ADMS 3960

International Business

Chapter 11
The Strategy
of
International
Business

Chapter Objectives
To identify how managers develop strategy
To examine industry structure, firm strategy, and
value creation
To profile the features and functions of the value
chain framework
To assess how managers configure and
coordinate a value chain
To explain global integration and local
responsiveness
To profile the types of strategies firms use in
international business

The Role of Strategy in International

Business

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

Five Forces Model

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

Competition
In its pure form it refers
to the conditions that are
present in the
marketplace when
buyers and sellers
interact to establish
prices and exchange
goods and services.
It refers to the means
whereby the self interest
of buyers and sellers
acts to serve the needs
of society as well as
those of individual
market participants.

The Practical Significance of

Perfect Competition
A large number of small
firms and many buyers do
not possess the power to
influence the behavior of
the participants in the
marketplace.
That power is thoroughly
dispersed throughout the
marketplace.
Perfect Competition rarely
exists in the real world.

Desirable Conditions for Workable

Competition
1.

2.

3.

A market structure with

at least two buyers and
two sellers, but
preferably more
A mixture of large and
small firms
No collusion or
coercion among sellers

Desirable Conditions for Workable

Competition
4.

5.

As much market
information as
possibly is
available to buyers
and sellers
No barriers to
entry and exit

Strategy and Value

Strategy helps managers
assess the companys
present situation, identify
the direction the
company should go, and
determine how the
company will get there.

Strategies
Strategy is a set of
goals and policies
or actions to
achieve those
goals.
A strategic plan
must link to substrategies at the
operations level.

Strategic Programming
This focuses on,
who what and how
much.
Day to day
priorities
Roles and
responsibilities

Tactics and Execution

This focuses on
how to get it done
Immediate
objectives with a
focus on
adjustment based
on new information

Michael Porter
Competitive strategy, is all
about being different from
others. As a nation or a
company your differences
will allow you to excel in
areas that other will not.
Strategy is not about one
activity, but a series of
complementary and
reinforcing activities.

What does strategy give us?

Organizational purpose
Competitive domains
Interpretations of opportunities, threats,
strengths and weaknesses
Defines managerial tasks and processes
Defines the impact that the firm intends to
make on its shareholders
Determines investment

Value
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.

Value Chain
What is the value chain?
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.

Porters Value Chain

Purpose of The Value Chain? Cost

Analysis
1. Define the value chain in terms of
sources of competitive advantage
2. Establish the relative importance of each
activity in terms of total product cost
3. Compare costs by activity and against
competitors
4. Identify cost drivers
5. Identify linkages between activities
6. Identify opportunities for reducing costs

Using the Value Chain

Using the value chain leads to

Configuration of the Company

Macro Cost Factors
Logistics analysis
Industry Clusters
Digitization
Economies of Scale
Business Environment

Digitization
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.

Clusters
An industry cluster
is a system of
businesses and
institutions
engaged with one
another at various
levels.

Manufacturing
Manufacturing
costs vary from
country to country
because of wage
rates, worker
productivity,
resource
availability, and
fiscal and
monetary policies.

Logistics
Logistics entails
how companies
obtain, produce,
and exchange
material and
services in the
proper place and in
proper quantities
for the proper
value activity.

Economies of Scale
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.

Economies of Scale
Sources
The division of labour This is related to
specialization particularly in mass production. Leads
to lower unit costs, machinery output increased,
quality control improvements, time savings.
Economies of massed resources Theory rests on
the idea of large numbers. This is what insurance is
based on. Any company needs excess resources and
capacity. The larger the firm, the smaller the
proportion of duplicate capacity needed.

Economies of Scale
Sources
Firm-level economies
of scale
Administrative
economies
Financial economies
Marketing
economies

Porters Value Chain

Economies of Scale
Limits
Diseconomies of scale in
distribution
Complexity of large-scale
management
Costs of product
differentiation
HRM costs in large plants

Economies of Scale

Coordination
Coordination Concerns
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.

National Cultures
Cultures 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.

National Cultures
Hence, features of
national culture
require managers to
understand their
implications to the
collaborative
relationship that
shape the
coordination of value
activities.

Learning Curve
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 Experience Curve

The Experience
Curve

Unit cost
reductions arising
from experience of
production
Benefits accrue to
first movers and
those who facilitate
learning

Experience leads to Core

Competency
A core competency can emerge from
various sources, including:
Product development
Employee productivity
Manufacturing expertise
Marketing imagination
Executive leadership

Operational Obstacles
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.

Change and the Value Chain

The configuration and coordination of value
chains respond to changes in customers,
competitors, industries, and environments.
Caveat: The Risk of Strategy

Global Integration versus Local

Responsiveness
Pressures for Global Integration

Globalization of Markets

A provocative thesis, increasingly

supported by global buying patterns and
companies strategies, suggests that
consumers worldwide seek global
productswhether they are Apple iPods,
Samsung plasma screens, Facebook
connections, Starbucks espressos,
Google searches, or Zara blouses.

Global Integration versus Local

Responsiveness
Efficiency Gains of Standardization
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
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.

Standardization
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.

Local Responsiveness
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.

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.

Integration Responsiveness Grid

Strategic Choices

What Strategy to Pursue?

Multidomestic Strategy
Competition in one
country is independent
of competition
elsewhere.
Markets in each country
have different consumer
behaviour.
Portfolio of independent
subsidiaries
Leads to product
diversity.

From International to Global

Strategy
Global Strategy
Competition in one
country influenced by
competition elsewhere.
Markets and consumer
behaviour broadly
similar in all countries.
International
coordination and
integration.
Leads to product
standardisation

Toyota
Our global strategy used
to center on world cars
which we would modify
slightly to accommodate
demand in different
markets. Today our focus
is shifting to models that
we develop and
manufacture for selected
regional markets.

Ford

Transnational Strategies
Exploit experience-based
cost economies
and location economies,
transfer distinctive
competences within the
company, and at the same
time
pay attention to pressures for
local responsiveness
(Bartlett and Ghoshal, 1989)

Why Global? Scale is important

but..
1. Exposure to global best
practices.
2. Access to technology
3. Ability to serve customers
4. Ability to anticipate
competitors
5. Leaning and knowledge
transfer

Why Global? They are only

viable if
1. They serve locals better
than the domestics
2. Are hard to copy
3. Are sustainable.
4. Change the economics of
the industry
5. Are capable of further
development.

How to be BIG
MNEs go through three phases on the path
to becoming a global powerhouse:
1. First there was the nineteenthcentury 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.

How to be BIG
The third phase, the globally integrated
enterprise, is one that builds a companywide 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.

How to be BIG
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.

Future: Whats New in the World of

Strategy Types
Evolution of the Multinational Corporation
Visions of the Future
The Metanational Company
Micro-Nationals
The Cybercorp

Metanational
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.

Metanational

Micro National
Although the number of MNEs grows worldwide,
their average size is fallingmost 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.

Cybercorp
To this type of MNE, national boundaries
no longer organize consumers, locations,
markets, or industries. Instead, the
cyberspace created by evolving Internet
technologiesnot the physical geography
of lines on a mapdefines markets. The
cybercorp develops competencies that let
it react in real time to changes in its
customers, competition, industry, and
environment.

Micro National