Chapter 13: The Strategy of International Business

Profitability

The rate of return that the firm makes on its invested capital (ROI).

Criteria to meet if a company use Transnational Strategy

- Achieve low costs through location economies, economies of scale, and learning effects; - differentiate their product offering 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 (global learning)

Pressures for cost reductions(global integration)

- Cost drivers: In competitive global markets, international businesses often face opportunities for cost reductions. Responding to pressures for cost reduction requires a firm to try to lower the costs of value creation. A manufacturer, for example, might mass-produce a standardized product at the optimal location in the world, wherever that might be, to realize economies of scale, learning effects, and location economies. Alternatively, a firm might outsource certain functions to low-cost foreign suppliers in an attempt to reduce costs. - Market globalization drivers: Pressures for cost reduction can be particularly intense in industries producing commodity-type products where meaningful differentiation on nonprice factors is difficult and price is the main competitive weapon. This tends to be the case for products that serve universal needs. Universal needs exist when the tastes and preferences of consumers in different nations are similar if not identical. - Competitive drivers: The liberalization of the world trade and investment environment in recent decades, by facilitating greater international competition, has generally increased cost pressures.

Pressures to be locally responsive:

- Pressures for local responsiveness arise from national differences in consumer tastes and preferences, infrastructure, accepted business practices, and distribution channels, and from host-government demands. Responding to pressures to be locally responsive requires a firm to differentiate its products and marketing strategy from country to country to accommodate these factors, all of which tends to raise the firm's cost structure. - This can be due to historic or cultural reasons. - This arises also from differences in infrastructure or traditional practices among countries, creating a need to customize products accordingly. Fulfilling this need may require the delegation of manufacturing and production functions to foreign subsidiaries. For example, in North America, consumer electrical systems are based on 110 volts, whereas in some European countries, 240-volt systems are standard. - A firm's marketing strategies may have to be responsive to differences in distribution channels among countries, which may necessitate the delegation of marketing functions to national subsidiaries. - Threats of protectionism, economic nationalism, and local content rules (which require that a certain percentage of a product should be manufactured locally) dictate that international businesses manufacture locally.

To create value, firms need to do:

1) Choose their position on the "efficiency frontier" (= what is their balance between low cost and differentiation?) 2) Configurate operations to support that position 3) Ensure that the right organization structure is in place to execute the strategy

What International businesses are able to do through expansion:

1) Expand the market for their domestic products by selling those products (or services) in international markets. 2) Realize location economies by dispersing value creation activities to those worldwide locations where they can be performed most efficiently and effectively. 3) Realize greater cost economies from experience effects by serving an expanded global market from a geographically central location, thereby reducing the costs of value creation. 4) Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firm's global network of operations. (Leveraging subsidiary skills)

Plan for increasing profitability according to Porter

1) pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that choice; 2) configure its internal operations, such as manufacturing, marketing, logistics, information systems, human resources, and so on, so that they support that position; 3) make sure that the firm has the right organization structure in place to execute its strategy.

Global web

A web of value creation activities, with different stages of the value chain being dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized.

Porters competitive advantage and the two ways to create value:

According to Porter, superior profitability goes to those firms that can create superior value, and the way to create superior value is to drive down the cost structure of the business and/or differentiate the product in some way so that consumers value it more and are prepared to pay a premium price. Porter emphasizes that it is very important for management to decide where the company wants to be positioned with regard to value (V) and cost (C), to configure operations accordingly, and to manage them efficiently to make sure the firm is operating on the efficiency frontier.

How can firm promote subsidiary skills:

Firms must have the humility to recognize that valuable skills that lead to competencies can arise anywhere within the firm's global network, not just at the corporate centre. Second, they must establish an incentive system that encourages local employees to acquire new skills.

Leveraging subsidiary skills:

For more mature multinationals that have already established a network of subsidiary operations in foreign markets, the development of valuable skills can just as well occur in foreign subsidiaries. Skills can be created anywhere within a multinational's global network of operations, wherever people have the opportunity and incentive to try new ways of doing things. The creation of skills that help lower the costs of production, or enhance perceived value and support higher product pricing, is not the monopoly of the corporate center.

A third dimension (not included in the IR framework)

Need for Global Innovation, Learning: - Value created with the exploitation of knowledge that is geographically distributed

What can cause that the firm must change strategy?

Remember the change of the external situation based on local responsiveness and cost reduction might cause that companies must change strategies.

Core competence

Skills within the firm that competitors cannot easily match or imitate. These skills may exist in any of the firm's value creation activities—production, marketing, R&D, human resources, logistics, general management, and so on

Strategy:

The actions that managers take to attain the goals of the firm and increase profitability because this will increase the value of the enterprise. This is about gaining competitive advantage and superior financial performance.

Experience curve

The experience curve: Systematic reductions in production costs that have been observed to occur over the life of a product. A number of studies have observed that a product's production costs decline by some quantity about each time cumulative output doubles (The more you produce, the smaller the output would be). This is due to two things: - Learning effects: Cost savings that come from learning by doing. Labour productivity increases over time as individuals learn the most efficient ways to perform particular tasks. Equally important in new production facilities, management typically learns how to manage the new operation more efficiently over time which increases profitability. - Economies of Scale: This is the reductions in unit cost achieved by producing a large volume of a product. Attaining economies of scale lowers a firm's unit costs and increases its profitability. This can be achieved due to a country's ability the ability to spread fixed costs over a large volume or exploit bigger markets.

Integration-Responsivness framework:

The pressure for cost reductions(Global Integration) and locally responsive define what strategy a company should use

Value chain:

The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities, including production, marketing and sales, materials management, R&D, human resources, information systems, and the firm infrastructure. We can categorize these value creation activities, or operations, as primary activities and support activities Primary activities: Primary activities have to do with the design, creation, and delivery of the product; its marketing; and its support and after-sale service. Support activities: The support activities of the value chain provide inputs that allow the primary activities to occur. In terms of attaining a competitive advantage, support activities can be as important as, if not more important than, the primary activities of the firm.

Global standardization Strategy(Global strategy)

The strategy focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies. Their strategic goal is to pursue a low-cost strategy on a global scale. The production, marketing, R&D, and supply chain activities of firms pursuing a global standardization strategy are concentrated in a few favorable locations. Firms pursuing a global standardization strategy try not to customize their product offering and marketing strategy to local conditions because customization involves shorter production runs and the duplication of functions, which tend to raise costs(Thus no value creation through differentiation). Instead, they prefer to market a standardized product worldwide so that they can reap the maximum benefits from economies of scale and learning effects. They also tend to use their cost advantage to support aggressive pricing in world markets. A global standardization strategy makes the most sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal.

Economies of Scope

The theory of an Economy of Scope states the average total cost of a company's production decreases when there is an increasing variety of goods produced. One simple way to think about economy of scope is to imagine that it's cheaper for two products to share the same resource inputs (if possible) than for each of them to have separate inputs.

How to increase the profitability of a firm

The way to increase the profitability of a firm is to create more value. The amount of value a firm creates is generally measured by the difference between its costs of production and the quality that consumers perceive in its products. In general, the more value customers place on a firm's products, the higher the price the firm can charge for those products. However, the price a firm charges for a good or service is typically less than the value placed on that good or service by the customer. This is because the customer captures some of that value in the form of what economists call a consumer surplus. The customer is able to do this because the firm is competing with other firms for the customer's business, so the firm must charge a lower price than it could were it a monopoly supplier

International Strategy(Home replication)

This are firms taking products first produced for their domestic market and selling them internationally with only minimal local customization. The distinguishing feature of many such firms is that they are selling a product that serves universal needs, but they do not face significant competitors, and thus unlike firms pursuing a global standardization strategy, they are not confronted with pressures to reduce their cost structure. The strategy is suited for smaller firms that may pursue this as a first internationalization step.

Localization Strategy (Multidomestic strategy)

This strategy focuses on increasing profitability by customizing the firm's goods or services so that they provide a good match to tastes and preferences in different national markets. Localization is most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences and where cost pressures are not too intense. By customizing the product offering to local demands, the firm increases the value of that product in the local market. On the downside, because it involves some duplication of functions and smaller production runs, customization limits the ability of the firm to capture the cost reductions associated with mass-producing a standardized product for global consumption.

Transnational Strategy

This strategy is trying to simultaneously achieve low costs through location economies, economies of scale, and learning effects; differentiate their product offering 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 (global learning). As attractive as this may sound in theory, the strategy is not an easy one to pursue since it places conflicting demands on the company. Differentiating the product to respond to local demands in different geographic markets raises costs, which runs counter to the goal of reducing costs. How best to implement a transnational strategy is one of the most complex questions large multinationals are grappling with today.

Location Economies:

the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be (transportation costs and trade barriers permitting. Introducing transportation costs and trade barriers complicates this picture. Location economies can also cause an increase in coordination, which will lead to more costs as well.). This can end up in a global web of value chain activities. 1) It can lower the costs of value creation and help the firm achieve a low-cost position, 2) and/or it can enable a firm to differentiate its product offering from those of competitors.