International Business: Competing in the Global Marketplace Fifth Edition
The Strategy of International Business
Learning objectives
With this chapter we switch our
emphasis from the environment
of business to the strategies of
firms. Students should be able to
more directly understand how
firms handle the complex
international environment
previously described.
Suggest the reasons why firms
may decide to enter
international business, and
identify the benefits from
international strategies
Outline the basic strategies
undertaken by MNEs, and
specifically focus on how they
relate to the needs for local
responsiveness and cost
minimization
Chapter 12
12
In this chapter the focus shifts from the environment to the
firm itself and, in particular, to the actions managers can
take to compete more effectively as an international
business. This chapter looks at how firms can increase
their profitability by expanding their operations in foreign
markets. The different strategies that firms pursue when
competing internationally and the various factors that
affect a firms choice of strategy are discussed.
The question why firms often enter into strategic alliances
with their global competitors is assessed together with the
benefits, costs and risks of strategic alliances.
Subsequent chapters build on the framework established
here to discuss a variety of topics including the design of
organization structures and control systems for
international businesses, strategies for entering foreign
markets, the use and misuse of strategic alliances,
strategies for exporting, and the various manufacturing,
marketing, R&D, human resource, accounting, and
financial strategies that are pursued by international
businesses.
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OUTLINE OF CHAPTER 12: THE STRATEGY OF INTERNATIONAL BUSINESS

Opening Case: Global Strategy at MTV
Strategy and the Firm
The Firm as a Value Chain
The Role of Strategy
Profiting from Global Expansion
Location Economies
Experience Effects
Leveraging Core Competencies
Management Focus: McDonalds every where
Leveraging Subsidiary Skills
Pressures for Cost Reduction and Local Responsiveness.
Pressure for Cost Reductions
Pressures for Local Responsiveness
Management Focus: Tailoring World Cars to the U.S. Market
Strategic Choices
International Strategy
Management Focus: IKEA
Multi domestic Strategy
Global Strategy
Transnational Strategy
Critical Discussion Questions
Closing case: Global Strategy at General Motors
TEACHING SUGGESTIONS
In order to trigger discussion you can ask the students to think of strategy in a setting that
they are familiar with:
1) How many of you watch MTV? Regularly? Now and then?
2) If you had responsibility for introducing MTV in a new national market a
market that MTV has not served before how would you go about it?
3) Would you broadcast American MTV programs in this new market? How would
you ensure that MTVs broadcast content would appeal to viewers in the new
market?

TRANSITION
After students have shared their perspective you can transition into the chapter by
discussing some of the facts from the Opening Case.
-By March 2003 MTV had 30 channels reaching 413 million households in 166
countries.
-In 1987 when MTV first began broadcasting largely American content to Europe they
discovered that outside a handful of American superstars, the European audiences
interests were surprisingly local
-By 1995 MTV broke Europe into a number of regional feeds. Today there are eight
distinct European feeds designed to cater to the local interests in different parts of
Europe.
-Today, although 60 percent of MTVs programming originates in the United States there
is an increasing amount of local content. The Indian MTV channel produces 21
homegrown shows.
-The localization push has reaped great benefits for MTV. In India alone ratings have
improved 700% since MTV began to increase local content.

LECTURE OUTLINE FOR CHAPTER

Slide 12-2 Global strategy at MTV networks

Although MTV Networks has become a modern symbol of globalization, MTVs move
into global markets was not exactly smooth. In 1987, it piped a single feed across Europe
almost entirely composed of American programming with English-speaking Veejays.
Naively, the networks U.S. managers thought Europeans would flock to the American
programming. But while viewers in Europe shared a common interest in a handful of
global superstars, who at the time included Madonna and Michael Jackson, their tastes
turned out to be surprisingly local. What was popular in Germany might not be popular in
Great Britain. Many staples of the American music scene left Europeans cold. MTV
suffered as a result. Soon local copycat stations were springing up in Europe that focused
on the music scene in individual countries. They took viewers and advertisers away from
MTV.
Since MTV changed its strategy to give a prominent role to local programming,
things have changed a lot. In India, ratings increased by more than 700 percent between
1996 when the localization push began and 2000. In turn, localization helps MTV to
capture more of those all-important advertising revenues, even from other multinationals
such as Coca-Cola.

Slide 12-3 Strategy & the firm

A firms strategy can be defined as the actions that managers take to attain the goals of
the firm. For most firms, the preeminent goal is to maximize long-term profitability. A
firm makes a profit if the price it can charge for its output is greater than the costs of
producing that output or if the return on equity is high.

Slide 12-4 Value creation

Value creation is an important determinant of profit. If a consumer perceives the value of
a good to be much higher than the actual cost of producing that good, profit margins will
be higher.
Porter emphasized two basic strategies to create value and attain competitive advantage,
low cost and differentiation strategy. Managers must decide whether they seek
competitive advantage based on their ability to achieve a low cost position relative to the
competition, or whether they seek competitive advantage based on their ability to offer
the customer unique features that the customer is willing to pay a premium for.

Slide 12-5 Value creation

Managers must decide where the firm will be positioned with regard to value (V) and
cost (C). Once this decision has been made, managers must align the firms operations so
that they align with the value and cost decisions.

Slide 12-6 Strategic Positioning

Not all positions on the efficiency frontier are viable. As shown on figure 12.2, in the
international hotel industry, there might not be enough demand to support a chain that
emphasizes very low cost and strips all of the value out of its product offering. This is
because international travelers are relatively affluent and expect a degree of comfort
(value) when they travel away from home. Thus, a firm must also chose a strategic
position that is viable.

Slide 12-7 Firm as a Value Chain

The internal value adding activities of the firm can be viewed as Primary Activities such
as Marketing, R&D, and Production. Other internal value adding activities that are
viewed as Support Activities are Materials Handling, Human Resources and Information
Systems. Primary Activities are value adding activities that are directly connected to the
creation of the product or service. Support Activities provide inputs that allow Primary
Activities to occur.

Slide 12-8 Firm as a value chain

Primary Activities and Support Activities can be depicted pictorially as shown in Fig 12.3
with Primary Activities forming the direct flow that leads to an end product or service
and Support Activities playing an indirect role.
Slide 12-9 Strategy in international business
The objective of strategic thinking is to establish and sustain Competitive Advantage with
respect to competitors. Accordingly strategy involves identifying and pursuing actions
that will lower costs or actions that will set the company apart through differentiation.

Slide 12-10 Advantages of global expansion

Location economies means that trade barriers and transportation costs permitting, the
manager gets the maximum benefit if activities are placed in the national setting where
economic, political and cultural conditions are the most conducive to the performance of
that activity.
Experience effects are systematic reductions in production costs observed over the life of
a product.
Core competencies are skills within the firm that competitors cannot easily match or
imitate. Global expansion can be a way to further exploit these competencies.
Leveraging skills created in one foreign subsidiary in another part of the companys
global operations is one way global companies create value.

However, the profitability of global companies is often constrained by competitive

pressure which forces them to reduce costs and modify their products or services to suit
local requirements.

Slide 12-11 Location economies

These are economies that arise from performing a value creation activity in a particular
optimal location. According to this a product could be designed in France, manufactured
in Mexico and marketed using skills of American managers. A location may be optimal
because it has favorable factor costs and may help a company either achieve a low cost
position or a differentiated position.

Slide 12-12 Creating a Global Web

A map showing how the manufacture of the Pontiac Le Mans is done all over the world
to take advantage of location economies.

Slide 12-13 Caveats

There are situations where location economies cannot be exploited. Usually this is when
transportation costs, trade barriers and political risk pose a hurdle.

Slide 12-14 Experience effects

Experience effects are systematic reductions in production costs over the life of the
product. These could be the result of learning effect as well as economies of scale.

Slide 12-15 Learning Effect

Learning can lead to significant cost reductions over the life of the product. Both worker
productivity and management efficiency play a role in the experience effect. Sometimes,
the cost reduction, are hard to manage and completely cease within a few years after
initial production.
Slide 12-16 Economies of scale
This phenomenon refers to the declines in unit cost as production capacity increases.
Often requires the manager to make a large irreversible commitment of specialized plant,
personnel, and equipment.

Slide 12-17 Strategic significance of the experience curve

The speed with which a firm moves down the Experience Curve will determine how
much advantage it has over its competitors. A plant serving a large international market
from a single location can benefit significantly because the large volume allows quicker
learning. Experience curves are often exploited by very aggressive marketing because
experience is truly a first-mover advantage.

Slide 12-18 Leveraging core competencies

Core competencies are unique skills in any part of the firms value adding activities that
are extremely difficult if not impossible for competitors to imitate. Global companies can
leverage these skills in international markets. MTV in the Opening Case takes its core
competencies in TV programming in music-related areas to new markets all over the
world.

Slide 12-19 Leveraging subsidiary skills

A global corporation can find vital skills developed in one foreign subsidiary and
leverage them in another part of the world. In order to take advantage of subsidiary skills
the company must have sophisticated processes that identify new skills that could be of
interest. Once these skills are identified, managers must have the capability to transfer
them elsewhere. When Hewlett-Packards Singapore subsidiary displayed the ability to
design high quality, low cost ink-jet printers, Hewlett-Packard had to find a way to use
Singapore as a source for design know-how in the global market for ink-jet printers.

Slide 12-20 Pressures for cost reduction

In industries where it is hard to adopt a differentiated position, and where major
competitors have aggressive low-cost position, managers will often experience intense
pressure to reduce the cost. These pressures are the strongest when the consumers have
significant power. After the emergence of a liberalized trade regime worldwide, many
familiar industries such as bulk chemicals, petroleum, and the personal computer

Slide 12-21 Pressure for local responsiveness

Whether it is consumer tastes, infrastructure, distribution channels, or host government,
global companies can often experience pressure to conform to the local needs.

Slide 12-22 Pressures for Cost Reduction & Local Responsiveness

The diagram shows that High on Cost Reduction and High on Local Responsiveness is
the way many global companies have positioned themselves.
Slide 12-23 Management Focus: Tailoring World Card for the US Market
Examples of specific ways in which car manufacturers cater to the unique demands of the
American market

Slide 12-24 Strategic Choices

Managers in a global market have some choices. They can formulate their strategy as
International Strategy, Multi domestic Strategy, Global Strategy, and Transnational
Strategy.

Slide 12-25 Four basic strategies

Managers can see the 4 strategies in terms of their ability to handle the cost pressure and
their ability to be locally responsive.

Slide 12-26 International Strategy

Firms pursuing an international strategy transfer the skills and products derived from core
competencies to foreign markets, while undertaking some limited local customization.
However, they may suffer from a lack of extensive local responsiveness and from an
inability to exploit experience curve and location economies.

Slide 12-27 Multi domestic strategy

Firms pursuing a multi domestic strategy customize their product offering, marketing
strategy, and business strategy to national conditions. However, they may suffer from an
inability to transfer skills and products between countries, and from an inability to exploit
experience curve and location economies.

Slide 12-28 Global Strategy

Firms pursuing a global strategy focus on reaping the cost reductions that come from
experience curve and location economies. However, they may suffer from a lack of local
responsiveness.

Slide 12-29 Transnational Strategy

In a transnational strategy firms must exploit experience curve cost economies and
location economies, transfer distinctive competencies within the firm, and pay attention
to pressures for localization. To do this here, there need to be flows of knowledge from
the parent to subsidiaries, flows from foreign subsidiary to home country, and from
foreign subsidiary to foreign subsidiary - a process called global learning.

Slide 12-30 Caterpillar

This diagram illustrates the position of Caterpillar with regard to Cost Pressures and
Local Responsiveness.

Slide 12-31 Advantages and Disadvantages

This is a tabular representation of the advantages and disadvantages of the 4 strategies
International, Multi domestic, Global, and Transnational serves as a guide for managers
in the process of choosing the right strategy.
ANSWERS TO CRITICAL DISCUSSION QUESTIONS FOR CHAPTER 12

QUESTION 1: In a world of zero transportation costs, no trade barriers, and nontrivial

differences between nations with regard to factor conditions, firms must expand
internationally if they are to survive. Discuss.

ANSWER 1: Different countries are usually endowed with different factor conditions.
The theory of comparative advantage suggests that different activities should take place
in the countries that can perform them most efficiently. If there are also no barriers or
costs to trade, then it is likely that a lot of industries will be based out of the countries that
provide the best set of factor endowments.
If a firm is in a sub-optimal location, it will either have to expand internationally in order
to locate its value adding in optimal conditions or switch to a different industry where the
factor endowments are in its favor. For firms already located in the countries with the
most favorable factor endowments for their industry, however, there may not be a need to
expand internationally. Firstly, the firm may be content to simply focus on the domestic
market. But if the firm does want to expand internationally, it may be able to do so via
licensing or exporting, and need not necessarily undertake FDI. Thus both theory and
practice suggest that many firms are able to survive quite well without having to expand
internationally.

QUESTION 2: Plot the position of the following firms on Figure 12.5: Procter &
Gamble, IBM, Nokia, Coca Cola, Dow Chemicals, US Steel, and McDonalds. In each
case justify your answer.

ANSWER 2: Note: If assigning this as a discussion question, the instructor may prefer to
use examples of local companies that the students are likely to have some more detailed
knowledge about.

Based simply on the information in the book, it is difficult to say for sure where all these
companies fit. Here is an armchair answer, which a person more knowledgeable about
each company may choose to refute. Another way to position this is to say, Based on
the information in the text, my best attempt to classify these companies is as follows. I
am open to discussing your positioning which may be different.
- Proctor & Gamble: They reasonably fit into the international category; although it is
clear that they are becoming more transnational (see Bartlett and Ghoshal).
- IBM: Originally a classic International, but perhaps now moving more to a global
strategy.
- Coca-Cola: With R&D and the general market approach all coming from headquarters,
but with subsidiaries having some discretion over the advertising message, this is
probably an international.
- Dow Chemical: Given it is in a classic commodity industry, most likely a global firm
- US Steel: Given the cost pressures and commodity nature of this business, a global
strategy is most likely.
- McDonalds: Given the international consistency of the product and the delivery, the
slight adaptations to local tastes and requirements, and the lack of strong cost pressures,
McDonalds would appear to be following an international strategy.

QUESTION 3: Are the following global industries or multi domestic industries: bulk
chemicals, pharmaceuticals, branded food products, moviemaking, television
manufacture, personal computers, and airline travel?

ANSWER 3:
It is difficult, and perhaps arbitrary, to label industries as strictly one or the other. For
example, there are huge economies of scale in development and manufacturing of
pharmaceuticals, yet governmental regulations make it necessary to do a number of
things different in various countries. Overall, however it can be said that the following
are global: bulk chemicals, televisions, personal computers, pharmaceuticals, and airline
travel (although in all instances some localization is required - the keyboard and software
for computers, the power supplies for TVs, or the labeling and regulatory paperwork for
bulk chemicals and pharmaceuticals). Branded food products and movie making are still
predominantly multi domestic, although some foods have worldwide name recognition
(Coke, Pepsi, Nestle), and movies are often dubbed or subtitled for international
audiences as well as developed with the interests of global customers taken into
consideration.

QUESTION 4: What do you see as the main organizational problems that are likely to be
associated with implementation of a transnational strategy?

ANSWER 4:
Simultaneously trying to achieve cost efficiencies, global learning, and local
responsiveness places difficult and contradictory demands on an organization. Managing
these conflicting demands requires the setting of control and motivational policies for
people and organizations that force balancing of these demands at multiple levels within
firms. The organizational challenges involve managing these inherent conflicts to
resolutions that serve the best interests of the firm overall.

TEACHING SUGGESTIONS FOR THE CLOSING CASE OF CHAPTER 12

The closing case describes global strategy at General Motors. GM has always had to
manage a trade-off between a centrally driven global strategy and a strategy that would
allow each plant or national organization to design and build cars specifically tailored for
its market. The best approach lies somewhere between pure centralization and pure
decentralization, but finding the right mix is a challenge for GM and many other firms.
The following questions can be helpful in directing the discussion.

QUESTION 1: How would you characterize the strategy pursued by GM in the (a)
developing world and (b) Europe prior to 1997?
ANSWER 1: Traditionally the developing world could only afford inexpensive cars, and
demand was not particularly large given income levels. The most efficient way to
provide cars for these markets was to use existing designs for extended periods of time,
as it was not economically feasible to make model changes. So, the developing world was
a dumping ground for obsolete models and technology. In Europe, GM dealt with most of
its operations on an arms-length basis, prior to 1997. A profusion of brands appeared
merited, and GM allowed most operations to operate autonomously, developing their own
manufacturing strategies and marketing plans. Many of these operations were historically
independent companies, so when acquiring interests in these firms, GM decided that they
could retain their autonomy. Another aspect is that the needs of the markets differed.
This decentralization is partly because of the desired product attributes differed (Germans
emphasize performance, Swedes safety). Competition in the markets differed since most
Western European countries had their own domestic auto firms. Thus a much more
locally responsive strategy was essential.

QUESTION 2: What do you think were likely competitive effects of the pre-1997
strategy?

ANSWER 2: The likely effects were that GM would be able to capture a large share of
the European market, where it appealed to local preferences. The competition would
likely look to other areas of the world for possible expansion, and could be expected to
make considerable inroads in Eastern Europe, Latin America and Asia.

QUESTION 3: How would you characterize the strategy that GM has been pursuing
since 1997? How should this strategy affect GMs ability to create value in the global
automobile market?

ANSWER 3: Since 1997, GMs strategy has been to switch from a mindset that believed
Detroit was the center of automobile world, and the heart of all changes and innovations.
Realizing that other areas of the world may give birth to marketable automotive
innovations, GM has built four identical plants to capitalize on the efficiencies that are
provided by a common global platform. Proponents of the increasing globalization can
argue that cost pressures and the need to bring state of the art products to developing
markets make the current strategy appear appropriate. Opponents can argue that the
world still has very different consumers with different needs (American buys seem to
have an insatiable desire for cup holders that are deemed unnecessary clutter in
Germany), and that while a global consumer may exist for jeans and Coke, this is not true
with autos.

STUDENT EXERCISES FOR CHAPTER 12

globalEDGE Exercise Questions http://globalEDGE.msu.edu/

Answers to exercise questions.
Chapter12 Exercise 1
There are a variety of surveys that rank multinational corporations. Each of these surveys
uses a slightly different method for ranking the companies, although size (assets or
revenues) is typically one of the primary criteria. Some of the most influential rankings of
this kind are the Financial Times FT Global 500, the Fortune Global 500, the Fortune
Global Most Admired Companies, and the Business Week Global 1000. A full list and
links to these studies can be accessed by under the Rankings category of the
globalEDGE Resource Desk. The Business Week ranking is listed below

globalEDGE Category: Research: Rankings

Resource Name: Business Week Global 1000 Scorecard.
Website: http://bwnt.businessweek.com/global_1000/

Chapter 12 Exercise 2
The country specific information can be found in the Country Insights section of
globalEDGE. Both summary and detailed information regarding each country can be
accessed by using the drop-down menu on the right, or by clicking the Europe link.
For illustration purposes, we will choose Bulgaria. The synopsis information indicates
that the language of the country (Bulgarian) and the voltage used (110/220V) will be two
of the critical variables that have to be considered in the adaptation of the product. More
detailed analysis by following the external links, such as the Country Commercial Guide,
will surely highlight additional aspects.

globalEDGE Location: Resource Desk/ Country Insights/ Europe/ Bulgaria

Resource Name: Bulgaria
Website: http://globaledge.msu.edu/ibrd/CountryIntro.asp?CountryID=40&RegionID=2

SUGGESTED READINGS FOR CHAPTER 12

The footnotes suggest some appropriate additional readings. The following may be of
particular interest:

Bartlett, Christopher and Sumantra Ghoshal 1989. Managing across borders. Boston:
Harvard Business School Press.

Davidson, William H. and Jose de la Torre 1989. Managing the global corporation: Case
studies in strategy and management. New York: McGraw-Hill.

Hamel, Gary and C.K. Prahalad 1994. Competing for the future. Boston: Harvard
Business School Press.

Harvard Business Review 1994. Global strategies: Insights from the worlds leading
thinkers. Boston: Harvard Business School Publishing. This book contains
reprints of a number of previous HBR articles on global strategies.
Hood, Neil and Jan-Erik Vahlne 1988. Strategies in global competition. London:
Croom-Helm.

Porter, Michael E. 1990. The Competitive Advantage of Nations. New York: Free Press

Prahalad, C.K. and Yves L. Doz 1987. The multinational mission. New York: Free Press.
Prahalad, C.K. and Venkat Ramaswamy 2004. The Future of Competition. Harvard
Business School Press.