International Business take-home exam

What is Strategy?

Agenda

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� Today we will… � Strategy primer/baseline � Extending to international strategy

What is Strategy?

What is Strategy?

Integrated and coordinated set of commitments and actions designed to exploit core competences and gain competitive

advantage the underlying variability among firms that leads to a significant

difference in their performance

� What does that mean? � Several pieces together to be better than other firms � What the firm does differently that makes them achieve better

results � typically more profit or economic gain

What is Strategy?

How and why…

� Strategic management process � Full set of commitments, decisions, and actions required to achieve

strategic competitiveness and above-average returns � Strategic competitiveness = successful implementation � Above-average returns

� Risk (uncertainty)-weighted profit relative to investment � Competitive advantage

� When create superior value that competitors can’t match � Hypercompetition

� Inherent instability and change in an industry � Strategic Flexibility & Strategic Leadership

� Dynamic capabilities for uncertainty and related mindset

What is Strategy?

Risk weighted above-average returns…

� Risk (uncertainty)-weighted � Amount of resource invested and potential variability in cash flows

� Above-average � Compared to others offering the essentially the same thing

� Returns � Profits (but depends on your end goals)

Building competitive advantage

What is Strategy?

What are value and cost?

� value is not price! � “willingness to pay” The highest price a customer

would be willing to pay for a product in the absence of a competing product and in the context of other purchasing opportunities

� The customer … and not the seller … always determines value

� cost � marginal cost to produce a unit of the product

with a particular level of value. � economic contribution

� difference between value and cost

Economic contribution

difference between the product’s value and its cost to the firm

Value and cost drivers

What is Strategy?

What determines firm profitability?

� macroeconomic factors � global market growth

� industry factors � industry growth � competitive rivalry � entry barriers/new entrants � technological innovation � customer tastes

� market position � overall competitive capability

(strategy implementation) � productivity through efficient

and effective resource allocation � Core competencies

� adaptability to changing market conditions � strategic flexibility

… so can Strategy be any of these things?

What is Strategy?

Strategy Making Process External Analysis

• Political, Social, Regulatory • Competitive conditions

Internal Analysis

• Resources and capabilities • Sources of competitive adv.

Company’s Strategic Situation

Strategic Alternatives • TOWS

Strategy

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What is Strategy?

What’s happening today…

� Technology changing the way we do most things … internet, robots � Globalization vs. nationalism

� Faster growth from emerging markets, job tensions � Interconnected global capital and markets

� Currency wars / printing, sovereign debt, slowing economies � Demographics … Aging populations, immigration � Scarcity … clean water, food, energy, etc. � Energy … rapid tech advances … fracking, solar, etc. … OPEC glut � War, Terror, & Ugliness … pushing the boundaries � Knowledge economy driving continuous learning … less disclosure

Instability, hypercompetition, need for flexibility

What is Strategy?

Possible responses …

Protect or new

markets

Create something

new and get to

market first

Use price-quality to

build market

presence

Firm

New and

innovative product

offerings

Make sure market

is meeting needs

Entrepreneurial/

opportunistic

Management

Exploit what firm is

good at

Build networks and

barriers

What is Strategy?

Industry/Organization (I/O) Model

Suppliers

Substitutes

Buyers

Potential Entrants

Industry Rivalry

ManyMany

Few

What is Strategy?

Industry/Organization (I/O) Model

� External environment drives strategic choice and profits � So … Pick the industry with the highest average profit

� Use the Strategy that matches with the environment and leads to profit better than the average � Cost leadership: Same good at lowest cost � Differentiation: Pay more for better product

� Make sure you have or get the skills or assets to deliver � Mimicry, mobility, and control of similar resources lead

back to avg � Maximize profits

… 5 forces gives industry profitability at a point in time

What is Strategy?

Industry/Organization (I/O) Model

The Firm’s

Strategic

Choices

Economies

of scale

Barriers to

market entry

Diversification Product

differentiation

Industry

concentration

Market

frictions

What is Strategy?

Strategy Making Process External Analysis

• Political, Social, Regulatory • Competitive conditions

Internal Analysis

• Resources and capabilities • Sources of competitive adv.

Company’s Strategic Situation

Strategic Alternatives • TOWS

Strategy

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What is Strategy?

Resource-based (RBV) Model

Resources

Physical, human, and organizational capital (tangible and intangible)

Capability

An integrated set of resources

Core

competence

A source of competitive advantage

What is Strategy?

Resource-based (RBV) Model

� Combinations of internal resources drive profits � So … Get VRIN resources and use them in a unique way � Pick the industry where you can use them the best

� Yes, even in the same industry � Not everyone has the same access to resources or the

same way to put them to use � Some of these are not easily copied or transferred

� Especially know-how that is tough to explain … � Complex combo…No one resource that drives all the profits � org culture … “just the way we do things here”

What is Strategy?

Resource-based (RBV) Model … VRIN

Costly to imitate

Rare

Nonsubstitutable

Valuable How resources become core competencies

What is Strategy?

I/O vs. RBV … Industry- vs. Firm-level

Suppliers

Substitutes

Buyers

Potential Entrants

Industry Rivalry

ValuableRare

Non-

Inimitable

What is Strategy?

Stakeholders

� Capital Market … the money � The most money back at the lowest risk of loss

� Product Market … buyers, suppliers, community � The best quality at the lowest price

� Organizational … employees and managers � Dynamic, stimulating, and rewarding environment � See Org Behavior when reverse priorities … rewarded so

long as they don’t have to grow or change

What is Strategy?

Stakeholder Trade-offs

� Capital Market vs. Product Market � Minimize the quality to price ratio vs. Minimize the returns

� Product Market vs. Organizational � Quality takes time to develop capabilities vs. too dynamic

� Organizational vs. Capital Market � “Rewarding” is costly … balance the spoils

� Develop resources/capabilities Æ better quality and potential price Æ greater returns on capital

What is Strategy?

Value Chain Analysis Support Activities

Primary Activities

Firm Infrastructure

Human Resource Management

Systems & Solutions

Materials & Equipment

Product

Design

Operations Distrib.

(Outbound

Logistics)

Marketing

& Sales

Service

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What is Strategy?

Value Chain Analysis Support Activities

Primary Activities

Firm Infrastructure

Human Resource Management

Systems & Solutions

Materials & Equipment

Product

Design

Ops. Distrib. Marketing

& Sales

Service

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What is Strategy?

Value Chain Analysis Support Activities

Primary Activities

Firm Infrastructure

Human Resource Management

Systems & Solutions

Material & Equipment

Product

Design

Operations Distrib. Marketing

& Sales

Service

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What is Strategy?

Value Chain Analysis Support Activities

Primary Activities

Firm Infrastructure

Human Resource Management

Systems & Solutions

Material & Equipment

Product

Design

Operations Distrib. Marketing

& Sales

Service

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What is Strategy?

Business Model … interconnections

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From Demil & Lecocq, LRP, 2010

What is Strategy?

Strategy Making Process External Analysis

• Political, Social, Regulatory • Competitive conditions

Internal Analysis

• Resources and capabilities • Sources of competitive adv.

Company’s Strategic Situation

Strategic Alternatives • TOWS

Strategy

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What is Strategy?

Strengths Weaknesses

Opportunities

Strategic actions that use strengths to

pursue opportunities (SO Strategies)

Strategic actions that bolster weaknesses to pursue opportunities

(WO Strategies)

Threats

Strategic actions that use strengths to counter threats (ST Strategies)

Strategic actions that bolster weaknesses to

counter threats (WT Strategies)

TOWS Matrix

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What is Strategy?

So what’s different for IB?

� Split into groups of 2-3 people � Discuss the general strategy framework

� What changes across borders? � What are the key challenges?

� Present it to the class

What is Strategy?

So what’s different for IB?

� Location, location, location � Actually, how much does location matter? Good or bad?

� CAGE, IGP, VoC � What are you seeking (market, resources, or both)?

� Location-specific advantages/resource stocks � HQ-Subsidiary relationships

� I-R

Figure 8.1 Opportunities and Outcomes of International Strategy

What is Strategy?

Vertical vs. Horizontal Integration by location Support Activities

Primary Activities

Firm Infrastructure

Human Resource Management

Systems & Solutions

Material & Equipment

Product

Design

Operations Distrib. Marketing

& Sales

Service

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What is Strategy?

Vertical Integration

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Country 1 (Product Design)

Country 2 (Ops)

Country 3 (Distribution)

Country 4 (Mktg & Sales)

Country 5 (Service)

Tap into location advantages needed

for each activity

What is Strategy?

Horizontal Integration

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Country 1 (Product Design)

Country 1 (Ops)

Country 3 (Distribution)

Country 3 (Mktg & Sales)

Country 5 (Service)

Multiple locations for the same activity

Country 2 (Distribution)

Country 4 (Distribution)

Country 2 (Mktg & Sales)

Country 4 (Mktg & Sales)

What is Strategy?

Integration vs. Responsiveness

� Pressures for global integration � Globalization of markets … common tastes, easy flows

� Borrowing in London for investment in China � R&D in Israel with SW programming in India and Assembly in Vietnam � More specialization and trade

� Efficiency gains from standardization � Pressures for local responsiveness

� Divergent consumer behaviors � Culture matters, but usually hurts efficiency

� Host-government policies � Local production or hiring requirements

What is Strategy?

Integration vs. Responsiveness • Scale Economies • similar demand/

standard product • Centralize at HQ • Typical cost leader

• Adapt for local demands to increase value

• Local autonomy • Focused on single

country as the market

• Local differentiator

• Combined, similar to integrated/hybrid

• “Flexible coordination”

• Integrated network

• Little adaptation but still benefit from core competences in foreign locations

What is Strategy?

I-R Grid: By Industry

What is Strategy?

CAGE distance

� Cultural � Different preferences and what is deemed appropriate � Language, ethnicities, religions, values/norms … traditional, insular

� Administrative � Laws and regs are different … hiring/firing, hours, loss leaders � Colonial ties, trading bloc, currency, in int’l orgs, corruption

� Geographic � Transportation costs and access to shipping lanes � Shared border, time zone, climate, size, remoteness

� Economic � Ability to pay, market size, capital availability, infrastructure

What is Strategy?

CAGE distance

Figure 8.6 Risks in the International Environment

What is Strategy?

A-A-A Strategies

� Aggregation � Seek out similar environments for rapid growth in markets � Similar to Global strategy to reduce impact of distance

� Adaptation � Change to match what locals want � Similar to Multidomestic to embrace impact of distance

� Arbitrage � Buy low and sell high

� Combinations are difficult since they seem to be conflicting � BUT, a business model has several parts

� R/COV: resources/competence, organization, and value proposition � Connect the strategies that fit inside and with enviro pressures

What is Strategy?

Modes of entry

� Exporting … produce at home and ship abroad � No foreign manufacturing expertise, need marketing & distribution. � Some cost but less control … many small firms and/or early on

� Licensing … foreign partner mfg/production � Need to facilitate product improvements

� Strategic Alliances � Connect with experienced partner; share entry costs, risks, but profit

� Acquisition � Speed to enter, high human capital dependency, late and costly

� Greenfield � Protect IP and higher integration, expats, late and costly

What is Strategy?

Key take-aways

� Strategy is comprehensive and integrated � Economic contribution and isolating mechanisms yield

sustainable competitive advantage � I/O and RBV Approaches complement despite conflict � Need to assess where and how location matters � Match up I-R with the environment and the organization � Assess most critical for external pressure and internal

“core”, then identify optimal combinations to resolve

What is Strategy?

Parting thoughts for the day

� For next class… � Textbook Ch 13 – country selection � Yip’s Industry Globalization Potential � Hummus Bar case from HBS

� Quiz 2 should be open after class… until start of class for Week 3 (i.e. before I see you again) � 2 attempts … keeps highest score