International Business Strategy Session 7

International Business Environment - Session 7: Strategy for International Business

• Introduction: Managers need to consider the benefits of expanding into foreign markets, choosing appropriate strategies, collaborating with global competitors, and understanding strategic alliances for global success.

Strategy and the Firm

• What is strategy?: A firm's strategy is the actions managers take to achieve firm goals. Strategies typically focus on maximizing profitability and profit growth.
• Profitability: The rate of return a firm makes on its invested capital.
• Profit Growth: The percentage increase in net profits over time.

Determinants of Enterprise Value

• Enterprise valuation is influenced by profitability and profit growth.
• Profitability: Factors such as reducing costs, adding value, and raising prices are crucial to maximizing profitability.
• Profit Growth: Factors such as selling more in existing markets and entering new markets contribute to profit growth.

Value Creation

• Question: How do you increase the profitability of a firm?

• Answer: Value must be created for the consumer through differentiation or low cost strategies.

• Value Creation is V - C: V (value) minus C (cost) signifies value creation. A firm gains high profits when it creates greater value for customers at a lower production cost.

Strategic Positioning

• Maximizing Profitability: -A firm needs a viable position on the efficiency frontier (low cost or differentiation). -Internal operations must support the chosen position. -A firm's organization structure should support its strategy. -All these elements (strategy, operations, and organization) must align to gain competitive advantages and achieve superior profitability.

How Are A Firm's Operations Configured?

• A firm's operations work like a value chain. Activities, such as production, marketing, materials, research, human resources, and information systems are key components of this value chain.

The Firm as a Value Chain

• Two types of activities that make up a firm's value chain:
  • Primary Activities: involve creating the product, marketing and delivering it, providing support and after-sales service to the buyers of the product.
  • Support Activities: provide the inputs that support the primary activities of production and marketing.

The Value Chain (Diagram)

• A diagram shows the firm's value chain which includes Firm Infrastructure, Human Resource Management, Technology and Product Development, Procurement, Inbound Logistics, Operations (Production), Outbound Logistics, Marketing and Sales, and Service.

Location of Activities: Patterns 1-4

• Diagrams showcase the different geographic locations of firm activities (patterns 1-4).

Managing the Value Chain

• Factors to consider when configuring the value include location, business environment quality, innovation context, labor costs, logistics, digitization, and economies of scale.

Location Economies

• Location Decisions: Firms should locate their value creation activities in locations with favorable economic, political, and cultural conditions.
• Location Economies: Lowering production costs and differentiating offerings by efficient location selection.
• Global Web: Multinationals may spread operations across locations based on the need for value & cost optimization.

Leveraging Subsidiary Skills

• Valuable Skills Development: Managers should leverage valuable skills developed anywhere within the global network of a firm, not just within HQ. -Incentives & Processes: Firms must use appropriate incentive systems to motivate employees; a consistent process should be in place to identify and transfer learned skills effectively.

Leveraging Products and Competencies

• Leveraging Core Competencies for Profit: Firms can increase growth through the sale of products and services developed domestically, leveraging core competencies to establish a differentiating product edge.
  • Core Competencies: skills unique to the firm that make it hard for competitors to copy.

Summary

• International expansion: Firms increase profitability and growth by entering markets where competitors have weak capabilities, realizing location benefits, leveraging their experience, and transferring valuable in-house skills.

Competitive Pressures

• Cost Reduction and Local Responsiveness: Firms competing globally frequently face pressures for both cost reductions and adapting to local demands, creating potentially conflicting pressures.

Pressures for Cost Reductions

• Greatest in Commodity-like Industries: Pressures for cost reductions often dominate for firms selling in industries where customers' needs are universal and competitive locations are associated with lower production costs.

Pressures for Local Responsiveness

-Consumer Preferences & Adaptations: Local responsiveness pressures are strongest when consumer tastes or national preferences differ considerably (e.g., specific food preferences, unique language or cultural practices in distribution channels).

Choosing a Strategy (Global)

• Four Basic Strategies:
  • International Strategy
  • Global Strategy
  • Multi-domestic Strategy
  • Transnational Strategy

International Strategy

• Focuses on leveraging a firm's core competencies in foreign markets, centralization of critical value chain activities with HQ. This strategy prioritizes leveraging existing competencies where home country strengths and fewer adaptations are required for international success. This strategy is optimal when pressures for global integration are low and pressures for local responsiveness are also low.

Global (Standardization) Strategy

• Involves marketing standardized products with minimal adjustments to local conditions, taking advantage of location economies to maximize worldwide scale economies. Global strategies are effective when local responsiveness pressures are low, but pressures for global integration are high. Firms operating with high global integration needs typically utilize cost leadership as their competitive advantage.

Multi-domestic Strategy

• Emphasis on responsiveness to unique national market circumstances, adapting value-adding activities to local markets. This strategy is best used when local responsiveness pressures are high and global integration pressures are low.

Transnational Strategy

• Aims to leverage core competencies across the globe while simultaneously adapting to local markets, utilizing the advantages of both globalization and localization to optimize value and cost across numerous countries. This is the most complex strategy as it requires a firm to simultaneously achieve global integration and local responsiveness.

HQ/Subsidiary Relations in the Multinational Organization

• Centralized Federation: HQ maintains critical control and information systems.
• Decentralized Federation: Autonomous subsidiary operation.

Evolution of Strategy

• Strategy Adaptability: Competition pushes firms to change — strategies may adjust from international/localization strategies to global/transnational strategies to survive and outpace competitors.

How Does Strategy Evolve?

• Evolutionary Diagram: A diagram clarifies that when pressures for globalization or local responsiveness are high or low, the suitable choice of strategy is better suited to the market environment to maximize the firm's profitability across the globe.