1. International Business Environments & Operations
Chapter 11
The Strategy of international Business
Daniels ● Radebaugh ● Sullivan
International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan

2. International Business - Globally
As a result of global economic crisis, the potential for profitability in all sorts of industries has become less predictable

3. The Role of Strategy in International Business
Strategy is the framework that managers apply to determine the competitive moves and business approaches that run the company.
Strategy is management’s idea on how to best:
• Attract customers
• Operate efficiently
• Compete effectively
• Create value

4. Industry, Strategy ,and Firm Performance
Industry organization (IO) paradigm: performance of a firm is a function of its marker conduct, which is determined by the structure of its industry
Presumes that markets are perfectly competitive
There are large number of fully informed buyers and sellers
There are no obstacles to the entry or exit of firms into market
Full mobility of resources
The explanatory power of the IO paradigm can be done by the potential bright and motivated managers
The exceptions of imperfect competition
Presence of entry barriers that deterred new firms
Presence of a few large sellers (oligarchs)
Many buyers (immediate or end consumers)- passive price takers
An industry is composed of the companies engaged in a particular kind of commercial enterprise.
The IO paradigm presumes that markets demonstrate perfect competition.
Perfect competition presumes:
• Many buyers and sellers such that no individual affects price or quantity
• Perfect information for both producers and consumers
• Few, if any, barriers to market entry and exit
• Full mobility of resources
• Perfect knowledge among firms and buyers
The IO paradigm assumes that firm performance is a function of its conduct, which is ultimately determined by industry factors that shape the corresponding pattern of competition.
Firm conduct refers to the strategic and tactical choices a company makes regarding research and innovation, product strategy, plant investment, pricing behavior, and the like that influence its profitability.
These two anomalies—markets are not always perfectly competitive and some firms consistently outperform industry averages—suggest that industry structure is not entirely deterministic of firm performance. Instead, firm performance is influenced by the presence of bright, motivated managers and their keen sense of innovative products or processes.
The idea of industry structure helps explain the functions, form, and interrelationships among:
• Suppliers of inputs
• Buyers of outputs
• Substitute products
• Potential new entrants
• Rivalry among competing sellers

5. The idea of industry structure: The Five Forces Model
The nature of competition in an industry is the combined outcome of the competitive pressures generated by:
Moves of rivals battling for market share
The entry of new rivals seeking market share (the Exit of a rival is also an important force that may transform the structure of an industry)
The efforts of other companies outside the industry to convince buyers to switch to their own substitute products
The push by input suppliers to charge more for their inputs
The push by output buyers to pay less for products

6. The Five Forces Model The five-forces model collectively develops:
a representation of the structure and competition in an industry that prepares managers to figure out what forces shape strategic conduct
how strong each force is
What forces are driving change
what strategic moves rivals are likely to make next
what are the key factors for future competitive success

7. Copyright © 2011 Pearson Education
Five Forces Model
Copyright © 2011 Pearson Education

8. Industry Structure and Change
A global industry is one in which a firm’s competitive position in one country is significantly affected by its position in other countries
Industry structure changes because of events like
• Competitors’ moves
• Government policies
• Changes in economics
• Shifting buyer preferences
• Technological developments
• Rate of market growth
New products, new firms, new markets, and new managers trigger new developments in rivalry, pricing, substitutes, buyers, and suppliers. These developments often change a minor feature of the industry, such as the expansion of an existing distribution channel. More recently, changes due to the global economic crisis are resetting the structure of most industries.

9. Creating Value: Two Basic Strategies
1- Low Cost leadership
A firm sells its products either at average industry prices to earn a profit higher than that of rivals OR below the average industry prices to capture market share
Emphasizes high production volumes, low costs, and low prices
Low cost-leadership strategy focuses on lowering operating costs
2- Differentiation
Offer unique attributes that they reason are highly valued by customers AND which customers perceive to be better than or sufficiently different from products offered by rivals- Generating customer insights regarding innovations
Unique goods or services that its rivals find hard to match or copy

10. Strategy and Value
Strategy helps managers assess the company’s present situation, identify the direction the company should go, and determine how the company will get there.
A great strategy defines the perspectives and tools managers use to appraise the company’s present situation, identifies the direction the company should go, and determine how the company will get there
Strategy is the efforts of managers to build and strengthen the company’s competitive position within its industry to create value
Creating value spurs the firm to develop a compelling value proposition (why a consumer should buy its goods or use its services) that specifies its targeted customer markets (those consumers for whom a firm creates goods or services).
Value is what remains after costs have been deducted from the revenues of a firm. Cost leadership emphasizes high production volumes, low costs, and low prices. Firms that choose this strategy strive to be the low-cost producer in an industry for a given level of quality. This strategy requires that a firm sell its products at the average industry price to earn a profit higher than that of rivals or below the average industry prices to capture market share.
Differentiation spurs the company to provide a unique product that customers value and that rivals find hard, if not impossible, to match or copy.

11. Strategy and Value
The fundamental principle of strategy is Creating Value
Value is the measure of a firm’s capability to sell what it makes for more than the costs incurred to make it
Purpose of Value proposition: to explain why a consumer should buy the products

12. The Firm as Value Chain
Value Chain: set of linked value-creating activities that company perform to design, produce, market, deliver, and support a product
Helps the managers integrate the knowledge and skills of employees around the world in the way that allows the best global reach
Value Chain Analysis helps the manager understand the behavior of cots and the existing and potential sources of differentiation
Primary Activities: inbound logistics, operations, outbound logistics, sales and marketing, service
Support Activities: procurement, technology and system development, human resource management, firm infrastructure, Shipping, Customer Services
The value chain is the set of linked value-creating activities the company performs to design, produce, market, distribute, and support a product. Value-chain analysis helps managers understand the behavior of costs and existing and potential sources of differentiation.
A value chain disaggregates a firm into:
• Primary activities that create and deliver the product
• Support activities that aid the individuals and groups engaged in primary activities
Value chains identify the format and interactions between different activities of the company.
Configuration is the way in which managers arrange the activities of the value chain.
Manufacturing costs vary from country to country because of wage rates, worker productivity, resource
availability, and fiscal and monetary policies.
An industry cluster is a system of businesses and institutions engaged with one another at various levels.
Logistics entails how companies obtain, produce, and exchange material and services in the proper place and in proper quantities for the proper value activity.
The process of digitization involves converting an analog product into a string of zeros and ones. Increasingly, products like software, music, and books, as well as services like call centers, application processing, and financial consolidation, can be digitized and, hence, located virtually anywhere. Equipped with networked computers, workers can move goods and services anywhere in the world at negligible cost and complication. Consequently, the potential for digitization of goods or services influences how a company configures its value chain.
The concept of economies of scale refers to a situation wherein a firm doubles its cumulative output yet total cost less than doubles due to efficiency gains. Effectively, reductions in the unit cost of a product result from the increasing efficiency that comes with larger operations.

13. Factors that influence the value chain
Configuration: the way that mangers arrange the activities of the value chain to exploit location economies (economies from performing a value activity in the optimal location given prevailing economic, political, legal, and cultural conditions)
Cost Factors: differences in wage rates, worker productivity, inflation rates, and government regulations (creating significant variations in production costs)
Cluster Effects: particular industry gradually clusters more and more related value creation effects
Logistics: how companies obtain, procure, and exchange material and services in the proper place and proper quantities for the proper value activity

14. Factors that influence the Value Chain
Digitization: converting an analog product into a string of zeros and ones. The degree of difficulty of this process influences how a company configures its value chain
With network computers, negligible cost and complication
Economies of Scale: decrease in the unit cost of production associated with the increase in total output (by producing a large volume of a product)
Business Environment: business-friendly markets, government interest in foreign investments, corporate tax rates, flexible operating requirements, public policies
Customer Needs: buyer-related activities such as distribution to dealers, sales and advertising, after sales service – locate close to buyers

15. Coordination Sources of Core competency:
Coordination: the way that managers connect the activities of the value chain, whether they are performed in one or many countries
Social network analysis indicates that information flows more efficiently in a collaborative manner
Core Competencies: a special outlook, skill, capability, or technology that creates unique value for the firm
Sources of Core competency:
Product development
Employee productivity
Manufacturing expertise
Marketing imagination
Executive leadership
Coordination is the way that managers connect the activities of the value chain. As companies globally configure value activities, they must develop coordination tools. Coordinated well, MNEs can leverage their core competencies, using them to serve customers, boost sales, and improve profits.
A company’s core competency is:
• The unique skills and/or knowledge that it does better than its competitors
• Essential to its competitiveness and profitability
A core competency can emerge from various sources, including:
• Product development
• Employee productivity
• Manufacturing expertise
• Marketing imagination
• Executive leadership
Several factors influence value chain coordination:
• Operational obstacles
• National cultures
• Learning effects
• Subsidiary networks
The globalization of a company’s value chain, such as design done in Finland, inputs sourced from Brazil, production done in China, distribution organized in the United States, and service done in Mexico, presses managers to understand how foreign cultures influence coordination.
National cultures also impose hurdles in coordinating a transaction from one stage of the value chain to another. Units anchored in individual versus collectivist cultures may disagree over information sharing or collaboration responsibilities; conflicts complicate coordination. Hence, features of national culture require managers to understand their implications to the collaborative relationship that shape the coordination of value activities.
A learning curve is the commonsense principle that the more one does something, the better one gets at it.
Companies configure value chain activities to exploit the learning curve.
The matter of learning shapes how manufacturing and service MNEs coordinate value chains. In the case of the former, MNEs often adapt production activities for different attitudes and approaches to manufacturing. For example, an MNE may have factories in different countries, such as Japan and Mexico, which manufacture the same product but apply different production philosophies. The Mexican factory may use a traditional assembly-line operation given the local conditions of inexpensive labor, patchy transportation infrastructure, and marginal cost of high technology. The Japanese factory, in contrast, may use a lean production system given local labor competency, manufacturing expertise, and efficient logistics. The different manufacturing approaches complicate how managers coordinate activities between factories. Planning to learn how to coordinate these links in the value-chain positions the MNE to gain production efficiencies that lead to lower costs, higher quality, satisfied customers, and new sales. MNEs run into problems getting the various links of their global value chain to engage.
Operating internationally inevitably runs into communication challenges because of time zones, differing languages, and ambiguous meanings. Increasingly, companies rely on browser-based communications methods to coordinate the handoffs from link to link. The thinking goes that electronically linked producers and retailers can lower coordination costs throughout the value chain. In addition, standardizing the format for data input helps standardize the format for interpretation. Electronic transactions boost efficiency by reducing intermediary transactions and the associated unneeded coordination (streamlining the distributor link in the value chain by eliminating an intermediary).
The growing prevalence of social networks provides perspectives for managers to better understand the dynamics of their subsidiary networks.

16. Coordination Concerns
Operational Obstacles: problems when trying to get the various links of their global value chain to deal with each other
National Cultures: disagreement over how much information to share or who should take lead responsibility, and so on
Learning effects: costs saving that comes from learning by doing
Experience Curve: gain new insights into managing the value chain and cut costs by 20-30% each time their cumulative output doubles
Subsidiary Networks: subsidiaries exchange information freely, whether systematically within an Enterprise Resource Planning (ERP) context or via s

17. Change and the Value Chain
The configuration and coordination of value chains respond to changes in customers, competitors, industries, and environments.
Designing and delivering a strategy is an ongoing struggle for companies. While some succeed, many fall short
of their objectives.

18. Forces of Pressures for Globally competing Firms
Pressures for Global Integration
Globalization of Markets
Efficiency Gains of Standardization
Standardization is a push dynamic that drives supply in the global market
An MNE is pressed to integrate its value activities globally when costs of producing in separate facilities exceed those of producing in a single facility
Pressures for Local Responsiveness
Consumer Divergence
Host Government Policies
Integration is the process of combining differentiated parts into a standardized whole.
Responsiveness is the process of disaggregating a standardized whole into differentiated parts.
The convergence of national markets, standardization of business processes, and the drive to maximize production efficiency push for the integration of value activities. A provocative thesis, increasingly supported by global buying patterns and companies’ strategies, suggests that consumers worldwide seek global products—whether they are Apple iPods, Samsung plasma screens, Facebook connections, Starbucks espressos, Google searches, or Zara blouses. Two conditions—one demand-pull, the other supply-push—influence this trend. Powering demand-pull conditions are the intrinsic functions of money.
Money has three inalienable features:
• difficult to acquire
• scarce
• transient
Global and local pressures challenge how the firm configures and coordinates its value chain. The convergence of national markets and quest for production efficiency push for the global integration of value activities.
Standardization is the handmaiden of globalization, encouraging supply conditions that produce volumes of low-cost, high-quality products. That is, standardization is the push dynamic that drives supply, whereas the globalization of markets represents the pull dynamic that converges consumer preferences. The logic of standardization is straightforward. Repeatedly doing the same task the same way improves the efficiency of effort. Improving efficiency in the value chain, in turn, supports aggressive product development, lower-cost production processes, and lower prices.
Prominent pressures for local responsiveness are consumer divergence and host-government policies.
Contrary to the globalization-of-markets thesis, others argue that divergences in consumer preferences across countries necessitate locally responsive value chains.
Differences in local consumers’ preferences endure due to cultural predisposition, historical legacy, and endemic nationalism. Regardless of the cause, consumers often prefer goods that are sensitive to the particular idiosyncrasies of their daily life. Consequently, cross-national divergence presses MNEs to adapt value activities to the demands of local markets. The source of many variations is the policies, or the lack thereof, mandated by host-country governments. Prior to the economic crisis, companies confronted policy differences as they moved from country to country. However, these differences had been narrowing as capitalism and economic freedom shaped policy in a growing number of countries. Now, in the early phases of the crisis, governments’ distrust of market mechanisms spurs revising the rules of the market. Moreover, despite calls for coordinated policy initiatives, different countries have taken different paths to reset fiscal, monetary, and business policies. Collectively, these trends required companies to rethink their value chains. Constrained options for standardization and wavering momentum of globalization spotlight the sustainability of value chains biased toward local responsiveness.

19. Types of Strategy
The international strategy leverages a company’s core competencies in foreign markets. It allows limited local customization.
Benefits of Int’l Strategy:
An international strategy works well when a firm has a core competence that foreign rivals lack and industry conditions do not demand high degrees of global integration or local responsiveness.
Limitations of Int’l Strategy:
Unless aware, the company implementing the international strategy can be blindsided by an unexpectedly innovative rival. Google, for example, faces increasingly adept local rivals in South Korea, specifically Naver, and China, specifically Baidu, whose native sensitivities to local search tendencies pose threats.
The multidomestic strategy adjusts products, services, and business practices to meet the needs of local markets.
Firms applying a multidomestic strategy hold that value-chain design is the prerogative of the local subsidiary, not the unilateral declaration by the home office. Management that chooses the multidomestic strategy believes in customizing value activities to the unique conditions that prevail in different markets.
Benefits (Multidomestic):
A multidomestic strategy makes sense when the company faces a high need for local responsiveness and low need to reduce costs via global integration (the lower right-hand space of the IR grid). It has other benefits as well, such as minimizing political risk given the local standing of the company, lower exchange-rate risk given reduced need to repatriate funds to the home office, greater prestige given its national prominence, higher potential for innovative products from local R&D, and higher growth potential due to entrepreneurial zeal.
Limitations (Multidomestic):
The multidomestic strategy leads to widespread replication of management, design, production, and marketing activities—the outcome of building “mini-me” units around the world. Customizing products and processes to local markets inevitably increases costs. Different product designs require different materials, production runs become shorter, marketing programs are adapted, distribution requires new channels, and different transactions require different coordination methods. Hence, the multidomestic strategy is impractical in cost-sensitive situations.
A global strategy champions worldwide consistency and standardization.
Firms that choose the global strategy face strong pressure for cost reductions but weak pressure for local responsiveness.
Benefits (Global):
Global strategy is suited to industries that emphasize efficient operations and where local responsiveness needs either are nonexistent or can be neutralized by offering a higher-quality product for a lower price than the local substitute.
Limitations (Global):
Countries whose markets demand local responsiveness reduce the attractiveness of the global strategy. More fundamentally, the strength of the global strategy, ironically, is its weakness. The cost sensitivity and standardization bias of a global strategy gives MNEs little latitude to adapt value activities to local conditions. Moreover, disruptive market changes or product breakthroughs can turn a fine-tuned value chain into a misfiring machine.
A transnational strategy simultaneously engages pressures for global integration and local responsiveness in ways that leverage insight to improve the firm’s core competency.
A transnational strategy makes the exchange of ideas across value activities a key element of competitive advantage. The company implementing a transnational strategy aims not to work harder or work smarter than competitors but rather work differently based on diffusing the lessons it has learned and the knowledge it has earned throughout its worldwide operations. Ideas are the primary source of competitiveness for companies implementing a transnational strategy.
Benefits(transnational):
The learning orientation of the transnational strategy drives many benefits—most visibly its fine-tuned balancing of global integration and local responsiveness. The vitality of learning in the transnational strategy pushes managers to respond to changing environments, configuring resources and coordinating processes without imposing more bureaucracy. Ultimately, these capabilities permit standardizing some links of the value chain to generate the efficiencies warranted by global integration pressures, while also adapting other links to meet pressures for local responsiveness—but without sacrificing the benefits of one for the other.
Limitation (transnational):
Transnational strategy, admittedly difficult to even specify in theory, is even more difficult to implement in practice. Limitations arise from complicated agendas, high costs, and cognitive limits.