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The strategy of international business
- 1. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-1 Chapter 11 The Strategy of International Business
- 2. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-2 The Role of Strategy in International Business
- 3. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-3 Strategy is the framework that managers apply to determine the competitive moves and business approaches that run the company. Strategy is management’s idea on how to best: • Attract customers • Operate efficiently • Compete effectively • Create value • Achieve goals
- 4. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-4 Industry, Strategy ,and Firm Performance • Industry organization paradigm leading strategy perspectives • The exceptions of imperfect competition • The idea of industry structure: The Five Forces Model
- 5. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-5 Five Forces Model
- 6. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-6 Industry Change Industry structure changes because of events like • Competitors’ moves • Government policies • Changes in economics • Shifting buyer preferences • Technological developments • Rate of market growth
- 7. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-7 Strategy and Value • Strategy helps managers assess the company’s present situation, identify the direction the company should go, and determine how the company will get there. • Creating Value – Cost Leadership – Differentiation
- 8. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-8 The Firm as Value Chain • What is the value chain? • Using the value chain – Configuration – Macro Cost Factors – Cluster Effects – Logistics – Digitization – Economies of Scale – Business Environment
- 9. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-9 Coordination • Coordination Concerns • National Cultures • Learning Curve • Operational Obstacles • Subsidiary Networks
- 10. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-10 Change and the Value Chain • The configuration and coordination of value chains respond to changes in customers, competitors, industries, and environments. • The Risk of Strategy
- 11. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-11 Global Integration versus Local Responsiveness • Pressures for Global Integration – Globalization of Markets – Efficiency Gains of Standardization • Pressures for Local Responsiveness – Consumer Divergence – Host Government Policies
- 12. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-12 When Pressures Interact The Integration-Responsiveness grid helps managers measure the global and local pressures that influence the configuration and coordination of their value chains.
- 13. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-13 Integration Responsiveness Grid
- 14. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-14 Types of Strategy
- 15. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11-15 Future: What’s New in the World of Strategy Types • Evolution of the Multinational Corporation • Visions of the Future • The “Metanational” Company • “Micro-Nationals” • The “Cybercorp”
Editor's Notes
- An industry is composed of the companies engaged in a particular kind of commercial enterprise. The IO paradigm presumes that markets demonstrate perfect competition. Perfect competition presumes: • Many buyers and sellers such that no individual affects price or quantity • Perfect information for both producers and consumers • Few, if any, barriers to market entry and exit • Full mobility of resources • Perfect knowledge among firms and buyers The IO paradigm assumes that firm performance is a function of its conduct, which is ultimately determined by industry factors that shape the corresponding pattern of competition. Firm conduct refers to the strategic and tactical choices a company makes regarding research and innovation, product strategy, plant investment, pricing behavior, and the like that influence its profitability. These two anomalies—markets are not always perfectly competitive and some firms consistently outperform industry averages—suggest that industry structure is not entirely deterministic of firm performance. Instead, firm performance is influenced by the presence of bright, motivated managers and their keen sense of innovative products or processes. The idea of industry structure helps explain the functions, form, and interrelationships among: • Suppliers of inputs • Buyers of outputs • Substitute products • Potential new entrants • Rivalry among competing sellers
- New products, new firms, new markets, and new managers trigger new developments in rivalry, pricing, substitutes, buyers, and suppliers. These developments often change a minor feature of the industry, such as the expansion of an existing distribution channel. More recently, changes due to the global economic crisis are resetting the structure of most industries.
- Creating value spurs the firm to develop a compelling value proposition (why a consumer should buy its goods or use its services) that specifies its targeted customer markets (those consumers for whom a firm creates goods or services). Value is what remains after costs have been deducted from the revenues of a firm. Cost leadership emphasizes high production volumes, low costs, and low prices. Firms that choose this strategy strive to be the low-cost producer in an industry for a given level of quality. This strategy requires that a firm sell its products at the average industry price to earn a profit higher than that of rivals or below the average industry prices to capture market share. Differentiation spurs the company to provide a unique product that customers value and that rivals find hard, if not impossible, to match or copy.
- The value chain is the set of linked value-creating activities the company performs to design, produce, market, distribute, and support a product. Value-chain analysis helps managers understand the behavior of costs and existing and potential sources of differentiation. A value chain disaggregates a firm into: • Primary activities that create and deliver the product • Support activities that aid the individuals and groups engaged in primary activities Value chains identify the format and interactions between different activities of the company. Configuration is the way in which managers arrange the activities of the value chain. Manufacturing costs vary from country to country because of wage rates, worker productivity, resource availability, and fiscal and monetary policies. An industry cluster is a system of businesses and institutions engaged with one another at various levels. Logistics entails how companies obtain, produce, and exchange material and services in the proper place and in proper quantities for the proper value activity. The process of digitization involves converting an analog product into a string of zeros and ones. Increasingly, products like software, music, and books, as well as services like call centers, application processing, and financial consolidation, can be digitized and, hence, located virtually anywhere. Equipped with networked computers, workers can move goods and services anywhere in the world at negligible cost and complication. Consequently, the potential for digitization of goods or services influences how a company configures its value chain. The concept of economies of scale refers to a situation wherein a firm doubles its cumulative output yet total cost less than doubles due to efficiency gains. Effectively, reductions in the unit cost of a product result from the increasing efficiency that comes with larger operations.
- Coordination is the way that managers connect the activities of the value chain. As companies globally configure value activities, they must develop coordination tools. Coordinated well, MNEs can leverage their core competencies, using them to serve customers, boost sales, and improve profits. A company’s core competency is: • The unique skills and/or knowledge that it does better than its competitors • Essential to its competitiveness and profitability A core competency can emerge from various sources, including: • Product development • Employee productivity • Manufacturing expertise • Marketing imagination • Executive leadership Several factors influence value chain coordination: • Operational obstacles • National cultures • Learning effects • Subsidiary networks The globalization of a company’s value chain, such as design done in Finland, inputs sourced from Brazil, production done in China, distribution organized in the United States, and service done in Mexico, presses managers to understand how foreign cultures influence coordination. National cultures also impose hurdles in coordinating a transaction from one stage of the value chain to another. Units anchored in individual versus collectivist cultures may disagree over information sharing or collaboration responsibilities; conflicts complicate coordination. Hence, features of national culture require managers to understand their implications to the collaborative relationship that shape the coordination of value activities. A learning curve is the commonsense principle that the more one does something, the better one gets at it. Companies configure value chain activities to exploit the learning curve. The matter of learning shapes how manufacturing and service MNEs coordinate value chains. In the case of the former, MNEs often adapt production activities for different attitudes and approaches to manufacturing. For example, an MNE may have factories in different countries, such as Japan and Mexico, which manufacture the same product but apply different production philosophies. The Mexican factory may use a traditional assembly-line operation given the local conditions of inexpensive labor, patchy transportation infrastructure, and marginal cost of high technology. The Japanese factory, in contrast, may use a lean production system given local labor competency, manufacturing expertise, and efficient logistics. The different manufacturing approaches complicate how managers coordinate activities between factories. Planning to learn how to coordinate these links in the value-chain positions the MNE to gain production efficiencies that lead to lower costs, higher quality, satisfied customers, and new sales. MNEs run into problems getting the various links of their global value chain to engage. Operating internationally inevitably runs into communication challenges because of time zones, differing languages, and ambiguous meanings. Increasingly, companies rely on browser-based communications methods to coordinate the handoffs from link to link. The thinking goes that electronically linked producers and retailers can lower coordination costs throughout the value chain. In addition, standardizing the format for data input helps standardize the format for interpretation. Electronic transactions boost efficiency by reducing intermediary transactions and the associated unneeded coordination (streamlining the distributor link in the value chain by eliminating an intermediary). The growing prevalence of social networks provides perspectives for managers to better understand the dynamics of their subsidiary networks.
- Designing and delivering a strategy is an ongoing struggle for companies. While some succeed, many fall short of their objectives.
- Integration is the process of combining differentiated parts into a standardized whole. Responsiveness is the process of disaggregating a standardized whole into differentiated parts. The convergence of national markets, standardization of business processes, and the drive to maximize production efficiency push for the integration of value activities. A provocative thesis, increasingly supported by global buying patterns and companies’ strategies, suggests that consumers worldwide seek global products—whether they are Apple iPods, Samsung plasma screens, Facebook connections, Starbucks espressos, Google searches, or Zara blouses. Two conditions—one demand-pull, the other supply-push—influence this trend. Powering demand-pull conditions are the intrinsic functions of money. Money has three inalienable features: • difficult to acquire • scarce • transient Global and local pressures challenge how the firm configures and coordinates its value chain. The convergence of national markets and quest for production efficiency push for the global integration of value activities. Standardization is the handmaiden of globalization, encouraging supply conditions that produce volumes of low-cost, high-quality products. That is, standardization is the push dynamic that drives supply, whereas the globalization of markets represents the pull dynamic that converges consumer preferences. The logic of standardization is straightforward. Repeatedly doing the same task the same way improves the efficiency of effort. Improving efficiency in the value chain, in turn, supports aggressive product development, lower-cost production processes, and lower prices. Prominent pressures for local responsiveness are consumer divergence and host-government policies. Contrary to the globalization-of-markets thesis, others argue that divergences in consumer preferences across countries necessitate locally responsive value chains. Differences in local consumers’ preferences endure due to cultural predisposition, historical legacy, and endemic nationalism. Regardless of the cause, consumers often prefer goods that are sensitive to the particular idiosyncrasies of their daily life. Consequently, cross-national divergence presses MNEs to adapt value activities to the demands of local markets. The source of many variations is the policies, or the lack thereof, mandated by host-country governments. Prior to the economic crisis, companies confronted policy differences as they moved from country to country. However, these differences had been narrowing as capitalism and economic freedom shaped policy in a growing number of countries. Now, in the early phases of the crisis, governments’ distrust of market mechanisms spurs revising the rules of the market. Moreover, despite calls for coordinated policy initiatives, different countries have taken different paths to reset fiscal, monetary, and business policies. Collectively, these trends required companies to rethink their value chains. Constrained options for standardization and wavering momentum of globalization spotlight the sustainability of value chains biased toward local responsiveness.
- The international strategy leverages a company’s core competencies in foreign markets. It allows limited local customization. Benefits of Int’l Strategy: An international strategy works well when a firm has a core competence that foreign rivals lack and industry conditions do not demand high degrees of global integration or local responsiveness. Limitations of Int’l Strategy: Unless aware, the company implementing the international strategy can be blindsided by an unexpectedly innovative rival. Google, for example, faces increasingly adept local rivals in South Korea, specifically Naver, and China, specifically Baidu, whose native sensitivities to local search tendencies pose threats. The multidomestic strategy adjusts products, services, and business practices to meet the needs of local markets. Firms applying a multidomestic strategy hold that value-chain design is the prerogative of the local subsidiary, not the unilateral declaration by the home office. Management that chooses the multidomestic strategy believes in customizing value activities to the unique conditions that prevail in different markets. Benefits (Multidomestic): A multidomestic strategy makes sense when the company faces a high need for local responsiveness and low need to reduce costs via global integration (the lower right-hand space of the IR grid). It has other benefits as well, such as minimizing political risk given the local standing of the company, lower exchange-rate risk given reduced need to repatriate funds to the home office, greater prestige given its national prominence, higher potential for innovative products from local R&D, and higher growth potential due to entrepreneurial zeal. Limitations (Multidomestic): The multidomestic strategy leads to widespread replication of management, design, production, and marketing activities—the outcome of building “mini-me” units around the world. Customizing products and processes to local markets inevitably increases costs. Different product designs require different materials, production runs become shorter, marketing programs are adapted, distribution requires new channels, and different transactions require different coordination methods. Hence, the multidomestic strategy is impractical in cost-sensitive situations. A global strategy champions worldwide consistency and standardization. Firms that choose the global strategy face strong pressure for cost reductions but weak pressure for local responsiveness. Benefits (Global): Global strategy is suited to industries that emphasize efficient operations and where local responsiveness needs either are nonexistent or can be neutralized by offering a higher-quality product for a lower price than the local substitute. Limitations (Global): Countries whose markets demand local responsiveness reduce the attractiveness of the global strategy. More fundamentally, the strength of the global strategy, ironically, is its weakness. The cost sensitivity and standardization bias of a global strategy gives MNEs little latitude to adapt value activities to local conditions. Moreover, disruptive market changes or product breakthroughs can turn a fine-tuned value chain into a misfiring machine. A transnational strategy simultaneously engages pressures for global integration and local responsiveness in ways that leverage insight to improve the firm’s core competency. A transnational strategy makes the exchange of ideas across value activities a key element of competitive advantage. The company implementing a transnational strategy aims not to work harder or work smarter than competitors but rather work differently based on diffusing the lessons it has learned and the knowledge it has earned throughout its worldwide operations. Ideas are the primary source of competitiveness for companies implementing a transnational strategy. Benefits(transnational): The learning orientation of the transnational strategy drives many benefits—most visibly its fine-tuned balancing of global integration and local responsiveness. The vitality of learning in the transnational strategy pushes managers to respond to changing environments, configuring resources and coordinating processes without imposing more bureaucracy. Ultimately, these capabilities permit standardizing some links of the value chain to generate the efficiencies warranted by global integration pressures, while also adapting other links to meet pressures for local responsiveness—but without sacrificing the benefits of one for the other. Limitation (transnational): Transnational strategy, admittedly difficult to even specify in theory, is even more difficult to implement in practice. Limitations arise from complicated agendas, high costs, and cognitive limits.
- MNEs go through three phases on the path to becoming a global powerhouse: 1. First there was the nineteenth-century “international model, whereby the company was headquartered both physically and mentally in its home country; it sold goods, when it was so inclined, through a scattering of overseas sales offices.” 2. Phase two of the evolution ushered in the classic, multinational firm of the late twentieth century. This model saw the parent company creating smaller versions of itself in foreign markets. These smaller satellite companies were run by home-nation executives sent from headquarters, who typically had great technical expertise but little cultural fluency and minimal foreign-language competency. 3. The third phase, the “globally integrated enterprise,” is one that builds a company-wide value chain that put people, jobs, and investments anywhere in the world “based on the right cost, the right skills and the right business environment . . . . now work flows to the places where it will be done best, that is, most efficiently and to the highest quality.” Visions of the future: Others trumpet a world where a dynamic ecology of locations and firms pushes beyond the historic division of local firms versus global companies. This view provides for different types of companies following different types of strategies. In a sense, these companies create a natural ecology that reacts to, and interacts with, their different environments. The diversity of these strategies and companies in this global ecology creates a business world populated by a variety of local firms, regional firms, firms that operate in a few countries or many countries, centralized firms, and networks of firms. The Metanational Company: Others see the emergence of a new type of global corporation, the so-called metanational company, which thrives on seeking unique ideas, activities, and insights that complement its existing operations as well as creating leverage points. The metanational company “builds a new kind of competitive advantage by discovering, accessing, mobilizing, and leveraging knowledge from many locations around the world.” Micro-Nationals: Although the number of MNEs grows worldwide, their average size is falling—most of the 70,000 or so firms that operate internationally employ less than 250 people. This anomaly signals the era of so-called micro-multinationals: clever, small companies that are born global and operate worldwide from day one. Unlike their bigger counterparts that expanded internationally by gradually entering new markets, micro-multinationals go global immediately. The Cybercorp: To this type of MNE, national boundaries no longer organize consumers, locations, markets, or industries. Instead, the cyberspace created by evolving Internet technologies—not the physical geography of lines on a map—defines markets. The cybercorp develops competencies that let it react in real time to changes in its customers, competition, industry, and environment.