The Strategy of International Business 8 The Strategy of International Business

The Strategy of International Business INTRODUCTION The focus is on the firm itself and, in particular, on the actions managers can take to compete more effectively as an international business.

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.

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)

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

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

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

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

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.

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

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

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.

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

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

The Strategy of International Business Location Economies Firms can benefit by basing each value creation activity at that location where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity Firms that pursue such as strategy 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)

The Strategy of International Business Locating a value creation activity in the optimal location for that activity can have one of two effects: It can lower the costs of value creation and help the firm to achieve a low cost position It can enable a firm to differentiate its product offering from the offerings of competitors

The Strategy of International Business Creating a Global Web By taking advantage of location economies in different parts of the world, multinational firms 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

The Strategy of International Business Some Caveats Introducing transportation costs and trade barriers complicates this picture Political risks must be assessed when making location decisions

The Strategy of International Business 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 Learning Effects Learning effects are cost savings that come from learning by doing So, when labor productivity increases, individuals learn the most efficient ways to perform particular tasks, and management learns how to manage the new operation more efficiently

The Strategy of International Business Economies of Scale Economies of scale refers to the reductions in unit cost achieved by producing a large volume of a product. Sources of economies of scale include: the ability to spread fixed costs over a large volume the ability of large firms to employ increasingly specialized equipment or personnel

The Strategy of International Business Strategic Significance Moving down the experience curve allows a firm to reduce its cost of creating value Serving a global market from a single location is consistent with moving down the experience curve and establishing a low-cost position

The Strategy of International Business Leveraging Subsidiary Skills Managers must recognize 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 center) Managers must also establish an incentive system that encourages local employees to acquire new skills Summary Managers need to keep in mind the complex relationship between profitability and profit growth when making strategic decisions about pricing

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.

The Strategy of International Business Pressures for cost reductions and pressures to be locally responsive

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

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

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

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

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

The Strategy of International Business CHOOSING A STRATEGY Firms use four basic strategies to compete in the international environment: global standardization localization transnational international Internet Extra: Cadbury Schweppes has changed its strategy over the years to respond to shifting market and competitive conditions. Go to the company’s web site {http://www.cadburyschweppes.com/EN/} to further explore this and to see real examples of the different strategic approaches outlined in this chapter. Click on Investor Centre, then on Our Business and Values. From this point, you can explore why the company is in its various products lines and what it expects to achieve (click on Origins and Portfolio Development), where the company is today, and why (click on The Business Today), the company’s structure and organization (click on structure and organization), and where the company wants to go in the future (click on 2007 goals and priorities).

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

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

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.

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

The Strategy of International Business The Evolution of Strategy An international strategy may not be viable in the long term To survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors Similarly, localization 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 structures, and the only way to do that may be to shift toward a transnational strategy 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 a business unit approach whereby different units are entirely responsible for generated 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? 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? 3. How would you characterize Procter & Gamble’s current strategy? What challenges do you foresee with the new strategy?

The Strategy of International Business HIGH GLOBAL STANDARDIZATION STRATEGY TRANSNATIONAL STRATEGY LOCALIZATION STRATEGY INTERNATIONAL STRATEGY PRESSION FOR COST REDUCTION STRATEGIA PAG. 619 As competitors emerge these strategies become less viable LOW LOW HIGH PRESSION FOR LOCAL RESPONSIVENESS

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

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 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 believes that the Japanese market will be important, and wants 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? 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? 3. What does the alliance between Cisco and Fujitsu mean to other competitors in the router market?

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 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 believes that the Japanese market will be important, and wants 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? 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? 3. What does the alliance between Cisco and Fujitsu mean to other competitors in the router market?

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

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

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

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