Chapter 13 - The Strategy of International Business
How can firms profit by expanding globally?
- Expanding the market for domestic products → increasing profit growth Much based on core competencies, meaning use of skills and know-how within the value creation activities that foreign competitors cannot match. - Ability to achieve location economies → decreasing costs and/or differentiate products The possibility of achieving location economies, meaning performing value creation activities in the optimal location, increases if the firm opens up to global production and can disperse its activities wherever they are most likely to be optimized(=creating a global web). The complication are the possible trade barriers and high transportation costs. - Ability to achieve experience effects → decreasing costs and/or differentiate products Referring to systematic reductions in production costs. Learning effects are based on the idea of learning-by-doing. Productivity and efficiency increases over time as the workforce repeats and learns their tasks. - Economies of scale are a way for firms to spread the fixed costs of production over a large volume, resulting in decreasing unit costs. By moving production to a global scale and expanding the market, economies of scale become easier to achieve. Creating the initial demand might mean aggressive pricing in the beginning is necessary in order to reach a good unit cost. After that, the high demand and low-cost can be used a competitive advantage over other firms. - Transferring valuable skills back to home country → increasing know-how Managers must recognize that valuable skills leading to competencies can arise anywhere within a firm's global network, including at the bottom of a foreign subsidiary. However, using an incentive system that encourages innovation and entrepreneurial activity will motivate employees to develop new skills that can later be transferred back to the headquarter.
How do pressures for cost reductions and pressures for local responsiveness influence strategic choice?
- Pressures for cost reductions Especially intense for products that serve universal needs and don't differentiate much from country to country, such as commodity products(sugar, metal, steel, petroleum etc). Also in industries where firms who have established themselves in low-cost locations compete with each other for customers who easily switch brands when prices fall somewhat. - Pressures for local responsiveness Firms must learn how to adapt to the customer tastes and preferences, differences in infrastructure and traditional practices, apply different marketing strategies depending on the available distribution channels, consider host-government demands and make use of the rising regionalism.
What are the different strategies that managers can choose to compete globally?
Localization strategy → When? High pressures for local responsiveness and low pressure for cost reductions. → Structure? By customizing products according to customer demands and increasing value in the local markets the firm increases its profitability and profit growth. Places smaller facilities in multiple locations to draw from the benefits of local knowledge in order to better adapt their products. The decision-making is generally completely decentralized, as head quarter placed managers know little about location-specific demands and requirements. → Disadvantages? Smaller possibilities of capturing benefits from use of mass production of standardized products and economies of scale. → Examples? Domino's pizza → adapts their menu according to local tastes and preferences. Netflix → adapts language and movie/tv series according to country specific tastes and preferences. International strategy → When? Low pressures for local responsiveness and low pressures for cost reductions. → Strategy? These types of firms normally sell domestic products on a global market that serve universal needs and does not needs any specific customization. These firms do not face many competitors either, meaning the need for cost reduction is small. Product development functions such as R&D remain centralized, and production activities are usually located in each major country or region. The head office retains tight control over marketing and product strategy. → Disadvantages? Duplication due to multiple production facilities can raise costs, but does not affect the firm greatly since it is not under high cost reduction pressure. → Examples? Xerox → sold photocopiers under patent which helped the firm monopolize the market while selling a globally standardized product. Global Standardization strategy → When? Low pressures for local responsiveness and high pressures for cost reductions. → Strategy? Increases its profitability and profit growth by reaping the cost reductions of economies of scale, learning effects and location economies. Production, marketing and R&D is placed in few and favorable locations to maintain tight control over these as the main focus is to produce and market a globally standardized product that is sold in a similar way all over the world. This strategy is common when products are industrial goods that serve universal needs. → Disadvantages? Requires a very specific product as not many can be produced in a standardized matter without any location-specific adaptation. Highly dependent on suppliers to remain at the same low cost as planned for. → Examples? Intel, Texas Instruments and Motorola as well as IKEA. → When? High pressures for local responsiveness and high pressures for cost reductions. → Strategy? In today's society, global competitive conditions will only continue to rise, and therefore many firms in the future will be faced with high pressures for both low prices and customized products. The transnational strategy refers to trying to simultaneously achieve low cost through location economies, economies of scale, and learning effects while also differentiating their products and maintaining a consistent flow of skills between subsidiaries in the global network. A way to go about this strategy is by redesigned products so that they consist of many identical parts and are all produced at few and favorable location, thus achieving economies of scale. The final products are then put together in more locally placed facilities so that they can be adapted to specific preferences. → Disadvantages? This strategy is extremely complex and therefore difficult to pursue, especially since there are no real guidelines for how to go about it. Also, as noticed in the next chapter, transnational firms are costly due to controls because of high interdependence. → Examples? Caterpillar → creating diesel engines, warehouse machines etc, applied the above mentioned strategy to decrease costs and increase customer adaptation.
What is the concept of strategy?
The strategy of a firm refers to the actions managers take to pursue the goals of the firm, which mostly is to maximize the value of the firm. What does maximizing value of the firm mean? To increase the profitability and rate of profit growth over time → increasing economic profit, meaning the rate of return the firm makes on its invested capital. The ways of increasing the value of a firm can be done by pursuing strategies that... Lower costs of manufacturing the firm's products Add value to the firm's products → raises the costs of the products In order to increase the rate of profit growth, managers can either apply strategies for selling more products in the existing market or expand sales by entering into new markets. How can a firm create more value? Value is measured by the difference between the cost of production and the quality that consumers perceive in the products. This means → higher value → higher price. A company creates value by converting the input (capital) into a product that consumers place a certain value of. By lowering production costs or making a product more attractive, thus increasing the perceived value and increasing prices, profit increases. Connecting back to Porter (the diamond theory), this would indicate that low cost and differentiation are two main strategies for creating value and attaining competitive advantage. The use of Strategic Positioning Important for a firm to find a good balance between differentiation(increased value perceived by customers) and cost. The optimal position is where the cost set by the firm is same or close to what the customers believe the product or service is worth → position at the efficiency frontier. The firm as a Value Chain The operation of a firm can be considered to be a value chain. It is composed of a series of distinct value creation activities → production, marketing & sales, materials management, R&D, HR, information systems, and firm infrastructure. → Primary activities. R&D production, marketing & sales, and customer service. In R&D, value can be created by either developing a superior product design, increased functionality or lowering costs of production through more efficient production processes. In production value is created by enhanced efficiency or increased quality of products. Marketing and sales can create value through commercials that increases demand, but also through market research which can discover gaps in the market. Finally, customer service can create a perception of high value. → Support activities. Information systems, firm infrastructure & logistics, and HR. The support activities can be highly important for the value creation of the firm. Information systems can alter efficiency and effectiveness in how value is created in other activities. Information is transmitted immediately, leading to firms being constantly aware of what is up - be it inventory management, tracking sales, pricing products or dealing with customer service. Logistics combined with information systems allows a firm to plan production efficiently by giving live information about the location of all parts included. Finally, HR ensures the right type of people are involved in the value creation activities, with the education and skills necessary to handle all operations of the firm as efficiently as possible. The firm infrastructure can apply strong leaderships and thus enhance performance in all value creation activities.