The Strategy of International Business Chapter 12 © McGraw Hill Companies, Inc., 2000

© McGraw Hill Companies, Inc., 2000 12-1

The Firm as a Value Chain Primary Activities: Those activities having to do with creating, marketing and delivering the product to customers and providing support and after-sales service. Support Activities: Provide inputs that allow primary activities to occur. An Efficient Infrastructure: helps create value and reduce the cost of creating value. © McGraw Hill Companies, Inc., 2000 12-2

The Firm as a Value Chain Organizational infrastructure Support activities Information systems Human resources Research and development Materials management Manufacturing Marketing Primary activities Figure 12.1 © McGraw Hill Companies, Inc., 2000 12-3

The Role of Strategy Strategy: Actions managers take to attain the goals of the firm. Need to identify and take action that lowers the cost of value creation and/or differentiates the firm’s product through superior design, quality, service, or functionality. © McGraw Hill Companies, Inc., 2000 12-4

Profiting from Global Expansion International firms can: Earn a greater return from distinctive skills or core competencies. Realize location economies by dispersing value creation activities to locations where they can be performed most efficiently. Realize greater experience curve economies, which reduces the cost of value creation. © McGraw Hill Companies, Inc., 2000 12-5

Location Economies Pontiac LeMans 12-6 Assembly Parts Sales Design Advertising Parts Pontiac LeMans Parts © McGraw Hill Companies, Inc., 2000 12-6

Caveats When making location decisions: Consider trade barriers and transportation costs. Assess political and economic risks. © McGraw Hill Companies, Inc., 2000 12-7

Experience Curve Economies Learning Effects: Labor productivity increases over time as individuals learn the most efficient ways to perform particular tasks. Economies of Scale: Reductions in unit cost achieved by producing a large volume of a product. Strategic Significance: Moving down the experience curve allows a firm to reduce its cost of creating value. © McGraw Hill Companies, Inc., 2000 12-8

The Experience Curve 12-9 Unit costs Moving down the curve reduces the cost of creating value Unit costs B A Accumulated output Figure 12.2 © McGraw Hill Companies, Inc., 2000 12-9

Firms Face Two Conflicting Concepts (Pressures) Overseas Reduce costs. Be responsive to local needs. © McGraw Hill Companies, Inc., 2000 12-10

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 12.3 Pressures for local responsiveness © McGraw Hill Companies, Inc., 2000 12-11

Cost Reduction Desire to reduce costs by: Mass production Product standardization. Optimal location production. Hard to do with commodity-type products. products serving universal needs. Also hard where competition is in low cost producing location. Finally, int’l competition creates price pressures. $ © McGraw Hill Companies, Inc., 2000 12-12

Local Responsiveness Different consumer tastes and preferences. Different infrastructure and practice. Differences in distribution channels. Government demands. © McGraw Hill Companies, Inc., 2000 12-13

McDonalds McDonald’s overseas experience. Detailed planning Export of management skills. Foreign partners. Adaptation/Adopting ideas. © McGraw Hill Companies, Inc., 2000 12-14

Strategic Choice Four basic strategies: International strategy. Multidomestic strategy. Global strategy. Transnational strategy. © McGraw Hill Companies, Inc., 2000 12-15

Four Basic Strategies 12-16 High Cost pressures Low Low High Global Strategy Transnational Strategy High Cost pressures Low International Strategy Multi domestic Strategy Low High Pressures for local responsiveness Figure 12.4 © McGraw Hill Companies, Inc., 2000 12-16

International Strategy Go where locals don’t have your skills. Little adaptation. Products developed at home (centralization). Manufacturing and marketing in each location. Makes sense where low skills, competition, and costs exist. © McGraw Hill Companies, Inc., 2000 12-17

Multi-domestic Strategy Maximize local responsiveness. Customize the product and marketing strategy to national demands. Skill and product transfer. Transfer all value-creation activities, no experience curve rewards. Good for high local responsiveness and low cost reduction pressures. © McGraw Hill Companies, Inc., 2000 12-18

Global Strategy Best use of the experience curve and location economies. This is the low cost strategy. Utilize product standardization. Not good where local responsiveness demand is high. © McGraw Hill Companies, Inc., 2000 12-19

Transnational Strategy Christopher Bartlett and Sumantra Ghoshal Core competencies can develop in any of the firm’s worldwide operations. Flow of skills and product offerings occurs throughout the firm - not only from home firm to foreign subsidiary (global learning). Makes sense where there is pressure for both cost reduction and local responsiveness. © McGraw Hill Companies, Inc., 2000 12-20

The Advantages and Disadvantages of the Four Strategies Strategy Advantages Disadvantages Global Exploit experience curve effects Lack of local responsiveness Exploit location economies Lack of local International responsiveness Inability to realize Transfer distinctive competencies to location economies Foreign Markets Failure to exploit experience curve effects Figure 12.6a © McGraw Hill Companies, Inc., 2000 12-21

The Advantages and Disadvantages of the Four Strategies Strategy Advantages Disadvantages Multi-domestic Customize product offerings Inability to realize location and marketing in accordance economies with local responsiveness Failure to exploit experience curve effects Failure to transfer distinctive competencies to foreign markets Transnational Exploit experience curve Difficult to implement due effects to organizational Exploit location economies problems Customize product offerings and marketing in accordance with local responsiveness Figure 12.6b Reap benefits of global learning © McGraw Hill Companies, Inc., 2000 12-22

Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar High Cost pressures Low Caterpillar Tractor Figure 12.5 Low High Pressures for local responsiveness © McGraw Hill Companies, Inc., 2000 12-23