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Daniels11 pp.doc

  1. 1. PART FIVE GLOBAL STRATEGY, STRUCTURE, AND IMPLEMENTATION International Business Chapter Eleven The Strategy of International Business
  2. 2. Chapter Objectives <ul><li>To examine the idea of industry structure, firm strategy, and value creation </li></ul><ul><li>To profile the features and functions of the value chain framework </li></ul><ul><li>To appreciate how managers configure and coordinate a value chain </li></ul><ul><li>To identify the dimensions that shape how managers develop strategy </li></ul><ul><li>To profile the types of strategies firms use in international business </li></ul>11-
  3. 3. Introduction <ul><li>Strategy: the framework that managers apply to determine the competitive moves and business approaches that guide a firm, i.e., the means used to achieve objectives </li></ul><ul><li>Strategy represents management’s idea on how to best: </li></ul><ul><ul><li>attract customers </li></ul></ul><ul><ul><li>stake out a market position </li></ul></ul><ul><ul><li>conduct operations </li></ul></ul><ul><ul><li>compete effectively </li></ul></ul><ul><ul><li>create value </li></ul></ul><ul><ul><li>achieve goals </li></ul></ul>11-
  4. 4. Fig. 11.2: The Strategy of International Business 11-
  5. 5. Fundamentals of Strategic Management: Basic Concepts <ul><li>Perfect competition presumes that: </li></ul><ul><li>there are large numbers of fully informed buyers and sellers of an homogeneous product </li></ul><ul><li>buyers and sellers possess perfect information </li></ul><ul><li>there are no obstacles to the entry or exit of firms into or out of the market </li></ul><ul><li>resources are fully mobile </li></ul><ul><li>An industry is a group of firms, i.e., competitors, that produce products which are close substitutes. </li></ul><ul><li>A global industry is one in which a firm’s competitive position in one country is significantly affected by its position in other countries. </li></ul>11-
  6. 6. Fundamentals of Strategic Management: The IO Paradigm <ul><li>The industry organization (IO) paradigm: risk-adjusted rates of return should be constant across firms and industries </li></ul><ul><li>• O ver time no one firm or industry should consistently outperform others. </li></ul><ul><li>The performance of a firm is a function of its market conduct, which in turn is determined by the structure of its industry. </li></ul><ul><li>Industry effects explain up to 75% of the differences in average returns for firms within a given industry. </li></ul>11-
  7. 7. Industry Structure: The Five Fundamental Forces <ul><li>The Five Fundamental Forces Model: the nature of competition in an industry is the combined out-come of competitive pressures generated by: </li></ul><ul><li>• t he moves of rivals battling for market share </li></ul><ul><li>• the entry of new rivals seeking market share </li></ul><ul><li>• the efforts of firms outside the industry to convince buyers to switch to their substitute products </li></ul><ul><li>• the push by suppliers to charge more for their inputs </li></ul><ul><li>• the push by buyers to pay less for products </li></ul><ul><li>Markets are not perfectly competitive; some firms consistently outperform industry averages. </li></ul>11-
  8. 8. Fig. 11.3: Industry Structure: The Five Fundamental Forces Model 11-
  9. 9. <ul><li>The five-forces model defines the structure and competition in an industry in a way that reveals: </li></ul><ul><li>what forces are driving changes within an industry </li></ul><ul><li>the relative strength of each fundamental force </li></ul><ul><li>which fundamental forces shape strategic conduct </li></ul><ul><li>the strategic moves rivals are likely to make </li></ul><ul><li>Common to each issue is the question of whether the current or future outlook suggests that firms in the industry have no, some, or great potential to realize profits. </li></ul>11-
  10. 10. Changes in Industry Structure <ul><li>Forces that can transform an industry’s structure include: </li></ul><ul><li>changes in the long-term industry [market] growth rate </li></ul><ul><li>technological developments </li></ul><ul><li>shifting customer purchase and usage patterns </li></ul><ul><li>manufacturing innovations that revise cost and efficiency frontiers </li></ul><ul><li>changes in government regulations and policies </li></ul><ul><li>the entry or exit of major firms </li></ul><ul><li>the diffusion of business, executive, and technical expertise across countries </li></ul>11-
  11. 11. Strategy and Value Creation <ul><li>Strategy: a firm’s efforts to build and strengthen its competitive position within its industry in order to create value and attain goals </li></ul><ul><li>A firm’s core competency may be a special outlook, skill, capability, or technology that creates unique value essential to its competitiveness. </li></ul><ul><li>Value: the measure of a firm’s capability to sell the products it offers for more than the costs it incurs </li></ul><ul><li>Operationally, firms create value either through cost leadership or product differentiation . </li></ul><ul><li>Differentiation spurs a firm to offer unique, high-value products that are difficult to match or copy. </li></ul>11-
  12. 12. The Firm as a Value Chain <ul><li>Value chain: the set of linked, value-creating activities a firm performs to design, produce, market, deliver, and support a product, i.e., the format and interactions amongst the various functions of a firm </li></ul><ul><li>[Value chain analysis explains cost behavior and reveals existing and potential sources of product differentiation.] </li></ul><ul><li>Primary activities: the classical managerial functions of the firm </li></ul><ul><li>Support activities: functions that provide inputs which allow the primary activities to occur </li></ul><ul><li>Profit margins: the differences between total revenues generated and total costs incurred </li></ul><ul><li>Orientation: upstream (in-bound) vs. downstream (out-bound) activities </li></ul>11-
  13. 13. Fig. 11.4: The Value Chain Framework 11-
  14. 14. Value Chain Configuration <ul><li>Value chain configuration may be influenced by: </li></ul><ul><li>cost factors [wage rates, productivity, inflation, etc.] </li></ul><ul><li>business environments [political & economic risk] </li></ul><ul><li>cluster effects [related value creation activities] </li></ul><ul><li>logistics [value-to-weight ratio, just-in-time practices] </li></ul><ul><li>degree of digitization [virtual value creation] </li></ul><ul><li>economies of scale [unit cost reductions] </li></ul><ul><li>customer needs [buyer-related support activities] </li></ul><ul><li>Configuration [spatial arrangement] should be optimized in light of prevailing economic, legal, political, and cultural conditions. </li></ul>11-
  15. 15. Map 11.2: Labor Costs and Location Decisions 11-
  16. 16. Value Chain Coordination <ul><li>Value chain coordination may be influenced by: </li></ul><ul><li>operational obstacles [communication challenges, currencies, and measurement systems] </li></ul><ul><li>national cultural differences [information sharing, time, etc.] </li></ul><ul><li>learning effects [cost savings via performance and quality improvements] </li></ul><ul><li>subsidiary networks [real-time connectivity and functional integration] </li></ul><ul><li>Coordination [the balanced movement of different parts at the same time] should be optimized in ways that leverage a firm’s core competencies. </li></ul>11-
  17. 17. <ul><li>The value chain serves as a system concept that helps mangers: </li></ul><ul><li>evaluate a firm’s strengths and weaknesses </li></ul><ul><li>interpret the determinants of the firm’s internal cost structure, the basis of its core competencies, and its relationships with customers </li></ul><ul><li>link the internal features and functions of a competitor to the content of its marketplace strategy </li></ul><ul><li>The configuration and coordination of a firm’s value chain should reflect changes in its bases for value creation, including: </li></ul><ul><li>• customers and their needs </li></ul><ul><li>• competitors </li></ul><ul><li>• industries </li></ul><ul><li>• environments </li></ul>11-
  18. 18. Countervailing Forces: Global Integration vs. Local Responsiveness <ul><li>Pressures for global integration </li></ul><ul><ul><li>Globalization of markets: the convergence of customer preferences for similar products, minimal costs, and maximum value </li></ul></ul><ul><ul><li>[A commodity serves a universal need across countries and cultures and is traded strictly on the basis of price.] </li></ul></ul><ul><ul><li>Globalization of production: efficiency gains via stan-dardization, i.e., the maximization of location economies </li></ul></ul><ul><li>Pressures for local responsiveness </li></ul><ul><ul><li>Customer divergence: differences in culture, national attitudes, and economic and usage conditions </li></ul></ul><ul><ul><li>Host government policies: economic freedom, work-place and product regulation, buy-local legislation, etc. </li></ul></ul>11-
  19. 19. The Global Integration/ Local Responsiveness Grid <ul><li>The integration/responsiveness grid (IR) profiles the interaction of the pressures for global integration and pressures for local responsiveness. </li></ul><ul><li>Integration: the process of combining dif- ferentiated parts into a standardized whole </li></ul><ul><li>Responsiveness: the process of disaggregating a standardized whole into differentiated parts </li></ul><ul><li>The IR grid reveals how a firm’s choice of strategy is a function of the relationship between its idea of value creation and the pressures for integration and/or respon-siveness as it looks to international markets for growth opportunities, cost reductions, and risk diversification. </li></ul>11-
  20. 20. Fig. 11.5: The Integration/ Responsiveness Grid and Industry Types 11-
  21. 21. Strategic Alternatives: The International Strategy <ul><li>International strategy: opportunistic expansion into foreign operations that leverages the firm’s core (domestic) competencies </li></ul><ul><li>Ultimate control and decision-making reside at headquarters. </li></ul><ul><li>Value is created by transferring core competencies and unique offerings from headquarters into foreign markets where rivals are unable to develop, match, or sustain them. </li></ul><ul><li>International activities are generally secondary to the priorities of the domestic market. </li></ul><ul><li>Headquarter’s ethnocentric orientation, i.e., its home country focus, may lead to significant missed market opportunities. </li></ul>11-
  22. 22. Strategic Alternatives: The Multidomestic Strategy <ul><li>Multidomestic strategy: expansion into foreign opera-tions that grants decision-making authority to local managers and emphasizes responsiveness to local conditions </li></ul><ul><li>• Decision-making is decentralized so that offerings can be adjusted to meet the needs of individual countries or regions. </li></ul><ul><li>• Value is created by giving local managers the authority to respond to unique local cultural, legal, and economic environments. </li></ul><ul><li>• The polycentric view holds that people who are close to the market both physically and culturally can best run a business. </li></ul><ul><li>The distribution of decision-making authority to local managers may lead to duplication in activities, significantly higher costs, and unusually powerful (autonomous) local subsidiaries. </li></ul>11-
  23. 23. Strategic Alternatives: The Global Strategy <ul><li>Global strategy: expansion into foreign operations that champions worldwide consistency, standard-ization, and cost competitiveness </li></ul><ul><li>Although activities are dispersed to the most favorable global locations, decision-making remains highly cen-tralized at headquarters. </li></ul><ul><li>Value is created by designing products for a world market and manufacturing and marketing them as effectively and efficiently as possible. </li></ul><ul><li>Global firms strive to convert global efficiency into price competitiveness via production and location economies. </li></ul><ul><li>In markets where demand for local responsiveness remains high, global strategies are largely ineffective, and market opportunities are missed. </li></ul>11-
  24. 24. Strategic Alternatives: The Transnational Strategy <ul><li>Transnational strategy: expansion into foreign opera-tions that exploits location economies, leverages core competencies, and responds to key local conditions </li></ul><ul><li>The causes of interactive global learning and worldwide information sharing are championed. </li></ul><ul><li>Value is created by the relentless renewal, enhancement, and exchange of ideas, products, and processes across functions and borders. </li></ul><ul><li>The transnational MNE differentiates capabilities and contribu-tions while finding ways to systematically learn and ultimately integrate and diffuse knowledge, thus developing more powerful core competencies. </li></ul><ul><li>Realistically, the transnational firm faces serious challenges to its attempts to efficiently and effectively configure and coordinate its activities. </li></ul>11-
  25. 25. Fig. 11.6: The Integration/ Responsiveness Grid and Strategy Types 11-
  26. 26. Implications/Conclusions <ul><li>Industry structure explains the functions, form, and interrelationships amongst suppliers, buyers, products, new entrants, and rivals. </li></ul><ul><li>Even though competition is not perfect, industry structure does influence a firm’s performance. </li></ul><ul><li>Because competition is not perfect, oppor-tunities exist to convert innovative strategies into superior competitiveness. </li></ul><ul><li>[continued] </li></ul>11-
  27. 27. <ul><li>Great managers devise great strategies that build great companies that outperform their industry rivals. </li></ul><ul><li>Designing a strategy within the context of the value chain can improve the quality of analyses and decisions by deconstructing value creation opportunities into a series of discrete activities. </li></ul>11-