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Strategy of International Business (What Types of Competitive Pressures…
Strategy of International Business
What is Strategy?
Action taken by manager to achieve firm's goal
Firm's goal is to increase;
Profit Growth
% increase in net profits over time
Profitability
ROR that firms make on its invested capital
How can Firms Increase Profits through Intention Expansion?
International firms can;
2) Realise Location Economies
Disperse value creations activities to locations where they can performed effectively & efficiently
Why Are Location Economies Important?
:check: Lower the costs of value creation and achieve a low cost position
:check: Differentiate their product offering
:check: 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
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
3) Realise Greater Cost Econonmies from Experience Effect
Serve an expanded global market from a central location
Why Are Experience Effects Important?
:check: Experience curve
Systematic reductions in production costs that occur over the life of a product
Moving down 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
:check: Economies of scale
Reductions in unit cost achieved by producing a large volume of a product
Sources of economies of scale
Spreading fixed costs over a large volume
Increasing bargaining power with suppliers
Utilising production facilities more intensively
:check: Learning Effect
Cost savings that come from learning by doing
1) Expand their market
Sell in International Market
4) Earn Greater Return
Leverage skills developed in foreign operations & transfer them elsewhere in the firm
How can firm leverage their products & competencies?
:check: Core competencies
Skills within the firm that competitors cannot easily match or imitate
Allow firms to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible
:check: G&S sold
How is Value Created?
Low Cost Strategy
Differentiation Strategy
Adding value to a product so that customers are willing to pay more for it
What Types of Competitive Pressures Exist in the Global Marketplace?
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)
Pressures for cost reductions
Force the firm to lower unit costs
When Are Pressures for
Local Responsiveness Greatest?
2) Differences in consumer tastes & preferences
3) Differences in traditional practices & infrastructure
4) Host government demands
Economic and political demands imposed by host
1) Differences in distribution channels
Need to be responsive to differences in distribution channels between countries
When Are Pressures for Cost Reductions Greatest?
1) When major competitors are based in low cost locations
2) Where there is persistent excess capacity
3) Where consumers are powerful and face low switching costs
4) In industries producing commodity-type products that fill universal needs, where price is the main competitive weapon
Which Strategy Should a Firm Choose?
Global standardization
Increase profitability and profit growth by reaping the cost reductions from economies of scale, learning effects, and location economies
Goal: 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 :!:
Transnational
Tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects
Makes sense when both cost & local responsiveness are intense :!:
Firms differentiate their product across geographic markets to account for local differences & foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations
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 & local responsiveness pressures :!:
Localization
Increase profitability by customizing goods or services so that they match tastes and preferences in different national market
Makes sense when there are substantial differences across nations with regard to consumer tastes and preferences and cost pressures are not too intense :!: