Chapter 12 Strategy In Intl Bus. (Fall 2007)


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  • Chapter 12 Strategy In Intl Bus. (Fall 2007)

    1. 1. Last Phase of MGNT 4670 <ul><li>Focus is on the company itself </li></ul><ul><ul><li>What actions must a company take to compete effectively in the international business market? </li></ul></ul><ul><ul><li>What are the benefits, costs, and risks associated with these actions? </li></ul></ul>
    3. 3. Opening Case <ul><li>Wal-Mart moved into other countries for three reasons </li></ul><ul><ul><li>Growth opportunities at home were becoming constrained </li></ul></ul><ul><ul><li>It thought it could create value by transferring its business model to foreign markets </li></ul></ul><ul><ul><li>It wished to preempt other retailers that were also starting to expand globally </li></ul></ul><ul><li>Wal-Mart initially treated foreign markets much like the US; it did discover that this was not the correct approach. </li></ul><ul><li>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 </li></ul><ul><li>Going global has yielded additional benefits as well </li></ul><ul><ul><li>Enhanced bargaining power with suppliers </li></ul></ul><ul><ul><li>The ability to transfer valuable ideas from one country to another </li></ul></ul>
    4. 4. STRATEGY & THE FIRM: VALUE CREATION <ul><li>Strategy: actions that managers must take to attain the goals of the firm </li></ul><ul><ul><li>For most firms, the preeminent goal is to maximize the value of the firm for its owners </li></ul></ul><ul><ul><li>Main goal usually to maximize long-term profit (П) П = TR - TC </li></ul></ul><ul><li>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 . </li></ul><ul><li>Profit growth is measured by the percentage increase in net profits over time </li></ul>
    5. 5. Strategy and the Firm Figure 12.1 p 409
    6. 6. VALUE CREATION <ul><li>A firm’s profits are determined by two basic conditions: </li></ul><ul><ul><li>Value customers place on the goods or services offered by the firm (perception) = V </li></ul></ul><ul><ul><li>Costs of production = C </li></ul></ul><ul><li>Value Creation </li></ul><ul><ul><li>Difference between Value and Costs or: </li></ul></ul><ul><ul><li>V-C = level of value creation </li></ul></ul>
    7. 7. STRATEGY in INTERNATIONAL BUSINESS <ul><li>Strategy is concerned with identifying and taking actions that will: </li></ul><ul><ul><li>lower costs of value creation and/or </li></ul></ul><ul><ul><li>differentiate the firm’s product offering through superior design, quality service, functionality, etc. in order to increase perception of value by the customer </li></ul></ul>
    8. 8. FIRM AS A VALUE CHAIN <ul><li>Any firm is composed of a series of distinct value creating activities </li></ul><ul><li>Primary activities </li></ul><ul><ul><li>Research & development </li></ul></ul><ul><ul><li>Production </li></ul></ul><ul><ul><li>Marketing & sales </li></ul></ul><ul><ul><li>Service </li></ul></ul><ul><li>Support Activities (provide inputs to enable the primary activities to occur) </li></ul><ul><ul><li>Materials management or logistics </li></ul></ul><ul><ul><li>Human resource </li></ul></ul><ul><ul><li>Information systems </li></ul></ul><ul><ul><li>Company infrastructure </li></ul></ul>
    9. 9. The Value Chain Fig 12.4 p 412
    10. 10. STRATEGY in INTERNATIONAL BUSINESS Example: Clear Vision <ul><li>Clear Vision, manufacturer and distributor of eyewear </li></ul><ul><li>Early 1980’s Clear Vision realized it had to lower its costs by importing; </li></ul><ul><li>Started by importing from manufacturers in Asia but was not satisfied with product quality and delivery; </li></ul><ul><li>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. </li></ul>
    11. 11. STRATEGY in INTERNATIONAL BUSINESS Example: Clear Vision <ul><li>After time, industrialization of Hong Kong caused labor shortage and increase in wages, so manufacturing plant was moved to mainland China. </li></ul><ul><li>Objective : lower costs </li></ul><ul><li>At same time, Clear Vision sought foreign eyewear companies specializing in fashionable, high quality design to broaden its product line. </li></ul><ul><li>Objective : product differentiation </li></ul><ul><li>Clear Vision invested in factories in Japan, France, and Italy </li></ul>
    12. 12. STRATEGY in INTERNATIONAL BUSINESS Example: Clear Vision <ul><li>Clear Vision responded to threats and opportunities in the international marketplace by developing strategies to increase profitability through value creation. </li></ul><ul><li>Today, Clear Vision is an MNE with over $100 in gross annual revenues. </li></ul><ul><li>Threat: lower cost imports from foreign competition </li></ul><ul><li>Response: lower costs by shifting manufacturing to a lower cost location </li></ul><ul><li>Threat: competition from high-end market segment and need to increase perceived value of eyewear </li></ul><ul><li>Response: achieve differentiation and increase perceived value </li></ul>
    13. 13. Advantages of Global Expansion <ul><li>Expanding globally allows firms to increase profitability in ways that are not available to purely domestic enterprises. The international environment can offer: </li></ul><ul><li>Leveraging products and core competencies </li></ul><ul><li>Location economies </li></ul><ul><li>Cost economies from experience effects </li></ul><ul><li>Leveraging subsidiary skills </li></ul><ul><li>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. </li></ul>
    14. 14. EXPANDING THE MARKET: LEVERAGING PRODUCT AND COMPETENCIES <ul><li>A company can increase its growth rate by taking goods or services developed at home and selling them internationally </li></ul><ul><ul><li>Returns from such a strategy are likely to be greater if indigenous/local competitors in the nations a company enters lack comparable products </li></ul></ul><ul><li>Success of multinational companies also rest upon the core competencies that underlie the development, production, and marketing of goods or services </li></ul><ul><ul><li>Core competencies are skills within the firm that competitors cannot easily match or imitate </li></ul></ul><ul><ul><li>Core competencies are the bedrock of a firm’s competitive advantage and enable them to reduce the costs of value creation </li></ul></ul>
    15. 15. EXPANDING THE MARKET: LEVERAGING PRODUCT AND COMPETENCIES <ul><li>Examples of core competencies: </li></ul><ul><ul><li>Toyota – production of cars </li></ul></ul><ul><ul><li>McDonald’s – fast food operations </li></ul></ul><ul><ul><li>Proctor & Gamble – development and marketing of consumer products </li></ul></ul><ul><ul><li>Wal-Mart – information systems and logistics for large retail operations </li></ul></ul><ul><ul><li>Can you think of any others? </li></ul></ul>
    16. 16. LOCATION ECONOMIES <ul><li>Realized by performing a value creation activity in an optimal location anywhere around the globe </li></ul><ul><li>Often arise due to differences in factor costs </li></ul><ul><li>Due to differences in factor costs, some countries have comparative advantage in production of certain products </li></ul><ul><li>It can lower costs of value to enable low cost strategy and/or help in differentiation of products from competitors </li></ul><ul><li>Global web: different stages of value chain are dispersed to those locations where perceived value is maximized or costs of value creation are minimized </li></ul>
    17. 17. Location Economies Pontiac LeMans Parts Parts Parts Assembly Advertising Design Creating a Global Web Sales Finding the “right” location
    18. 18. COST ECONOMIES from EXPERIENCE EFFECTS: Recall New Trade Theory <ul><li>Experience Effects: The systematic reduction in production costs that occurs over the life of a product. </li></ul><ul><ul><li>First observed in aircraft industry where unit costs reduced by 80% each time output was doubled </li></ul></ul><ul><li>How is the reduction brought about? </li></ul><ul><ul><li>Learning effects : cost savings that come from learning by doing </li></ul></ul><ul><ul><li>Economies of scale : the reductions in unit cost achieved by producing a large volume of a product </li></ul></ul>
    19. 19. Strategic Significance of the Experience Curve <ul><li>The firm that moves down the experience curve most rapidly has a cost advantage over its competitors </li></ul><ul><li>Serving the global market </li></ul><ul><li>from a single location helps to establish low cost strategy </li></ul><ul><li>Aim to rapidly build up sales, aggressive marketing strategies and get first-mover advantages. </li></ul><ul><li>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 </li></ul>Fig. 12.4, 5 th edition
    20. 20. LEVERAGING SUBSIDIARY SKILLS <ul><li>Subsidiary Skills: </li></ul><ul><li>Unique skills and ideas often developed in foreign subsidiaries. </li></ul><ul><li>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. </li></ul><ul><li>Other examples: idea-sharing at Hewlett-Packard; McDonald’s </li></ul><ul><li>Value created by identifying skills and applying it to a firm’s global network of operations. Some Challenges: </li></ul><ul><ul><li>Managers must create an environment where incentives are given to take necessary risks and reward them </li></ul></ul><ul><ul><li>Managers must accept that good ideas can come from anywhere in the firm </li></ul></ul><ul><ul><li>Need a process to identify new skill development </li></ul></ul><ul><ul><li>Need to facilitate transfer of new skills within the firm </li></ul></ul>
    21. 21. Cost Pressures and Pressures for Local Responsiveness <ul><li>Firms that compete in the global marketplace typically face two types of competitive pressure </li></ul><ul><ul><li>Pressures for cost reductions </li></ul></ul><ul><ul><li>Pressures to be locally responsive </li></ul></ul>
    22. 22. PRESSURES TO BUILDING AN INTERNATIONAL STRATEGY <ul><li>PRESSURES FOR COST REDUCTIONS </li></ul><ul><ul><li>Intense in industries of standardized, commodity type product that serve universal needs </li></ul></ul><ul><ul><li>Meaningful differentiation on non-price factors is difficult </li></ul></ul><ul><ul><li>Major competitors are based in low-cost locations </li></ul></ul><ul><ul><li>Consumers are powerful and face low switching costs </li></ul></ul><ul><ul><li>Liberalization of world trade and investment environment </li></ul></ul><ul><li>Examples of industries with cost pressures </li></ul><ul><ul><li>Commodity-type products which usually serve universal needs e.g.. Bulk chemicals, petroleum, steel, semi-conductor chips </li></ul></ul><ul><ul><li>Industries which locate in low-cost locations e.g. tire industry </li></ul></ul>
    23. 23. PRESSURES TO BUILDING AN INTERNATIONAL STRATEGY <ul><li>PRESSURES FOR LOCAL RESPONSIVENESS </li></ul><ul><ul><li>Differences in consumer tastes & preferences </li></ul></ul><ul><ul><ul><li>North American families like pickup trucks while in Europe they are viewed as a utility vehicle for firms </li></ul></ul></ul><ul><ul><li>Differences in infrastructure & traditional practices </li></ul></ul><ul><ul><ul><li>Consumer electrical system in North America is based on 110 volts; in Europe on 240 volts </li></ul></ul></ul><ul><ul><li>Differences in distribution channels </li></ul></ul><ul><ul><ul><li>Germany has few retailers dominating the food market, while in Italy it is fragmented </li></ul></ul></ul><ul><ul><li>Host-Government demands </li></ul></ul><ul><ul><ul><li>Health care system differences between countries require pharmaceutical firms to change operating procedures </li></ul></ul></ul>
    24. 24. LOCAL RESPONSIVENESS vs. STANDARDIZED PRODUCTS <ul><li>Theodore Levitt: (“The Globalization of Markets,” HBR May/June 1983) </li></ul><ul><li>Globalization and technology have brought convergence of tastes and preferences of consumers. </li></ul><ul><li>Modern global corporations must “seek sensibly to force suitably standardized products and practices in the entire globe.” </li></ul><ul><li>Companies which do not pursue standardized products will fall behind those that do . </li></ul><ul><li>Christopher Bartlett and Sumantra Ghoshal ( Managing Across Borders, HBR Press, 1989) </li></ul><ul><li>Complete standardization of products is not appropriate. </li></ul><ul><li>Global preferences still exist and companies must recognize these differences. </li></ul><ul><li>In certain industries, some companies have gained advantage by emphasizing local preferences and moving away from standardized products. </li></ul>
    25. 25. STRATEGIC CHOICES <ul><li>Four basic strategies to enter and compete in the international environment: </li></ul><ul><ul><li>International strategy- “Here it is” </li></ul></ul><ul><ul><li>Localization strategy-”Act local” * </li></ul></ul><ul><ul><li>Global standardization strategy- “Be cost-effective” ** </li></ul></ul><ul><ul><li>Transnational strategy – “Be cost-effective and Act local” </li></ul></ul><ul><li>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. </li></ul><ul><li>Example: Proctor & Gamble might purse global strategy for disposable diapers, but multidomestic one for detergents in Asian markets. </li></ul><ul><li>*In 5 th edition, this is called “Multidomestic” </li></ul><ul><li>** In 5 th edition, this is called “Global” </li></ul>
    26. 26. Choosing a Strategy The appropriateness of each strategy depends on the amount of pressures for cost reductions and local responsiveness. Fig. 12.7 p 427 ! “ Low” does not mean “NO”!
    27. 27. Global Standardization Strategy: “Be cost-effective” <ul><li>Focus is on increasing profitability through a low cost strategy: maximize cost reductions that come from experience curve effects and location economies </li></ul><ul><li>Production, marketing, and R&D concentrated in few favorable functions </li></ul><ul><li>Market standardized product to keep costs low </li></ul><ul><li>Effective where strong pressures for cost reductions and low demand for local responsiveness (emphasis on efficient operations) </li></ul><ul><li>Example: Semiconductor industry, Intel, Texas Instruments, Motorola. </li></ul>
    28. 28. Localization Strategy: “Act local” <ul><li>Main aim is maximum local responsiveness </li></ul><ul><li>Customize product offering, market strategy (including production and R&D) according to national conditions; compete through localization of products, no standardization </li></ul><ul><li>Generally unable to realize value from experience curve effects and location economies </li></ul><ul><li>Possess high cost structure due to decentralization </li></ul><ul><li>Strategy effective if firm faces strong pressures for local responsive and weak pressures for cost reductions </li></ul><ul><li>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 </li></ul>
    29. 29. Transnational Strategy: “Be cost-effective and act local” <ul><li>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 </li></ul><ul><li>Global learning is critical to meet competitive demands </li></ul><ul><ul><li>Valuable skills can develop in any of the firm’s world wide operations </li></ul></ul><ul><ul><li>Transfer of knowledge from foreign subsidiary to home country, to other foreign subsidiaries </li></ul></ul><ul><li>Transnational strategy difficult task due to contradictory demands placed on the organization </li></ul><ul><ul><li>Example : Caterpillar, Mal-Mart (evolving into) </li></ul></ul>
    30. 30. International Strategy: “Here it is” <ul><li>Create value by transferring valuable core competencies to foreign markets that indigenous competitors lack </li></ul><ul><li>Centralize product development functions at home </li></ul><ul><li>Establish manufacturing and marketing functions in local country but head office exercises tight control over it </li></ul><ul><li>Limit customization of product offering and market strategy </li></ul><ul><ul><li>Strategy effective if firm faces weak pressures for local responsive and cost reductions </li></ul></ul><ul><li>Examples: Toys R Us, Microsoft, Yahoo, McDonald’s (in early stages) </li></ul>
    31. 31. The Evolution of Strategy <ul><li>The problem with the international strategy is that over time competitors inevitably emerge </li></ul><ul><ul><li>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 </li></ul></ul><ul><li>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 </li></ul><ul><ul><li>Over time, the pressures to reduce costs may require a change in strategy </li></ul></ul><ul><li>As competition intensifies </li></ul><ul><ul><li>International and localization strategies tend to become less viable </li></ul></ul><ul><ul><li>Managers need to orient their companies toward either a global standardization strategy or a transnational strategy </li></ul></ul>
    32. 32. The Evolution of Strategy
    34. 34. GENERAL ELECTRIC <ul><li>Global technology, service, and finance company </li></ul><ul><li>HQ fosters change but operational and strategic decisions are decentralized to achieve cost effectiveness </li></ul><ul><li>Company maximizes internal resources through intense sharing </li></ul><ul><li>G.E. is global brand; most products </li></ul><ul><li>have minimal adaptation </li></ul>
    35. 35. HARLEY-DAVIDSON <ul><li>Active in over 75 countries </li></ul><ul><li>Products easy to sell as they represent symbol of American spirit of independence; minimal modification </li></ul><ul><li>Produced in U.S.A. </li></ul><ul><li>Little need for changing prices </li></ul>
    36. 36. SARA LEE (before latest restructuring) <ul><li>Core focus: leading/repeat-purchase branded consumer goods </li></ul><ul><li>26 different brands with minimal adaptation/localization </li></ul><ul><li>Global practices </li></ul><ul><li>Intense control on costs to insure </li></ul><ul><li>competitive pricing </li></ul><ul><li>Sara Lee announced in 2005 that it would be making strategic decisions emphasizing greater product focus and increasing operational efficiency </li></ul>
    37. 37. NESTLE <ul><li>Major brand: Nestle with several other well known brands </li></ul><ul><li>Product line includes: milk products, ice cream, chocolate, candy, cookies, bottled water, pet food, pet care products, prepared foods, pasta </li></ul><ul><li>Products adapted on regional or individual market basis </li></ul><ul><li>Advertising, pricing, and distribution is market by market basis </li></ul><ul><li>Efforts are being made to coordinate more closely in regional areas and to rotate managers around the world in various assignments </li></ul>
    38. 38. UNILEVER <ul><li>A Global food, cleaning products, toiletries group </li></ul><ul><li>Relationship between parent company and subsidiaries is changing. </li></ul><ul><li>Strong network of personal manager networks used as vehicle for global learning and exchange </li></ul><ul><li>Organized by regional business groups </li></ul><ul><li>Production of certain key products regionalized for cost effectiveness </li></ul><ul><li>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 </li></ul>
    39. 39. BY INDUSTRY <ul><li>Bulk chemicals </li></ul><ul><li>Fast food franchises </li></ul><ul><li>Feature films </li></ul>
    40. 40. BY INDUSTRY <ul><li>Automobiles </li></ul><ul><li>Packaged food items (branded) </li></ul><ul><li>Gasoline/Oil companies </li></ul>
    41. 41. BY INDUSTRY <ul><li>Pharmaceuticals </li></ul><ul><li>Consulting </li></ul><ul><li>Luxury items </li></ul><ul><li>e.g. (caviar, diamonds, fine wines) </li></ul>