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Chapter 4: The Strategy of International Business (Which Strategy Should…
Chapter 4: The Strategy of International Business
How Are a Firm’s
Operations Configured?
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
Value Creation Activities
Primary activities
R&D
Production
Marketing & Sales
Customer Service
Support activities
Information systems
logistics
Human resource
How Can Firms Increase Profits Through
International Expansion?
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
How Can Firms Leverage Their Products
and Competencies?
Firms can increase growth by selling internationally
goods or services developed at home
The success of firms that expand internationally
depends on
– the goods or services sold
– the firm’s core competencies
• Core competencies - skills within the firm that
competitors cannot easily match or imitate
– can exist in any value creation activity
Core competencies allow firms to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible
Why Are Location
Economies Important?
Location economies are 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
Why Are Experience
Effects Important?
The experience curve refers to the systematic reductions in production costs that occur over the life of a product
learning effects are cost savings that come from learning by doing
when labour productivity increases
Economies of scale - 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
How can managers leverage subsidiary skills
recognise that valuable skills that could be applied elsewhere in the firm can arise anywhere within the firm's global network - not just at the corporate centre
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 to help transfer skills within the firm
What Types of Competitive Pressures Exist in
the Global Marketplace?
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
Dealing with both pressures is challenging
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
When Are Pressures for
Local Responsiveness Greatest?
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
Differences in distribution channels
need to be responsive to differences in distribution
channels between countries
Host government demands
– economic and political demands imposed by host
country governments may require local responsiveness
Which Strategy
Should a Firm Choose?
1.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
Use 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
– use when there are substantial differences across nations with regard to consumer tastes and preferences and cost pressures are not too intense
Transnational - tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects
– firms differentiate their product 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
– use when both cost pressures 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
– use when there are low cost pressures and low pressures for local responsiveness
How does strategy evolve?
An international strategy may not be viable in the long term so to survive, firms may need to shift to a global standardisation strategy or a transnational strategy in advance of competitors
Localisation 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 structure which would require a shift toward a transnational strategy
What are the implications for trade theory for managers?
location implications
a firm should disperse its various productive activities to those countries where they can be performed most efficiently - firms that do not may be at a competitive advantage
first mover implications
a first-mover advantage can help a firm dominate global trade in that product
policy implications
firms should work to encourage governmental policies that support free trade