MGCR 622 International Business Strategy (Fall 2024) - Session 3 PDF

Session 3 MGCR 622 International Business Strategy Where to locate Ghahhar Zavosh, Strategy & Organization Area October-Novemb...

Session 3 MGCR 622 International Business Strategy Where to locate Ghahhar Zavosh, Strategy & Organization Area October-November 2024 McGill Desautels Faculty of Management  Outline – What we do today Why do firms go abroad? Creating and capturing value Juan Alcacer (Generic strategies) David Collis and Jordan Siegel (Scope Economies) Pankaj Ghemawat (AAA Triangle) McGill Desautels Faculty of Management 2  Why do firms go abroad? Strategies to create value globally What is the creating value? What is capturing value? McGill Desautels Faculty of Management 3  Value creation and appropriation along the vertical chain 1. How much value will all players together create? 2. What determines how much value each player will appropriate? Willingness to Pay Buyer’s Share Value Created Price Firm’s Share Cost Supplier’s Share Opportunity Cost McGill Desautels Faculty of Management 4  Price and Willingness to Pay (WTP)- Calculation of buyers’ Share Value Stick Framework Price Willingness to Pay The amount a firm charges customers for product / service Buyer’s Share Willingness to Pay (WTP) WTP is the maximum price a customer is willing to pay Value Created Price based on the perceived value they receive Firm’s Share Firms can increase WTP by improving product quality, customer experience, or offering unique features Cost Price vs. WTP Supplier’s Share Price > WTP: The potential customer does not buy the Opportunity Cost firm’s product / service Price < WTP: The potential customer buys the firm’s product / service and captures a non-zero value McGill Desautels Faculty of Management 5  Cost and Opportunity Cost of Resources (OCR)- Calculation of Suppliers’ Share Value Stick Framework Identify the resources used and the quantity of each resource Negotiated cost rate Vs. opportunity cost rate per unit of resource Willingness to Pay After using the below equations for each resource, add up all costs Buyer’s Share Value Created Price Negotiated Quantity of Cost Cost per unit Firm’s Share Resource of resource Cost Opportunity Supplier’s Share Opportunity Quantity of Cost per unit Cost Resource Opportunity Cost of resource McGill Desautels Faculty of Management 6 Generic strategies for Going Abroad Deployment Replication of competitive advantage from home country Mechanism of Creation of value is by aggregating demand Target Homogenous segments [needs] of market across regions standardization of services or products - Development - Deepening McGill Desautels Faculty of Management 7 Generic strategies for Going Abroad - Deployment Development Identifying where potential new capabilities resides Goal is to get integrated competitive advantage Knowledge arbitrage v/s other forms of arbitrage Locations should be “different enough” rather than “too different” - Deepening McGill Desautels Faculty of Management 8 Generic strategies for Going Abroad - Deployment - Development Deepening Widen competitive advantage, without changing primary business strategy Increase willingness to pay by adjusting to local tastes Decreasing costs by aggregation of demand Being internationally dispersed has value for stakeholders McGill Desautels Faculty of Management 9 Why Do Firms Go Abroad? Strategies to Create Value Globally Challenges in New Markets: Liability of being a foreigner Paradox of being consistent McGill Desautels Faculty of Management 10 Liabilities of Being a Foreigner Local laws favor domestic firms Import / Export costs Cultural differences Caps on foreign investment Separate time zones can be a liability Different contract structures McGill Desautels Faculty of Management 11 Paradox of being consistent Need for Market Adaptation Loss of Internal Consistency Dilution of Competitive Advantage Complex Decision-Making Risk of Strategic Misalignment “When combined, the liability of being a foreigner and the paradox of being consistent can prevent even the most successful domestic firm from fully duplicating its home-market success abroad.” McGill Desautels Faculty of Management 12  International Strategy McGill Desautels Faculty of Management 13  Economic Justification for Expanding Scope across Geographic Markets The Better-off test Demand-side scope economy (e.g., Horizontal multinationals) Both are categorized Supply-side scope economy (e.g., Vertical multinationals) as static arbitrage The ownership test Market failure that prevents efficient contracting between the parties in different countries McGill Desautels Faculty of Management 14  Economies of scale vs. Economies of scope Economies of Scale Reduction of average cost per unit as output rises Economies of Scope Increase in created value by expansion of the scope of activities Subadditivity of Costs Superadditivity of Revenue Volatility and the Strategic Advantage of Dynamic Arbitrage McGill Desautels Faculty of Management 15  Managing Differences McGill Desautels Faculty of Management 16  Overview of Global Strategy Global Strategy Challenge: Companies must choose the right strategy for competing on a global stage Three Key Strategies: 1. Aggregation: Achieving economies of scale by standardizing operations across regions 2. Adaptation: Customizing processes and offerings to meet local market needs 3. Arbitrage: Exploiting differences, such as offshoring to countries with lower labor costs Strategic Alignment: The type of business expenses can indicate which strategy to prioritize McGill Desautels Faculty of Management 17  Implementing Global Strategies Change Your Strategy as Needed: Be prepared to shift strategies or combine them as business needs evolve Example: IBM transitioned from adaptation to aggregation to enhance scale economies Consider Integrating Two Strategies: Companies usually have to focus on one or at most two A’s to build competitive advantage Example: Procter & Gamble balances aggregation and adaptation by creating global business units (GBUs) that allow for local adaptations Example: Tata Consultancy Services (TCS) combines arbitrage with aggregation by developing a global delivery structure. Explore External Integrative Mechanisms: Don’t assume you must rely only on internal integration mechanisms Example: IBM has used joint ventures in advanced semiconductor research and development, and forged relationships with companies like Lenovo McGill Desautels Faculty of Management 18 APPENDIX McGill Desautels Faculty of Management How can companies overcome them McGill Desautels Faculty of Management 20 A Few Examples Challenges faced by foreign firms due to regulatory and cultural differences Example 1: Google in China Faced restrictive regulations (Great Firewall) compliance challenges and reputational risks Competed against local firms like Baidu – already compliant Pulled out in 2010 due to compliance and reputational risks McGill Desautels Faculty of Management 21 A Few Examples Challenges faced by foreign firms due to regulatory and cultural differences Example 2: Walmart Germany Struggled with cultural differences and regulatory constraints German labor laws and unionized workforces Strong local competitors (Aldi, Lidl) Exited market in 2006 McGill Desautels Faculty of Management 22 A Few Examples Challenges faced by foreign firms due to regulatory and cultural differences Example 3: Starbucks in China- Adapted menu to local coffee preferences Created a culturally resonant in-store experience Navigated complex food safety regulations Competed with local brands (e.g., Luckin Coffee) and established foreign brands (e.g., Costa) Continuously adjusted strategies to stay relevant in the market McGill Desautels Faculty of Management 23 Economies of scale – Cost Advantages Cost advantages experienced as businesses increase production, are often seen in a reduction of average cost per unit as output rises. This decrease happens largely due to structure of costs in production, which includes both fixed costs and variable costs. Fixed Costs: Variable Costs: Fixed costs are expenses that remain constant regardless Variable costs are expenses that fluctuate directly with the level of the level of production, such as machinery, rent, or of output, such as raw materials, packaging, or hourly wages salaries for administrative staff. These costs do not for production workers. Unlike fixed costs, total variable costs fluctuate with each unit produced, and when spread across rise as production increases, but the cost per unit remains a larger number of units, the fixed cost per unit decreases. constant. This process, known as amortizing fixed costs over more units, is a key driver of economies of scale, where increasing production volumes make each unit cheaper to produce. Together, these factors mean that as companies increase their production volume, the fixed cost per unit drops, and they may also achieve bulk discounts on variable costs, further lowering the average cost per unit. This advantage is why larger firms often have a competitive edge through lower costs, making it harder for smaller firms to compete on price McGill Desautels Faculty of Management 24 Economies of scope Refer to cost and revenue advantages that arise when a firm expands the range, or scope, of its activities to produce multiple products rather than just one. When a company broadens its activities, it can leverage resources, capabilities, or processes across several products or services, often resulting in subadditivity of costs and superadditivity of revenue. Subadditivity of Costs: Superadditivity of Revenue: The total cost of producing multiple products together is often lower Expanding a firm's product line can boost revenue through a than producing each product separately. By sharing resources such phenomenon known as superadditivity of revenue. By offering as technology, expertise, or facilities, a firm avoids duplicate costs complementary products or services, a company can increase its and spreads fixed costs across a wider range of activities. For revenue streams through cross-selling or bundling. For example, a example, a company already manufacturing one product can technology company that produces both software and hardware can expand its offerings at a lower incremental cost by reusing existing attract more customers by offering integrated solutions, generating more resources like distribution networks or production equipment, revenue than if it sold each product separately. Additionally, a diversified resulting in a lower average cost per product. This cost savings product line can appeal to new customer segments, further amplifying from combined production illustrates the efficiency gained through revenue beyond what would be possible with a single-product focus. economies of scope. Together, subadditivity of costs and superadditivity of revenue underscore the strategic value of economies of scope, enabling firms to operate more efficiently and increase their market appeal by leveraging their resources across a broader range of products and services McGill Desautels Faculty of Management 25