Summary about global business
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CH13.pptxChapter 13
The Strategy of International Business
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Learning Objectives
LO 13-1 Explain the concept of global strategy.
LO 13-2 Recognize how firms can profit by expanding globally.
LO 13-3 Understand how pressures for cost reductions and local responsiveness influence strategic choice.
LO 13-4 Identify and choose the different global strategies for competing in the global marketplace.
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What drives firms to go global
- Profit Maximization & Growth
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Strategy and the Firm 1 of 7
Learning Objective 13-1 Explain the concept of global strategy.
What Is Strategy?
A firm’s strategy refers to the actions that managers take to attain the goals of the firm
Firms need to pursue strategies that increase profitability and profit growth
Profitability is the rate of return the firm makes on its invested capital
Profit growth is the percentage increase in net profits over time
To increase profitability and profit growth , firms can
add value
lower costs
sell more in existing markets
expand internationally
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Strategy refers to actions that managers take to attain the goals of the firm.
Profitability is a rate of return concept.
Profit growth is the percentage increase in net profits over time.
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Figure 13.1 Determinants of enterprise value
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Profit= Price- Cost
=100-95
= 5
Profitability= (Profit/Price)x100
= 5/100x100
= 5%
Total Profit= 1 Million
Profit Growth= 1 million to 2 millions
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Strategy and the Firm 2 of 7
Value Creation
Measured by the difference between a firm’s costs of production and the quality that consumers perceive in its products
The more value customers place on a firm’s products, the higher the price the firm can charge for those products.
Measured by the difference between V (value) and C (cost)
Two strategies: low cost and differentiation
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Value creation refers to performing activities that increase the value of goods or services to customers.
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Strategy and the Firm 3 of 7
Strategic Positioning
Porter
A firm should be explicit about its choice of strategic emphasis with regard to value creation (differentiation) and low cost.
A firm should configure its internal operations to support that strategic emphasis.
Efficiency frontier
Diminishing returns
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Strategy and the Firm 4 of 7
Strategic Positioning continued
To maximize profitability, a firm must:
Pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that choice
Configure its internal operations, such as manufacturing, marketing, logistics, information systems, human resources, and so on, so that they support that position
Make sure that the firm has the right organization structure in place to execute its 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
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Operations refers to the different value creation activities a firm undertakes.
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Strategic Positioning
FIGURE 13.3 Strategic choice in the international hotel industry.
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Strategy and the Firm 5 of 7
The Firm as a Value Chain
Value creation activities
Production
Marketing and sales
Materials management
R&D
Human resources
Information systems
Infrastructure
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Figure 14.4 The value chain
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Strategy and the Firm 6 of 7
The Firm as a Value Chain continued
Primary activities
Design, creation, and delivery of the product
Marketing, support, and after-sale service
R&D is concerned with the design and production processes.
Production is concerned with the creation of a good or service.
Marketing and sales can increase the perceived value of a product and discover customer needs.
Service activity provides after-sale service and support.
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Strategy and the Firm 7 of 7
The Firm as a Value Chain continued
Support activities
Provide inputs that allow the primary activities to occur
Information systems can alter the efficiency and effectiveness with which a firm manages its other value creation activities.
Logistics controls the transmission of physical materials through the value chain.
Human resources ensures that the company has the right mix of skilled people and ensures training, motivation, and compensation.
Infrastructure includes the organization structure, control systems, and culture of the firm.
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Global Expansion, Profitability, and Profit Growth 1 of 6
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.
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.
Learning Objective 13-2 Recognize how firms can profit by expanding globally.
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Global Expansion, Profitability, and Profit Growth 2 of 6
1. Expanding the Market: Leveraging Products and Competencies
Firms can increase growth by selling goods or services internationally that were developed for home market.
The success of firms that expand internationally depends on
the goods or services they sell.
their core competencies - skills within the firm that competitors cannot easily match or imitate
core competencies enable the firm to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible
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Core competence refers to skills within the firm that competitors cannot easily match or imitate.
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Global Expansion, Profitability, and Profit Growth 3 of 6
2. Realize Location Economies
Location economies are the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be
By achieving location economies, firms can
lower the costs of value creation and achieve a low-cost position
differentiate their product offering
Firms that take advantage of location economies in different parts of the world, create a global web of value creation activities
different 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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Location economies are economies that arise from performing a value creation activity in the optimal location for that activity.
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Global Expansion, Profitability, and Profit Growth 4 of 6
3.Realize greater cost economies from experience effects
The experience curve refers to the systematic reductions in production costs that occur over the life of a product
by moving down the experience curve, firms reduce the cost of creating value
to get down the experience curve quickly, firms can use a single plant to serve global markets
Learning effects are cost savings that come from learning by doing
When labor productivity increases
individuals learn the most efficient ways to perform particular tasks
managers learn how to manage the new operation more efficiently
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Experience curve is systematic reductions in production costs that have been observed to occur over the life of a product.
Learning effects refer to cost savings that come from learning by doing.
Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product.
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Figure 13.5 The experience curve
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Global Expansion, Profitability, and Profit Growth 5 of 6
Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product
Sources of economies of scale include
spreading fixed costs over a large volume
utilizing production facilities more intensively
increasing bargaining power with suppliers
Why Are Experience Effects Important?
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Global Expansion, Profitability, and Profit Growth 6 of 6
4. Leveraging Subsidiary Skills
Development of valuable skills can occur in foreign subsidiaries.
Leveraging the skills created within subsidiaries and applying them to other operations within the firm’s global network may create value.
Managers must:
Recognize that valuable skills that lead to competencies can arise anywhere within the firm’s global network, not just at the corporate center
Establish an incentive system that encourages local employees to acquire new skills
Have a process for identifying when valuable new skills have been created in a subsidiary
Act as facilitators, helping transfer valuable skills within the firm
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What Types of Competitive Pressures Exist in the Global Marketplace? 1of 3
Firms that compete in the global marketplace face two conflicting types of competitive pressures
the pressures limit the ability of firms to realize location economies and experience effects, leverage products, and transfer skills within the firm.
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 market—a strategy that raises costs
Learning Objective 13-3 Understand how pressures for cost reductions and local responsiveness influence strategic choice
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Firms that compete internationally face two types of competitive pressures, pressure for cost reductions and pressures to be locally responsive. Unfortunately, these pressures usually place conflicting demands on the company!
For example, in the highly competitive cell phone market, Americans consumers tend to focus on design elements while European and Asian consumer focus on functions and features. This means that companies must keep costs low, while at the same time absorb the costs of designing phones that meet the demands of individual markets.
When companies face pressure for local responsiveness, they incur the costs of differentiating their products or strategies.
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When Are Pressures For Cost Reductions Greatest? 2 of 3
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 weapon
When major competitors are based in low cost locations
Where there is persistent excess capacity
Where consumers are powerful and face low switching costs
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Where are pressures for cost reductions greatest?
This type of pressure is usually greatest in industries that produce commodity type products that fill universal needs like steel, when major competitors are based in low cost locations, where excess capacity is persistent, and where consumers are powerful and face low switching costs.
When a firm faces pressures for cost reductions, it has to try to lower the cost of value creation.
Firms can try to lower costs by mass-producing standardized products at optimal locations, or outsourcing to low-cost suppliers.
Many companies have outsourced their call centers to India for example, to take advantage of lower wage costs.
In fact, wages in 2007 at Indian call centers were so low compared to American call centers that companies were able to offer additional benefits like subsidized food and tuition assistance.
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When Are Pressures For Local Responsiveness Greatest? 1 of 3
Pressures for local responsiveness arise from
Differences in consumer tastes and preferences
strong pressure emerges when consumer tastes and preferences differ significantly between countries
Differences in traditional practices and infrastructure
strong pressure emerges when there are significant differences in infrastructure and/or traditional practices between countries (e.g. MCArabia Family section).
Differences in distribution channels
need to be responsive to differences in distribution channels between countries. E.g. In India retailing is done through local shops (Kiryana Stores)
Host government demands
economic and political demands imposed by host country governments may require local responsiveness. Walmart in India
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Where does pressure for local responsiveness come from?
Pressures for local responsiveness come from differences in consumer tastes and preferences, differences in traditional practices and infrastructure, differences in distribution channels, and demands from host governments. Let’s talk about how each of these can affect the firm.
While many products like Coca-Cola are accepted around the world, when consumer preferences and tastes differ significantly between countries, companies have to adapt the product mix and/or the marketing message. Auto companies sell a lot of pick-up trucks to individuals in the U.S. for example, but have to market them as utility vehicles in Europe. MTV found that while many of the programs it runs in the United States are popular in other parts of the world, it’s still important to localize programming as well. You can learn more about MTV’s global operations in the Management Focus in your text.
Similarly, differences in infrastructure and traditional practices between countries can force companies to adapt their strategies.
If you’ve ever traveled to Europe for example, you’ve probably encountered different voltage requirements. These differences of course, would require companies to sell products designed to meet the voltage requirements in each country.
Differences in distribution channels also prompt companies to change.
In Brazil for example, about 36 percent of food retailing takes place through supermarkets.
In Russia, supermarket sales account for less than 1 percent of food retailing!
Finally, companies may be required by host governments to be locally responsive.
In the U.S. for example, pharmaceuticals have to go through FDA testing, and food products have to be labeled with nutrition information.
KFC Arabia UK
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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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As you can see, some firms face high pressure for cost reductions while others face high pressure for local responsiveness. Some unlucky companies face pressures for cost reductions and local responsiveness simultaneously. Dealing with these pressures can be a strategic nightmare for companies!
Choosing a Strategy 1 of 4
Learning Objective 13-4 Identify and choose the different global strategies for competing in the global marketplace.
There are four basic strategies to compete in international markets
the appropriateness of each strategy depends on the pressures for cost reduction and local responsiveness in the industry
Global standardization - increase profitability and profit growth by reaping the cost reductions from economies of scale, learning effects, and location economies
goal is to pursue a low-cost strategy on a global scale
makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal
Localization - increase profitability by customizing goods or services so that they match tastes and preferences in different national markets
makes sense when there are substantial differences across nations regarding consumer tastes and preferences and when cost pressures are not too intense
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There are four basic strategies to compete in international markets
the appropriateness of each strategy depends on the pressures for cost reduction and local responsiveness in the industry
Global standardization - increase profitability and profit growth by reaping the cost reductions from economies of scale, learning effects, and location economies
goal is to pursue a low-cost strategy on a global scale
makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal
Localization - increase profitability by customizing goods or services so that they match tastes and preferences in different national markets
makes sense when there are substantial differences across nations with regard to consumer tastes and preferences and when cost pressures are not too intense
Choosing a Strategy 2 of 4
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So, given these conflicting pressures, how should companies compete in foreign markets? Well, there are four basic strategies, global standardization, localization, transnational, and international.
Each strategy makes sense in certain situations depending on which pressures a firm is facing.
Let’s look at each one more closely.
The global standardization strategy focuses on increasing profitability and profit growth by capitalizing on the cost reductions that come from economies of scale, learning effects, and location economies.
When should firms pursue global standardization?
This strategy makes sense when pressure is high for cost reductions, but low for local responsiveness.
The goal is to pursue a low cost strategy on a global scale, so firms pursuing this type of strategy usually locate in a few optimal locations and produce standardized products.
Can you think of any firms that might use global standardization?
Motorola, Texas Instruments, and Intel all fit the profile.
The localization strategy focuses on increasing profitability by customizing the firm’s goods to meet the needs and preferences of the local market.
When should firms use a localization strategy?
This strategy is appropriate when consumer tastes are substantially different between countries, and pressures for cost reductions are low.
Firms using a localization strategy increase the value of their product to the local market by better meeting local needs.
Since, costs pressures are low, the additional costs that come with customization don’t present a problem.
As you’ll recall, MTV followed this type of strategy.
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Choosing a Strategy 3 of 4
Transnational - tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects, differentiate the product offering across geographic markets to account for local differences, and foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations
makes sense when cost pressures are intense and pressures for local responsiveness are intense
International – take products first produced for the domestic market and sell them internationally with only minimal local customization
makes sense when there are low cost pressures and low pressures for local responsiveness
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The transnational strategy tries to simultaneously meet demand for low costs by focusing on location economies, economies of scale, and learning effects, while at the same time, differentiates the product to meet the needs of individual markets.
In addition, a transnational strategy fosters a multidirectional flow of skills between the subsidiaries within the firm’s global network.
When does a transnational strategy makes sense? As you’ve probably already guessed, the transnational strategy makes sense when a firm is facing both types of pressures.
As you might expect, this type of strategy can be very difficult to implement as companies like Ford have found out.
One company that has been successful with this type of strategy is Caterpillar.
Finally, the international strategy involves taking products that were initially produced for the domestic market and then selling them internationally.
When does the international strategy make sense?
This type of strategy works when pressure is low for both cost reduction and local responsiveness.
Procter and Gamble has used this strategy and so has Microsoft.
You can read more about Procter and Gamble in the Management Focus in your text.
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Choosing a Strategy
Four Basic Strategies
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Here you can see the four basic strategic alternatives.
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How Does Strategy Evolve?
An international strategy may not be viable in the long term
to survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors
Localization 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 structures
would require a shift toward a transnational strategy
Choosing a Strategy 4 of 4
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Keep in mind that strategy is not static.
Instead, we think of strategy as evolving over time.
A firm may start out using an international strategy, but then find that it has to shift to a global standardization strategy or transnational strategy as competition increases. Similarly, a localization strategy might initially give a firm a competitive advantage, but competition might also put pressure on price prompting the company to move to a transnational strategy.
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How Does Strategy Evolve?
Changes in Strategy over Time
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Here you can see the evolutionary process of strategy.
