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Global Business Today 9e

by Charles W.L. Hill

and Tomas Hult

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Chapter 12

The Strategy of

International Business

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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.

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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

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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

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Strategy and the Firm

To increase profitability and profit growth, firms can

Add value

Lower costs

Sell more in existing markets

Expand internationally

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Strategy and the Firm

Determinants of Enterprise Value

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Value Creation

Question: How can firms increase profitability?

Answer:

By creating value for the consumer

Value creation is measured by 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)

The two basic strategies for creating value are:

Differentiation

Low cost

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Value Creation

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Putting it into Practice

Starbucks currently has just a few stores in Scandinavia

New strategy? Become a household name

Starbucks wants to become a major player in the Nordic region. To learn more, go to “Starbucks Aims to Invade Nordic Region,” The Wall Street Journal, 9/27/12, B8.

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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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Strategic Positioning

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

A firm’s operations are like a value chain composed of a series of distinct value creation activities:

production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure

All of these activities must be managed effectively and be consistent with firm strategy

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The Firm as a Value Chain

Value creation activities can be categorized as

Primary activities

R&D

Production

Marketing and sales

Customer service

Support activities

Information systems

Logistics

Human resources

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The Firm as a Value Chain

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

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The Firm as a Value Chain

The Value Chain

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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-centralized versus decentralized

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

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The Implementation of Strategy

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

Incentives - the devices used to reward appropriate managerial behavior

Processes - the manner in which decisions are made and work is performed

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

People - employees and the strategy used to recruit, compensate, and retain those individuals in terms of their skills, values, and orientation

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The Implementation of Strategy

Organization Architecture

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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 elements of the organizational architecture must be internally consistent

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-the strategy and architecture must be consistent with each other, and consistent with competitive conditions

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In Sum: Strategic Fit

Strategic Fit

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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

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Leveraging Products and 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- exist in any value creation activity)

Core competencies :

Enable the firm to reduce the costs of value creation

Create perceived value so that premium pricing is possible

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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 - the 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

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Location Economies

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

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Experience Effects

The experience curve - the 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

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Experience Effects

Economies of scale - the 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 to utilize production facilities more intensively

The ability to increase bargaining power with suppliers

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

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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

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Global Strategies

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

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Competitive Pressures

Two competitive pressures:

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

But, this strategy can raise costs

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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

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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 county government demands

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

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Pressures for Local Responsiveness

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

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Pressures for Local Responsiveness

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

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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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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.

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Competitive Pressures

Pressures for Cost Reductions and Local Responsiveness

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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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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. Why do you think that Vodafone was pursuing a global standardization strategy? How did it hope that this strategy would boost profitability and profit growth?

Discussion Points: Vodafone’s vision was to build a global brand using a phone that would work anywhere in the world. To achieve that vision, the company offered consumers a standardized product with the same technology regardless of where they were located. In theory, by offering the same basic product everywhere, Vodafone would not only capitalize on a brand name, it would also capitalize on a streamlined production process. However, the company failed to recognize that consumers in different locations values different features.

2. Why did the strategy not work in Japan? In retrospect, what should Vodafone have done differently?

Discussion Points: In Japan, Vodafone was selling primarily to younger people who did not travel much, and did not value the global portability of the company’s phones. Instead, Japanese consumers were more interested in other features like games and cameras. In retrospect, Vodafone probably should have paid more attention to local preferences. The company delayed introduction of phones using 3G technology that would allow users to watch video clips and teleconference because it wanted to launch the technology only when it had a phone that would work inside and outside Japan.

Teaching Tip: To learn more about Vodafone, go to {http://www.vodafone.com/hub_page.html}.

Lecture Note: To extend this discussion, go to {http://www.businessweek.com/globalbiz/content/may2008/gb20080527_542953.htm?chan=search}.

Teaching Tip: To learn more about Vodafone, go to {http://www.vodafone.com/hub_page.html}.

Lecture Note: To extend this discussion, go to {http://www.businessweek.com/globalbiz/content/may2008/gb20080527_542953.htm?chan=search}.

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Localization Strategy

Question: When does a localization strategy make sense?

Answer:

A localization strategy focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets

Makes sense when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense

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Transnational Strategy

Question: When does a transnational strategy make sense?

Answer:

A transnational strategy 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

Foster a multidirectional flow of skills between different subsidiaries

Makes sense when there are both high cost pressures and high pressures for local responsiveness

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International Strategy

Question: When does an international strategy make sense?

Answer:

An international strategy involves taking products first produced for the domestic market and then selling 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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Putting it into Practice

Starbucks Mumbai: A new partner and new flavors

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In 2012, Starbucks opened its first store in India via a joint venture with Tata. To learn more, go to {http://www.businessweek.com/ap/2012-10-19/news-summary-starbucks-opens-first-indian-store}. The menu is the same, with some local favorites added in.

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The Evolution of Strategy

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

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Management Focus: The Evolution of Strategy at Procter & Gamble

Summary

This feature explores the evolution of Procter & Gamble’s global strategy. In 1915, Procter & Gamble opened its first foreign operation in Canada. In the 1950s and 1960s, Procter & Gamble expanded into Western Europe, and then, in the 1970s, into Japan and other parts of Asia. Throughout this expansion, the company maintained all product development at its Cincinnati, Ohio headquarters, while each subsidiary took on the responsibility for manufacturing, marketing, and distributing the products. Procter & Gamble shifted its strategy in the 1990s, closing several foreign locations and moving to a more regional approach to global markets. More recently, the company implemented “Organization 2005”, a business unit approach whereby different units are entirely responsible for generating profits for a product group. Discussion of this feature can begin with 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}.

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The Evolution of Strategy

Question: Is the choice of strategy static?

Answer:

As competition increases, international and localization strategies become less viable

To survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors

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Management Focus: The Evolution of Strategy at Procter & Gamble

Summary

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?

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?

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

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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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Management Focus: Cisco and Fujitsu

Summary

This feature examines Cisco Systems’ joint venture with Fujitsu. Cisco, the world’s largest manufacturer of Internet routers, entered the alliance in 2004 in an effort to jointly develop the next generation of high end routers for sales in Japan. Cisco believed the Japanese market was important, and wanted to expand its presence there. Fujitsu wanted the routers so that it can offer end-to-end communications solutions to its customers. Discussion of the feature can begin with the following questions.

Suggested Discussion Questions

1. What did Cisco hope to gain by forming an alliance with Fujitsu? What risks are involved for Cisco with this alliance? How can Cisco limit those risks?

Discussion Points: Cisco hoped to achieve several goals through its alliance with Fujitsu. The company hoped that by sharing R&D, new product development would be quicker, that combining its technology expertise with Fujitsu’s production expertise would result in more reliable products, that it would gain a bigger sales presence in Japan, and that by bundling its routers together with Fujitsu’s telecommunications equipment, the alliance could offer end-to-end communications solutions to customers. Students will probably suggest that the biggest risk for Cisco is that by sharing its proprietary technology with Fujitsu, it could potentially create a competitor. To avoid this, Cisco will need to take steps to protect its technology by making sure that safeguards are written into alliance agreements, and it will need to ensure that it is getting an equitable gain from the agreement.

2. What did Fujitsu bring to the alliance? Why was it important for Cisco to have a Japanese presence? What were the advantages of the alliance for Fujitsu?

Discussion Points: One of the key attractions of an alliance with Fujitsu’s was the company’s strong presence in the Japanese market. Japan is at the forefront of second generation high speed Internet based telecommunications networks, and Cisco wanted to be a part of that market. For Fujitsu, the alliance meant that it could fill the gap in its product line for routers, reduce product development costs and time, and produce more reliable products.

3. What does the alliance between Cisco and Fujitsu mean to other competitors in the router market?

Discussion Points: For other competitors in the market, the alliance between Cisco and Fujitsu is significant. Together, the companies can offer one-stop shopping end-to-end communications solutions. Furthermore, because the two companies are pooling their resources, development costs are lower, which will put additional pressure on competitors.

Teaching Tip: To find out more about Cisco and Fujitsu, students can visit the company web sites at {http://www.cisco.com/} and {http://www.fujitsu.com/global/}. In addition, a new release about the Cisco- Fujitsu alliance is available at {http://www.cisco.com/web/partners/pr67/fujitsu/index.html}.

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Putting it into Practice

In a new strategic alliance: Mazda will produce cars at its plant in Mexico for Toyota

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Toyota signed a deal with Mazda in 2012 whereby Mazda will produce Toyotas at the Mazda plant in Mexico. The cars will be sold in North America. To learn more, go to “Mazda to Build Cars For Toyota in Mexico,” The Wall Street Journal, 11/12/12, B5.

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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

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

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

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.

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