1

International Business
BT-360
HILL CHAPTER 9
THE STRATEGY OF INTERNATIONAL BUSINESS
 2
Required for today

 Hill edition 11, Chapter 9, The Strategy of International

Business
 Core material, critical reading for comprehension
 Entire chapter

 No Case Study
 3
Learning Objectives

 Explain the concept of strategy

 Recognize how firms can profit* by expanding globally
 *increase profit AND profit growth
 Understand how pressures for cost reductions and pressures for local
responsiveness influence strategic choice
 Identify and choosing the different strategies for competing globally
 4
What Is Strategy?

 Strategy – the actions that managers take to attain the goals of the firm
LO13-1

 Corporate strategy addresses overall organizational purpose

 Business strategy addresses specific business units
 Firms need to pursue strategies that increase profitability and profit growth
 Profitability – the rate of return the firm makes on its invested capital
 Profit growth – is the percentage increase in net profits over time
 Profit growth is discussed in the next learning objective
 In general, firms should seek to increase enterprise value (EV)
 5
Increasing Enterprise Value

McGraw-Hill Education. Figure 13.1

 6
Profitability and Value

 To increase profitability we must add value or lower costs

Real consumer value

What consumers pay

Profit

Difference
impacted by
competition

McGraw-Hill Education

Lowering cost is a production issue

Raising price (which requires raising value) is a differentiation issue
 7
Profitability, Value and Competition

 If the product has greater value than Price

competitors, the price can be raised
resulting in more profit

 If the competition is stronger only a

lower price can be charged, resulting in
Price
less profit
 8
Profitability and Strategy

 Since increasing value results in higher cost, a choice between 2

strategies is required
 Differentiation strategy – adding value to a product so that customers are
willing to pay more for it
 Low cost strategy – lowering production costs
 You can only have 1 single highest priority.
 The choice in strategic positioning is critically important
 9
Why is Strategic Positioning Important?

 Michael Porter argues that firms need to choose either differentiation or

low cost, AND then configure internal operations to support the choice
 To do this, maximize long run return on invested capital by:
 first pick a viable position on the efficiency frontier (on next slide)
 then:
 have the right organizational structure to execute the strategy
 Organization will covered in chapter 10
 configure internal operations to support that position
 10
Efficiency Frontier

 Strategic Choice in the International Hotel Industry

McGraw-Hill Education
 11
Optimizing the Firm

 A firm’s internal operations are like a value chain composed of a series

of distinct value creation activities (on next slide):
 production, marketing, materials management, R&D, human resources,
information systems, and the firm infrastructure
 All of these activities must be managed effectively and be consistent
with firm strategy
 12
Optimizing the Firm’s Value Chain

 Primary activities
 R&D
 Production
 marketing and sales
 customer service
 Support activities
 information systems
 logistics
McGraw-Hill Education
 human resources
 13
Increasing Profit Growth

1. Leveraging their products or services, aka sell more LO13-2

 sell more of their domestic production in international markets

 14
Increasing Profit Growth

2. Realize location economies

 disperse value creation activities to locations where
they can be performed most efficiently and
effectively
3. Experience Curve Effects - Economies of scale &
the experience curve.

4. Leverage resources across international boundaries

 leveraging skills and innovation developed in foreign
operations and transfer them elsewhere in the firm (could
be a cost or value advantage)
 15
1. Leveraging Product & Services

 Selling internationally more of what they produce domestically

 The success of firms that expand internationally depends on
 the goods or services sold
 the firm’s core competencies . A strong predictor of success in selling more
internationally is based in a firm’s core competence
 16
1. Leveraging Product & Services

 Core competencies - skills within the firm that competitors cannot easily
match or imitate
 Core competencies allow firms to reduce the costs and/or to more easily create
perceived value so premium pricing is possible
 can exist in any value creation activity

McGraw-Hill Education
 17
2. Location Economies

 Location economies – 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
 18
2. Location Economies

 Firms that take advantage of location economies in different parts of the

world create a global web of value creation activities
 different stages of the value chain are dispersed to locations where perceived
value is maximized or where the costs of value creation are minimized

McGraw-Hill Education

San Jose Mexico NYC Philippines

 19
3. Effect of - Economy of Scale

 Economy of scale - the reductions in unit cost achieved by producing a

large volume of a product, i.e. production on a large scale
 Sources of economies of scale include
 spreading fixed costs over a large volume
 utilization of production facilities more intensively
 increasing bargaining power with suppliers
 Firms may serve an expanded global market from a central location to
accelerate economy of scale effects & experience curve
learning.
 20
3. Effect of - the Experience Curve

 Experience curve – refers to the systematic reductions in production

costs that occur over the life of a product
 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
 21
3. Effect of - the Experience Curve

 Learning effects are cost savings from learning by doing

 When labor productivity increases
 individuals learn the most efficient ways to perform particular tasks
 managers learn how to manage new operations more efficiently

McGraw-Hill Education
 22
4. Leverage Resources Internationally

 Gain access to multiple innovation processes

Managers in international firms should:
 Recognize valuable skills cam be applied elsewhere in the firm and can
arise anywhere within the firm’s global network - not just at the corporate
center or domestic facilities.
 Establish an incentive system that encourages local employees to acquire new
skills
 Have a process for identifying valuable new skills created in subsidiaries
 Facilitate transfer of skills within the firm across borders
 23
4. Leverage Resources Internationally

Must have
competitive
Must have Advantages
competitive
advantages But only some
advantages can
transfer

Only these are transferable

 24
International Competitive Pressures

 There are 2 conflicting international competitive pressures LO13-3

 Cost reductions – firm is forced to lower unit costs

 Local responsiveness – firm must adapt its product to meet local demands in
each market, but this generally raises costs
 Dealing with both pressures is challenging because they limit the ability
of firms to simultaneously leverage products, realize location economies,
realize experience effects, and leverage resources within the firm
 25
Cost Reductions Pressures

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 there is persistent excess capacity (raises costs)
 Where consumers are powerful and face low switching costs
 26
Local Responsiveness Pressures

Pressures for local responsiveness arise from:

 Differences in consumer tastes and preferences
 strong pressure emerges when consumer tastes and preferences differ
significantly between countries
 Differences in traditional practices and infrastructure
 strong pressure emerges when there are significant differences in infrastructure
and/or traditional practices between countries
 27
Local Responsiveness Pressures

 Differences in distribution channels (Wal-Mart in Europe)

 need to be responsive to differences in distribution channels between countries
 Host government demands
 economic and political demands imposed by host country governments may
require local responsiveness
 28
International Strategies

 There are four basic strategies to compete in international markets to deal LO13-4
with cost and local responsiveness needs
 International
 Global
 Localization
 Transnational

McGraw-Hill Education
 29
International

 International – take products first produced for the domestic market and
sell them internationally with only minimal local customization
 This strategy makes sense when
 there are low cost pressures and low pressures for local responsiveness
 30
Globalization

 Global standardization - increase profitability and profit growth by

reaping the cost reductions from economies of scale, learning effects,
and location economies
 goal is to pursue a low-cost strategy on a global scale
 This strategy makes sense when
 there are strong pressures for cost reductions and demands for local
responsiveness are minimal
 31
Localization

 Localization - increase profitability by customizing goods or services so

that they match tastes and preferences in different national markets
 This strategy makes sense when
 there are substantial differences across nations with regard to consumer tastes
and preferences and cost pressures are not too intense
 32
Transnational

 Transnational - tries to simultaneously achieve low costs through

location economies, economies of scale, and learning effects AND
differentiate the product offering across geographic markets to account
for local differences
 firms differentiate their product across geographic markets to account for local
differences and foster a multidirectional flow of skills between different
subsidiaries in the firm’s global network of operations
 This strategy makes sense when
 both cost pressures and pressures for local
responsiveness are intense
 33
Think Like a Manager

 Imagine that you are the manager of a foreign subsidiary of a major U.S.
apparel company. Consumer tastes in your location require a high degree
of local responsiveness, while declining sales in the United States require
significant cost reductions.

 Which of the four main strategic postures (global standardization,

localization, transnational, or international) would you adopt to address
these pressures? What advantages or disadvantages would that strategy
provide?

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13-33
 34
Required for Next Class

 Hill edition 11, Chapter 9, The Strategy of International

Business
 Core material, critical reading for comprehension
 Entire chapter

 Case Studies: BRL Hardy and Bosch India – Becoming a Transnational

Organization
 Look for strategy components in each case and strategy changes
 Quiz will be from BRL Hardy and Bosch