PART FIVE
GLOBAL STRATEGY, STRUCTURE,
AND IMPLEMENTATION
International Business
Chapter Eleven
The Strategy of
International Business
Chapter Objectives
• To examine the idea of industry structure, firm
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strategy, and value creation
To profile the features and functions of the value
chain framework
To appreciate how managers configure and
coordinate a value chain
To identify the dimensions that shape how
managers develop strategy
To profile the types of strategies firms use in
international business
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Introduction
Strategy: the framework that managers apply to
determine the competitive moves and business
approaches that guide a firm, i.e., the means
used to achieve objectives
• Strategy represents management’s idea on how to
best:
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attract customers
stake out a market position
conduct operations
compete effectively
create value
achieve goals
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Fig. 11.2: The Strategy of
International Business
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Fundamentals of Strategic
Management: Basic Concepts
Perfect competition presumes that:
• there are large numbers of fully informed buyers and
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sellers of an homogeneous product
buyers and sellers possess perfect information
there are no obstacles to the entry or exit of firms into
or out of the market
resources are fully mobile
An industry is a group of firms, i.e., competitors, that
produce products which are close substitutes.
A global industry is one in which a firm’s competitive
position in one country is significantly affected by its
position in other countries.
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Fundamentals of Strategic
Management: The IO Paradigm
The industry organization (IO) paradigm: risk-
adjusted rates of return should be constant
across firms and industries
• Over time no one firm or industry should
consistently outperform others.
• The performance of a firm is a function of its
market conduct, which in turn is determined by
the structure of its industry.
Industry effects explain up to 75% of the differences
in average returns for firms within a given industry.
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Industry Structure:
The Five Fundamental Forces
The Five Fundamental Forces Model: the nature of
competition in an industry is the combined outcome of competitive pressures generated by:
• the moves of rivals battling for market share
• the entry of new rivals seeking market share
• the efforts of firms outside the industry to convince
buyers to switch to their substitute products
• the push by suppliers to charge more for their inputs
• the push by buyers to pay less for products
Markets are not perfectly competitive;
some firms consistently outperform industry averages.
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Fig. 11.3: Industry Structure: The
Five Fundamental Forces Model
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The five-forces model defines the structure
and competition in an industry in a way
that reveals:
• what forces are driving changes within an
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industry
the relative strength of each fundamental force
which fundamental forces shape strategic
conduct
the strategic moves rivals are likely to make
Common to each issue is the question of whether the
current or future outlook suggests that firms in the industry
have no, some, or great potential to realize profits.
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Changes in Industry Structure
Forces that can transform an industry’s structure
include:
• changes in the long-term industry [market] growth rate
• technological developments
• shifting customer purchase and usage patterns
• manufacturing innovations that revise cost and efficiency
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frontiers
changes in government regulations and policies
the entry or exit of major firms
the diffusion of business, executive, and technical
expertise across countries
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Strategy and Value Creation
Strategy: a firm’s efforts to build and strengthen
its competitive position within its industry in
order to create value and attain goals
A firm’s core competency may be a special outlook, skill,
capability, or technology that creates unique value
essential to its competitiveness.
Value: the measure of a firm’s capability to sell the
products it offers for more than the costs it incurs
• Operationally, firms create value either through cost
leadership or product differentiation.
Differentiation spurs a firm to offer unique,
value products that are difficult to match or copy.
high-
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The Firm as a Value Chain
Value chain: the set of linked, value-creating activities a
firm performs to design, produce, market, deliver, and
support a product, i.e., the format and interactions
amongst the various functions of a firm
[Value chain analysis explains cost behavior and reveals
existing and potential sources of product differentiation.]
Primary activities: the classical managerial functions of
the firm
Support activities: functions that provide inputs which
allow the primary activities to occur
Profit margins: the differences between total revenues
generated and total costs incurred
Orientation: upstream (in-bound) vs. downstream (outbound) activities
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Fig. 11.4: The Value Chain
Framework
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Value Chain Configuration
Value chain configuration may be influenced
by:
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cost factors [wage rates, productivity, inflation, etc.]
business environments [political & economic risk]
cluster effects [related value creation activities]
logistics [value-to-weight ratio, just-in-time practices]
degree of digitization [virtual value creation]
economies of scale [unit cost reductions]
customer needs [buyer-related support activities]
Configuration [spatial arrangement] should be optimized in light
of prevailing economic, legal, political, and cultural conditions.
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Map 11.2: Labor Costs and
Location Decisions
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Value Chain Coordination
Value chain coordination may be influenced by:
• operational obstacles [communication challenges,
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currencies, and measurement systems]
national cultural differences [information sharing,
time, etc.]
learning effects [cost savings via performance and
quality improvements]
subsidiary networks [real-time connectivity and
functional integration]
Coordination [the balanced movement of different parts
at the same time] should be optimized in ways
that leverage a firm’s core competencies.
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The value chain serves as a system concept that
helps mangers:
• evaluate a firm’s strengths and weaknesses
• interpret the determinants of the firm’s internal cost
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structure, the basis of its core competencies, and its
relationships with customers
link the internal features and functions of a competitor to
the content of its marketplace strategy
The configuration and coordination of a firm’s
value chain should reflect changes in its bases
for value creation, including:
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customers and their needs
competitors
industries
environments
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Countervailing Forces: Global
Integration vs. Local Responsiveness
• Pressures for global integration
– Globalization of markets: the convergence of customer
preferences for similar products, minimal costs, and
maximum value
[A commodity serves a universal need across countries and
cultures and is traded strictly on the basis of price.]
– Globalization of production: efficiency gains via standardization, i.e., the maximization of location economies
• Pressures for local responsiveness
– Customer divergence: differences in culture, national
attitudes, and economic and usage conditions
– Host government policies: economic freedom, workplace and product regulation, buy-local legislation, etc.
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The Global Integration/
Local Responsiveness Grid
The integration/responsiveness grid (IR) profiles the
interaction of the pressures for global integration
and pressures for local responsiveness.
• Integration: the process of combining differentiated parts into a standardized whole
• Responsiveness: the process of disaggregating
a standardized whole into differentiated parts
• The IR grid reveals how a firm’s choice of strategy is a
function of the relationship between its idea of value
creation and the pressures for integration and/or responsiveness as it looks to international markets for growth
opportunities, cost reductions, and risk diversification.
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Fig. 11.5: The Integration/
Responsiveness Grid and Industry Types
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Strategic Alternatives:
The International Strategy
International strategy: opportunistic expansion
into foreign operations that leverages the firm’s
core (domestic) competencies
• Ultimate control and decision-making reside at
headquarters.
• Value is created by transferring core competencies and
unique offerings from headquarters into foreign markets
where rivals are unable to develop, match, or sustain
them.
• International activities are generally secondary to the
priorities of the domestic market.
Headquarter’s ethnocentric orientation, i.e., its home country
focus, may lead to significant missed market opportunities.
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Strategic Alternatives:
The Multidomestic Strategy
Multidomestic strategy: expansion into foreign operations that grants decision-making authority to local
managers and emphasizes responsiveness to local
conditions
• Decision-making is decentralized so that offerings can be
adjusted to meet the needs of individual countries or regions.
• Value is created by giving local managers the authority to
respond to unique local cultural, legal, and economic
environments.
• The polycentric view holds that people who are close to the
market both physically and culturally can best run a business.
The distribution of decision-making authority to local managers may
lead to duplication in activities, significantly higher costs, and
unusually powerful (autonomous) local subsidiaries.
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Strategic Alternatives:
The Global Strategy
Global strategy: expansion into foreign operations
that champions worldwide consistency, standardization, and cost competitiveness
• Although activities are dispersed to the most favorable
global locations, decision-making remains highly centralized at headquarters.
• Value is created by designing products for a world
market and manufacturing and marketing them as
effectively and efficiently as possible.
• Global firms strive to convert global efficiency into price
competitiveness via production and location economies.
In markets where demand for local responsiveness remains high, global
strategies are largely ineffective, and market opportunities are missed.
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Strategic Alternatives:
The Transnational Strategy
Transnational strategy: expansion into foreign opera-
tions that exploits location economies, leverages core
competencies, and responds to key local conditions
• The causes of interactive global learning and worldwide
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information sharing are championed.
Value is created by the relentless renewal, enhancement, and
exchange of ideas, products, and processes across functions
and borders.
The transnational MNE differentiates capabilities and contributions while finding ways to systematically learn and ultimately
integrate and diffuse knowledge, thus developing more
powerful core competencies.
Realistically, the transnational firm faces serious challenges to its attempts
to efficiently and effectively configure and coordinate its activities.
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Fig. 11.6: The Integration/
Responsiveness Grid and Strategy Types
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Implications/Conclusions
• Industry structure explains the functions, form,
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and interrelationships amongst suppliers,
buyers, products, new entrants, and rivals.
Even though competition is not perfect, industry
structure does influence a firm’s performance.
Because competition is not perfect, opportunities exist to convert innovative strategies
into superior competitiveness.
[continued]
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• Great managers devise great strategies that
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build great companies that outperform their
industry rivals.
Designing a strategy within the context of the
value chain can improve the quality of analyses
and decisions by deconstructing value creation
opportunities into a series of discrete activities.
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