1. International
Business
Fourth Edition

2. The Strategy of International Business
CHAPTER 12
The Strategy of International Business

3. Chapter Focus
Shifting focus from the international environment to the firm.
Actions managers can take to compete more effectively.
How firms can increase profitability by expanding to foreign markets.
Different international strategies.
Pros and cons of the strategies.
Factors affecting strategic choice.
Tactics.

4. Strategy and the Firm Profitability Rate of return concept; i.e.
return on sales (ROS).
ROS=/TR
Profit ()
The difference between
total revenue (TR) and
total costs (TC):
=TR-TC
Value
Creation
Firm as
Value Chain
Role of
Strategy
Actions taken by managers
to attain firm’s goals.
Maximize
Long-term
profitability

5. Value Creation V - P P - C V P V - C C V = Consumer Value
P = Market Price
C = Cost of Production
V-P = Consumer Surplus
P-C = Profit Margin
V-C = Value Added
V - P
P - C
V - C V P C
Figure 12-1

6. The Firm as a Value Chain
Figure 12.2
Support Activities
Company Infrastructure
Information Systems
Human Resources
Materials Management
R & D
Production
Marketing & Sales
Service
Primary Activities

7. The Role of Strategy
Identifying and taking actions that will lower costs
of value creation and/or differentiate the firm’s
product offering through superior design, quality
service, functionality, etc.

8. Profiting from Global Expansion
Firms operating internationally are able to:
Realize location economies.
Realize greater cost economies.
Earn a greater return from the firm’s distinctive skills or core competencies.
Earn a greater return by leveraging valuable skills developed in foreign operations and transferring them to the firm’s other operations.
Profitability is constrained by product customization and
the “imperative of localization”.

9. Location Economies Pontiac LeMans Creating a Global Web Assembly Parts
Sales
Design
Advertising
Parts
Pontiac LeMans
Parts

10. Caveats Needs for consideration: Transportation costs. Trade barriers.
Low labor costs.
Proximity to U.S.
NAFTA.
Needs for consideration:
Transportation costs.
Trade barriers.
Political risks.
Economic risks.

11. Experience Curve Learning effects: Economies of Scale:
Cost savings that come from “learning by doing.”
More significant in complex tasks.
Decline then cease after two years.
Decline after this point comes from economies of scale.
Economies of Scale:
Reduction in unit cost achieved through volume production.
Sources:
Spread fixed costs over volume.
Employing specialized equipment or personnel.

12. The Experience Curve Strategic Significance
Figure 12.3 B A
Accumulated Output
Unit Costs
Strategic Significance
Moving down the curve reduces
the cost of creating value.

13. Leveraging Core Competencies
Firm skills that competitors
can not easily match
or imitate.
Skills and products
are most unique.
Value placed by
consumers is great.
Few capable competitors
with skills or products.
Value greatest when:

14. Leveraging Subsidiary Skills
New Challenges
Humility to recognize
valuable skills can come
from anywhere.
Establish incentives to
encourage local employees
to acquire new skills.
Need a process to identify
new skill development.
Need to facilitate transfer
of new skills within the
firm.
Skills can be created
anywhere in a
multinational’s global
operations network.

15. Pressures for Cost Reduction and Local Responsiveness
Company A
Company C
High
Cost
pressures
Low
Generally reflects
the position of most
companies
Company B
Low High
Figure 12.4
Pressures for local responsiveness

16. Local responsiveness Arise from: Cost Reduction
Mass producing a standardized product at an optimal location.
Intense:
in commodity industries.
Where competitors are in low cost locations.
Where there is persistent excess capacity.
Where there are low switching costs.
Because of greater international competition.
Local responsiveness
Arise from:
Differences in consumer taste and preferences.
Differences in infrastructure and traditional practices.
Differences in distribution channels.
Host government demands.

17. Local Responsiveness Taste and preference Distribution channels
Delegate marketing to
national subsidiaries.
Delegate manufacturing
and production to foreign
subsidiaries.
Delegate production
and marketing to
national subsidiaries
Taste and
preference
Infrastructure
And
practice
Distribution
channels
Manufacture
locally.
Host
government

18. Four Basic Strategies High Cost pressures Low Low High
Global
Strategy
Transnational
Multi domestic
International
Pressures for local responsiveness
Figure 12.5

19. Strategic Choices Transnational
Exploit experienced based cost and location economies, transfer core competencies within the firm, and pay attention to local responsiveness needs.
International
create value by transferring skills to local markets where skills are not present.
Multidomestic
oriented toward
achieving maximum
local responsiveness.
Global
increase profitability through cost reductions from experience curve effects and location economies.

20. Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar
High
Cost
pressures
Low
Caterpillar
Tractor
Figure 12.6
Low High
Pressures for local responsiveness

21. The Advantages and Disadvantages of the Four Strategies
Strategy
Advantages
Disadvantages
Global
Exploit experience curve effects
Exploit location economies
Lack of local
responsiveness
International
Transfer distinctive
competencies to
Foreign Markets
Inability to realize
location economies
Failure to exploit experience curve
effects
Table 12.1a

22. The Advantages and Disadvantages of the Four Strategies
Strategy
Advantages
Disadvantages
Multi-domestic
Customize product offerings
and marketing in accordance
with local responsiveness
Inability to realize location
economies
Failure to exploit
experience curve effects
Failure to transfer
distinctive competencies
to foreign markets
Transnational
Exploit experience curve
effects
Exploit location economies
Reap benefits of global learning
Difficult to implement due
to organizational
problems
Table 12.1