International Business

Sixteenth Edition, Global Edition

Chapter 7
Strategies for
International Business

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Learning Objectives

7-1 Explain the idea of strategy in the MNE.

7-2 Profile how executives make strategy.
7-3 Differentiate resources, capabilities, and core
competencies.
7-4 Assess approaches to create value.
7-5 Diagram the features and functions of the value chain
7-6 Compare global integration and local responsiveness
7-7 Differentiate the types of strategies used by MNEs

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 IB Strategy
• Strategy is a general plan to achieve one or more long-term or
overall goals under conditions of uncertainty. It defines and
communicates an MNE’s plan on how it will use its resources,
capabilities, and competencies to compete in different countries.
• Strategy maps an MNE’s plan to create value, both for itself and its
stakeholders.
• Importantly, strategy specifies what an MNE will do and what it will
not do.
• Strategy calls on managers to deal with the questions and
complexities that follow from crosschecking opportunities with
competencies, assessing competitive threats, and setting and
sustaining superior performance.
• Managers formulate strategies that build endlessly clever new ways
to build productive and profitable enterprises.
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Strategy Process
Figure 12.1 The Role of Strategy in IB

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Mission and Vison
➢ Strategy starts with a vision and a mission.
➢ The MNE’s vision, a future-oriented declaration of
its purpose and aspirations, outlines its broad
ambitions.
➢ It communicates to stakeholders, namely
employees, stockholders, governments, partners,
suppliers, customers, and society, what the MNE
is, where it is going, and the values that will guide
its efforts.

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Cont’d…
➢ The MNE’s mission complements its vision.
Whereas the vision statement inspires people to
dream, the mission statement inspires them to
action.
➢ It communicates what the MNE is going to do, why
it’s going to do that, and the general approach to
doing so.
➢ MNE vision and mission statements must work in
many businesses run by many different people
operating in many different environments.

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Examples of Mission and Visons
Objective 12-1
Table 12.1 Vision and Mission Statements, Leading MNEs

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 Environmental Assessment
• These assessments include an analysis of various internal
and external factors present in the marketing environment.
– External factors include culture, language, political
and legal systems, economic systems, and
infrastructure.
– Internal factors include human and financial capital,
competitive advantage, market knowledge, and
responsiveness to market changes and demands.

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 How do Executives Create Strategy?
– Market Analysis: estimate market (target segment/s) potential (total
market share), and estimate (our) sales potential
– PESTEL Analysis: Political Economic Social Techno Environmental
Legal
– Customer Analysis: understand the common features of customer
requirements and choice factors (common market success factors)
– SWOT Analysis: Strengths Weaknesses Opportunities Threats
– Skills Analysis: assess readiness to face competitive environment
– Five Forces Analysis: understand the structure of the global industry
➢ Competitors Analysis (Who?/SWOT/products/market share/strategies)
➢ Supplier Power: how easy it is for your suppliers to increase their
prices
➢ Buyer Power: how easy it is for buyers to drive your prices down
➢ Threat of Substitution: how easily customer can find alternatives
➢ Threat of New Entry: how easily new competitor can enter your market
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 Tangible and Intangible Resources
Table 12.2 Resources of the Firm: Specification and Profile

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SWOT Analysis

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 Resources, Capabilities and Core
Competencies
• Collectively, resources represent the stocks of available factors
that managers bundle together into capabilities.

• Managers also transform resources and capabilities into core

competencies.
• Difficult to define precisely, most see a core competency as
the special outlook, skill, or technology that, by blending
links between resources and capabilities, sets and sustains
the firm’s capacity to create superior value.
• In general, core competencies are the resources and
capabilities that comprise the strategic advantages of a
business.
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Creation of Value
1) Value in economic terms, refers to the difference between the cost of
making a product and the price that customers are willing to pay for it. If
an MNE can sell its product for more than the costs incurred to make it,
it generates profits, and hence, creates value.
2) Cost leadership strategy: An MNE aims to make a product at the
lowest cost, relative to those offered by rivals, which appeals to the
largest number of potential customers.
3) Differentiation strategy: when an MNE aims to do something no other
firm can do, and, besides doing it, doing it effectively.
• A differentiation strategy is an integrated set of choices to make a
product or provide a service.
• The differentiation strategy requires designing and delivering products
that customers see as different in ways that are important to them—
and thus are willing to pay a premium price.

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Creation of Value
4) Successfully implementing the integrated cost
leadership/differentiation strategy requires an MNE
adapt quickly to change, particularly when disruptive
innovations call for new capabilities.
• Production must optimize efficiency in order to
generate the funds that support differentiation.

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 PESTEL Analysis
• It includes Political, Economic, Social, Technological,
Legal, and ecological factors affecting any operating
situation of the business firm.
• This type of analysis is used to gauge external factors
that could impact the profitability of a company.
• Generally, it is more effective with larger organizations
that are more likely to experience the effects of macro
events.

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 PESTEL Analysis
Economic Factors
1. Availability of credit
2. Level of disposable income
3. Individual spending
4. Prime interest rates that commercial banks charge
5. Inflation rates: Rising prices in the economy
6. Trends in the growth of the gross national product
7. Unemployment rates
8. Globalization of the economy
9. Outsourcing

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 PESTEL Analysis
Social Factors
The social factors that affect a firm involve the:
 Beliefs & Values: Beliefs are ideas that accepted as true without
facts, whereas values are a set of principles that individuals
consider of great importance.
 Attitudes & Opinions: Attitude is a way of thinking and feeling
 Lifestyles of persons
Developed from:
 Cultural conditioning
 Ecological conditioning
 Demographic makeup
 Religion
 Education
 Ethnic conditioning.
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 Three Profound Social Changes
• Entry of large numbers of women into the labor market
• Accelerating interest of consumers and employees in quality-
of-life issues
• Shift in the age distribution of the population.
• Cutting across the above three issues is concern for individual
health.

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 PESTEL Analysis
Political Factors
❑ Political factors define the legal and regulatory
parameters within which the firm must operate.

▪ Political constraints are placed on firms through:

o Fair-trade Decisions
o Antitrust Laws: Laws against monopoly
o Tax Programs
o Minimum Wage Legislation
o Pollution and Pricing Policies

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 PESTEL Analysis
Technological Factors
• A firm must be aware of technological changes
that might influence its industry.
• Technological forecasting helps protect and
improve the profitability of firms in growing
industries.
‫التحديات الوشيكة‬
• It alerts strategic managers to impending
challenges and promising opportunities.
• It involves the study of the expected effect of new
technologies on remote environment, competitive
business situation, and the society.
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 Industry-Level Competitive Advantage

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 Threat of New Entrants
• The threat of new entrants affects the nature of
local, national, and international competition.
• The large size of the markets in Big Emerging
Markets alone sparks interest and increases the
chance of new entrants.
• Barriers to entry can be used by companies to
prevent or limit new entrants.
– Potential barriers include brand equity, large initial
cost requirements, regulations, monopolies over
distribution or needed resources, and/or lack of
specific, hard-to-learn knowledge.
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 Threat of Substitute Products
• The existence of substitute products increases
competitive intensity.
– Different substitute products exist in international markets.

• When consumers can switch from product to product,

companies face stronger pressure from competitors to get
consumers to make the switch.
– Switching costs increase
– Consumer loyalty increase

• Brand loyalty, unique product benefits, and repeat

purchase rewards all decrease switching.

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 Bargaining Power of Suppliers
• Companies within an industry typically use the same
supplier or a small group of suppliers for the resources
needed, including labor and raw materials.
– Suppliers of these resources with strong bargaining
power increase the competition within the industry.

• Supplier bargaining power increases when only one or a

small number of companies serve as supplier.

• Steps to lower the bargaining power of suppliers:

– Buy the supplier.
– Supply the resource internally.
– Find substitutes for the resource, often by looking
internationally.
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 Bargaining Power of Consumers
❑ Consumers possess bargaining power.
– When only a few individuals purchase a product, such as
can be the case in business-to-business marketing, those
buyers hold more power.
– Small numbers of consumers increase competition.

❑ Price sensitivity increases consumer power due to the

increased likelihood of a customer switching to a lower-
priced competitor.

❑ Methods to decrease consumer bargaining power:

– Brand loyalty
– Opening new markets or increasing market share
– Growth in market size

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 Rivalry Among Competitors
❖Together, the four forces above work to increase
rivalry among competitors.
❖Company-specific factors also increase rivalries
among competitors.
– Widely accessible knowledge and processes result in
more rivalry than does specialized, difficult-to-imitate
knowledge.
– Innovation, especially when legally protected, can
reduce competition within an industry.

❖When every company in an industry competes

based on similar, duplicable factors, rivalry becomes
intense.
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The Value Chain
Figure 12.2 Visualizing the Value Chain

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The Value Chain
• Primary activities represent the core business
functions that make and move products.
• Its organization follows from that of designing a
product and building the operations that make it
onward through the tasks of logistics, marketing,
distribution, and service.
• Primary activities reflect classic business activities
and managerial orientations. Thus, they carry
functional labels such as operations or marketing.
Video:
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 The Value Chain
• Support activities. These represent the
infrastructure of the firm, identifying the activities that
support the work done in carrying out primary
activities.
• Human resources, for example, are needed for each
primary activity, from supervising warehousing
materials, to directing production, to shipping
products, to serving customers.

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Configuration Choices
• How a MNE distributes value activities around the
world is the matter of configuration—essentially,
the task of deciding which activity to do where.
• Configuration definition
– Concentrated
– Dispersed ‫مشتت‬
– Location advantages
– Economies of scale
– Experience and learning effects
– Risks of configuration choices
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Cont’d….
• Concentrated: the MNE performs all value chain activities
in one location.
• Dispersed: the MNE performs different value-chain
activities in different locations.
• Location Advantages: Differing environmental conditions,
given differing political, legal, and market features, means
costs differ from country to country.
• The option to go anywhere to do anything pushes MNEs to
exploit location advantages. Labor, capital, and resources
costs are traditional determinants of location advantages.
Increasingly, the matters of digitization and cluster effects
moderate configuration choices.

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 Cont’d…
• Economies of Scale: The degree that a MNE concentrates or
disperses its value-chain activities reflects the importance of
efficiency to its pursuit to create value.
• Experience and Learning Effects: Industry and firm conduct
confirms that low costs create strategic advantage. Hence, MNEs
look to capitalize on the scale and scope of their operations to
exploit potential cost minimization via experience and learning
effects.
• The Risks of Configuration Choices: Configuration decisions face
the risks of unpredictable market change. Disruptions, such as a
government change, material shortages, labor unrest, or currency
instability, can quickly convert an efficient location into a costly one.

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Global Integration or Local Responsiveness?
Table 12.6 Motivations of Global Integration and Local Responsiveness

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 Decision between Standardization vs Adaptation

• Standardization strategy: involves using 4Ps “the same

range of products, the same pricing, promotional and location
strategies”, so it offers advantages of economies of scale, and
homogenization of consumer is the best situation to use, and
when the brand is already strong.
• Adaptation strategy: implies changing various aspects of
products and services to a considerable extent in order to
meet the needs of consumers in international markets taking
into account their differences, so it offers advantages of
meeting differences of local markets at various levels, and in
this way achieving greater levels of customer satisfaction.
[Link]

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Considerations with Global
Integration or Local Responsiveness
• Potential to standardize
• Responding to local customers preferences
• Institutional agents
• Mapping interaction

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Cont’d…
• The greater the potential to standardize value
activities, the greater the importance of global integration
to an MNE’s competitiveness.
• Responding to local customers’ preferences requires
customizing products and processes.
• Adaptation reduces the efficiencies of standardization,
thereby stressing the liability of foreignness, inflating
operational costs, and reducing value creation. Hence,
MNEs oppose adapting operations unnecessarily. Still,
local imperatives often compel them to do so.

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Cont’d…
• A third factor, institutional agents: Various transnational
institutions, such as the IMF, WTO, and World Bank, build an
increasingly seamless global business environment.

• Systematically opening national borders to trade and

investment creates greater potential for MNEs to build,
expand, and integrate global operations.
• Mapping the Interaction: Operating internationally calls for
configuring and coordinating operations in ways that match the
competing demands of global integration and local
responsiveness. The Integration-Responsiveness (IR) Grid
provides a straightforward framework to organize analysis
(shown on next slide).

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The Integration Responsiveness Grid
Figure 12.4 The Integration-Responsiveness Grid

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International Corporate Level Strategies

1) International strategy
2) Localization Strategy
3) Global Strategy
4) Transnational Strategy

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 Localization Strategy.
• Some MNE faces higher pressure for local responsiveness,
but lower pressure to reduce costs via global integration
(the lower-right quadrant of the IR Grid).
• Cultural, political, legal, and economic conditions in foreign
markets require MNEs, like J&J, McDonald’s, Nestlé, or
HSBC, adapt products and processes to local
circumstances.
• Efficiently customizing products and process from market to
market, if headquarters aims to direct activity despite high
responsiveness pressures, is costly and complicated.
• Instead, an MNE adopts a localization strategy, orienting
its vision, mission, and plans to provide customers products
that fit their distinctive preferences.
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 International Strategy
• It is used when a company is primarily focused on its
domestic operations.
• It does not intend to expand globally but does export some
products to take advantage of international opportunities.
• It does not attempt to customize its products for
international markets.
• It is not interested in either responding to unique conditions
in other countries or in creating an integrated global
strategy.

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 Global Strategy and Transnational Strategy
▪ Global strategy: A firm sacrifices responsiveness to local
requirements within each of its markets in favor of emphasizing
efficiency. A global strategy stresses the need to gain economies of
scale by offering essentially the same products or services in each
market.
▪ Example: Microsoft offers the same software programs around the
world but adjusts the programs to match local languages.

▪ Transnational strategy: The transnational company has

characteristics of both the global and localization strategy. Such a
firm tries to balance the desire for efficiency with the need to adjust
to local preferences within various countries.
▪ Example: large fast-food chains such as McDonald’s and KFC rely on
the same brand names and the same core menu items around the world.
These firms make some concessions to local tastes too.
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