1. Global Business Today 10e
by Charles W.L. Hill
and G. Tomas M. Hult

2. The Strategy of International Business
© Jasper Juinen/Bloomberg/Getty Images
Chapter 12: The Strategy of International Business

3. Learning Objectives
LO 12-1 Explain the concept of strategy. LO 12-2 Recognize how firms can profit by expanding globally. LO 12-3 Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice. LO 12-4 Identify the different strategies for competing globally and their pros and cons. LO 12-5 Explain the pros and cons of using strategic alliances to support global strategies.

4. Opening Case: AB InBev and Beer Globally
Anheuser-Busch InBev originated in St. Louis in 1852
Operations in 25 countries, and 155,000 employees
Seven of the top ten beer brands
Built brand through organic growth and value- enhancing acquisitions
Majority of resources devoted to brands with greater long-term growth potential
“Dream-People-Culture” approach to global strategy
The foundation for AB InBev’s global strategy is the company’s “Dream-People-Culture” approach. The goal is that despite having operations in many countries around the world, with different national cultures, AB InBev operates as one company, with one dream and one culture uniting them. There is also a focus on having the right people in the right place at the right time. This culture is built on ownership, informality, candor, transparency, and meritocracy.

5. Introduction 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
Strategic alliances are cooperative agreements between potential or actual competitors.

6. Strategy and the Firm 1 of 7
Strategy: the actions taken by managers to attain the goals of the firm
Profitability: the rate of return the firm makes on its invested capital
Profit growth: the percentage increase in net profits over time
LO Explain the concept of strategy.

7. Figure 12.1 Determinants of Enterprise Value
Source: C. W. L. Hill and G. T. M. Hult, G. T. M., International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).

8. Strategy and the Firm 2 of 7
Value Creation
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)
Two basic strategies
Differentiation
Low cost

9. Jump to Appendix 1 long image description
Figure 12.2 Value Creation
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
Jump to Appendix 1 long image description

10. Did You Know?
Did you know FedEx’s global strategy focuses on more than transportation? Click to play video

11. Strategy and the Firm 3 of 7
Strategic Positioning
Pick a position on the efficiency frontier that is viable (enough demand to support the choice)
Configure internal operations to support the position
Have the right organization structure in place to execute the strategy
A firm’s strategy, operations, and organization must all be consistent with each other in order to achieve a competitive advantage and superior profitability.

12. Figure 12.3 Strategic Choice in the International Hotel Industry
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
Jump to Appendix 2 long image description

13. Strategy and the Firm 4 of 7
Operations: The Firm as a Value Chain
Primary Activities
Involves the design, creation, and delivery of the product; its marketing; and its support and after-sale service.
Divided into: research and development, production, marketing and sales, customer service
Support Activities
Provides the inputs that allow the primary activities to occur
Divided into: information systems, company infrastructure, logistics, human resources
The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities, including production, marketing and sales, materials management, research and development, human resources, information systems, and the firm infrastructure.

14. Figure 12.4 The Value Chain
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).

15. Is Education Creating Value for You?
The concept of a value chain can be used to examine the role your education plays in your life plans, if you look closely at your personal development plans (education, internship, work, physical and emotional fitness, and extracurricular activities) and think about them in terms of primary and support activities. If we use the logic that the amount of value you receive from your education is the difference between the costs (e.g., tuition, time, lost income) and what you receive in the form of education (e.g., knowledge, tools, networks), how does your choice of major area of focus in your education fit into your personal development strategy? How do your choices of how you spend your time fit into your value chain? Do you ever spend time doing things that do not support the strategic goals of your personal value chain? But, most importantly, what is the one thing you should do more of to drive the value higher for yourself today and in the future?

16. Operations Near and Far
© Bernd Wustneck/picture-alliance/dpa/AP Images
A Caterpillar motor factory in Germany helps to ensure product after-sales and service outside the United States.

17. Strategy and the Firm 5 of 7
Organization: The Implementation of Strategy
Organization architecture: the totality of a firm’s organization - formal organizational structure, control systems and incentives, organizational culture, processes, and people
Organizational structure:
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

18. Figure 12.5 Organization Architecture

19. Strategy and the Firm 6 of 7
Organization: The Implementation of Strategy continued
Controls: metrics used to measure the performance of subunits and make judgments about how well the subunits are run
Incentives: devices used to reward appropriate managerial behavior
Processes: manner in which decisions are made and work is performed
Organizational culture: norms and value systems that are shared among the employees
People: employees and the strategy used to recruit, compensate, and retain those individuals

20. Strategy and the Firm 7 of 7
In Sum: Strategic Fit
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

21. Figure 12.6 Strategic Fit

22. Global Expansion, Profitability and Profit Growth 1 of 8
Firms that operate internationally
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
LO Recognize how firms can profit by expanding globally.

23. Global Expansion, Profitability and Profit Growth 2 of 8
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)
Enable the firm to reduce the costs of value creation
Create perceived value so that premium pricing is possible
They are the source of a firm’s competitive advantage

24. Core Competencies
Source: © Imaginechina/AP Images
P&G’s core competency in marketing is evidenced in this photo of Olay men’s skin care products for sale in a Shanghai, China, supermarket.

25. Global Expansion, Profitability and Profit Growth 3 of 8
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: 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

26. Global Expansion, Profitability and Profit Growth 4 of 8
Creating a Global Web
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
Introducing transportation costs and trade barriers complicates this picture
Political and economic risks must be assessed when making location decisions

27. Global Expansion, Profitability and Profit Growth 5 of 8
Experience Effects
The experience curve: systematic reductions in production costs that have been observed to occur over the life of a product
A product’s production costs decline by some quantity about each time cumulative output doubles
Learning effects: 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

28. Figure 12.7 The Experience Curve
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).

29. Global Expansion, Profitability and Profit Growth 6 of 8
Experience Effects continued
Economies of scale: reductions in unit cost achieved by producing a large volume of a product
The ability to spread fixed costs over a large volume
Not able to attain efficient scale of production unless served global markets
Bargaining power increases with suppliers which may allow economies of scale in purchasing
Strategic Significance
Moving down experience curve allows firm to reduce its cost of creating value and increase its profitability
Once firm has established low-cost position it can act as a barrier to new competition
Many of the underlying sources of experience-based cost economies are plant-based. This is true for most learning effects as well as for the economies of scale derived by spreading the fixed costs of building productive capacity over a large output, attaining an efficient scale of output, and utilizing a plant more intensively.

30. Global Expansion, Profitability and Profit Growth 7 of 8
Leveraging Subsidiary Skills
Recognize that valuable skills can be developed anywhere within the firm’s global network (not just at the corporate center)
Use incentive systems to 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

31. Global Expansion, Profitability and Profit Growth 8 of 8
Profitability and Profit Growth 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

32. Cost Pressures and Pressures for Local Responsiveness 1 of 4
Pressures for Cost Reductions
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
LO 12-3 Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice.

33. Figure 12.8 Pressures for Cost Reductions and Local Responsiveness
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
Jump to Appendix 3 long image description

34. Cost Pressures and Pressures for Local Responsiveness 2 of 4
Differences in consumer tastes and preferences
Differences in traditional practices and infrastructure
Differences in distribution channels
Host government demands
The rise of regionalism
Firms facing these pressures need to differentiate their products and marketing strategy in each country

35. Cost Pressures and Pressures for Local Responsiveness 3 of 4
Differences in Consumer Tastes and Preferences
When consumer tastes and preferences differ significantly between countries, firms face strong pressures for local responsiveness
Differences in Infrastructure and Traditional Practices
When there are differences in infrastructure and/or traditional practices, a need to customize products emerges
Differences in Distribution Channels
A firm’s marketing strategies may be influenced by differences in distribution channels between countries which may necessitate delegation of marketing functions to national subsidiaries

36. Cost Pressures and Pressures for Local Responsiveness 4 of 4
Host Government Demands
Economic and political demands imposed by host country governments may necessitate a degree of local responsiveness
The Rise of Regionalism
Regional convergence of tastes and preferences can influence product offerings within a bloc of nations
The most obvious example of a region is the European Union and particularly the euro zone countries within that trade block, where there are institutional forces that are pushing toward convergence (see Chapter 9 for details). The creation of a single EU market—with a single currency, common business regulations, standard infrastructure, and so on—cannot help but result in the reduction of certain national differences among countries within the EU and the creation of one regional rather than several national markets. Indeed, at the economic level at least, that is the explicit intent of the EU.

37. Choosing a Strategy 1 of 6
Firms use four basic strategies in global markets
Global standardization
Localization
Transnational
International
LO Identify the different strategies for competing globally and their pros and cons.

38. Figure 12.9 Four Basic Strategies
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
Jump to Appendix 4 long image description

39. Choosing a Strategy 2 of 6
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 goal is to pursue a low-cost strategy on a global scale
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 {

40. More Customized Products in the Global Marketplace?
The Coca-Cola Company’s (TCCC) Minute Maid Pulpy became the cola giant’s 14th brand to reach $1 billion in global retail sales (in 2011). As opposed to cola carbonates, which often rely on global brand recognition and cross- generational formulas for success, Minute Maid Pulpy has relied on product development and innovations inspired by local flavors and textures. Toward the end of 2004, Minute Maid released Minute Maid Pulpy, which contained less than 24 percent actual fruit juice, but TCCC was able to retail the product at a much lower price point than products with a higher content of fruit juice. In China and throughout the Asia-Pacific region, consumer notions of freshness and health are connected much more to the consumption of actual fruit. Minute Maid Pulpy acknowledged this by including pieces of fruit in the drink, thereby creating a thicker texture that would not appeal to most North American consumers but has proven very popular in this region of the world. In customizing the product, Minute Maid Pulpy went from the 10th most popular fruit/vegetable juice brand in China in 2004 to first by the time it had achieved $1 billion in total sales in But isn’t the world becoming more globalized? Do we still need large multinational corporations customizing their products to local markets?
Source:

41. Choosing a Strategy 3 of 6
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
Makes sense when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense

42. Choosing a Strategy 4 of 6
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
Makes sense when there are both high cost pressures and high pressures for local responsiveness

43. Choosing a Strategy 5 of 6
An international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization
Makes sense when there are low cost pressures and low pressures for local responsiveness

44. Choosing a Strategy 6 of 6 The Evolution of Strategy
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 {
Lecture Note: Procter & Gamble recently announced plans to reorganize its overseas operations. To learn more, go to {

45. Figure 12.10 Changes in Strategy over Time
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).

46. Strategic Alliances 1 of 5
Strategic alliances are cooperative agreements between potential or actual competitors
Examples include formal joint ventures and short term contractual arrangements
The number of international strategic alliances has risen significantly in recent decades
LO Explain the pros and cons of using strategic alliances to support global strategies.

47. Strategic Alliances 2 of 5
The Advantages of Strategic Alliances
Facilitate entry into a foreign market
Allow firms to share the fixed costs and 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

48. A Strategic Alliance
A moviegoer walks past a poster of the Warner Bros movie Gravity in Shanghai, China. The strategic alliance between Warner Brothers and their Chinese partners has helped streamline the process for film distribution.
Source: © Imaginechina/Corbis

49. Strategic Alliances 3 of 5
The Disadvantages 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

50. Strategic Alliances 4 of 5
Making Alliances Work
Partner Selection
Collect as much information as possible
Gather data from informed third parties
Get to know the potential partner well before committing
Alliance Structure
Can be designed to make it difficult to transfer technology meant to be transferred
Contractual safeguards can be written into alliance agreement to guard against risk of opportunism
Both parties can agree in advance to swap skills and technologies that the other covets

51. Strategic Alliances 5 of 5
Making Alliances Work continued
Managing the Alliance
Requires managers from both companies to build interpersonal relationships (relational capital)
Should promote learning from alliance partners
Should promote the diffusion of learned knowledge throughout the organization

52. Summary In this chapter we have Explained the concept of strategy.
Recognized how firms can profit by expanding globally.
Understood how pressures for cost reductions and pressures for local responsiveness influence strategic choice.
Identified the different strategies for competing globally and their pros and cons.
Explained the pros and cons of using strategic alliances to support global strategies.