chapter The Strategy of International Business McGraw-Hill/Irwin Global Business Today, 7e © 2011 The McGraw-Hill Companies, Inc., All Rights Reserved. 11

Chapter 11: The Strategy of International Business INTRODUCTION In this chapter, we focus on the firm itself and, in particular, on the actions managers can take to compete more effectively as an international business.

Chapter 11: The Strategy of International Business STRATEGY AND THE FIRM A firm’s strategy can be defined as the actions that managers take to attain the goals of the firm. Profitability can be defined as the rate of return the firm makes on its invested capital. Profit growth is the percentage increase in net profits over time.

Chapter 11: The Strategy of International Business Value Creation The more value customers place on the firm’s products, the higher the price the firm can charge for those products The value created by a firm 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)

Chapter 11: The Strategy of International Business Firms can increase their profits: by adding value to a product so that customers are willing to pay more for it by lowering the costs There are two basic strategies for improving a firm’s profitability: a differentiation strategy a low cost strategy

Chapter 11: The Strategy of International Business Strategic Positioning A central tenet of the basic strategy paradigm is that in order to maximize its long run return on invested capital, 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

Chapter 11: The Strategy of International Business Operations: The Firm as a Value Chain The firm can be thought of a value chain composed of a series of distinct value creation activities, including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure These value creation activities can be categorized as primary activities and support activities

Chapter 11: The Strategy of International Business Primary Activities The primary activities of a firm have to do with 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 Support activities provide the inputs that allow the primary activities of production and marketing to occur

Chapter 11: The Strategy of International Business Do you remember? All of the following are examples of primary activities except a) Logistics b) Marketing and sales c) Customer service d) Production

Chapter 11: The Strategy of International Business Organization: The Implementation of Strategy The term organization architecture can be used to refer to the totality of a firm’s organization, including formal organizational structure, control systems and incentives, organizational culture, processes, and people.

Chapter 11: The Strategy of International Business 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

Chapter 11: The Strategy of International Business Controls are the metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits Incentives are the devices used to reward appropriate managerial behavior Processes are the manner in which decisions are made and work is performed within the organization Organizational culture is the norms and value systems that are shared among the employees of an organization By people we mean not just the employees of the organization, but also the strategy used to recruit, compensate, and retain those individuals and the type of people that they are in terms of their skills, values, and orientation

Chapter 11: The Strategy of International Business In Sum: Strategic Fit In sum, for a firm to attain superior performance and earn a high return on capital, its strategy must make sense given market conditions.

Chapter 11: The Strategy of International Business GLOBAL EXPANSION, PROFITABILITY, AND PROFIT GROWTH Firms that operate internationally are able to: 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

Chapter 11: The Strategy of International Business Expanding the Market: Leveraging Products and Competencies A company can increase its growth rate by taking goods or services developed at home and selling them internationally The success of firms that expand in this manner is based not only on the goods or services they sell, but also on their 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 and/or to create perceived value in such a way that premium pricing is possible

Chapter 11: The Strategy of International Business 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.

Chapter 11: The Strategy of International Business 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) where price is the main competitive weapon when major competitors are based in low cost locations where there is persistent excess capacity where consumers are powerful and face low switching costs

Chapter 11: The Strategy of International Business Firms facing pressures for cost reductions: must try to lower the costs of value creation by mass-producing a standard product at the optimal locations worldwide

Chapter 11: The Strategy of International Business 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

Chapter 11: The Strategy of International Business Differences in Consumer Tastes and Preferences Strong pressures for local responsiveness emerge when consumer tastes and preferences differ significantly between countries Differences in Infrastructure and Traditional Practices Pressures for local responsiveness emerge when there are differences in infrastructure and/or traditional practices between countries

Chapter 11: The Strategy of International Business Differences in Distribution Channels A firm's marketing strategies may have to be responsive to 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

Chapter 11: The Strategy of International Business CHOOSING A STRATEGY Firms use four basic strategies to compete in the international environment: global standardization localization transnational international

Chapter 11: The Strategy of International Business Global Standardization Strategy 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

Chapter 11: The Strategy of International Business Localization Strategy 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 Localization is most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense

Chapter 11: The Strategy of International Business Transnational Strategy 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 in the firm’s global network of operations A transnational strategy makes sense when cost pressures are intense, and simultaneously, so are pressures for local responsiveness.

Chapter 11: The Strategy of International Business International Strategy An international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization When there are low cost pressures and low pressures for local responsiveness, an international strategy is appropriate

Chapter 11: The Strategy of International Business STRATEGIC ALLIANCES Strategic alliances refer to cooperative agreements between potential or actual competitors

Chapter 11: The Strategy of International Business The Advantages of Strategic Alliances Strategic alliances: 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

Chapter 11: The Strategy of International Business The Disadvantages of Strategic Alliances Strategic alliances can give competitors low- cost routes to new technology and markets, but unless a firm is careful, it can give away more than it receives

Chapter 11: The Strategy of International Business Making Alliances Work 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

Chapter 11: The Strategy of International Business Partner Selection A good partner has three principal characteristics: a good partner helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values a good partner shares the firm’s vision for the purpose of the alliance a good partner is unlikely to try to opportunistically exploit the alliance for its own ends: that it, to expropriate the firm’s technological know-how while giving away little in return

Chapter 11: The Strategy of International Business Alliance Structure Alliances can be designed to make it difficult to transfer technology not meant to be transferred Contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner Both parties can agree in advance to swap skills and technologies to ensure a chance for equitable gain The risk of opportunism by an alliance partner can be reduced if the firm extracts a significant credible commitment from its partner in advance

Chapter 11: The Strategy of International Business Managing the Alliance Successfully managing an alliance requires managers from both companies to build interpersonal relationships A major determinant of how much a company gains from an alliance is its ability to learn from its alliance partners

So …. what is due this week?

Discussion Board: IKEA Case Scenario We see in our reading and assignment for this unit that companies structure themselves based on the corporate strategy needed to attain the company goals. Now that companies are experiencing changing financial pressures and a global trend towards social responsibility, companies must take many factors into consideration when adopting a strategy. Read the “Student Info” on IKEA’s Website: What kind of strategy (p ) is evident at IKEA? Choose one of the strategies mentioned from your reading and then explain why you think they are using that strategy. What is their Strategic positioning in general in the marketplace (see text p. 384) and explain how you know this. Address their Value (how do they differentiate themselves), and Cost. Please respond to the discussion questions by following the Discussion guidelines in the syllabus.

Assignment: Dropbox Paper STEPS: Read about organizational structure and look at the chart information by clicking on the Org Structure button on the page. 1. Then decide what structure the two types of turbine companies have; Functional, Matrix, Divisional, Team or Networking, etc.? Explain what characteristics each company has that make you think it is the type you specified? 2. Go to the following site to read about the differences between a centralized and a decentralized company. Based on what you have learned and applying that to the two turbine companies, are they centralized or decentralized? What makes you think so? 3. Based on your answers to the questions above, discuss the differences of these two companies’ structures in a minimum of a 1 page paper in double spaced 12 pt. Times New Roman font format (not including a Title and Reference page). Make sure to cite any references that you use.

Thank you joining us for Unit 7 Seminar – Have a great night!