Chapter 12 Strategy

8/3/2019 Chapter 12 Strategy

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Chapter 12The Strategy ofInternational Business

Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin


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STRATEGY

STRATEGY: focuses on the firm itself, and the

actions managers take to compete more

effectively in international markets.

GLOBAL OPERATIONS due to:

The globalization of the world economy

The global nature of customers

Emergence of competition in emerging

markets


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What Is Strategy? A firms strategy refers to the actions that managers take

to attain the goals of the firm

Firms need to pursue strategies that increase:

Profitabilityis the rate of return the firm makeson its invested capital

Profit growth is the percentage increase in netprofits over time

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What Is Strategy?

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To increase profitability andprofit growth, firms can

add valuelower costs

sell more in existingmarkets

expand internationally


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What Is Strategy?

Determinants of Enterprise Value

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What Is Strategy?

Ifprofitabilityis the rate of return the firmmakes on its invested capital, then why isprofit growth (the percentage increase in net

profits over time) important? Would profit growth occur automatically???

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Sonys Strategy

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How Is Value Created?

The product can still be of good quality, but nolonger valuable

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The firms value creation is thedifference between

V (the price that the firm cancharge for that product given

competitive pressures) andC (the costs of producing thatproduct) 12-9


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Profits can be increased by:

1.Using a differentiation strategy = addingvalue to a product so that customers arewilling to pay more for it the higher the value customers place on a firms

products, the higher the price the firm can charge

2.Using a low cost strategy = lowering costs12-

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Differentiation

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Variation on Value PHILLIES!

Pre-season?

Mid-season?

Post-season?

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Variation on Value Toyota

Japanese brand seen as valuable

Recall

Repositioning

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Variation on Value Hummer

Prior to rise in oil prices

Oil prices stabilize

Economic downturn

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Physical or Mandatory

Requirements and Adaptation


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Value Creation

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Value Creation

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Progression of Economic Value


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Progression of Economic Value


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Why Is Strategic

Positioning Important?

Michael Porter argues that firms need to choose

either differentiation or low cost, and then configure

internal operations to support the choice.

To maximize long run return on invested capital,

firms must:

1. pick a viable position on the efficiency frontier

2. configure internal operations to support that position

3. have the right organization structure in place to execute

the strategy 12-21


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How Are A Firms

Operations Configured?

A firms operations can be thought of a valuechain composed of a series of distinct valuecreation activities

including production, marketing, materials management, R&D,human resources, information systems, and the firminfrastructure

Value creation activities can be categorized as:

1. Primary activities (product creation) R&D, production, marketing and sales, customer

service

2. Support activities (allow creation to occur) information systems, logistics, human resources

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How Are A Firms

Operations Configured?The Value Chain

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How Can Firms Increase Profits Through

International Expansion?

International firms can:1. Expand their market - sell in international

markets

2. Realize location economies - disperse valuecreation activities to locations where they can beperformed most efficiently and effectively

3. Realize greater cost economies from experienceeffects -serve an expanded global market from a

central location4. Earn a greater return - leverage skills developed in

foreign operations and transfer them elsewhere inthe firm 12-

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Why Are Location

Economies Important?

Location economies:arise from performing a valuecreation activity in the optimal location for thatactivity, wherever in the world that might be

By achieving location economies, firms can

lower the costs of value creation andachieve a low cost position

differentiate their product offering

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Why Are Location

Economies Important? Firms that take advantage of location economies in

different parts of the world, create a global webof valuecreation activities

different stages of the value chain are dispersed to locationswhere perceived value is maximized or where the costs of valuecreation are minimized

The Case of Clear Vision Why did Clear Vision set up production in Hong Kong and

also France, Italy and Japan??

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Why Are Experience

Effects Important?

The experience curve refers to the systematic reductionsin production costs that occur over the life of a product by moving down the experience curve, firms reduce the cost of

creating value

to get down the experience curve quickly, firms can use a single

plant to serve global markets

Learning effects are cost savings that come from learningby doing

When labor productivity increases individuals learn the most efficient ways to perform particular

tasks

managers learn how to manage the new operation moreefficiently

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Why Are Experience

Effects Important?The Experience Curve

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Why Are Experience

Effects Important?The Experience Curve

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Why Are Experience

Effects Important?

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Why Are Experience

Effects Important?

Economies of scale refer to the reductions in

unit cost achieved by producing a large volume

of a product

Sources of economies of scale include

1. spreading fixed costs over a large volume

2. utilizing production facilities moreintensively

3. increasing bargaining power with suppliers 12-35


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How Can Managers

Leverage Subsidiary Skills?Recognize that valuable skills that could be applied can ariseanywhere within the firms global network - not just at thecorporate center

Establish an incentive system that encourages local employeesto acquire new skills

Have a process for identifying when valuable new skills have

been created in a subsidiary

Act as facilitators to help transfer skills within the firm 12-36


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What Types Of Competitive Pressures Exist In

The Global Marketplace?

Firms that compete in the global marketplace face two

conflicting types of competitive pressures:

1. Pressures for cost reductions- force the firm to

lower unit costs2. Pressures to be locally responsive- require the

firm to adapt its product to meet local demands in

each marketa strategy that raises costs Mac vs PC http://www.youtube.com/watch?v=TAtXJEHr1Mw

the pressures limit the ability of firms to realize location economies and

experience effects, leverage products, and transfer skills within the firm 12-

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http://www.youtube.com/watch?v=TAtXJEHr1Mwhttp://www.youtube.com/watch?v=TAtXJEHr1Mw


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What Types Of Competitive Pressures Exist In The

Global Marketplace?

In the cell phone market: Americans consumers tend to focus

on design elements.

European and Asian consumer focus

on functions and features.

Companies must keep costs low,

while at the same time absorb the

costs of designing phones that meet

demands. When companies face pressure for

local responsiveness, they incur the

costs of differentiating their products

or strategies.

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What Types Of Competitive Pressures Exist In

The Global Marketplace?Pressures for Cost Reductions and Local Responsiveness

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When Are Pressures For Cost Reductions

Greatest?

1. In industries producing commodity typeproducts that fill universal needs where price isthe main competitive weapon (ie steel)

needs that exist when the tastes and preferences of consumers

in different nations are similar if not identical

2. When major competitors are based in low costlocationshttp://www.cnbc.com/id/15840232?play=1&video=1398792562

3. Where there is persistent excess capacity4. Where consumers are powerful and face low

switching costs12-

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http://www.cnbc.com/id/15840232?play=1&video=1398792562http://www.cnbc.com/id/15840232?play=1&video=1398792562


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When Are Pressures For

Local Responsiveness Greatest?

Pressures for local responsiveness arise from1. Differences in consumer tastes and preferences

strong pressure when consumer tastes differ significantly

2. Differences in traditional practices and infrastructure

strong pressure emerges when there are significant differences

in infrastructure and/or traditional practices between countries(ie cell phones, electrical systems)

3. Differences in distribution channels

need to be responsive to differences in distribution channels

between countries (ie climate change in shipment, sales force)4. Host government demands economic and political demands imposed by host country (ie local content

laws, state testing)12-

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Which Strategy

Should A Firm Choose?

Global standardization

LocalizationTransnational

International

There are 4

basic

strategies tocompete in

international

markets

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the appropriateness of eachstrategy depends on the pressuresfor cost reduction and localresponsiveness in the industry


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Global Standardization

1. Global standardization - increase profitability and profit growththrough cost reductions from economies of scale, learning effects,and location economies

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 areminimal

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Localization

2. Localization - increase profitability by customizing goods orservices so that they match tastes and preferences in differentnational markets

makes sense when there are substantial

differences across nations with regard toconsumer tastes and preferences and when costpressures are not too intense

Yahoo! Answershttp://answers.yahoo.com/

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http://answers.yahoo.com/http://answers.yahoo.com/


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Transnational

3. Transnational - tries to simultaneously achieve low coststhrough location economies, economies of scale, and learningeffects.

Differentiate the product offering across geographic markets toaccount for local differences,

Foster a multidirectional flow of skills between different

subsidiaries in the firms global network ofoperations makes sense when cost pressures AND local

responsiveness pressures are intense

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hi h


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Which Strategy

Should A Firm Choose?

4. International take products first produced for the domesticmarket and sell them internationally with only minimal localcustomization

makes sense when pressure is low for both costreduction and local responsiveness

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Whi h S


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Which Strategy

Should A Firm Choose?Four Basic Strategies

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How Does Strategy Evolve?

An international strategy may not be viable in thelong term

to survive, firms may need to shift to a global

standardization strategy or a transnational

strategy in advance of competitors

Localization may give a firm a competitive edge,

but if the firm is simultaneously facing aggressive

competitors, the company will also have to reduceits cost structures

which would require a shift toward a

transnational strategy

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Changes in Strategy over Time

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Product Component Model


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Strategies for Expansion Aim - a chocolate manufacturer wishes to break

into a new overseas market

Objectives:

Develop relationships with overseas suppliers

Identify network of retail outlets Conduct market research to identify consumer needs

Find location for overseas sales team HQ


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The chocolate shop is up and running in an overseasmarket.

It is open from 9am to 4pm, Monday to Friday,

offering a variety of high-end chocolates.

HOWEVER, sales are slow and competition from a

nearby supermarket and outlet center seems to be

preventing the business from growing.

What action could the chocolate shop take toincrease sales? The key issue to identify is why customers are choosing other outlets.

Is it because of location, price, or product quality?12-

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Quality is defined by the Buyer

One important dimension of quality is how wella product meets the specific needs of the buyer.

The price-qualityrelationship is an important

factor

Product design must be viewed from all aspectsof use


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Effective strategic business decisions bring together:

the right resources

for the right markets

at the right time.

Timing is crucial. Tesco developed its online ordering and delivery service as internet

shopping expanded.

Virgin sold off its music stores as downloading music became more

popular.12-

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Vodafone in Japan

1. How did Vodafone enter the Japanese market?

2. Why was Vodaphone pursuing a global

standardization strategy?

3. Why didnt it work in Japan?

4. What advantage did Vodaphones competitors

have.

5. What should Vodaphone have donedifferently?

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ZARA

http://video.ft.com/v/62436030001/Iese-

Crossing-borders-successfully

Is Zara a global company?

What are the three strategies the speaker talks

about AAA???
http://video.ft.com/v/62436030001/Iese-Crossing-borders-successfullyhttp://video.ft.com/v/62436030001/Iese-Crossing-borders-successfullyhttp://video.ft.com/v/62436030001/Iese-Crossing-borders-successfullyhttp://video.ft.com/v/62436030001/Iese-Crossing-borders-successfullyhttp://video.ft.com/v/62436030001/Iese-Crossing-borders-successfullyhttp://video.ft.com/v/62436030001/Iese-Crossing-borders-successfullyhttp://video.ft.com/v/62436030001/Iese-Crossing-borders-successfullyhttp://video.ft.com/v/62436030001/Iese-Crossing-borders-successfullyhttp://video.ft.com/v/62436030001/Iese-Crossing-borders-successfully

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Chapter 12 Strategy

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