Strategy of International Business 14.12.09

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Strategy of International Business:

Strategy of International Business Focus shift from environment to actions managers can take to compete more effectively in international business How firms can increase their profitability by expanding operations into international markets Different strategies firms can use when competing internationally Benefits, costs and risks of strategic alliances

Wal-Mart’s experience:

Wal-Mart’s experience Moved into other countries Growth opportunities at home were becoming constrained Create value by transferring core skills to markets where indigenous competitors lacked those skills Preempt other retailers who were expanding globally Need to change US model Differences in local taste, preferences and local infrastructure Change store location, layout and stocking practices Keep company’s core strategies and operations – emphasize everyday low prices & realize operating efficiencies from world class logistics management and information systems Benefits – becoming transnational corporation Enhanced bargaining power with suppliers Ability to transfer valuable ideas from one country to another Balance global standardization with local customization

Terms:

Terms Strategy - Actions that managers take to attain the firms goals Profits – difference between total revenues & total costs TR – TC = II Profitability - a ratio or rate of return, e.g. ROS (sales) ROC (invested capital)

Value Creation:

Value Creation Profits are determined by amount of value customers place on firm’s goods/services & firm’s costs Generally the more value, the higher the price that can be charged Price is typically less than the value placed by customer (consumer surplus) because of competition in the market Can’t segment the market enough to charge a price that reflects each individual’s assessment (reservation price) Company creates value by converting inputs that cost C into a product on which customers place value V Can create more value by lowering production costs (C decreases) Can create more value by making product more attractive with superior design, functionality, features, quality, etc. (V increases so willing to pay a higher P) Higher profits when create more value for customers at lower cost

Value Creation Strategies:

Value Creation Strategies Low cost strategy – focus primarily on lowering production costs Differentiation strategy – focus primarily on increasing attractiveness of product Way to create superior value is to drive down the cost structure and/or differentiate product so consumers value more and willing to pay premium price

Strategic Positioning:

Strategic Positioning Important for firm to be explicit about choice of strategic emphasis (differentiation & cost) Important to make sure to configure internal operations accordingly & manage them efficiently (efficiency frontier) Basic tenet is to maximize long-run ROK & competitiveness Pick a position that has a enough demand to support choice Configure internal operations to support position (manufacturing, marketing, logistics, information systems, HR) Install right organizational structure to execute strategy

Firm as Value Chain:

Firm as Value Chain Series of distinct value creation activities Primary activities - influence V or C Research & development – design of products & production process Production – creation of a good or service Marketing and sales – brand positioning, advertising; discovering consumer needs & communicating them to R&D Customer service – after-sales service & support; solving customer problems Support activities – influence competitive advantage Logistics – transmission of physical materials through the value chain; procurement -> production -> distribution Human resources – right mix of skilled people; ensure that people are adequately trained, motivated & compensated Information systems – electronic systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries, etc. Company infrastructure – context within which all other value creation activities occur – organizational structure, control systems, and culture of firm

Implementation of Strategy:

Implementation of Strategy Organization architecture Strategy of firm implemented through its organization; Internal consistency among various components & support strategy and operations Organizational structure Formal division of organization into subunits such as product divisions, national operations, and functions Location of decision-making activities in structure Establishment of integrating mechanisms to coordinate activities of subunits eg. cross-functional teams & pan-regional committees Control system & incentives (linked) Metrics used to measure the performance of sub-units Devices used to reward appropriate managerial behavior Processes Manner is which decisions are made & work is performed (formulating strategy, allocating resources, evaluating performance) Distinct from location of decision-making activities Organizational culture Shared norms & value system of firm People = employees as well as strategy for recruitment, retention and compensation

Global Expansion:

Global Expansion Increase profitability Realize location economies by dispersing individual value creation activities around the globe – perform efficiently & effectively Realize cost economies from experience effects by serving global market from central location Earn a greater return from firm’s distinctive skills or core competencies by leveraging & applying to new geographic markets Earn a greater return by leveraging any valuable skills developed in foreign operations & transferring them to other locations

Location Economies:

Location Economies Countries differ along a range of dimensions (economic, political, legal, cultural) – these differences either raise or lower the cost of doing business. Differences in factor costs – certain countries have a comparative advantage in the production of certain products Trade barriers and transportation costs permitting – firm will benefit from basing each value creation activity at that location where the economic, political , cultural, factor costs, etc. are most conducive to the performance of the activity. Location economy – economies that arise from performing a value creation activity in the optimal location for that activity Lower the cost of value creation and help the firm achieve a low cost position Enable the firm to differentiate its product offering from those of its competitors Clear Vision Strategy to lower cost structure (lower C) Shifting from US –> Hong Kong -> China Strategy to increase perceived value (increase V) Investing in French, Italian & Japanese factories for superior design Strategy for premium pricing (increase P) Increase value thus profit and profitability

Global Web:

Global Web Different stages of the value chain are dispersed to those locations around the globe where value added is maximized or where cost of value creation is minimized In general firm with global web should have competitive advantage by lowering its cost structure & differentiating its product Caveats Transportation costs & trade barriers complicate the picture – Mexico vs Asia Assessing political & economic risks when making location decisions

Experience Effects:

Experience Effects Experience curve – systematic reduction in production costs that occur over the life of a product – observed production costs decline each time cumulative output (not period output) doubles (aircraft industry) Learning effects – Cost savings that come from learning by doing. Labor productivity & management Only during first 2-3 years Economies of Scale – reduction in unit cost achieved by producing a large volume of product Ability to spread fixed costs over a large volume of sales Ability of large firms to employ increasingly specialized equipment or personnel - -> lower unit cost Strategic significance Moving down the experience curve allows firm to reduce its cost of creating Value (lower C) One key is to increase the volume in a single plant as quickly as possible - Serving global market from single location allows building accumulated volume more quickly Once a firm has established a low-cost position, it can act as a barrier to new competition.

Leveraging Core Competencies:

Leveraging Core Competencies Core competencies Skills within the firm that competitors cannot easily match or imitate Firm’s value creation activities = production, R&D, marketing, human resources, logistics, general management Expressed in product offerings that other firms find difficult to match or imitate Bedrock of a firm’s competitive advantage Global expansion is a way of further exploring the value creation potential of their skills and product offerings by applying to a larger market & where indigenous competitors lack similar skills and products

Leveraging Subsidiary Skills:

Leveraging Subsidiary Skills Skills are developed first at home and then transferred to foreign operations Skills can be created anywhere within the global network, wherever people have the opportunity and incentive to try new things Management implications Humility to recognize that valuable skills can arise anywhere Establish incentive system that encourages local employees to acquire new skills Have a process for identifying when valuable new skills have been created Act as facilitators to help transfer valuable skills within the firm

Pressures for cost reduction:

Pressures for cost reduction Minimize unit costs Base its productive activities at the most favorable low cost location Offer a standardized product to the global marketplace Particularly intense in commodity industries with competitors in low cost locations, persistent excess capacity & consumers are powerful & face low switching costs – products serve universal needs, e.g. tires

Pressures for local responsiveness:

Pressures for local responsiveness Recognize national differences in consumer tastes & preferences, e.g world cars in infrastructure and traditional business practices, e.g. electrical requirements US vs EU in distribution channels, e.g. delegation of marketing functions to national subsidiaries competitive conditions & host government policies, e.g politics of health care with local clinical testing, registration procedures & pricing restrictions Differentiate its product offering & marketing strategy from country to country May not be possible to realize the benefits of experience curve & location economies Customizing may involve duplication & lack of standardization thereby raising costs May not be possible to leverage the skills and products associated with a firm’s core competence from location to location

Strategic Choices:

Strategic Choices Four basic strategies to compete in international environment – appropriateness varies with extent of pressures for cost reduction & local responsiveness International Strategy Firms create value by transferring valuable skills & products to foreign markets where indigenous competitors lack Centralize R&D at home, establish production & marketing in each country, retain control over strategy -> high operating costs Relatively weak pressure for cost reduction & local responsiveness (Microsoft) Multidomestic Strategy Achieving maximum local responsiveness – extensively customize both product offering & marketing strategy Establish a complete set of value creation activities in each market - production, marketing and R&D -> realize value from experience curve effects High cost structure & poor job of leveraging core competencies High pressure for local responsiveness & low pressure for cost reduction

Strategic Choices continued:

Strategic Choices continued Global Strategy Focus on increasing profitability by cost reductions from experience curve effects & location economies (low-cost strategy) Production, marketing and R&D in a few key locations – do not customize product offering & marketing Standardized product to reap economies of scale from experience curve Strong pressure for cost reductions & low demand for local responsiveness (Industrial goods, e.g. Intel) Transnational Strategy Plan to exploit experienced-based cost and location economies, transfer core competencies within the firm & pay attention to local responsiveness High pressure for cost reduction, high pressure for local responsiveness & significant opportunities for leveraging valuable skills with the global network of operations – simultaneously achieve cost & differentiation strategies (conflicting demands - Caterpillar)

Strategic Alliances:

Strategic Alliances Cooperative agreements between potential or actual competitors Advantages Facilitate entry into a foreign market Allow firms to share fixed costs & risks of developing new products or processes Bring together complimentary skills & assets Help the firm establish technological standards for the industry that benefit firm Disadvantages Give competitors a low cost route to new technology & markets (Japanese) If firms not careful they can give away more than they receive

Making Alliances Work:

Making Alliances Work Partner Selection Helps the firm attain strategic goals – market access, sharing costs & risks of product development, gaining access to critical core competencies Shares the firm’s vision for purpose of the alliance Fair Play – unlikely to exploit the firm’s technological know-how while giving little away in return Research Collect as much publicly available info as possible Collect data from informed third parties Get to know the potential partner

Making Alliances Work:

Making Alliances Work Alliance Structure - Risk of giving away too much reduced to acceptable level Wall off critical technology to prevent leakage to other party Establish contract safeguards in alliance agreement to guard against risk of opportunism (technology or markets) Agree in alliance to swap skill and technologies to help ensure equitable gain Extract a significant credible commitment from partner in advance (50/50 JV)

Making Alliances Work:

Making Alliances Work Managing the Alliance Maximize benefits of the alliance by building trust & learning from partners – relational capital Personal relationships foster informal management network between partners Japanese learn more from alliances than US or EU who view alliance as cost or risk sharing

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