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Slide 7.1

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

International strategic issues

Chapter 7

Slide 7.2


Strategy

• The guiding rules or principles which influence

the direction and scope of the organisation’s

activities over the long term.

Slide 7.3


Levels of strategy

• Corporate (whole enterprise) level

• Business (competitive) level

• Functional (type of role) level.

Slide 7.4


SWOT analysis

• During the 1970s, Andrews proposed a framework for

strategy formulation based on the premise that the final

strategy adopted by a company should achieve a ‘fit’

between its internal capabilities (strengths and

weaknesses) and the external situation (opportunities

and threats).

• This is commonly known as SWOT analysis and

involves undertaking

(1) an analysis of the external environment within which the

firm operates

(2) an objective appraisal of the organisation’s current

position.

Slide 7.5


SWOT matrix

Figure 7.1a The SWOT Matrix and Porter’s ‘Five Forces’ analysis Source: Figure 7.1(b) Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from COMPETITIVE STRATEGY: Techniques for Analyzing Industries

and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved.

Slide 7.6


External analysis: PESTLE

• Highlights the general environmental influences

that a firm must cope with, e.g. the political,

economic, social, technological, legal and

ecological factors (PESTLE).

• This analysis of the external environment will

lead to the identification of a number of

opportunities and threats.

Slide 7.7


Internal analysis

• Should identify those things that the organisation does particularly well (strengths) and those features that inhibit its ability to fulfil its purposes (weaknesses).

• The features to be assessed may include the organisation, personnel, marketing and financial features.

• Strategic alternatives arise from matching current strengths to environmental opportunities at an acceptable level of risk.

• This framework was further developed during the 1980s by Michael Porter who proposed a more analytical approach to strategy formulation.

Slide 7.8


Porter’s Five Forces analysis (1)

• Porter argued that ‘the essence of strategy

formulation is coping with competition’ and that in

addition to undertaking a PEST analysis, it is also

necessary to undertake a structural analysis of the

industry to gauge the strengths and weaknesses of

the opposition and also determine the competitive

structure of a given market.

• The key elements in Porter’s Five Forces analysis

can be identified as the threat of (1) potential entrants

and (2) substitutes, as well as the power of (3)

suppliers and (4) buyers, together with an exploration

of (5) the degree of competitive rivalry.

Slide 7.9


Porter’s Five Forces analysis (2)

• According to Porter, strategy formulation requires

that each of the above forces be carefully

analysed in order to successfully:

– Position the company so that its capabilities

provide the best defence against the competitive

forces.

– Influence the balance of the forces through

strategic moves, thereby improving the company’s

position.

– Anticipate changes in the factors underlying the

forces and respond to them.

Slide 7.10


Strategic choice

• There have been several theoretical models of strategic choice, each of which seeks to identify the main strategic options open to the business in pursuit of its objectives.

• The following three approaches to strategic choice are often referred to.

– Competitive strategies – which influence the action/reaction patterns an organisation will pursue for competitive advantage (e.g. Porter).

– Product–market strategies – which determine where the organisation competes and the direction of growth (e.g. Ansoff).

– Institutional strategies – which involve a variety of formal and informal relationships with other firms usually directed towards the method of growth (e.g. acquisition versus. organic).

Slide 7.11


Porter’s generic strategies (1)

• Generic strategies – help ‘position’ the enterprise

to best advantage.

• Overall cost leadership strategy – seeks to be the

lowest cost provider.

• Differentiation strategy – seeks to create

something unique, unmatched by competitors.

• Focus strategy – seeks to identify a particular

segment within the broader market and to

dominate that segment.

Slide 7.12


Porter’s generic strategies (2)

Figure 7.3b Porter’s generic strategies

Slide 7.13


Product–market strategies

• Igor Ansoff presented the various strategic options in the form of a matrix.

• Market penetration strategy refers to gaining a larger share of the market by exploiting the firm’s existing products.

• Market development strategy involves taking present products into new markets, and thus focusing activities on market opportunities and competitor situations.

• Product development strategy is where new products are introduced into existing markets, with the focus moving towards developing, launching and supporting additions to the product range.

• Diversification strategy involves the company branching out into both new products and new markets. This strategy can be further subdivided into horizontal, vertical, concentric and conglomerate diversification.

Slide 7.14


Competitive advantage

• Competitive advantages are often expressed by Porter in terms of the additional ‘added value’ the more successful firms in an industry are able to generate vis-à-vis the most marginal firm in that industry.

• These competitive advantages could be attributed to a host of potential factors:

– Architecture (a more effective set of contractual relationships with suppliers/customers)

– Incumbency advantages (reputation, branding, scale economies, etc.)

– Access to strategic assets (raw materials, wavebands, scarce labour inputs, etc.)

– Innovation (product or process, protected by patents, licences, etc.)

– Operational efficiencies (quality circles, just-in-time techniques, re-engineering, etc.)

Slide 7.15


Sources of national competitive

advantage

Porter identified six key sources:

• Demand conditions

• Factor conditions

• Firm strategies: structures and rivalries

• Related and supporting industries

• Government policies

• Chance.

Slide 7.16


Portfolio analysis

• The Boston Consulting Group’s portfolio matrix provides

a useful framework for examining an organisation’s own

competitive position.

• The organisation’s portfolio of products is subjected to a

detailed analysis according to market share, growth rate

and cash flow.

• The four alternative categories of company (or product)

that emerge from the model are given the labels of ‘stars’,

‘cash cows’, ‘dogs’ and ‘problem children’ (or ‘question

marks’).

Slide 7.17


Boston matrix (1)

Figure 7.2 The Boston Consulting Group growth-share matrix Source: The BCG Portfolio Matrix from the Product Portfolio Matrix, © 1970, The Boston Consulting Group

Slide 7.18


Boston matrix (2)

• Stars have high market share, high growth, but limited cash flow due to the substantial amount of investment required to maintain growth. Successful stars go on to become cash cows.

• Cash cows have a high market share but slow growth. They tend to generate a very positive cash flow that can be used to develop other products.

• Dogs have a low share of a slow-growth market. They may be profitable, but only at the expense of cash reinvestment, and thus generate little for other products.

• Problem children have a low share of a fast-growing market and need more cash than they can generate themselves in order to keep up with the market.

Slide 7.19


Cross-border mergers and

acquisitions (M&A)

• Various synergies (2+ 2 > 4 effect) are often associated

with cross border M&A.

• Cost-based synergies – horizontal acquisitions have

traditionally been considered an effective means of

achieving economies of scale in production, in R&D and in

administrative, logistical and sales functions.

• Revenue-based synergies – horizontal or vertical

acquisitions enable companies to develop new

competencies, which may in turn enable them to

command a price premium (via increased market power,

higher innovation capabilities) or to increase sales volume

(via increased market leverage – both geographic and

product-line extension).

Slide 7.20


Synergies for M&A

Figure 7.8 Potential synergies from M&A

Slide 7.21


Cost-based efficiencies of M&A

• Economies of scale: Increase in global size of

firm can provide economies of scale, i.e. a fall in

long-run average costs.

• Technical economies: related to an increase in

the size of the plant or production unit.

• Non-technical (enterprise) economies: related to

an increase in the size of the enterprise

(business unit) as a whole.

Slide 7.22


Technical economies of scale

• Specialisation

• ‘Engineers rule’ – area increases as the square

but volume (capacity) as the cube

• Dovetailing of linked processes (i.e. lowest

common multiple is a large output)

• Indivisibility of large-scale processes (i.e. more

efficient, large-scale processes cannot be

reproduced at a smaller scale)

Slide 7.23


Division of labour (specialisation)

• Advantages include:

– Increased productivity

– Increased standard of living

– Increased range of products available.

• Disadvantages include:

– Increased boredom

– Lack of variety

– Worker interdependence

– Limited market size.

Slide 7.24


Indivisibility of large-scale processes

Type of process Factor inputs

L (men) K(machines)

Output

X (units)

A Small-scale

process

B Medium-scale

process

C Large-scale

process

1

100

1000

1

100

1000

1

1000

20,000

Slide 7.25


Non-technical economies of scale

• Financial economies

• Administrative, marketing and other functional

economies

• Distributive economies

• Purchasing economies.

Slide 7.26


Cost gradient and MES

Figure 7.9 Economies of scale and minimum efficient size (MES)

Slide 7.27


Other benefits of size

• Risk reduction: larger firms often have a more

diversified product portfolio.

• Market power: larger firms can exert greater

influence of price/output decisions for the sector.

Slide 7.28


Economies of scope

• Reduction in average costs through changing the

mix of production

• Sources include selecting a product mix that:

– Can use joint inputs (e.g. common management,

marketing etc.)

– Involves products which are complements in

production (cars and trucks)

– Involves by-products that can be used

constructively (e.g. heat from one production

process used as energy in another).

Slide 7.29


Economies of experience (1)

• Emphasis here is on cumulative output, i.e. the

total output (and therefore length of time) the

company has produced (been in existence)

• Experience increases insights into ways of

increasing efficiency.

Slide 7.30


Economies of experience (2)

Figure 7.18 Experience or learning curve: declining average costs as a function of

cumulative output

Slide 7.31


Knowledge management strategies

• Explicit knowledge: codified knowledge available in books, reports, online, etc.

• Tacit knowledge: knowledge embodied in human experience and practice

• Individual knowledge: the source of much tacit and explicit knowledge

• Collective knowledge: the outcome of corporate structures and processes for converting tacit and individual knowledge into explicit knowledge available for corporate use in process or product innovation.

Slide 7.32


Game-based strategies

• Zero and non-zero sum games

– maxi-min decision rule

– mini-max decision rule

• One-shot and repeated games

• Sequential games

• First-mover strategy

• Tit-for-tat strategy

• Dominant strategy and Nash equilibrium

• Prisoner’s dilemma and collusion.

Slide 7.33


Decision rules

• Assumptions built into the ‘game’

• Maxi-min decision rule – assumes that the rival

(Firm B) reacts in the worst (for Firm A) way

possible for each A strategy. Firm A then selects

the best (maxi) of these worst (mini) possible

outcomes.

• Mini-max decision rule – assumes that the rival

(Firm B) reacts in the best (for Firm A) way

possible for each A strategy. Firm A then selects

the worst (mini) of these best (maxi) possible

outcomes.

Slide 7.34


Two-firm zero-sum game

Firm B’s strategies

Price cut Extra advertising

Price cut 60*† 70†

Firm A’s

strategies

Extra

advertising

50* 55

Slide 7.35


Other ‘game’ strategies/outcomes

• Dominant strategy. In this approach the firm seeks to do the best it can (in terms of the objectives set) irrespective of the possible actions/reactions of any rival(s).

• Nash equilibrium. This occurs when each firm is doing the best that it can in terms of its own objective(s), given the strategies chosen by the other firms in the market.

• Prisoner’s dilemma. This is an outcome where the equilibrium for the game involves both firms doing worse than they would have done had they colluded, and is sometimes called a ‘cartel game’ because the obvious implication is that the firms would be better off by colluding.

Slide 7.36


International operation management

strategies

• Operations management: The co-ordination of a

set of interrelated activities directed towards the

efficient production of goods and services.

Figure 7.14 The operations management system approach

Slide 7.37


Traditional methods of manufacture (1)

Figure 7.15 Characteristics of some traditional methods of manufacture

Slide 7.38


Traditional methods of manufacture (2)

• Jobbing processes

• Batch processes

• Mass processes

• Continuous processes.

Slide 7.39


Just-in-time (JIT)

• Minimises stock-holding costs by planning the arrival of

raw materials / components just as they are needed.

• This requires a highly efficient ordering system, normally

computerised, linked directly to the suppliers who, in turn,

must be highly reliable.

• Customers orders ‘pull’ production and stocks through the

manufacturing process, thus eliminating the need for

large stock holdings and driving down the costs of

production.

• Although this can reduce significantly the stock-holding

costs, it increases the danger of production disruption due

to non-arrival of stock supplies.

Slide 7.40


Lean production (1)

• A ‘total approach’ to removing anything that does

not add value to the final product.

– Involving e.g. both management and workers in the

decision-making and suggestion-making process

– Minimising e.g. the use of key resources such as

materials, manpower, floor space, capacity and

time

– Introducing e.g. JIT materials handling to help lower

stock-holding costs and to minimise the need for

buffer stocks.

Slide 7.41


Lean production (2)

• Worker participation in quality circles where

improvements can be suggested and discussed

• Introducing preventative maintenance

• Using multiple purpose machines for flexible

production

• Employing and training multi-skilled operatives

• Encouraging teamwork.

Slide 7.42


Lean production (3)

• This approach has slimmed down ‘mass’ production into a flexible or ‘lean’ production system.

• Advantages claimed for this approach include: – An increase in quality of product and after-sales

service

– Shorter product development time

– Faster reaction to changes in consumer preferences

– A reduction in unit costs of production without sacrificing quality

– A better trained and more motivated workforce.

Slide 7.43


Three arenas of modularisation

Figure 7.19 Three arenas of modularisation

Slide 7.44


Finding the economic order quantity (EOQ)

Figure 7.20 Finding the economic order quantity (EOQ)

Slide 7.45


Logistical principles

• Square root law

• Logistical cost trade-offs

• Time compression

• Postponement principle.

Slide 7.46


Incoterms

• Ex works (EXW)

• Free on board (FOB)

• Free carrier (RRC)

• Cost, insurance and freight (CIF)

• Delivered at frontier (DAF)

• Delivered duty paid (DDP).

Slide 7.47


Types of international distributional

channel

• Direct system

• Transit system

• Classical system

• Multicountry system.

Slide 7.48


Direct and transit channels

Types of system Advantages Disadvantages

1. Direct No need for foreign warehouse

Greater inventory centralisation/

Lower inventory level

Longer order lead time

Less load

consolidation/higher

transport costs

2. Transit Permits breaking of bulk

Greater load consolidation, so

lower transport costs

Less packaging and

administration

Extra handling costs in

foreign markets

Slide 7.49


Classical and multicountry channels

Types of system Advantages Disadvantages

1. Classical Permits breaking of bulk

Greater load consolidation, so lower

transport costs

Less packaging and administration

Shorter order lead times

Local stock availability

Lower import dues

Incurs full warehousing cost

Decentralisation of inventory increases

total stockholding

2. Multicountry Higher degree of inventory

centralisation and lower unit

warehousing costs than classical

Longer lead times to customers

Higher delivery costs

Difficult to coordinate with nationally

based sales organisation

Slide 7.50


Choice of distributional channel

• A few key factors will determine that choice:

– Foreign customer base

– Export volumes

– Value density of product

– Order lead times.

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