International Business: by Charles W.L. Hill

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International

Business 7e

by Charles W.L. Hill


Chapter 12

The Strategy of International


Business
Introduction

What actions can managers take to compete more


effectively as an international business?
How can firms increase profits through international
expansion?
What international strategy should firms pursue?

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Strategy And The Firm

A firm’s strategy refers to the actions that managers take


to attain the goals of the firm
Profitability can be defined as the rate of return the firm
makes on its invested capital (ROIC)
Profit growth is the percentage increase in net profits
over time
Expanding internationally can boost profitability and profit
growth

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Calculating Profitability and Profit
Growth

The formula to determine the percentage growth for the


year is:
Percentage growth = (Ending value / Beginning value) -1
Thus, the growth rates for each of the years is as follows:
Year one growth = $120,000 / $100,000 - 1 = 20%
Year two growth = $135,000 / $120,000 - 1 = 12.5%

ROIC= NOPLAT/ IC
Where
NOPLAT = Net operating profit less adjusted Taxes
IC= Invested Capital
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Strategy And The Firm

Figure 12.1: Determinants of Enterprise Value

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Value Creation

Figure 12.2: Value Creation

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Value Creation

The value created by a firm is measured by the difference


between V (the price that the firm can charge for that
product given competitive pressures) and C (the costs of
producing that product)
The higher the value customers place on a firm’s
products, the higher the price the firm can charge for those
products, and the greater the profitability of the firm

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Value Creation

Profits can be increased by:


adding value to a product so that customers are willing to
pay more for it – a differentiation strategy
lowering costs – a low cost strategy

Michael Porter argues that superior profitability goes to


firms that create superior value by lowering the cost
structure of the business and/or differentiating the product
so that a premium price can be charged

12-9
Strategic Positioning

Michael Porter argues that firms need to choose either

Differentiation or
Low cost
and then configure internal operations to support the choice

To maximize long run return on invested capital, firms must:


pick a viable position on the efficiency frontier
configure internal operations to support that position
have the right organization structure in place to execute
the strategy

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Operations: The Firm As A Value Chain
A firm’s operations can be thought of a value chain
composed of a series of distinct value creation activities.
Production,
Sales & marketing
Materials management
 R&D
Human resources
 Information systems, and the firm infrastructure
Value creation activities can be categorized as primary
activities (R&D, production, marketing and sales, customer
service) and support activities (information systems,
logistics, human resources)

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Operations of The Firm As A Value
Chain
Figure 12.4: The Value Chain

12-12
Global Expansion, Profitability,
And Profit Growth
International firms can:

Expand the market for their domestic product offerings by


selling those products in international markets

1-Realize location economies by dispersing individual value


creation
2-Realize greater cost economies from experience effects by
serving an expanded global market from a central location,
thereby reducing the costs of value creation
3-Earn a greater return by leveraging any valuable skills
developed in foreign operations and transferring them to
other entities within the firm’s global network of operations

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Expanding The Market: Leveraging
Products And Competencies

Firms can increase growth by selling goods or services


developed at home internationally
The success of firms that expand internationally depends
on the goods or services they sell, and on their 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 and/or to create perceived value in such a
way that premium pricing is possible

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Location Economies

When firms base each value creation activity at that


location where economic, political, and cultural conditions,
including relative factor costs, are most conducive to the
performance of that activity, they 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)

By achieving location economies, firms can:


lower the costs of value creation and achieve a low cost
position
differentiate their product offering

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Location Economies

Firms that take advantage of location economies in


different parts of the world, 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

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Experience Effects

Economies of scale refer to the reductions in unit cost achieved by


producing a large volume of a product

Sources of economies of scale include:


spreading fixed costs over a large volume
utilizing production facilities more intensively
increasing bargaining power with suppliers

By moving down the experience curve, firms reduce the cost of
creating value
To get down the experience curve quickly, firms can use a single
plant to serve global markets

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Summary

Managers need to keep in mind the complex relationship


between profitability and profit growth when making
strategic decisions about pricing
In some cases, it may be worthwhile to price products
low relative to their perceived value in order to gain market
share

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Cost Pressures And Pressures
For Local Responsiveness

Firms that compete in the global marketplace typically face


two types of competitive pressures:
pressures for cost reductions
pressures to be locally responsive

These pressures place conflicting demands on the firm


Pressures for cost reductions force the firm to lower unit
costs, but pressure for local responsiveness require the
firm to adapt its product to meet local demands in each
market—a strategy that raises costs

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Cost Pressures And Pressures
For Local Responsiveness

Figure 12.6: Pressures for Cost Reductions and Local


Responsiveness

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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) where price is the main competitive weapon
when major competitors are based in low cost locations
where consumers are powerful and face low switching
costs
Eg. Steel for construction , Chemicals , Computers etc.

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Pressures For Local Responsiveness

Pressures for local responsiveness arise from:

Differences in consumer tastes and preferences - strong


pressures for local responsiveness emerge when consumer
tastes and preferences differ significantly between countries.
Eg. MTV Networks, Automobiles ( Trucks and Cars)
Differences in traditional practices and infrastructure -
pressures for local responsiveness emerge when there are
differences in infrastructure and/or traditional practices
between countries
Eg. 110 volts in N. America and 240 volts in Europe for
Consumer Electrical systems. LHD and RHD vehicles.

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Pressures For Local Responsiveness

differences in distribution channels - a firm's marketing


strategies needs to be responsive to differences in
distribution channels between countries.
Eg. Pharmaceuticals in Japan and US. Soft sell Vs Hard
Supermarkets
host government demands - economic and political
demands imposed by host country governments may
necessitate a degree of local responsiveness.
Eg. Demands for local content, Bombardier Canadian
railcar manufacturer has different plants in Germany,
France, Austria.

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Choosing A Strategy

There are four basic strategies to compete in the


international environment:
global standardization
localization
transnational
International

The appropriateness of each strategy depends on the


pressures for cost reduction and local responsivness in the
industry

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Choosing A Strategy

Figure 12.7: Four Basic Strategies

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Global Standardization Strategy

The global standardization strategy focuses on


increasing profitability and profit growth by reaping the cost
reductions that come from economies of scale, learning
effects, and location economies
The strategic goal is to pursue a low-cost strategy on a
global scale
The global standardization strategy makes sense when:
there are strong pressures for cost reductions
demands for local responsiveness are minimal.
Eg. Fly Dubai. Steel, Cement, Computers, Cemex etc.

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Localization Strategy

The localization strategy focuses on increasing


profitability by customizing the firm’s goods or services so
that they provide a good match to tastes and preferences in
different national markets.
The localization strategy makes sense when:
Localization is most appropriate where consumer
tastes and preferences differ substantially across
nations and cost pressures are not too intense.
Cant take advantage of economies of scale.
Eg. MTV, Amazon in Japan, Nike. Yum brands

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Transnational Strategy

The transnational strategy tries to simultaneously:


achieve low costs through location economies,
economies of scale, and learning effects
differentiate the product offering across geographic
markets to account for local differences
foster a multidirectional flow of skills between different
subsidiaries in the firm’s global network of operations

The transnational strategy makes sense when:


cost pressures are intense
pressures for local responsiveness are intense
Eg. P&G, Colgate Miswak, A3 Audi in Pakistan.
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International Strategy

The international strategy involves taking products first


produced for the domestic market and then selling them
internationally with only minimal local customization

The international strategy makes sense when


Cost reduction pressure = Low
Local responsiveness = Low

Eg. Apple Products, Luxury Brands like Patek Philippe,


Lamborghini, Chanel etc.

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The Evolution of Strategy

An international strategy may not be viable in the long


term
To survive, firms may need to shift to a global
standardization strategy or a transnational strategy in
advance of competitors
Similarly, localization may give a firm a competitive edge,
but if the firm is simultaneously facing aggressive
competitors, the company will also have to reduce its cost
structures, and the only way to do that may be to shift
toward a transnational strategy

12-30
The Evolution of Strategy

Figure 12.8: Changes in Strategy over Time

12-31

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