ENT 3378: Global Business Management

CHAPTER 06
STRATEGY OF
INTERNATIONAL BUSINESS

Ruvini Perera
Department of
Entrepreneurship
071 855 9494
ruviniperera@sjp.ac.lk
Strategy and Firm
• Strategy - actions that managers take to attain the goals of
the firm

• The preeminent goal is to maximize the value of the firm for

its owners and its shareholders

• To maximize the value of a firm, managers must pursue

strategies that increase the profitability of the enterprise
and its rate of profit growth over time
Enterprise Value
Reduce Cost
Profitability

Add value & raise price

Enterprise
Valuation
Sell more in existing
markets
Profit Growth

Enter new markets

 Value Creation
• The way to increase the profitability of a firm is to create
more value. V = value of the product to an
V-P average consumer

V-C P = price per unit

P-C C = cost of production per unit
V
V – P = consumer surplus per unit
P
P – C = profit per unit sold
C C
V – C = value created per unit
Strategic Positioning
• It is important for a firm to be explicit about its choice of strategic emphasis with
regard to value creation (differentiation) and low cost

• To configure its internal operations to support that strategic emphasis

• The efficiency frontier shows all of the different positions a firm can adopt with
regard to adding value to the product and low cost

• The efficiency frontier has a convex shape because of diminishing returns -

when a firm already has significant value built into its product offering, increasing
value by a relatively small amount requires significant additional costs

• When a firm already has a low-cost structure, it has to give up a lot of value in its
product offering to get additional cost reductions
Strategic Positioning
Increased Value/ Differentiation

Four Seasons Efficiency

Frontier

Starwood Marriott
(V)

Strategic Choices in
This Area Not
Viable in
International
Hotel Industry

High Cost Low Cost

Strategic Positioning
• To maximize its profitability, a firm must do three things:

(1) Pick a position on the efficiency frontier that is viable in the

sense that there is enough demand to support that choice

(2) Configure its internal operations, such as manufacturing,

marketing, logistics, information systems, human resources, and
so on, so that they support that position

(3) Make sure that the firm has the right organization structure in
place to execute its strategy
Strategic Positioning
• The strategy, operations, and organization of the firm must all be
consistent with each other if it is to attain a competitive advantage and
garner superior profitability

• A firm can change the basis of competition to its advantage by pursuing

innovative strategies that offer more value to its customer set, at a lower cost
than its rivals

• Through innovation, a firm can change the frontier of what is possible in an

industry, pushing the efficiency frontier outward

• Ex: Emirates - it decided to fly only long-haul routes that connected the world
through its Dubai hub (it changed the basis of competition to its advantage)
 Operations: The Firm as a Value
Chain Support
Activities

Company Infrastructure
Information Systems Human Resources
Logistics

Marketin
Producti Customer
R&D g&
on Services
Sales

Primary Activities

• Must manage these activities effectively and in a manner that is consistent with
 Primary Activities
• Primary activities have to do with the design, creation, and delivery of the
product; its marketing; and its support and after-sale service - divided into four
functions

• R & D - concerned with the design of products and production processes

• Production activity - creates value by performing its activities efficiently so

lower costs result, performing in a way that a higher-quality product is produced

• Marketing and sales - through brand positioning and advertising, the

marketing function can increase the value that consumers perceive to be
contained
 Primary Activities

• Create a favorable impression of the firm’s product in the minds of

consumers, they increase the price that can be charged for the
firm’s product

• Marketing and sales can also create value by discovering consumer

needs and communicating them back to the R&D function of the
company, which can then design products that better match those
needs

• Ex: Allocation of research budgets at Pfizer is determined by the

marketing function’s assessment of the potential market size
Primary Activities
• The role of the enterprise’s service activity is to provide after-sale
service and support

• This function can create a perception of superior value in the

minds of consumers by solving customer problems and supporting
customers after they have purchased the product

• Ex: Caterpillar, the U.S.-based manufacturer of heavy earthmoving

equipment, can get spare parts to any point in the world within 24
hours, minimizing the amount of downtime its customers have to
suffer if their Caterpillar equipment malfunctions
Support Activities

• Support activities of the value chain provide inputs that allow

the primary activities to occur

• Information systems refer to the electronic systems for

managing inventory, tracking sales, pricing products, selling
products, dealing with customer service inquiries etc.

• Information systems, when coupled with the communications

features of the internet, can alter the efficiency and
effectiveness
Support Activities

• The logistics function controls the transmission of physical

materials through the value chain, from procurement through
production and into distribution

• The combination of logistics systems and information systems is a

particularly potent source of cost savings in many enterprises

• Ex: Dell, where information systems tell Dell on a real-time basis

where in its global logistics network parts are, when they will arrive
at an assembly plant, and thus how production should be scheduled
Support Activities
• Human resource function ensures that the company has the right mix of skilled
people to perform its value creation activities effectively and also ensures that
people are adequately trained, motivated, and compensated to perform their value
creation tasks

• The infrastructure is the context within which all the other value creation activities
occur including the organization structure, control systems, and culture of the firm

• Since top management can exert considerable influence in shaping these aspects of
a firm, viewed as part of firm’s infrastructure

• Through strong leadership, top management can consciously shape the

infrastructure of a firm and through that the performance of all its value creation
activities.
Global Expansion, Profitability and Profit Growth

• Expanding globally gives firms opportunities to increase their profitability and rate
of profit growth. Firms that operate internationally are able to:

1. Expand the potential size of the market for their domestic products by selling
those products (or services) in the global marketplace.

2. Realize location economies by dispersing value-creation activities to those

worldwide locations where they can be performed most efficiently and effectively.

3. Realize greater cost economies from experience effects by serving an expanded

global market from a geographically central location.

4. Earn a greater return on investment by leveraging valuable skills developed in

international operations and transferring them to other entities within the firm.
Opportunities for Global Firms
• A firm’s ability to increase its profitability and profit growth by pursuing these strategies

• Expanding the market

• Location economies

 Creating a global web

 Some caveats

• Experience effects

 Learning effects

 Economies of scale

 Strategic significance

• Leveraging subsidiary skills

Expanding the Market
• A company can increase its growth rate by taking goods or services developed at home
and selling them internationally.

• The returns from such a strategy are likely to be greater if indigenous competitors in
the nations that a company enters lack comparable products (e.g., availability of the
product, quality of the product, price of the product).

• Ex: Toyota increased its profits by entering the large automobile market of North
America, offering products that were different from those offered by local rivals (Ford
and GM) by their quality, price, and reliability.

• The success of many multinational companies that expand in this manner is based on
the core competencies that underlie the development, production, and marketing of
those goods or services.

• Core competence refers to skills within the firm that competitors cannot
Location Economies

• Countries differ in dimensions—including economic, political, legal, and cultural and

that these differences can either raise or lower the costs of doing business in a
country

• Due to differences in factor costs, certain countries have a comparative advantage

in the production of certain products

• Firm will benefit by basing each value creation activity it performs at that location in
different conditions, including relative factor costs, are most conducive to the
performance of that activity

• Firms that pursue such a strategy can realize what we refer to as location
economies, which are the economies that arise from performing a value creation
activity in the optimal location for that activity
Creating a Global Web
• Different stages of the value chain being dispersed to locations around the globe, where
perceived value is maximized or where the costs of value creation are minimized. Ex:
Lenovo’s ThinkPad Laptop

• A firm that realizes location economies by dispersing each of its value creation activities to
its optimal location should have a competitive advantage than a firm that bases all of its value
Some Caveats
creation activities at a single location.
• Introducing transportation costs and trade barriers complicates this picture

• Due to favorable factor endowments, New Zealand may have a comparative advantage for
automobile assembly operations, but high transportation costs of parts that often would be
heavy can make it an uneconomical location from which to serve global markets

• Another caveat concerns the importance of assessing political and economic risks when making
location decisions.
Experience Effects
• 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

• Two things explain this: learning effects and economies of scale

B
Unit Costs

Cumulative Outputs
Learning Effects

• Learning effects refer to cost savings that come from learning by doing.

• Labor productivity increases over time as individuals learn the most efficient ways to perform
particular tasks.

• Any decline in the experience curve after such a point is due to economies of scale.
Economies of Scale

• Attaining economies of scale lower a firm’s unit costs and increases its profitability

• Economies of scale have a number of sources:

1. The ability to spread fixed costs over a large volume.

2. A firm may not be able to attain an efficient scale of production unless it serves global
markets.
Strategic Significance
• Moving down the experience curve allows a firm to reduce its cost of creating value and
increase its profitability.

• A firm that moves down the experience curve most rapidly will have a cost advantage
over competitors

• Serving a global market from a single location is consistent with moving down the
experience curve and establishing a low-cost position

• A firm may need to price and market aggressively so demand will expand rapidly

• Once a firm has established a low-cost position, it can act as a barrier to new competition

• Ex: Intel - masters of this kind of strategy

The costs of building a state-of-the-art facility to manufacture microprocessors are so large

(now around $5 billion) that to make this investment pay Intel must pursue experience
curve effects, serving world markets from a limited number of plants to maximize the cost
economies that derive from scale and learning effects
Leveraging Subsidiary Skills

• Core competencies is the idea that valuable skills are developed first at home and
then transferred to foreign operations

• Mature multinationals – a network of subsidiary operations in foreign markets, the

development of valuable skills can just as well occur in foreign subsidiaries

• Skills can be created anywhere within a multinational’s global network of

operations, wherever people have the opportunity and incentive to try new ways of
doing things

• Leveraging the skills created within subsidiaries and applying them to other
operations within the firm’s global network may create value

• Ex: McDonald’s – source of valuable new ideas

Cost Pressures and Pressures for Local
Responsiveness
• Two types of competitive pressure affect their ability to realize location economies and
experience effects and to leverage products and transfer competencies and skills within the
enterprise
Hig

h Firm A Firm C
Pressures for Cost

Reductions

Firm B
Low

Low High
Pressures for Local
Pressure for Cost Reduction

• Responding to pressures for cost reduction requires a firm to try to lower the costs
of value creation.

 Option 1 - Mass-produce a standardized product at the optimal location in the

world, to realize economies of scale, learning effects, and location economies

 Option 2 - Outsource certain functions to low-cost foreign suppliers in an

attempt to reduce costs

• Intense in industries producing commodity-type products where meaningful

differentiation on non-price factors is difficult and the price is the main
competitive weapon

• Tends to be the case for products that serve universal needs - tastes and
preferences of consumers in different nations are similar if not identical
Pressure for Local Responsiveness

• Pressure for local responsiveness arises due to:

 Differences in customer taste and preferences

 Differences in infrastructure and traditional practices

 Differences in distribution channels

 Host-government demands

 Rise of regionalism

• Requires a firm to differentiate its products and marketing strategy from

country to country to accommodate these factors, all of which tend to raise the
firm’s cost structure
Choose a Strategy

• Pressures for local responsiveness imply that it may not be possible for a
firm to realize the full benefits from economies of scale, learning effects, and
location economies

• It is unrealistic for a firm to serve the global marketplace from a single, low-cost
location, producing a globally standardized product and marketing it worldwide to
attain the cost reductions associated with experience effects

• Therefore, need to customize the product to local conditions may work against
the implementation of such a strategy

• Ex: Japanese, American, and European consumers demand different kinds of cars

General Motors, Nissan, Honda, Ford, and Toyota are pursuing a strategy of
establishing top-to-bottom design and production facilities in each important world
Choosing a Strategy

Hig

h
Global
Transnational
Standardizati
Strategy
Pressures for Cost

on Strategy
Reductions

International Localization
Strategy Strategy
Low

Low High
Pressures for Local
Global Standard Strategy

• Focus on increasing profitability and profit growth by reaping the cost reductions
that come from economies of scale, learning effects, and location economies

• Pursue a low-cost strategy on a global scale

• Pursuing a global standardization strategy concentrated in a few favorable locations

• Does not customize their product offering and marketing strategy to local conditions

• Industrial goods industries and conventional goods industries - universal needs.

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

• Appropriate when there are substantial differences across nations with regard to
consumer tastes and preferences and where cost pressures are not too intense

• By customizing the product offering to local demands, the firm increases the value
of that product in the local market

• Ex: Automobile companies have found that they have to customize some of their
product offerings to local market demands
Transnational Strategy

• Simultaneously achieve low costs through location economies, economies of scale,

and learning effects; differentiate their product offering across geographic markets to
account for local differences; and foster a multidirectional flow of skills between
different subsidiaries in the firm’s global network of operations

• Results in conflicting demand

• Differentiating the product to respond to local demands in different geographic markets

raises costs, which runs counter to the goal of reducing costs.

• Ex: Caterpillar

Compete with low-cost competitors Komatsu of Japan and variations in construction

practices and government regulations across countries mean that Caterpillar also has to
be responsive to local demands.
International Strategy

• Confronted with low-cost pressures and low pressures for local responsiveness

• Taking products first produced for their domestic market and selling them
internationally with only minimal local customization.

• Serves universal needs, but does not face significant competitors, and is not
confronted with pressures to reduce its cost structure like a global standardization
strategy

• Ex: Xerox - after its invention and commercialization of the photocopier

• Tend to centralize product development functions such as R&D at home and tend
to establish manufacturing and marketing functions in each major country or
geographic region in which they do business
Cross broad trade, Investment & Strategy

• Change in the rules governing international trade and investment can affect the
viability of different strategies

• Progressive lowering of barriers to cross-border trade and investment

• Development has made a localization strategy and an international strategy less

viable and has increased the attractiveness of a global standardization
strategy and a transnational strategy

• Recent trade trends with Trump’s actions - higher trade barriers on some goods &
a trade war with China - Global standardization and transnational strategies are
more challenging to implement and less attractive

• Higher barriers to cross-border investments may also limit the establishment of

wholly owned subsidiaries in different nations and make strategic alliances more
Choosing a Strategy

High
Global
Transnationa
Standardizat
l Strategy
Pressures for Cost ion Strategy

Reductions

International Localization
Strategy Strategy
Low

Low High
As competitors emerge, Pressures for Local
these strategies become
less viable. Responsiveness
ENTERING DEVELOPED AND
EMERGING MARKETS
Basic Entry Decisions

• Which markets to enter

• Timing of entry

• Scale of entry and strategic

commitments
Which markets to enter
• Almost 200 countries with different profit potentials – Asses long term Profit Potential

• The attractiveness of a country as a potential market – balance between benefits, costs, and
risks

• Factors affecting economic benefits:

 size of the market (in terms of demographics)

 the present wealth (purchasing power) of consumers in that market

 Likely future wealth of consumers (depends on economic growth rates)

• Costs and risks associated with doing business - lower in economically advanced and politically
stable democratic nations

• Ability to create value in the foreign market – suitability and availability of its products (satisfies
an unmet need)

• Ex: Tesco - focusing on emerging markets that lack strong indigenous competitors
Timing of entry
• The advantages associated with entering a market - first-mover advantages

 Build sales volume and ride down the experience curve ahead of rival - cost advantage

 Ability to preempt rivals and capture demand by establishing a strong brand name and customer satisfaction

 Create switching costs that tie customers into their products or services

first-mover disadvantages

• Pioneering costs, costs that an early entrant has to bear that a later entrant can avoid

• Late entrants may benefit by observing and learning from the mistakes made by early entrants

• Costs of promoting and establishing a product offering, including the costs of educating customers

• Ex: KFC introduced the Chinese to American style fast food, but a later entrant, McDonald’s
capitalized on the market in China
Scale of entry and strategic
commitments
• Entering a market on a large scale involves the commitment of significant resources and
implies rapid entry

• Identify how actual and potential competitors might react to large-scale entry into a market

• Large-scale entrant is more likely to capture first-mover advantages associated with demand
preemption, scale economies, and switching costs

• Small-scale entry allows :

 To learn about a foreign market while limiting the firm’s exposure to that market

 Way to gather information about a foreign market before deciding how best to enter

 Reduces the risks associated with a subsequent large-scale entry

Entry Modes
• Exporting

• Turnkey Projects

• Franchising

• Licensing

• Joint Ventures

• Wholly owned subsidiaries

Advantages & Disadvantages of Entry
Modes
Entry Mode Advantages Disadvantages
Exporting • Ability to realize location and • High transport costs
experience curve economies • Trade barriers
• Increased speed and flexibility • Problems with local marketing
of engaging target markets agents

Turnkey • Ability to earn returns from • Creation of efficient

Projects process technology skills in competitors
countries where FDI is restricted • Lack of long-term market
presence
Licensing • Low development costs and • Lack of control over technology
risks • Inability to realize location and
• Moderate involvement and experience curve economies
commitment • Inability to engage in global
strategic coordination
Advantages & Disadvantages of Entry
Modes
Entry Mode Advantages Disadvantages
Franchising • Low development costs and risks • Lack of control over quality
• Possible circumvention of import • Inability to engage in global
barriers strategic coordination
• Strong sales potential
Joint • Access to local partner’s • Lack of control over
Ventures knowledge technology
• Shared development costs and • Inability to engage in global
risks strategic coordination
• Politically acceptable • Inability to realize location and
• Typically, no ownership experience economies
restrictions
Wholly • Protection of technology • High costs and risks
owned • Ability to engage in global • Need for more human and
subsidiary strategic coordination nonhuman resources;
• Ability to realize location and interaction and integration
experience economies with local employees
Discussion and Q&A
Thank You