 conflicting types of
competitive pressures.
• These pressures limit the ability of firms to realise location
economies and experience affects leverage core competencies
and transfer skills within the firm.
• Dealing with both the pressures is challenging.
• The 2 competitive pressures are
1. Pressure for cost reductions
2. Freshers to be locally responsive

21. Competitive pressure for cost reduction
• The liberalization of world trade and investment has increased cost
pressures.
• In competitive global markets, international businesses face pressures for cost
reductions.
• Intense cost reduction pressures are found in industries producing
commodity-type products with limited non-price differentiation and serving
universal needs.
• Cost pressures are high in industries with competitors in low-cost locations,
excess capacity, and powerful consumers with low switching costs.
• To lower costs, firms can mass-produce standardized products at optimal
locations to benefit from economies of scale, learning effects, and location
economies.
• Outsourcing functions to low-cost foreign suppliers is another strategy to
reduce costs.
• Service businesses may move back-office functions to developing nations with

22. Competitive pressure for local responsiveness
1.Differences in Customer Tastes and Preferences:
1. Customize products and marketing strategies to appeal to local customers.
2. Delegate production and marketing responsibilities to overseas subsidiaries.
3. Consider deeply embedded historic or cultural reasons for differences in tastes and preferences.
2.Differences in Infrastructure and Traditional Practices:
1. Customize products to accommodate differences in infrastructure.
2. Adapt to variations in traditional practices across nations.
3. Delegate manufacturing and production functions to foreign subsidiaries.
3.Differences in Distribution Channels:
1. Be responsive to variations in distribution channels among countries.
2. Delegate marketing functions to national subsidiaries.
3. Adopt different marketing practices based on local distribution systems.
4.Host-Government Demands:
1. Comply with economic and political demands imposed by host-country governments.
2. Customize manufacturing and marketing to meet local requirements.
3. Consider protectionism, economic nationalism, and local content rules.
5.Rise of Regionalism:
1. Recognize pressures for convergence within broader regional markets.
2. Harmonize trade policies, infrastructure, and regulations within trading blocs.
3. Consider regional differences and trends for strategic decision-making.

23. Which strategy should have firm choose?
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
1. Global standardization
2. Localization
3. Transnational
4. International

24. Which strategy should have firm choose?
Source: Hill, C. W. L. (2023)

25. Global Standardization Strategy
1.Strategic goal: Pursue a low-cost strategy on a global scale.
2.Focus on increasing profitability through cost reductions.
3.Benefit from economies of scale, learning effects, and location economies.
4.Concentrate production, marketing, R&D, and supply chain activities in
favorable locations.
5.Market a standardized product worldwide to maximize economies of scale.
6.Use cost advantage to support aggressive pricing in global markets.
7.Suitable for industrial goods industries with universal needs and global
standards.
8.Inappropriate when demands for local responsiveness are high.
9.Balance cost reduction with building brand equity and superior customer
service.
10.Create a global brand around attributes that meet basic needs of international
travelers.
11.Drive demand, fill aircraft, and lower operating costs per mile through superior
customer service.
12.Evaluate cost reduction against additional costs of providing superior service

26. Examples of Global Standardization Strategy
1.McDonald's: The fast-food chain follows a global
standardization strategy by offering a consistent menu,
branding, and customer experience across its worldwide
locations. This allows them to achieve cost reductions through
economies of scale and maintain a strong global brand identity.
2.Coca-Cola: Coca-Cola uses a global standardization strategy
by selling its carbonated beverages with the same brand and
taste worldwide. This approach helps them leverage economies
of scale, reduce production costs, and maintain a consistent
global brand image.
3.Emirates Airline offering standardized long-haul service
worldwide to maximize cost reduction and provide a superior
global brand.

27. Localization Strategy
1.Strategic goal: Increase profitability by customizing goods or services to match
local market preferences.
2.Focus on customization to meet varying tastes and preferences in different
national markets.
3.Suitable when substantial differences exist across nations in consumer tastes
and preferences.
4.Appropriate when cost pressures are not too intense.
5.Customization increases the value of the product in the local market.
6.Duplication of functions and smaller production runs limit cost reductions
associated with mass production.
7.Customization may support higher pricing to recoup higher costs or stimulate
greater local demand.
8.Efficiency and capturing scale economies remain important for firms pursuing
localization.
9.Use common vehicle platforms and components across models for scale
economies.
10.Optimize location of efficiently scaled factories for manufacturing.
11.Localize product offering while capturing scale economies, learning effects, and

28. Examples of Localization Strategy
1.Toyota: Toyota customizes its vehicle offerings based on local
market demands. For example, in North America, they focus on
larger vehicles like trucks and SUVs, while in Asia, they
emphasize smaller, more fuel-efficient models. This localization
strategy helps them cater to specific customer preferences in
different regions.
2.Nestlé: Nestlé adapts its food and beverage products to suit
local tastes and preferences. For instance, they offer different
flavors and formulations of products like chocolates, coffee, and
instant noodles to cater to the specific preferences of
consumers in different countries.

29. Transnational Strategy
1.Strategic goal: Balancing cost pressures and demands for local responsiveness.
2.Intense competition requires firms to respond to both cost reduction and local
responsiveness pressures.
3.Pursue location economies, experience effects, and leverage products
internationally.
4.Transfer core competencies and skills within the company.
5.Achieve low costs through location economies, economies of scale, and learning
effects.
6.Differentiate product offering across geographic markets to account for local
differences.
7.Foster a multidirectional flow of skills between different subsidiaries in the
global network of operations.
8.Conflicting demands arise when differentiating the product raises costs.
9.Implementation challenges make the strategy difficult to pursue.
10.Building an organization capable of supporting a transnational strategy is complex
and challenging.

30. Examples of transnational strategy
1.Samsung: Samsung Electronics pursues a transnational strategy by
leveraging its global network for manufacturing, R&D, and marketing. They
develop products centrally but adapt them to local market needs.
Additionally, they transfer skills and knowledge between different
subsidiaries to achieve cost efficiencies and responsiveness to local
markets.
2.Unilever: Unilever adopts a transnational strategy by customizing its
product offerings and marketing strategies to suit local preferences while
maintaining global efficiency. They produce and market a wide range of
products such as personal care, home care, and food products, adapting
them to local cultures and consumer preferences.
3.Caterpillar's invested in large-scale component manufacturing facilities,
and added local features at assembly plants. It realized benefits of global
manufacturing while differentiating products among national markets. This
helped achieve significant cost reduction and outperformed competitors
like Komatsu and Hitachi.

31. International Strategy
1.Strategic Goal : to sell domestic market products internationally with
minimal customization
2.leveraging existing products and technologies to serve universal needs in
foreign markets.
3.Low cost pressures and low pressures for local responsiveness.
4.Serving universal needs without significant competitors.
5.Monopoly position allows for higher prices and no strong cost reduction
pressures.
6.Centralize product development functions such as R&D at home.
7.Establish manufacturing and marketing functions in each major country or
region of operation.
8.Duplication of functions may raise costs, but not a significant concern.
9.Limited scope of local customization in product offering and marketing
strategy.
10.Head office retains tight control over marketing and product strategy.

32. Examples of International Strategy
1.IBM: IBM follows an international strategy by centralizing its
product development and innovation in its headquarters in the
United States while establishing manufacturing and marketing
functions in different countries. They may undertake limited
local customization but maintain overall control over marketing
and product strategy from the head office.
2.L'Oréal: L'Oréal, a cosmetics company, employs an
international strategy by developing new products at its
research centers in France and then distributing them
internationally. They adapt their marketing and packaging to
specific markets, but the core product remains consistent
across countries.

33. 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

34. Evolution of Strategy
Source: Hill, C. W. L. (2023)

35. • To be continued ……….