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Slide 1:

Chapter The Strategy of International Business 12

Strategy & the firm:

12- 2 Strategy & the firm Strategy: actions that managers must take to attain the goals of the firm Main goal usually to maximize long-term profit (П), (EPS) Profitability defined by return on sales or return on equity Think strategic, not operational - this is what makes a great CEO

Value creation:

12- 3 Value creation Profit determined by : The amount of value customers place on firm’s goods or services (V) Firm’s cost of production (C) Consumer surplus occurs when price charged by a firm on a good or service is less than value placed on it by a customer Firm creates profit by increasing value or lowering cost Two basic strategies to create value and attain competitive advantage according to Porter: Low cost Differentiation strategy

Firm as a value chain:

12- 4 Firm as a value chain Where does value come from Any firm is composed of a series of distinct value creating activities Primary activities Research & development Production Marketing & sales Service Support Activities Materials management or logistics Human resource Information systems, (this includes you accts) Company infrastructure

Firm as a value chain:

12- 5 Firm as a value chain Fig 12.3

Strategy in international business:

12- 6 Strategy in international business Strategy is concerned with identifying and taking actions that will lower costs of value creation and/or differentiate the firm’s product offering through superior design, quality service, functionality, etc. Meet both of Porters Goals

Advantages of global expansion:

12- 7 Advantages of global expansion Location economies Cost economies from experience effects Leveraging core competencies Leveraging subsidiary skills BUT Profitability is constrained by product customization and the “imperative of localization”.

Location economies:

12- 8 Location economies Realized by performing a value creation activity in an optimal location anywhere around the globe Often arise due to differences in factor costs It can lower costs of value to enable low cost strategy and/or Help in differentiation of products from competitors Global web: different stages of value chain are dispersed to those locations where perceived value is maximized or costs of value creation are minimized

Slide 9:

12- 9 Parts Parts Parts Assembly Advertising Design Sales Location Economies Pontiac LeMans Creating a Global Web

Caveats:

12- 10 Caveats Complications arise due to Transportation costs Trade barriers Political and economic risks US firms have shifted production from Asia to Mexico due to Low labor costs. Proximity to U.S. NAFTA . - transportation costs .

Experience effects:

12- 11 Experience effects The systematic reduction in production costs that occurs over the life of a product First observed in aircraft industry where unit costs reduced by 80% each time output was doubled Caused due to Learning effects Economies of scale

Learning effects:

12- 12 Learning effects Cost savings that come from learning by doing Arises due to increased worker productivity and management efficiency Significant in cases of technologically complex task as there is a lot to be learned Experienced during start-up phase, cease after two or three years Decline after this point comes from economies of scale.

Economies of scale:

12- 13 Economies of scale Refers to reduction in unit cost by producing a large volume of a product Sources: Reduces fixed costs by spreading it over a large volume Ability of large firms to employ increasingly specialized equipment or personnel

Strategic significance of the experience curve:

12- 14 Strategic significance of the experience curve The firm that moves down the experience curve most rapidly has a cost advantage over its competitors Serving the global market from a single location helps to establish low cost strategy Aim to rapidly build up sales aggressive marketing strategies and first-mover advantages Fig 12.4

Leveraging core competencies:

12- 15 Leveraging core competencies Core competence: Skills within the firm that competitors cannot easily match or imitate Earn greater returns by transferring these skills and/or unique product offerings to foreign markets who lack them (McDonalds) Examples: Consumer marketing skills of U.S. firms allowed them to dominate European consumer product market in 1960s and 70s

Leveraging subsidiary skills:

12- 16 Leveraging subsidiary skills Value created by identifying them and applying it to a firm’s global network of operations Some Challenges: Managers must create an environment where incentives are given to take necessary risks and reward them Need a process to identify new skill development Need to facilitate transfer of new skills within the firm Unique skills and ideas often developed in foreign subsidiaries

Pressures for cost reductions:

12- 17 Pressures for cost reductions Intense in industries of standardized, commodity type product that serve universal needs Major competitors are based in low-cost locations Consumers are powerful and face low switching costs Liberalization of world trade and investment environment Examples Bulk chemicals, petroleum, steel, personal computers

Pressures for local responsiveness:

12- 18 Pressures for local responsiveness Differences in consumer tastes & preferences North American families like pickup trucks while in Europe it is viewed as a utility vehicle for firms Differences in infrastructure & traditional practices Consumer electrical system in North America is based on 110 volts; in Europe on 240 volts Differences in distribution channels Germany has few retailers dominating the food market, while in Italy it is fragmented Host-Government demands Health care system differences between countries require pharmaceutical firms to change operating procedures

Pressures for cost reduction and local responsiveness :

12- 19 Pressures for cost reduction and local responsiveness Generally reflects the position of most companies Fig 12.5

Management focus – tailoring world cars to the U.S. market:

12- 20 Management focus – tailoring world cars to the U.S. market Japanese automobile manufacturers customize car design to tastes of American consumers Toyota released the Tundra with V8 engines which looks like a heavy-duty pickup truck with a powerful engine Nissan let U.S. engineers and planners be completely responsible for development of most vehicles sold in North America Honda customizes the Pilot, it’s next generation SUV according to tastes for American families who wanted bigger vehicles with three row seating

Strategic choices:

12- 21 Strategic choices Four basic strategies to enter and compete in the international environment: International strategy Multi domestic strategy Global strategy Transnational strategy

Four basic strategies:

12- 22 Four basic strategies Fig 12.6

International strategy:

12- 23 International strategy Create value by transferring valuable core competencies to foreign markets that indigenous competitors lack Centralize product development functions at home Establish manufacturing and marketing functions in local country but head office exercises tight control over it Limit customization of product offering and market strategy Strategy effective if firm faces weak pressures for local responsive and cost reductions

Multidomestic strategy:

12- 24 Multidomestic strategy Main aim is maximum local responsiveness Customize product offering, market strategy including production, and R&D according to national conditions Generally unable to realize value from experience curve effects and location economies Possess high cost structure

Global strategy:

12- 25 Global strategy Focus is on achieving a low cost strategy by reaping cost reductions that come from experience curve effects and location economies Production, marketing, and R&D concentrated in few favorable functions Market standardized product to keep cost’s low Effective where strong pressures for cost reductions and low demand for local responsiveness Semiconductor industry

Transnational strategy:

12- 26 Transnational strategy To meet competition firms aim to reduce costs, transfer core competencies while paying attention to pressures for local responsiveness Global learning Valuable skills can develop in any of the firm’s world wide operations Transfer of knowledge from foreign subsidiary to home country, to other foreign subsidiaries Transnational strategy difficult task due to contradictory demands placed on the organization Example : Caterpillar

Cost pressures and pressures for local responsiveness facing Caterpillar:

12- 27 Cost pressures and pressures for local responsiveness facing Caterpillar Fig 12.7

Advantages and disadvantages of the four strategies:

12- 28 Advantages and disadvantages of the four strategies

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