International Business Homework : Country Analysis Report

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Global Business Today 9e

by Charles W.L. Hill

and Tomas Hult

© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 12

The Strategy of

International Business

Learning Objectives

The learning objectives for this chapter are to:

Explain the concept of strategy.

Recognize how firms can profit by expanding globally.

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

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

Explain the pros and cons of using strategic alliances to support global strategies.

Multimedia Lecture Support Package to Accompany Basic Marketing

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Introduction

Question: What actions can managers take to compete more effectively in a global economy?

Answer:

Managers must consider:

The benefits of expanding into foreign markets

Which strategies to pursue in foreign markets

The value of collaboration with global competitors

The advantages of strategic alliances

Strategy and the Firm

Question: What is strategy?

Answer:

Strategy: the actions taken by managers to attain the goals of the firm

Typically, strategies focus on profitability and profit growth

Profitability: the rate of return the firm makes on its invested capital

Profit growth: the percentage increase in net profits over time

Strategy and the Firm (continued from Slide 12-5)

Determinants of Enterprise Value

Value Creation

Question: How can firms increase profitability?

Answer:

By creating value for the consumer

Value creation: 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)

Two basic strategies:

Differentiation

Low cost

Strategic Positioning

To maximize profitability, a firm must:

Pick a position on the efficiency frontier that is viable (enough demand to support the choice)

Configure internal operations to support the position

Have the right organization structure in place to execute the strategy

A firm’s strategy, operations, and organization must all be consistent with each other in order to achieve a competitive advantage and superior profitability.

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The Firm as a Value Chain

The Value Chain

Firms are essentially value chains composed of a series of distinct value creation activities, including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure.

Value creation activities can be categorized as

Primary activities

Support activities

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Lecture Script 6-9

The Firm as a Value Chain (continued from Slide 12-9)

Primary Activities

Involves creating the product, marketing and delivering the product to buyers, and providing support and after-sale service to the buyers of the product

Support Activities

Provides the inputs that allow the primary activities of production and marketing to occur

The Implementation of Strategy

Organization architecture: the totality of a firm’s organization - formal organizational structure, control systems and incentives, organizational culture, processes, and people

Organizational structure:

The formal division of the organization into subunits

The location of decision-making responsibilities within that structure

The establishment of integrating mechanisms to coordinate the activities of subunits including cross functional teams and or pan-regional committees

The Implementation of Strategy (continued from Slide 12-11)

Organization Architecture

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The Implementation of Strategy (continued from Slide 12-12)

Controls: metrics used to measure the performance of subunits and make judgments about how well the subunits are run

Incentives: devices used to reward appropriate managerial behavior

Processes: manner in which decisions are made and work is performed

Organizational culture: norms and value systems that are shared among the employees

People: employees and the strategy used to recruit, compensate, and retain those individuals

In Sum: Strategic Fit

So, to attain superior performance and earn a high return on capital, a firm’s strategy must make sense given market conditions

The operations of the firm must support the firm’s strategy

The organizational architecture of the firm must match the firm’s operations and strategy

If market conditions shift, so must the firm’s strategy, operations, and organization

In Sum: Strategic Fit (continued from Slide 12-14)

Strategic Fit

Global Expansion and Profits

Firms that operate internationally can:

Expand the market for their domestic product offerings by selling those products in international markets

Realize location economies by dispersing individual value creation activities to locations around the globe where they can be performed most efficiently and effectively

Realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation

Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firm’s global network of operations

Leveraging Products & Competencies

To increase growth, a firm can sell products or services developed at home in foreign markets

Success depends on the type of goods and services, and the firm’s 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

Create perceived value so that premium pricing is possible

Location Economies

Firms should locate value creation activities where economic, political, and cultural conditions are most conducive to the performance of that activity

Firms that successfully do this can realize location economies: economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be

Locating value creation activities in optimal locations:

Can lower the costs of value creation

Can enable a firm to differentiate its product offering from those of competitors

Location Economies (continued from Slide 12-18)

Multinationals that take advantage of location economies create a global web of value creation activities

Under this strategy, different stages of the value chain are dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized

Introducing transportation costs and trade barriers complicates this picture

Political risks must be assessed when making location decisions

Experience Effects

The experience curve: systematic reductions in production costs that have been observed to occur over the life of a product

A product’s production costs decline by some quantity about each time cumulative output doubles

Learning effects: cost savings that come from learning by doing

Labor productivity increases when individuals learn the most efficient ways to perform particular tasks and management learns how to manage the new operation more efficiently

Experience Effects (continued from Slide 12-20)

Economies of scale: reductions in unit cost achieved by producing a large volume of a product

Sources include:

The ability to spread fixed costs over a large volume

The ability of large firms to employ increasingly specialized equipment or personnel

Serving a global market from a single location is consistent with moving down the experience curve and establishing a low-cost position

Leveraging Subsidiary Skills

To help increase firm value, managers should:

Recognize that valuable skills can be developed anywhere within the firm’s global network (not just at the corporate center)

Use incentive systems to encourage local employees to acquire new skills

Develop a process to identify when new skills have been created

Act as facilitators to transfer valuable skills within the firm

Summary

Firms that expand internationally can increase their profitability and profit growth by:

Entering markets where competitors lack similar competencies

Realizing location economies

Exploiting experience curve effects

Transferring valuable skills within the organization

Competitive Pressures

Pressures for Cost Reductions and Local Responsiveness

Firms that compete in the global marketplace typically face two types of competitive pressures:

Pressures for cost reductions

Pressures to be locally responsive

These pressures place conflicting demands on the firm.

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Pressures for Cost Reductions

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

When major competitors are based in low cost locations

Where there is persistent excess capacity

Where consumers are powerful and face low switching costs

To respond to these pressures, firms need to lower the costs of value creation

Pressures for Local Responsiveness

Pressures for local responsiveness arise from:

Differences in consumer tastes and preferences

Differences in traditional practices and infrastructure

Differences in distribution channels

Host government demands

Firms facing these pressures need to differentiate their products and marketing strategy in each country

Pressures for Local Responsiveness (continued from Slide 12-26)

Differences in Consumer Tastes and Preferences

When consumer tastes and preferences differ significantly between countries, firms face strong pressures for local responsiveness

Differences in Infrastructure and Traditional Practices

When there are differences in infrastructure and/or traditional practices between countries, pressures for local responsiveness emerge

Pressures for Local Responsiveness (continued from Slide 12-27)

Differences in Distribution Channels

A firm’s marketing strategies may be influenced by differences in distribution channels between countries

Host Government Demands

Economic and political demands imposed by host country governments may necessitate a degree of local responsiveness

The Rise of Regionalism

Regional convergence of tastes and preferences can influence product offerings within a bloc of nations

Choosing a Strategy

Question: How do the pressures for cost reductions and local responsiveness influence a firm’s choice of strategy?

Answer:

Firms use four basic strategies in global markets:

Global standardization

Localization

Transnational

International

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Lecture Script 6-29

Internet Extra: Nestle has changed its strategy over the years to respond to shifting market and competitive conditions. Go to the company’s web site {http://www.nestle.com/} to further explore this and to see real examples of the different strategic approaches outlined in this chapter.

Click on About Us and then on History. From this point, you can explore why the company is in its various products lines and what it expects to achieve, where the company is today, and why, the company’s structure and organization, and where the company wants to go in the future.

Global Standardization Strategy

Question: When does a global standardization strategy make sense?

Answer:

A global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies

The 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

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Lecture Script 6-30

Management Focus: Vodafone in Japan

Summary

This feature examines the strategy of the United Kingdom’s Vodafone, the world’s largest provider of wireless telephone service. As part of its strategy to expand internationally, Vodafone acquired Japan’s J-Phone in 2002, but later sold the company for a loss. Analysts believe that the acquisition was not successful because Vodafone failed to pay attention to local market conditions in Japan, and instead tried to sell Japanese consumers a standardized product. Discussion of the feature can revolve around the following questions:

Suggested Discussion Questions

1. Discuss the evolution of Procter & Gamble’s strategy. Do you think Procter & Gamble was reactive or proactive in its approach to strategy in the late 1990s and early 2000s?

Discussion Points: Many students will probably suggest that Procter & Gamble took a reactive approach to its strategy in the early 1990s, but was more proactive in the late 1990s and early 2000s. The company’s initial reorganization was a reaction to a changing marketplace and sluggish profits, however, when it became apparent that the reorganization attempt was not really fixing the problems that existed, the company embarked on a new strategy. This time, rather than simply trying to adjust its existing strategy as the company had done in 1993, Procter & Gamble completely dismantled the structure that had been in place for a quarter of a century and reorganized as a company ready to operate in a global marketplace.

2. What factors have forced Procter & Gamble to change its strategy? As a competitor to Procter & Gamble, what can you learn from the company’s experiences?

Discussion Points: Numerous factors prompted Procter & Gamble to change its strategy. Because of its country-by-country approach to the market, the company had extensive duplication of manufacturing, marketing, and administrative facilities that were driving up costs. In addition, the retailers that the company relied on were operating globally and demanding deeper discounts from Procter & Gamble. With its new strategy, the company has eliminated these problems. Now, Procter & Gamble’s competitors are facing many of the same challenges. Some students will probably suggest that a key element that competitors can learn from Procter & Gamble’s experiences is that operating in a global market is significantly different from selling internationally to individual markets.

3. How would you characterize Procter & Gamble’s current strategy? What challenges do you foresee with the new strategy?

Discussion Points: Students will probably suggest that Procter & Gamble is trying to take a transnational approach to markets. The company has reorganized into business units so that each unit is responsible for its own profits. Each unit has been directed to develop global brands where possible, and keep costs low. While this new approach eliminates many of the problems facing the company under its old structure, it does introduce a new challenge in that there is little communication between business units which effectively minimizes the possibility of cross-unit learning and information sharing. So far, the new strategy seems to be working. Profits at Proctor & Gamble were up for the time period 2003-2007. Interestingly, the company’s competitors – Kimberly-Clark and Colgate-Palmolive reported more mixed results for the same time period.

Teaching Tip: To explore Procter & Gamble’s international strategy in more depth, go to {http://www.pg.com/en_US/index.jhtml}. Click on “P&G Global Operations” to compare the company’s domestic operations to those in numerous foreign locations.

Lecture Note: Unilever, a competitor to Proctor& Gamble, has recently made changes to its strategy that could threaten Proctor & Gamble’s success. To extend this discussion consider {http://www.businessweek.com/globalbiz/content/feb2008/gb20080215_454648.htm}.

Lecture Note: Procter & Gamble recently announced plans to reorganize its overseas operations. To learn more, go to {http://www.businessweek.com/news/2013-12-13/procter-and-gamble-said-planning-reorganization-of-overseas-units}.

Strategic Alliances

Question: What are strategic alliances?

Answer:

Strategic alliances: cooperative agreements between potential or actual competitors

Examples include formal joint ventures and short term contractual arrangements

The number of international strategic alliances has risen significantly in recent decades

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Advantages of Strategic Alliances

Question: Why form a strategic alliance?

Answer:

Strategic alliances are attractive because they:

Facilitate entry into a foreign market

Allow firms to share the fixed costs and risks of developing new products or processes

Bring together complementary skills and assets that neither partner could easily develop on its own

Can help establish technological standards for the industry that will benefit the firm

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Disadvantages of Strategic Alliances

Question: What are the drawbacks of strategic alliances?

Answer:

Strategic alliances can give competitors low-cost routes to new technology and markets

Unless a firm is careful, it can give away more in a strategic alliance than it receives

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Making Alliances Work

Question: How can firms increase the success of their alliances?

Answer:

Many international strategic alliances run into problems

The success of an alliance is a function of:

Partner selection

Alliance structure

The manner in which the alliance is managed

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Making Alliances Work (continued from Slide 12-38)

Partner Selection

A good partner :

Helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values

Shares the firm’s vision for the purpose of the alliance

Does not expropriate the firm’s technological know-how while giving away little in return

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Making Alliances Work (continued from Slide 12-39)

Alliance Structure

A good alliance should:

Be designed to make it difficult to transfer technology not meant to be transferred

Have contractual safeguards to guard against the risk of opportunism by a partner

Involve an agreement in advance to swap skills and technologies to ensure a chance for equitable gain

Extract a significant credible commitment from the partner in advance

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Making Alliances Work (continued from Slide 12-40)

Managing the Alliance

A good alliance:

Requires managers from both companies to build interpersonal relationships

Should promote learning from alliance partners

Should promote the diffusion of learned knowledge throughout the organization

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Summary

In this chapter we have:

Explained the concept of strategy.

Recognized how firms can profit by expanding globally.

Understood how pressures for cost reductions and pressures for local responsiveness influence strategic choice.

Identified the different strategies for competing globally and their pros and cons.

Explained the pros and cons of using strategic alliances to support global strategies.

Multimedia Lecture Support Package to Accompany Basic Marketing

Lecture Script 6-42