Learning Objectives
Identify why international Business strategies are
formed Understand the concept and Implementation of International business strategies Think like Manager
Strategy: Rethinking the Foundations of Global Corporate Success International Business, 4th Edition Griffin & Pustay
Out Line
Part 1: Introduction to International Business Strategies What is Strategy and firms goal Why to go global Bases of strategy Basic Strategies Part 2: Strategies and Organization Architecture Organization architecture and profitability Vertical differentiation Horizontal integration Integrating mechanisms Control systems & incentives
Out Line
Part 3: Strategy implementation
Basic foreign expansion entry decisions Entry modes Selecting an entry mode
Class Activity
equity
Think strategic, not operational - this is what makes a
great CEO
Value creation
Profit determined by :
The amount of value customers place on firms goods or services Firms cost of production
according to Porter:
Low cost Differentiation strategy
actions that will lower costs of value creation and/or differentiate the firms product offering through superior design, quality service, functionality, etc.
Why to go global
Location economies
Cost economies from experience effects Leveraging core competencies Leveraging subsidiary skills
BUT
Profitability is constrained by product customization
Location economies
Realized by performing a value creation activity in an optimal
locations where perceived value is maximized or costs of value creation are minimized
Experience effects
The systematic reduction in production costs that
Caused due to
Learning effects
Economies of scale
Learning effects
Cost savings that come from learning by doing
Arises due to increased worker productivity and
management efficiency
Significant in cases of technologically complex task as there
is a lot to be learned
Experienced during start-up phase, cease after two or three
years
Decline after this point comes from economies of scale.
Economies of scale
Refers to reduction in unit cost by producing a large
volume of a product
Sources:
Reduces fixed costs by spreading it over a large volume Ability of large firms to employ increasingly specialized
equipment or personnel
network of operations
Some Challenges:
Managers must create an
environment where incentives are given to take necessary risks and reward them
Need a process to identify new skill
development
Need to facilitate transfer of new
Bases of strategy
Pressures for cost reductions
Pressures for local responsiveness
for firms
Host-Government demands
Health care system differences between countries require pharmaceutical firms to change
operating procedures
tastes for American families who wanted bigger vehicles with three row seating
Basic Strategies
Four basic strategies to enter and compete in the
international environment:
International strategy Multi domestic strategy Global strategy
Transnational strategy
International strategy
Create value by transferring valuable core competencies to
cost reductions
International strategy
Focus Taking products from your local country and without much customization, selling them in other markets. Method Centralize product development functions Tend to establish manufacturing and marketing functions in each major country or geographic region in which they do business. Increases costs but there are no cost pressures so that isnt an issue May decide to do some minor customization of the marketing strategy When to use it Low cost pressures Low need for local responsiveness Selling products that serve universal needs Do not have many competitors
Multidomestic strategy
Main aim is maximum local responsiveness
Customize product offering, market strategy including
Multidomestic strategy
Focus Increase profitability by customizing goods to match tastes and preferences in international markets Method Increase the value of the product in the local market Duplication of functions Smaller production runs Still need to be as efficient as possible When to use it When cost pressures are not high When local tastes differ dramatically When you have fewer competitors
Global strategy
Achieving a low cost strategy by reaping cost reductions that
functions
Market standardized product to keep costs low Effective where strong pressures for cost reductions and low
Global strategy
Focus Reaping cost reduction benefits through:
Economies of Scale Learning effects Locations economies
Method R&D, Production and Marketing activities are concentrated in a few favorable locations Try not to customize their products/marketing strategy Use aggressive pricing When to use it Strong pressures for cost reductions Minimal demand for localization
Transnational strategy
To meet competition firms aim to reduce costs, transfer core
foreign subsidiaries
Transnational strategy
Focus Multidirectional transfer of core competencies and skills Leveraging subsidy skills Try to achieve low costs through location economies, economies of scale and learning effects while differentiating their products for the local market. Very difficult to accomplish Method Redesign products to use the same components and produce them in one location Use assembly plants in key markets to assemble the more market specific final product When to use it When customization and cost reduction pressures are high When managers have to balance the divergent pressures
conditions:
An organizations architecture must be internally consistent. Strategy and architecture must be consistent. Strategy, architecture and competitive environments must be
consistent
Organizational architecture
Organizational structure: Location of decision-making
Organizational architecture
Incentives: Devices used to reward appropriate
employee behavior
Closely tied to performance metrics
work is performed
Organizational architecture
Organizational culture: Values and norms shared
People: Employees
Strategy used to recruit, compensate, and retain
Vertical differentiation
Concerned with where
Vertical differentiation
Centralization:
Facilitates coordination.
Decentralization:
Overburdened top
management.
Motivational research favors
decentralization.
Permits greater flexibility.
Can result in better decisions. Can increase control
activities
production
Problems
Heads of foreign subsidiaries relegated to second-tier position
Matrix structure
Attempts to meet needs of transnational strategy. Doesnt work as well as theory predicts. Flexible matrix structures.
Integrating mechanisms
Need for coordination follows the following order on an ascending basis
High
Low
Integrating mechanism
Impediments to coordination
Differing goals and lack of respect Different orientations due to different tasks Differences in nationality, time zone & distance Particularly problematic in multinational enterprises
three decisions
Which markets to enter When to enter these markets What is the scale of entry
Unfavorable
Politically unstable developing nations with a mixed or
command economy or where speculative financial bubbles have led to excess borrowing
Timing of entry
Advantages in early market entry:
First-mover advantage. Build sales volume. Move down experience curve and achieve cost advantage. Create switching costs.
Disadvantages:
First mover disadvantage - pioneering costs. Changes in government policy
Scale of entry
Large scale entry
Strategic Commitments - a decision that has a long-term impact and is difficult
to reverse.
May cause rivals to rethink market entry.
Jollibee Example
Entry modes
Exporting
Turnkey Projects Licensing
Franchising
Joint Ventures Wholly Owned Subsidiaries
Exporting
Advantages:
Avoids cost of establishing manufacturing
Disadvantages:
May compete with low-cost location manufacturers Possible high transportation costs Tariff barriers Possible lack of control over marketing reps
Turnkey projects
Advantages: Can earn a return on knowledge asset
Disadvantages: No long-term interest in the foreign country May create a competitor Selling process technology may be selling competitive advantage as well
Licensing
Advantages Licensee puts up most of the capital Good for firms lacking capital Prohibited from direct investment in a foreign market Disadvantages (3 serious ones) Does not give tight control over manufacturing, marketing, strategy, etc. that is required for realizing the experience curve and location economies. Limits a firms ability to share wealth amongst various divisions, and therefore limits a coordinated international strategy Giving away your comparative advantage
Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties.
Franchising
Advantages: Reduces costs and risk of establishing enterprise Disadvantages: May prohibit movement of profits from one country to support operations in another country Quality control
Franchiser sells intangible property and insists on rules for operating business
Joint Ventures
Advantages: Benefit from local partners knowledge. Shared costs/risks with partner. Reduced political risk. Disadvantages: Risk giving control of technology to partner. May not realize experience curve or location economies. Shared ownership can lead to conflict
be done through a Greenfield venture, where you build a factory from scratch or via acquisition of an existing enterprise Advantages:
No risk of losing technical competence to a competitor Tight control of operations. Realize learning curve and location economies.