The Strategy of
International Business
Chapter 11
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Strategy and the Firm
• ‘Strategy’ comes from the Greek word strategos, the
“art of the general”
- It deals with the big questions in an organization.
• Strategy can be defined as the actions that managers,
especially top managers, take or plan to take to
attain the goals of the firm
• For most firms, the preeminent goal is to
maximize the value of the firm for its owners
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Value Creation
• The single most important way to increase profitability is to
create more value for customers
- The amount of value a firm creates is measured by the difference
between its costs and the value that consumers perceive in its
products
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Value Creation
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• Michael Porter argues that there are two basic strategies for
creating value
- Low-cost strategy suggests that a firm has high profits when it
creates more value for its customers and does so at a lower cost
- Differentiation strategy focuses primarily on increasing the
attractiveness of a product (getting customers to think it’s
different and better than competitors’)
• This is an oversimplification, but it helps us think about the task
of global management
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Strategic Positioning
• It is important for a firm to be explicit about its choice
of strategic emphasis
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Strategic Choice in the
International Hotel Industry
See text, Fig. 11
.3
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Going global to increase
profitability and Profit Growth
• Expanding globally allows firms to increase
profitability and rate of profit growth in ways not
available to one-country enterprises
- Expand the market
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- Realize “location economies” by dispersing valuecreation activities
• Do things where they make most sense
- Clear Vision makes most of its eyeglass parts in China
- Does assembly in Hong Kong
- Has high-class design in Japan, France, Italy
• This produces a global web of activities
- Realize greater cost economies from
experience effects
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- Bring skills learned abroad back to the home
market
• Hewlett-Packard learned total quality skills from its Singapore
factory
• Wal-Mart introduces wine departments in U.S. after developing
them in Argentina
• French McDonald’s invents the high class McDonald’s restaurant
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Cost Pressures and Pressures for
Local Responsiveness
• Firms in the global
marketplace face two
common types of
competitive pressure
- Pressures for cost
reductions
- Pressures to be
locally responsive
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Pressures for Cost Reductions
• Competition in the global market forces prices lower
- Pressures for cost reduction can be particularly intense
in industries producing commodity-type products
• products where most customers want something similar
• where tastes and preferences of consumers in different
nations are similar
- Cost reduction pressures may also be intense
• where major competitors are based in low-cost locations
• where there is excess capacity
• where customers are powerful and face low switching costs
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Pressures for Local
Responsiveness
• Differences in consumer tastes & preferences
- North American families like pickup trucks while in Europe they
are viewed as a vehicle for businesses only
• Differences in infrastructure & traditional practices
- Consumer electrical system in North America is based on
110 volts; in Europe on 240 volts
• Differences in distribution channels
- Germany has a few retailers dominating the food market,
while in Italy it is fragmented
• Host-government demands
- Health care system differences between countries require
pharmaceutical firms to change operating procedures
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Choosing a Strategy
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“International” Strategy
• Create value by transferring valuable
core competencies that indigenous competitors lack
to foreign markets
• Centralize product development functions at home
• Head office exercises tight control
• Limit customization of product offering
- This is effective if firm faces weak pressures for
local responsiveness and cost reductions
- Starbucks
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Localization Strategy
• Main aim is maximum local responsiveness
• Customize product offering, market strategy including
production and R&D according to national conditions
• Often unable to realize value from experience curve
effects and location economies
• High cost structure
- Frito Lay
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Global Standardization Strategy
• Focus is on achieving low cost – cost reductions from
experience curve effects and location economies
• Production, marketing, and R&D concentrated in few
favorable locations
• Market standardized product to keep costs low
• Effective where strong pressures for cost reductions
and low demand for local responsiveness exist
- Semiconductor industry - Intel
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Transnational Strategy
• To meet competition, firms aim to reduce costs, transfer core
competencies and at the same time pay attention to pressures
for local responsiveness
• Global learning
- Valuable skills can develop in any of the firm’s world wide
operations
- Transfer of knowledge from foreign subsidiary to home
country, to other foreign subsidiaries
• Transnational strategic management is difficult due to
contradictory demands placed on the organization
- Caterpillar
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A common path
of evolution of strategy
• The big long-term problem of international strategic plans is
that over time competitors inevitably emerge
- An “international” strategy may not be viable in the long-term, so
firms need to shift toward a global standardization strategy or a
transnational strategy in advance of competitors
• As competition intensifies
- “International” and localization strategies tend to become less
viable
- A global standardization strategy becomes more possible
- A transnational strategy remains difficult, but powerful if it works.
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Avon
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But…
• What products can a country’s firms successfully produce?
• How do we know businesses we’re likely to succeed in
internationally?
-
Come back after the break!
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