1. Global Business Today 6e
by Charles W.L. Hill
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. The Strategy of International Business
Chapter 11
The Strategy of International Business

3. Introduction
Question: What actions can managers take to compete more effectively in a global economy?
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

4. Strategy and the Firm Question: What is strategy?
A firm’s strategy can be defined as the actions that managers take to attain the goals of the firm
Typically, strategies focus on profitability and profit growth
Profitability refers to the rate of return the firm makes on its invested capital
Profit growth is the percentage increase in net profits over time

5. Strategy and the Firm
Determinants of Enterprise Value

6. Value Creation
Question: How do you increase the profitability of a firm?
To increase profitability, value must be created 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

7. Strategic Positioning
To maximize profitability, a firm must
pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that choice
configure its internal operations so that they support that position
make sure that the firm has the right organization structure in place to execute its strategy
So, a firm’s strategy, operations, and organization must all be consistent with each other in order to achieve a competitive advantage and superior profitability

8. Operations: The Firm as a Value Chain
Firms are essentially value chains composed of a series of distinct value creation activities, including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure
Value creation activities can be categorized as
primary activities
support activities

9. Operations: The Firm as a Value Chain
1. 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
2. Support Activities
provides the inputs that allow the primary activities of production and marketing to occur

10. Operations: The Firm as a Value Chain
The Value Chain

11. Classroom Performance System
All of the following are examples of primary activities except
Logistics
Marketing and sales
Customer service
Production
Classroom Performance System Answer: a

12. Organization: The Implementation of Strategy
Organization architecture refers to the totality of a firm’s organization (formal organizational structure, control systems and incentives, organizational culture, processes, and people)
Organizational structure refers to
the formal division of the organization into subunits
the location of decision-making responsibilities within that structure
the establishment of integrating mechanisms to coordinate the activities of subunits including cross functional teams and or pan-regional committees

13. Organization: The Implementation of Strategy
Organization Architecture

14. Organization: The Implementation of Strategy
Controls are the metrics used to measure the performance of subunits and make judgments about how well the subunits are run
Incentives are the devices used to reward appropriate managerial behavior
Processes are the manner in which decisions are made and work is performed
Organizational culture is the norms and value systems that are shared among the employees
People refers to employees and the strategy used to recruit, compensate, and retain those individuals

15. 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 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

16. In Sum: Strategic Fit
Strategic Fit

17. Global Expansion, Profitability and Profit Growth
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

18. Expanding the Market: 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)
Core competencies
enable the firm to reduce the costs of value creation
create perceived value so that premium pricing is possible

19. 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

20. 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
However, introducing transportation costs and trade barriers complicates this picture
Political risks must be assessed when making location decisions

21. Experience Effects
The experience curve refers to the systematic reductions in production costs that have been observed to occur over the life of a product
Studies show that a product’s production costs decline by some quantity about each time cumulative output doubles
Learning effects are 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

22. Experience Effects
Economies of scale refer to 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
Serving a global market from a single location is consistent with moving down the experience curve and establishing a low-cost position

23. 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)
incentive systems can 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

24. Summary
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

25. Classroom Performance System
When different stages of a value chain are dispersed to those locations around the world where value added is maximized or where the costs of value creation are minimized, _____ is (are) created.
Experience effects
Learning effects
Economies of scale
A global web
Classroom Performance System Answer: d

26. Cost Pressures and Pressures for Local Responsiveness
Firms that compete in the global marketplace typically face two types of competitive pressures
pressures for cost reductions
pressures to be locally responsive
These pressures place conflicting demands on the firm

27. Cost Pressures and Pressures for Local Responsiveness
Pressures for Cost Reductions and Local Responsiveness

28. 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

29. 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 government demands
Firms facing these pressures need to differentiate their products and marketing strategy in each country

30. Pressures for Local Responsiveness
1. Differences in Consumer Tastes and Preferences
When consumer tastes and preferences differ significantly between countries, firms face strong pressures for local responsiveness
2. Differences in Infrastructure and Traditional Practices
When there are differences in infrastructure and/or traditional practices between countries, pressures for local responsiveness emerge

31. Pressures for Local Responsiveness
3. Differences in Distribution Channels
A firm’s marketing strategies may be influenced by differences in distribution channels between countries
4. Host Government Demands
Economic and political demands imposed by host country governments may necessitate a degree of local responsiveness

32. Classroom Performance System
Pressures for local responsiveness come from all of the following except
Excess capacity
Host government demands
Differences in consumer tastes and preferences
Differences in distribution channels
Classroom Performance System Answer: a

33. Choosing a Strategy
Question: How do the pressures for cost reductions and local responsiveness influence a firm’s choice of strategy?
There are four basic strategies to compete in the international environment
global standardization
localization
transnational
international
Internet Extra: Cadbury has changed its strategy over the years to respond to shifting market and competitive conditions. Go to the company’s web site { to further explore this and to see real examples of the different strategic approaches outlined in this chapter.
Click on Investors, then on Our Vision and Strategy. 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.

34. Global Standardization Strategy
Question: When does a global standardization strategy make sense?
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 strategic goal is to pursue a low-cost strategy on a global scale
This strategy makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal
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 {
Lecture Note: To extend this discussion, go to {

35. Localization Strategy
Question: When does a localization strategy make sense?
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
This strategy makes sense when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense

36. Transnational Strategy
Question: When does a transnational strategy make sense?
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
This strategy makes sense when there are both high cost pressures and high pressures for local responsiveness

37. International Strategy
Question: When does an international strategy make sense?
An international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization
This strategy makes sense when there are low cost pressures and low pressures for local responsiveness

38. The Evolution of Strategy
Question: Is the choice of strategy static?
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
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 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 { 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 {

39. Classroom Performance System
When pressures are high for local responsiveness, but low for cost reductions, a _______ makes sense.
Global standardization strategy
International strategy
Transnational strategy
Localization strategy
Classroom Performance System Answer: d

40. Strategic Alliances Question: What is a strategic alliance?
Strategic alliances refer to cooperative agreements between potential or actual competitors
Examples include
formal joint ventures
short term contractual arrangements
The number of international strategic alliances has risen significantly in recent decades

41. The Advantages of Strategic Alliances
Question: Why form a strategic alliance?
Strategic alliances are attractive because they
facilitate entry into a foreign market
allow firms to share the fixed costs (and associated 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
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 { and { In addition, a new release about the Cisco- Fujitsu alliance is available at {

42. The Disadvantages of Strategic Alliances
Question: What are the drawbacks of strategic alliances?
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

43. Making Alliances Work
Question: How can firms increase the success of their alliances?
Many international strategic alliances run into problems
The success of an alliance seems to be a function of three main factors
partner selection
alliance structure
the manner in which the alliance is managed

44. Making Alliances Work 1. 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

45. Making Alliances Work 2. 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

46. Making Alliances Work 3. 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

47. Critical Discussion Question
1. In a world of zero transportation costs, no trade barriers, and non-trivial differences between nations with regard to factor endowments, firms must expand internationally if they are to survive. Discuss.
Answer: Given differences in countries with respect to factor endowments, the theory of comparative advantage suggests that different activities should take place in the countries that can perform them most efficiently. If there are also no barriers or costs to trade, then it is likely that a lot of industries will be based out of the countries that provide the best set of factor endowments. Firms located in sub-optimal locations, will either have to expand internationally or switch to a different industry where the factor endowments are in their favor. For firms already located in the countries with the most favorable factor endowments for their industry, however, there may not be a need to expand internationally. The firm may be content to simply focus on the domestic market. But if the firm does want to expand internationally, it may be able to do so via licensing or exporting, and need not necessarily undertake foreign direct investment. Thus, not only in theory, but also in practice many firms are able to survive quite well without having to expand internationally.

48. Critical Discussion Question
2. Plot the position of the following firms on Figure Procter & Gamble, IBM, Nokia, Coca-Cola, Dow Chemical, US Steel, and McDonald's. In each case justify your answer.
Answer: Procter & Gamble would be located in the middle right-hand portion of the graph. This is a position of high pressures for local responsiveness and moderate pressures for cost reductions. P&G sells personal and home care products, which do face pressures for local responsiveness. Although these products are not commodities, there are many competitors in the industry, which implies a moderate degree of cost pressures. IBM would be in the upper middle portion of the graph. This is a position of moderate pressure for local responsiveness and high pressure for cost reductions. There is a moderate amount of pressure for local responsiveness for IBM products, due to language differences and differing voltage requirements for electronic products across countries. IBM is in a very competitive industry, and cost pressures are high. Nokia manufactures wireless handsets and infrastructures such as switches. Nokia, because it must customize its product offering according to the technical standards prevailing in a given country would be in the lower right hand side of the graph. Dow Chemical and U.S. Steel would both be located in the upper left-hand portion of the graph. Both Dow and U.S. Steel sell products that are commodity-like by nature. As a result, cost pressures would be high and local responsiveness pressures would be low for these products. Finally, McDonald’s and Coca Cola would be located in the middle left-hand portion of the graph. Pressures for local responsiveness would be low because a selling feature for both companies is the “American experience,” and cost reduction pressures would be moderate.

49. Critical Discussion Question
3. Re-Read the Management Focus box on Procter & Gamble and then answer the following questions:
a) What strategy was Procter & Gamble pursuing when it first entered foreign markets in the period up until the 1980s?
b) Why do you think this strategy became less viable in the 1990s?
c) What strategy does Procter & Gamble appear to be moving toward? What are the benefits of this strategy? What are the potential risks associated with it?
Answer: Procter & Gamble initially expanded internationally when it entered Canada in However, even after expanding into Western Europe and Asia in the 1960s and 1970s, the company sill maintained all product development at its headquarters location in Cincinnati, Ohio. Subsidiary units were responsible for manufacturing, marketing, and distributing the products in their local markets. However, by the 1990s several factors caused Procter & Gamble to reconsider its international strategy. Barriers to low-cost trade were falling rapidly worldwide, and fragmented national markets were merging into larger regional or global markets. In addition, the retailers through which the company distributed its products were growing larger and more global, and were demanding price discounts from Procter & Gamble. The company now appears to be moving towards a transnational strategy in which there are seven self-contained business units, each responsible for the complete generation of profits from its products, and for manufacturing, marketing, and development. A transnational strategy is complex, and the company will have to balance the demands of responding to local market needs for its consumer products, while at the same time reaching its cost savings goals.

50. Critical Discussion Question
4. What do you see as the main organizational problems that are likely to be associated with the implementation of a transnational strategy?
Answer: Simultaneously trying to achieve cost efficiencies, global learning, and local responsiveness places difficult and contradictory demands on an organization. Managing these conflicting demands requires the setting of control and motivational policies for people and organizations that force balancing of these demands at multiple levels within firms. The organizational challenges involve managing these inherent conflicts to resolutions that serve the best interests of the firm overall.

51. Critical Discussion Question
5. Reread the Management Focus box on the alliance between Cisco and Fujitsu. What are the benefits to Cisco and Fujitsu respectively of the alliance? What are the risks to Cisco? How can Cisco mitigate those risks?
Answer: The Cisco-Fujitsu venture was important to both companies as they develop the next generation of routers. The firms will be able to pool their R&D efforts, share complementary technology, and get products to market more quickly. The two companies also believe that the combination of Cisco’s technology together with Fujitsu’s production expertise will enable them to produce more reliable products. In addition, the alliance provides Cisco with access to the Japanese market, a market that it believes will be important in the future, and a more complete product line for Fujitsu. Cisco will have to ensure that it puts proper safeguards in place as it shares its technology with Fujitsu, or it risks creating a competitor.