Session 8 Strategy of international business PDF

ST307E_B-International Business Environment Session 7: Strategy for International Business  Introduction Question: What actions can managers take to compete more effectively in a global economy? Answer: ▪ Managers must consider –the benefits of expanding into foreign markets –which stra...

ST307E_B-International Business Environment Session 7: Strategy for International Business  Introduction Question: What actions can managers take to compete more effectively in a global economy? Answer: ▪ Managers must consider –the benefits of expanding into foreign markets –which strategies to pursue in foreign markets –the value of collaboration with global competitors –the advantages of strategic alliances  Strategy and the Firm What is strategy? ▪ A firm’s strategy can be defined as the actions that managers take to attain the goals of the firm ▪ Typically, strategies focus on profitability and profit growth ▪ Profitability refers to the rate of return the firm makes on its invested capital ▪ Profit growth is the percentage increase in net profits over time Strategy and the Firm Determinants of Enterprise Value  Value Creation Question: How do you increase the profitability of a firm? Answer: ▪ To increase profitability, value must be created for the consumer ▪ The two basic strategies for creating value are 1. differentiation 2. low cost  How Is Value Created? ▪ The firm’s value creation is the difference between V(value) and C (cost) –a firm has high profits when it creates more value for its customers and does so at a lower cost ▪ Profits can be increased by 1.Using a differentiation strategy 2.Using a low cost strategy How Is Value Created? Value Creation  Strategic Positioning ▪ To maximize profitability, a firm must –pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that choice (low cost or differentiation strategy) –configure its internal operations so that they support that position –make sure that the firm has the right organization structure in place to execute its strategy ▪ So, a firm’s strategy, operations, and organization must all be consistent with each other in order to achieve a competitive advantage and superior profitability  How Are A Firm’s Operations Configured? ▪ A firm’s operations are like a value chain composed of distinct value creation activities including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure  The Firm as a Value Chain 1. Primary Activities ▪ involves creating the product, marketing and delivering the product to buyers, and providing support and after- sale service to the buyers of the product 2. Support Activities ▪ provides the inputs that allow the primary activities of production and marketing to occur The value chain Firm Infrastructure Human Resource Management Support Technology and Product Development activities Procurement Primary Inbound Operations Outbound Marketing Service activities Logistics (production) Logistics and sales Upstream Value activities Downstream value activities 11 Location of activities: pattern 1 Location of activities: pattern 2 Firm Infrastructure Human Resource Management Technology and Product Development Procurement Inbound Operations Outbound Marketi Service Logistics Logistics ng and Upstream Value activities Downstream value activities sales Location of activities: pattern 3 Location of activities: pattern 4  Managing the Value Chain ▪ When configuring the value, consider –Where to go –Business environmental quality –Innovation context –Labor costs –Logistics –Digitization –Economies of scale 10-16 Location Economies ▪ Firms should locate value creation activities where economic, political, and cultural conditions are most conducive to the performance of that activity ▪ Firms that successfully do this can realize location economies - the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be ▪ Locating value creation activities in optimal locations –can lower the costs of value creation –can enable a firm to differentiate its product offering from those of competitors Location Economies ▪ Multinationals that take advantage of location economies create a global web of value creation activities ▪ Under this strategy, different stages of the value chain are dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized –introducing transportation costs and trade barriers complicates this picture –political risks must be assessed when making location decisions  Leveraging Subsidiary Skills ▪ To help increase firm value, managers should –recognize that valuable skills can be developed anywhere within the firm’s global network (not just at the corporate center) –use incentive systems to encourage local employees to acquire new skills –develop a process to identify when new skills have been created –act as facilitators to transfer valuable skills within the firm Leveraging Products and Competencies ▪ To increase (profit) growth, a firm can sell products or services developed at home in foreign markets ▪ Success depends on the type of goods and services, and the firm’s core competencies (skills within the firm that competitors cannot easily match or imitate) ▪ Core competencies –enable the firm to reduce the costs of value creation –create perceived value so that premium pricing is possible  Summary ▪ Firms that expand internationally can increase their profitability and profit growth by 1. Entering markets where competitors lack similar competencies 2. Realizing location economies 3. Exploiting experience curve effects 4. Transferring valuable skills within the organization  Competitive Pressures ▪ Firms that compete in the global marketplace typically face two types of competitive pressures 1. pressures for cost reductions 2. pressures to be locally responsive ▪ These pressures place conflicting demands on the firm Competitive Pressures Figure 11.8: Pressures for Cost Reductions and Local Responsiveness Pressures for Cost Reductions Pressures for cost reductions are greatest –in industries producing commodity type products that fill universal needs - needs that exist when the tastes and preferences of consumers in different nations are similar if not identical –when major competitors are based in low cost locations –where there is persistent excess capacity –where consumers are powerful and face low switching costs To respond to these pressures, firms need to lower the costs of value creation Pressures for Local Responsiveness Pressures for local responsiveness arise from 1. differences in consumer tastes and preferences 2. differences in traditional practices and infrastructure 3. differences in distribution channels 4. host government demands Firms facing these pressures need to differentiate their products and marketing strategy in each country Choosing a Strategy (Global strategy) How do the pressures for cost reductions and local responsiveness influence a firm’s choice of strategy? ▪ There are four basic strategies to compete in the international environment 1. International strategy 2. Global (standardization) strategy 3. Multi-domestic strategy 4. Transnational strategy International Strategy When does an international strategy make sense? International Strategy ▪ International strategy –leverage a company’s core competencies into foreign markets –critical elements of the value chain are centralized at headquarters ▪ The strategy works well when –the firm has core competencies that foreign rivals lack –there is low pressure for global integration –there is low pressure for local responsiveness 10-28 Global (Standardization) Strategy When does a global standardization strategy make sense? Global Strategy ▪ Global strategy – make standardized products that are marketed with little adaptation to local conditions – exploit location economies and capture scale economies ▪ The strategy works well when – the MNE is the cost leader – there is low pressure for local responsiveness – there is high pressure for global integration 10-30 HQ/subsidiary relations in the global organization Central hub HQ/subsidiaries relation HQ exercises tight control over decisions resources and information Key assets, resources, responsibilities and decisions are located at the center Local subsidiaires are one of the value chain activities Multi-domestic Strategy When does a Multidomestic (localization) strategy make sense? Multi-domestic Strategy ▪ Multidomestic strategy –emphasizes responsiveness to the unique circumstances that prevail in a country’s market –value added activities are adapted to local markets ▪ The strategy works well when –there is high pressure for local responsiveness –there is low pressure for global integration 10-33 HQ/subsidiary relations in the multinational organization Decentralized federation HQ exercises limited operational control Control is done through financial reporting and personal relations Most assets, resources, resp. and key decisions at country level HQ manage foreign operations as a portfolio of autonomous businesses Transnational Strategy When does a transnational strategy make sense? Transnational Strategy ▪ Transnational strategy simultaneously leverages core competencies worldwide, reduces costs by exploiting location economics, and adapts to local conditions ▪ The strategy works well when –global learning and knowledge flows are emphasized –there is high pressure for local responsiveness –there is high pressure for global integration 10-36 The transnational organization Integrated network Large flows of components, finished products, resources, people and information among interdependent units Distributed, specialized resources and capabilities Complex process of coordination and cooperation in a shared decision environment The Evolution of Strategy Is the choice of strategy static? ▪As competition increases, international and localization strategies become less viable ▪To survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors How Does Strategy Evolve? Changes in Strategy over Time