International Business 9e

By Charles W.L. HillMcGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 13The Strategy of International Business

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What Is Strategy?A firms strategy refers to the actions that managers take to attain the goals of the firmFirms need to pursue strategies that increase profitability and profit growthProfitability is the rate of return the firm makes on its invested capitalProfit growth is the percentage increase in net profits over time

LO1: Explain the concept of strategy.

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What Is Strategy?To increase profitability and profit growth, firms can add valuelower costssell more in existing marketsexpand internationally

Managers can increase the profitability of the firm by pursuing strategies that lower costs or by pursuing strategies that add value to the firms products, which enables the firm to raise prices. Managers can increase the rate at which the firms profits grow over time by pursuing strategies to sell more products in existing markets or by pursuing strategies to enter new markets. As we shall see, expanding internationally can help managers boost the firms profitability and increase the rate of profit growth over time.

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What Is Strategy?Determinants of Enterprise Value

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How Is Value Created?To increase profitability, firms need to create more valueThe firms value creation is the difference between V (the price that the firm can charge for that product given competitive pressures) and C (the costs of producing that product)a firm has high profits when it creates more value for its customers and does so at a lower cost

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How Is Value Created?Value Creation

The value of a product to an average consumer is V; the average price that the firm can charge a consumer for that product given competitive pressures and its ability to segment the market is P; and the average unit cost of producing that product is C (C comprises all relevant costs, including the firms cost of capital). The firms profit per unit sold () is equal to P C, while the consumer surplus per unit is equal to V P (another way of thinking of the consumer surplus is as value for the money; the greater the consumer surplus, the greater the value for the money the consumer gets). The firm makes a profit so long as P is greater than C, and its profit will be greater the lower C is relative to P. The difference between V and P is in part determined by the intensity of competitive pressure in the marketplace; the lower the intensity of competitive pressure, the higher the price charged relative to V.4 In general, the higher the firms profit per unit sold is, the greater its profitability will be, all else being equal.

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How Is Value Created?Profits can be increased by

Using a differentiation strategy adding value to a product so that customers are willing to pay more for it

Using a low cost strategy lowering costs

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Why Is Strategic Positioning Important? Michael Porter argues that firms need to choose either differentiation or low cost, and then configure internal operations to support the choiceSo, to maximize long run return on invested capital, firms mustpick a viable position on the efficiency frontier configure internal operations to support that positionhave the right organization structure in place to execute the strategy

The strategy, operations, and organization of the firm must all be consistent with each other if it is to attain a competitive advantage and garner superior profitability. Operations refers to the different value creation activities a firm undertakes.

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Why Is Strategic Positioning Important?Strategic Choice in the International Hotel Industry

The convex curve is what economists refer to as an efficiency frontier. The efficiency frontier shows all of the different positions that 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 (note that the horizontal axis is reverse scaledmoving along the axis to the right implies lower costs). 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.

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How Are A Firms Operations Configured?A firms operations are like a value chain composed of a series of distinct value creation activities:production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructureAll of these activities must be managed effectively and be consistent with firm strategy

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How Are A Firms Operations Configured?Value creation activities can be categorized as

Primary activities R&DProductionmarketing and salescustomer service

Support activitiesinformation systemslogisticshuman resources

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How Are A Firms Operations Configured?The Value Chain

The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities including production, marketing and sales, materials management, R&D, human resources, information systems, and the firm infrastructure. We can categorize these value creation activities, or operations, as primary activities and support activities (see Figure 12.4). If a firm is to implement its strategy efficiently, and position itself on the efficiency frontier shown, it must manage these activities effectively and in a manner that is consistent with its strategy.

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How Can Firms Increase Profits Through International Expansion?International firms can

Expand their market sell in international markets

Realize location economies disperse value creation activities to locations where they can be performed most efficiently and effectively

LO2: Recognize how firms can profit by expanding globally.

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How Can Firms Increase Profits Through International Expansion?Realize greater cost economies from experience effects serve an expanded global market from a central location

Earn a greater return leverage skills developed in foreign operations and transfer them elsewhere in the firm

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How Can Firms Leverage Their Products And Competencies?Firms can increase growth by selling goods or services developed at home internationallyThe success of firms that expand internationally depends on the goods or services soldthe firms core competencies

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How Can Firms Leverage Their Products And Competencies?Core competencies - skills within the firm that competitors cannot easily match or imitatecan exist in any value creation activityCore competencies allow firms to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible

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Why Are Location Economies Important?Location economies are economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might beBy achieving location economies, firms canlower the costs of value creation and achieve a low cost positiondifferentiate their product offering

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Why Are Location Economies Important?Firms that take advantage of location economies in different parts of the world, create a global web of value creation activitiesdifferent stages of the value chain are dispersed to locations where perceived value is maximized or where the costs of value creation are minimized

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Why Are Experience Effects Important?The experience curve refers to the systematic reductions in production costs that occur over the life of a productby moving down the experience curve, firms reduce the cost of creating valueto get down the experience curve quickly, firms can use a single plant to serve global markets

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Why Are Experience Effects Important?Learning effects are cost savings that come from learning by doingWhen labor productivity increasesindividuals learn the most efficient ways to perform particular tasksmanagers learn how to manage the new operation more efficiently

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Why Are Experience Effects Important?The Experience Curve

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Why Are Experience Effects Important?Economies of scale - the reductions in unit cost achieved by producing a large volume of a productSources of economies of scale includespreading fixed costs over a large volumeutilizing production facilities more intensivelyincreasing bargaining power with suppliers

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How Can Managers Leverage Subsidiary Skills?Managers should

Recognize that valuable skills that could be applied elsewhere in the firm can arise anywhere within the firms global network - not just at the corporate centerEstablish an incentive system that encourages local employees to acquire new skillsHave a process for identifying when valuable new skills have been created in a subsidiaryAct as facilitators to help transfer skills within the firm

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What Types Of Competitive Pressures Exist In The Global Marketplace? Firms that compete in the global marketplace face two conflicting types of competitive pressuresthe pressures limit the ability of firms to realize location economies and experience effects, leverage products, and transfer skills within the firmDealing with both pressures is challenging

LO3: Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice.

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What Types Of Competitive Pressures Exist In The Global Marketplace? Two competitive pressures:

Pressures for cost reductions force the firm to lower unit costs

Pressures to be locally responsive require the firm to adapt its product to meet local demands in each marketbut, this strategy can raise costs

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What Types Of Competitive Pressures Exist In The Global Marketplace?Pressures for Cost Reductions and Local Responsiveness

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When Are Pressures For Cost Reductions Greatest?Pressures for cost reductions are greatest

In industries producing commodity type products that fill universal needs (needs that exist when the tastes and preferences of consumers in different nations are similar if not identical) where price is the main competitive weaponWhen major competitors are based in low cost locationsWhere there is persistent excess capacityWhere consumers are powerful and face low switching costs

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When Are Pressures For Local Responsiveness Greatest?Pressures for local responsiveness arise from

Differences in consumer tastes and preferencesstrong pressure emerges when consumer tastes and preferences differ significantly between countries

Differences in traditional practices and infrastructurestrong pressure emerges when there are significant differences in infrastructure and/or traditional practices between countries

Management Focus: Local Responsiveness at MTV Networks describes MTVs global strategy. Since its start in 1981, the network has expanded to reach some 330 million customers spread across 140 countries. Interestingly, MTV has found that its global strategy has to be surprisingly local. Consumers in different markets, while enjoying some American programming, prefer to see their own local superstars. To maintain the companys culture and operating principles, MTV transfers expatriates from elsewhere in the world to new stations, then moves them elsewhere once the local station is well established.

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When Are Pressures For Local Responsiveness Greatest?Differences in distribution channelsneed to be responsive to differences in distribution channels between countries

Host government demandseconomic and political demands imposed by host country governments may require local responsiveness

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Which Strategy Should A Firm Choose?There are four basic strategies to compete in international marketsthe appropriateness of each strategy depends on the pressures for cost reduction and local responsiveness in the industry

LO4: Identify the different strategies for competing globally and their pros and cons.

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Which Strategy Should A Firm Choose?Four Basic Strategies

The Opening Case: Avon Products explores the competitive pressures Avon felt in 2005. the company, which relies on foreign sales for a significant portion of its overall earnings, was forced to implement a new strategy that emphasized the costs savings associated with global products. Avons new strategy was a success.

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Which Strategy Should A Firm Choose?Global standardization - increase profitability and profit growth by reaping the cost reductions from economies of scale, learning effects, and location economiesgoal is to pursue a low-cost strategy on a global scaleThis strategy makes sense whenthere are strong pressures for cost reductions and demands for local responsiveness are minimal

Management Focus: Vodafone in Japan explores the strategic decisions of Vodafone, the worlds largest provider of wireless telephone service, in Japan. Vodafone acquired J-Phone, the number three player in Japans wireless market, in 2002. However, after a series of questionable decisions, Vodafone sold J-Phone at a loss in 2006.

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Which Strategy Should A Firm Choose?Localization - increase profitability by customizing goods or services so that they match tastes and preferences in different national marketsThis strategy makes sense when there are substantial differences across nations with regard to consumer tastes and preferences and cost pressures are not too intense

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Which Strategy Should A Firm Choose?Transnational - tries to simultaneously achieve low costs through location economies, economies of scale, and learning effectsfirms differentiate their product across geographic markets to account for local differences and foster a multidirectional flow of skills between different subsidiaries in the firms global network of operationsThis strategy makes sense whenboth cost pressures and pressures for local responsiveness are intense

Management Focus: The Evolution of Strategy at Procter & Gamble explores the evolution of Procter & Gambles global strategy. In 1915, Procter & Gamble opened its first foreign operation in Canada. In the 1950s and 1960s, Procter & Gamble expanded into Western Europe, and then, in the 1970s, into Japan and other parts of Asia. Throughout this expansion, the company maintained all product development at its Cincinnati, Ohio headquarters, while each subsidiary took on the responsibility for manufacturing, marketing, and distributing the products. Procter & Gamble shifted its strategy in the 1990s, closing several foreign locations and moving to a more regional approach to global markets. More recently, the company implemented a business unit approach whereby different units are entirely responsible for generating profits for a product group.

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Which Strategy Should A Firm Choose?International take products first produced for the domestic market and sell them internationally with only minimal local customizationThis strategy makes sense whenthere are low cost pressures and low pressures for local responsiveness

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How Does Strategy Evolve?An international strategy may not be viable in the long termto survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitorsLocalization 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 structureswould require a shift toward a transnational strategy

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How Does Strategy Evolve?Changes in Strategy over Time

LO1: Explain the concept of strategy.Managers can increase the profitability of the firm by pursuing strategies that lower costs or by pursuing strategies that add value to the firms products, which enables the firm to raise prices. Managers can increase the rate at which the firms profits grow over time by pursuing strategies to sell more products in existing markets or by pursuing strategies to enter new markets. As we shall see, expanding internationally can help managers boost the firms profitability and increase the rate of profit growth over time.

The value of a product to an average consumer is V; the average price that the firm can charge a consumer for that product given competitive pressures and its ability to segment the market is P; and the average unit cost of producing that product is C (C comprises all relevant costs, including the firms cost of capital). The firms profit per unit sold () is equal to P C, while the consumer surplus per unit is equal to V P (another way of thinking of the consumer surplus is as value for the money; the greater the consumer surplus, the greater the value for the money the consumer gets). The firm makes a profit so long as P is greater than C, and its profit will be greater the lower C is relative to P. The difference between V and P is in part determined by the intensity of competitive pressure in the marketplace; the lower the intensity of competitive pressure, the higher the price charged relative to V.4 In general, the higher the firms profit per unit sold is, the greater its profitability will be, all else being equal.

The strategy, operations, and organization of the firm must all be consistent with each other if it is to attain a competitive advantage and garner superior profitability. Operations refers to the different value creation activities a firm undertakes.

The convex curve is what economists refer to as an efficiency frontier. The efficiency frontier shows all of the different positions that 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 (note that the horizontal axis is reverse scaledmoving along the axis to the right implies lower costs). 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.

The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities including production, marketing and sales, materials management, R&D, human resources, information systems, and the firm infrastructure. We can categorize these value creation activities, or operations, as primary activities and support activities (see Figure 12.4). If a firm is to implement its strategy efficiently, and position itself on the efficiency frontier shown, it must manage these activities effectively and in a manner that is consistent with its strategy.

LO2: Recognize how firms can profit by expanding globally.

LO3: Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice.

Management Focus: Local Responsiveness at MTV Networks describes MTVs global strategy. Since its start in 1981, the network has expanded to reach some 330 million customers spread across 140 countries. Interestingly, MTV has found that its global strategy has to be surprisingly local. Consumers in different markets, while enjoying some American programming, prefer to see their own local superstars. To maintain the companys culture and operating principles, MTV transfers expatriates from elsewhere in the world to new stations, then moves them elsewhere once the local station is well established.

LO4: Identify the different strategies for competing globally and their pros and cons.The Opening Case: Avon Products explores the competitive pressures Avon felt in 2005. the company, which relies on foreign sales for a significant portion of its overall earnings, was forced to implement a new strategy that emphasized the costs savings associated with global products. Avons new strategy was a success. Management Focus: Vodafone in Japan explores the strategic decisions of Vodafone, the worlds largest provider of wireless telephone service, in Japan. Vodafone acquired J-Phone, the number three player in Japans wireless market, in 2002. However, after a series of questionable decisions, Vodafone sold J-Phone at a loss in 2006.

Management Focus: The Evolution of Strategy at Procter & Gamble explores the evolution of Procter & Gambles global strategy. In 1915, Procter & Gamble opened its first foreign operation in Canada. In the 1950s and 1960s, Procter & Gamble expanded into Western Europe, and then, in the 1970s, into Japan and other parts of Asia. Throughout this expansion, the company maintained all product development at its Cincinnati, Ohio headquarters, while each subsidiary took on the responsibility for manufacturing, marketing, and distributing the products. Procter & Gamble shifted its strategy in the 1990s, closing several foreign locations and moving to a more regional approach to global markets. More recently, the company implemented a business unit approach whereby different units are entirely responsible for generating profits for a product group.