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Kdqt eng chap012


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Kdqt eng chap012

  1. 1. InternationalBusiness 7e by Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. Chapter 12 The Strategy of International Business
  3. 3. IntroductionWhat actions can managers take to compete moreeffectively as an international business?How can firms increase profits through internationalexpansion?What international strategy should firms pursue? 12-3
  4. 4. Strategy And The FirmA firm’s strategy refers to the actions that managers taketo attain the goals of the firmProfitability can be defined as the rate of return the firmmakes on its invested capitalProfit growth is the percentage increase in net profitsover timeExpanding internationally can boost profitability and profitgrowth 12-4
  5. 5. Strategy And The FirmFigure 12.1: Determinants of Enterprise Value 12-5
  6. 6. Value CreationThe value created by a firm is measured by thedifference between V (the price that the firm can charge forthat product given competitive pressures) and C (the costsof producing that product)The higher the value customers place on a firm’sproducts, the higher the price the firm can charge for thoseproducts, and the greater the profitability of the firm 12-6
  7. 7. Value CreationFigure 12.2: Value Creation 12-7
  8. 8. Classroom Performance SystemWhat is the rate of return the firm makes on its investedcapital?a) Profit growthb) Profitabilityc) Net returnd) Value created 12-8
  9. 9. Value CreationProfits can be increased by:adding value to a product so that customers are willing topay more for it – a differentiation strategylowering costs – a low cost strategyMichael Porter argues that superior profitability goes tofirms that create superior value by lowering the coststructure of the business and/or differentiating the productso that a premium price can be charged 12-9
  10. 10. Strategic PositioningMichael Porter argues that firms need to choose eitherdifferentiation or low cost, and then configure internaloperations to support the choiceTo maximize long run return on invested capital, firmsmust:pick a viable position on the efficiency frontierconfigure internal operations to support that positionhave the right organization structure in place to executethe strategy 12-10
  11. 11. Strategic PositioningFigure 12.3: Strategic Choice in the International Hotel Industry 12-11
  12. 12. Operations: The Firm As A Value ChainA firm’s operations can be thought of a value chaincomposed of a series of distinct value creation activities,including production, marketing, materials management,R&D, human resources, information systems, and the firminfrastructureValue creation activities can be categorized as primaryactivities (R&D, production, marketing and sales, customerservice) and support activities (information systems,logistics, human resources) 12-12
  13. 13. Classroom Performance SystemWhich of the following is not an example of a primaryactivity?a) Logisticsb) Marketing and salesc) Customer serviced) Production 12-13
  14. 14. Operations: The Firm As A Value Chain Figure 12.4: The Value Chain 12-14
  15. 15. Global Expansion, Profitability, And Profit GrowthInternational firms can:expand the market for their domestic product offerings byselling those products in international marketsrealize location economies by dispersing individual valuecreation activities to locations around the globe where theycan be performed most efficiently and effectivelyrealize greater cost economies from experience effectsby serving an expanded global market from a centrallocation, thereby reducing the costs of value creationearn a greater return by leveraging any valuable skillsdeveloped in foreign operations and transferring them toother entities within the firm’s global network of operations 12-15
  16. 16. Expanding The Market: Leveraging Products And CompetenciesFirms can increase growth by selling goods or servicesdeveloped at home internationallyThe success of firms that expand internationally dependson the goods or services they sell, and on their corecompetencies (skills within the firm that competitors cannoteasily match or imitate)Core competencies enable the firm to reduce the costs ofvalue creation and/or to create perceived value in such away that premium pricing is possible 12-16
  17. 17. Location EconomiesWhen firms base each value creation activity at thatlocation where economic, political, and cultural conditions,including relative factor costs, are most conducive to theperformance of that activity, they realize locationeconomies (the economies that arise from performing avalue creation activity in the optimal location for thatactivity, wherever in the world that might be)By achieving location economies, firms can:lower the costs of value creation and achieve a low costpositiondifferentiate their product offering 12-17
  18. 18. Location EconomiesFirms that take advantage of location economies indifferent parts of the world, create a global web of valuecreation activitiesUnder this strategy, different stages of the value chainare dispersed to those locations around the globe whereperceived value is maximized or where the costs of valuecreation are minimizedA caveat:transportation costs, trade barriers, and political riskscomplicate this picture 12-18
  19. 19. Classroom Performance SystemWhat is created when different stages of a value chain aredispersed to locations where value added is maximized orwhere the costs of value creation are minimized?a) Experience effectsb) Learning effectsc) Economies of scaled) A global web 12-19
  20. 20. Experience EffectsThe experience curve refers to the systematic reductionsin production costs that have been observed to occur overthe life of a productLearning effects are cost savings that come from learningby doingSo, when labor productivity increases, individuals learnthe most efficient ways to perform particular tasks, andmanagement learns how to manage the new operationmore efficiently 12-20
  21. 21. Experience EffectsFigure 12.5: The Experience Curve 12-21
  22. 22. Experience EffectsEconomies of scale refer to the reductions in unit cost achieved byproducing a large volume of a productSources of economies of scale include:spreading fixed costs over a large volumeutilizing production facilities more intensivelyincreasing bargaining power with suppliersBy moving down the experience curve, firms reduce the cost ofcreating valueTo get down the experience curve quickly, firms can use a singleplant to serve global markets 12-22
  23. 23. Leveraging Subsidiary SkillsIt is important for managers to:recognize that valuable skills that could be appliedelsewhere in the firm can arise anywhere within the firm’sglobal network (not just at the corporate center)establish an incentive system that encourages localemployees to acquire new skillshave a process for identifying when valuable new skillshave been created in a subsidiary 12-23
  24. 24. SummaryManagers need to keep in mind the complex relationshipbetween profitability and profit growth when makingstrategic decisions about pricingIn some cases, it may be worthwhile to price productslow relative to their perceived value in order to gain marketshare 12-24
  25. 25. Cost Pressures And Pressures For Local ResponsivenessFirms that compete in the global marketplace typically facetwo types of competitive pressures:pressures for cost reductionspressures to be locally responsiveThese pressures place conflicting demands on the firmPressures for cost reductions force the firm to lower unitcosts, but pressure for local responsiveness require thefirm to adapt its product to meet local demands in eachmarket—a strategy that raises costs 12-25
  26. 26. Cost Pressures And Pressures For Local ResponsivenessFigure 12.6: Pressures for Cost Reductions and Local Responsiveness 12-26
  27. 27. Pressures For Cost ReductionsPressures for cost reductions are greatest:in industries producing commodity type products that filluniversal needs (needs that exist when the tastes andpreferences of consumers in different nations are similar ifnot 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 switchingcosts 12-27
  28. 28. Pressures For Local ResponsivenessPressures for local responsiveness arise from:differences in consumer tastes and preferences - strongpressures for local responsiveness emerge whenconsumer tastes and preferences differ significantlybetween countriesdifferences in traditional practices and infrastructure -pressures for local responsiveness emerge when there aredifferences in infrastructure and/or traditional practicesbetween countries 12-28
  29. 29. Pressures For Local Responsivenessdifferences in distribution channels - a firms marketingstrategies needs to be responsive to differences indistribution channels between countrieshost government demands - economic and politicaldemands imposed by host country governments maynecessitate a degree of local responsiveness 12-29
  30. 30. Classroom Performance SystemWhich of the following is not a pressure for localresponsiveness?a) Excess capacityb) Host government demandsc) Differences in consumer tastes and preferencesd) Differences in distribution channels 12-30
  31. 31. Choosing A StrategyThere are four basic strategies to compete in theinternational environment:global standardizationlocalizationtransnationalInternationalThe appropriateness of each strategy depends on thepressures for cost reduction and local responsivness in theindustry 12-31
  32. 32. Choosing A StrategyFigure 12.7: Four Basic Strategies 12-32
  33. 33. Global Standardization StrategyThe global standardization strategy focuses onincreasing profitability and profit growth by reaping the costreductions that come from economies of scale, learningeffects, and location economiesThe strategic goal is to pursue a low-cost strategy on aglobal scaleThe global standardization strategy makes sense when:there are strong pressures for cost reductionsdemands for local responsiveness are minimal 12-33
  34. 34. Localization StrategyThe localization strategy focuses on increasingprofitability by customizing the firm’s goods or services sothat they provide a good match to tastes and preferences indifferent national marketsThe localization strategy makes sense when:there are substantial differences across nations withregard to consumer tastes and preferenceswhere cost pressures are not too intense 12-34
  35. 35. Transnational StrategyThe transnational strategy tries to simultaneously:achieve low costs through location economies,economies of scale, and learning effectsdifferentiate the product offering across geographicmarkets to account for local differencesfoster a multidirectional flow of skills between differentsubsidiaries in the firm’s global network of operationsThe transnational strategy makes sense when:cost pressures are intensepressures for local responsiveness are intense 12-35
  36. 36. International StrategyThe international strategy involves taking products firstproduced for the domestic market and then selling theminternationally with only minimal local customizationThe international strategy makes sense whenthere are low cost pressureslow pressures for local responsiveness 12-36
  37. 37. Classroom Performance SystemWhich strategy tries to simultaneously achieve low coststhrough location economies, economies of scale, andlearning effects, and differentiate the product offeringacross geographic markets to account for localdifferences?a) Internationalizationb) Localizationc) Global standardizationd) Transnational 12-37
  38. 38. The Evolution of StrategyAn international strategy may not be viable in the longtermTo survive, firms may need to shift to a globalstandardization strategy or a transnational strategy inadvance of competitorsSimilarly, localization may give a firm a competitive edge,but if the firm is simultaneously facing aggressivecompetitors, the company will also have to reduce its coststructures, and the only way to do that may be to shifttoward a transnational strategy 12-38
  39. 39. The Evolution of StrategyFigure 12.8: Changes in Strategy over Time 12-39
  40. 40. Classroom Performance SystemWhich strategy makes sense when pressures are high forlocal responsiveness, but low for cost reductions?a) Global standardization strategyb) International strategyc) Transnational strategyd) Localization strategy 12-40