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Learning Objectives Introduction
13-1 Explain the concept of global strategy. Shift focus from macro environment to the firm itself.
13-2 Recognize how firms can profit by expanding globally. • International business strategy comprised of strategy,
The Strategy of 13-3 Understand how pressures for cost reductions and international environment, and firm performance.
International local responsiveness influence strategic choice. • How organizations can increase revenue (and profitability)
Business 13-4 Identify and choose the different global strategies for
by expanding their operations in foreign markets.

Chapter 13 competing in the global marketplace. • A focus on value creation.

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Strategy and the Firm 1 Figure 13.1 Determinants of enterprise value Strategy and the Firm 2

Basic Principles of Strategy Value Creation

• Strategy refers to actions that managers take to attain the • Measured by the difference between a firm’s costs of
goals of the firm. production and the quality that consumers perceive in its
products.
• Goal is to maximize the value of the firm for owners and
shareholders. • The more value customers place on a firm’s products, the
higher the price the firm can charge for those products.
• Profitability is the rate of return a firm makes on its invested capital.
Divide net profits by total invested capital. • Measured by the difference between V (value) and C
• Profit growth measures percentage increase in net profits over time. (cost).

• Porter’s two strategies: low cost and differentiation.

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Figure 13.2 Value creation Strategy and the Firm 3 Strategy and the Firm 4

Strategic Positioning Strategic Positioning continued

• Porter: • To maximize profitability, a firm must:
• A firm should be explicit about its choice of strategic emphasis with 1. Pick a position on the efficiency frontier that is viable in the sense
regard to value creation (differentiation) and low cost. that there is enough demand to support that choice.

• A firm should configure its internal operations to support that 2. Configure its internal operations, such as manufacturing,
strategic emphasis. marketing, logistics, information systems, human resources, and so
on, so that they support that position.
• Efficiency frontier shows all the different positions a firm can adopt
with regard to adding value to the product and low cost. 3. Make sure that the firm has the right organization structure in place
to execute its strategy.
• Diminishing returns imply firm has significant value built into product
offering and adding value adds significant additional cost. • The strategy, operations, and organization of the firm must
all be consistent with each other if it is to attain a
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Strategy and the Firm 5 Figure 13.4 The value chain Strategy and the Firm 6

The Firm as a Value Chain The Firm as a Value Chain continued

• Value creation activities: • Primary Activities:

• Production. • Design, creation, and delivery of the product.
• Marketing and sales. • Marketing, support, and after-sale service.

• Materials management. • R&D is concerned with the design and production processes.
• R&D. • Production is concerned with the creation of a good or service.

• Human resources. • Marketing and sales can increase the perceived value of a product
and discover customer needs.
• Information systems.
• Service activity provides after-sale service and support.
• Infrastructure.

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Global Expansion, Profitability, and Profit Global Expansion, Profitability, and Profit
Strategy and the Firm 7

Growth 1 Growth 2

The Firm as a Value Chain continued International firms are able to: Expanding the Market
• Support Activities: • Expand potential size of market for domestic products. • Core competence refers to skills within the firm that
• Provide inputs that allow the primary activities to occur.
competitors cannot easily match or imitate.
• Realize location economies.
• Can exist in any of the value-creation activities.
• Information systems can alter the efficiency and effectiveness with • Realize greater cost economies from experience effects.
which a firm manages its other value creation activities. • Bedrock of a firm’s competitive advantage.
• Logistics controls the transmission of physical materials through the • Earn a greater return-on-investment.
• Successful firms transfer core competencies to foreign markets
value chain. where indigenous competitors lack comparable competencies.
• Human resources ensures that the company has the right mix of
skilled people and ensures training, motivation, and compensation.

• Infrastructure includes the organization structure, control systems,

and culture of the firm.

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Global Expansion, Profitability, and Profit Global Expansion, Profitability, and Profit Global Expansion, Profitability, and Profit
Growth 3 Growth 4 Growth 5

Location Economies Location Economies continued Experience Effects

• Economies that arise from performing a value creation • Creating a Global Web: • Experience curve—systematic reductions in production
activity in the optimal location for that activity. • When different stages of the value chain are dispersed to locations costs that have been observed to occur over the life of a
around the globe where value added is maximized or costs of value product.
• Can lower the costs of value creation and help the firm are minimized.
achieve a low-cost position. • Learning effects: cost savings that come from learning by doing.
• Should create a competitive advantage.
• Can enable a firm to differentiate its product offering from • Economies of scale: reductions in unit cost from producing large
• Should be able to better differentiate product offering (thereby raising volumes of a product.
those of competitors. perceived value, V) and lower cost structure (C) than a single-
location competitor. • Strategic significance: moving down the experience curve allows a
firm to reduce its cost of creating value and increase its profitability.
• Some Caveats:
• Transportation costs, trade barriers, and political and economic risk
complicate the benefits of location economies.

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Global Expansion, Profitability, and Profit Global Expansion, Profitability, and Profit
Figure 13.5 The experience curve Growth 6 Growth 7

Leveraging Subsidiary Skills Leveraging Subsidiary Skills continued

• In mature multinationals, development of valuable skills • Multinational enterprise managers must:
can occur in foreign subsidiaries. • Recognize that valuable skills that lead to competencies can arise
anywhere within the firm’s global network, not just at the corporate
• Leveraging the skills created within subsidiaries and
center.
applying them to other operations within the firm’s global
network may create value. • Establish an incentive system that encourages local employees to
acquire new skills.
• Have a process for identifying when valuable new skills have been
created in a subsidiary.

• Act as facilitators, helping transfer valuable skills within the firm.

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Global Expansion, Profitability, and Profit Cost Pressures and Pressures for Local Cost Pressures and Pressures for Local
Growth 8 Responsiveness 1 Responsiveness 2

Profitability and Profit Growth Summary Pressures for Cost Reductions Pressures for Local Responsiveness
• Firms that expand globally can increase profitability and • Require a firm to try to lower the costs of value creation. • Differences in Customer Tastes and Preferences:
profit growth by:
• Greater in industries producing commodity-type products. • Customer demands for local customization are on the decline
• Lowering costs and adding value to product offering through location worldwide in some markets, but not others.
economies, experience curve effects, and the transfer of valuable • Universal needs—when the tastes and preferences of consumers in
different nations are similar if not identical. Examples: steel, sugar. • Significant differences in consumer needs, wants, tastes still exist in
skills between subsidiaries. consumer goods markets.
• Also intense in industries where major competitors
are based in low-cost locations, where there is persistent • Differences in Infrastructure and Traditional Practices:
excess capacity, and where consumers are powerful and • May require the delegation of manufacturing and production
face low switching costs. functions to foreign subsidiaries.

• Example: technical standards.

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Cost Pressures and Pressures for Local Cost Pressures and Pressures for Local
Responsiveness 3 Responsiveness 4
Choosing a Strategy 1

Pressures for Local Responsiveness continued Pressures for Local Responsiveness continued The need to customize the product to local
• Differences in Distribution Channels: • Rise of Regionalism: conditions may work against the implementation of
a global standardization strategy.
• May necessitate delegation of marketing functions to national • Tendency toward the convergence of tastes, preferences,
subsidiaries. infrastructure, distribution channels, and host-government demands • Concessions may need to be made to local conditions.
with a broader region that is composed of two or more nations.
• Host-Government Demands: • Requires cost/benefit analysis and opportunity
• Examples: EU, North America, Latin America.
• Economic and political demands.
assessment.
• Ability to standardize a product within a region allows for greater
• Threats of protectionism, economic nationalism, and local content scale economies and lower costs.
rules dictate that international businesses manufacture locally.

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Choosing a Strategy 2 Figure 13.7 Four basic strategies Choosing a Strategy 3

Four International Strategies: Global Standardization Strategy

• Global standardization. • Looks to reap the cost reductions that come from
economies of scale, learning effects, location economies.
• Localization strategy.
• Goal is to pursue low-cost strategy on global scale.
• Transnational strategy.
• Production, marketing, R&D, and supply chain activities
• International strategy. are concentrated in a few favorable locations.
• Avoids customization.
• Makes the most sense when there are strong pressures
for cost reductions and demands for local responsiveness
are minimal.
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Choosing a Strategy 4 Choosing a Strategy 5 Choosing a Strategy 6

Localization Strategy Transnational Strategy International Strategy

• Customizes the firm’s goods or services so they are a • Achieve low costs, differentiate product offerings to • Taking products developed for domestic market and
good match to tastes and preferences in different national account for local differences, foster multidirectional flow of selling them internationally with minimal local
markets. skills between subsidiaries. customization.
• Most appropriate when: • Makes most sense when demands for local • For firms with low cost pressures and low pressures for
• There are substantial differences across nations with regard to
responsiveness are high but cost pressures are moderate local responsiveness.
consumer tastes and preferences. or low.
• Tend to centralize product development functions such as
• Cost pressures are not too intense. • Places conflicting demands on the company: R&D at home but establish manufacturing and marketing
functions in each major country or geographic region in
• Customization limits the ability of the firm to capture the • Differentiating the product to respond to local demands in different
geographic markets raises costs, which runs counter to the goal of which they do business.
cost reductions associated with mass-producing a
reducing costs.
standardized product for global consumption.
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Choosing a Strategy 7 Figure 13.8 Changes in strategy over time

The Evolution of Strategy

• Over time, competitors will emerge.
• International strategy may not work long term.

• Firms may need to shift to global standardization or

transnational strategy in advance of competitors.
• Localization strategy may also face competitors and have Because learning changes everything. ®

to shift to a transnational strategy.

• International and localization strategies less viable as
competitors emerge. www.mheducation.com

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