CHAPTER 1: COMPETING IN THE GLOBAL MARKETPLACE
1. What is international business?
- International business is the performance of trade and investment activities by firms across
national borders
- Elements of international business:
● Globalization of markets/production
● International trade
● International investment
● International business risks
● Participants: Firms, Intermediaries, Facilitators, Governments
● Foreign market entry strategies
1.1. Globalization of markets
- The globalization of markets refers to the merging of historically distinct and separate
national markets into one huge global marketplace.
- Internationalization: the tendency of companies to deepen their international business
activities systematically.
- Nowadays, it is no longer meaningful to talk about the “German market” or “American
market”. Instead, there is only one global market:
o Falling trade barriers make it easier to sell globally.
o Consumers’ tastes and preferences are converging.
o Firms promote the trend by offering the same basic product worldwide.
=> Makes it easier for customers to purchase or consume products from different parts of the
world. In short, the globalization of markets turns the many markets of the world into one big
market.
* Why do companies go global? There are many reasons, the biggest being cost. The others are:
o Seek opportunities for growth through market diversification.
o Earn higher margins and profits.
o Gain new ideas about products, services, and business methods.
o Serve key customers better that have relocated demand.
o Be close to supply sources, benefit from global sourcing advantage, or gain flexibility in product
sourcing.
o Gain access to lower cost or better-value factors of production (Globalization of production).
o Develop economies of scale in sourcing, production, marketing, and R&D.
o Confront international competitors more effectively or thwart the growth of competition in the
home market.
o Invest in a potentially rewarding relationship with a foreign partner.
Exp: If Macs were made in the US, prices would be much higher compared to its competitors
(fewer people would be willing to purchase a Mac, and the product would be less competitive).
1.2. Globalization of production
- Definition: The sourcing of goods and services from locations around the globe to take
advantage of national differences in the cost and quality of factors of production (land,
capital, bond, etc.).
=> Companies hope to lower the overall cost structure and improve the quality or functionality
of their product offerings, thereby allowing them to compete more effectively.
- Substantial impediments for firms to achieve the optimal dispersion of their productive
activities to locations around the globe:
o Formal and informal barriers to trade between countries.
o Transportation cost.
o Barriers to foreign direct investment.
o Issues associated with political and economic risk.
1.3. International investment
- International investment: The transfer of assets to another country or the acquisition of assets in
that country (Giao dịch asset với một nước khác).
- International portfolio investment: passive ownership of foreign securities such as stocks and
bonds to generate financial returns (Sở hữu chứng khoán nước ngoài nhằm thu lại lợi nhuận về
tài chính).
- Foreign direct investment (FDI): An internationalization strategy in which firms establish a
physical presence abroad through the acquisition of productive assets such as capital,
technology, labor, land, plant, and equipment. (Firm đầu tư resources vào hoạt động kinh doanh
ở ngoài lãnh thổ nước mình).
1.4. Global Institutions
- General Agreement on Tariffs and Trade (GATT).
- World Trade Organization (WTO).
- International Monetary Fund (IMF).
- The World Bank.
- United Nations (UN).
- G20tx: Finance ministers and central bank governors of the 19 largest economies in the
world.
1.5. The globalization debates
- Increased trade and cross-border investment mean:
▪ Lower prices for goods and services
▪ Greater economic growth
▪ Higher consumer income, more jobs
- However, globalization will cause:
▪ Job losses
▪ Environmental degradation
▪ The cultural imperialism of global media and MNEs
2. How does International Business differ from Domestic Business?
Risks in international business
Country risk Cross-cultural risk
- Harmful or unstable political system - Cultural differences
- Laws and regulations unfavorable to foreign - Decision-making styles
firms - Ethical practices
- Inadequate or underdeveloped legal system
- Bureaucracy and red tape Commercial risk
- Corruption and other ethical blunders
- Weak partner
- Government intervention, protectionism, and
- Operational problems
barriers to trade and investment
- Timing of entry
- Mismanagement or failure of the national
- Competitive intensity
economy
- Poor execution of strategy
3. Who participates in International Business
A Focal firm is the initiator of an international business transaction (bên khởi xướng một cuộc
giao dịch đa quốc gia). It conceives, designs, and produces offerings intended for consumption
worldwide. Focal firms take center stage in international business. They are primarily large
multinational enterprises/corporations (MNEs/MNCs) and SMEs. Some are privately owned, others
are public, stock-held firms, and still others are state-owned. Some are in the manufacturing sector,
while others are in the service sector.
A distribution channel intermediary (công ty trung gian chuyên về mảng logistics và marketing
cho các focal firm): is a specialist firm that provides various logistics and marketing services for
focal firms as part of international supply chains, both in the focal firm’s home country and abroad.
Typical intermediaries include independent distributors and sales representatives, usually located in
foreign markets where they provide distribution and marketing services to focal firms on a
contractual basis.
A facilitator (hỗ trợ focal firms thực hiện giao dịch đa quốc gia): is a firm or an individual with
special expertise in banking, legal advice, customs clearance, or related support services that help
focal firms perform international business transactions. Facilitators include logistics service
providers, freight forwarders, banks, and other support firms that assist focal firms in performing
specific functions. A freight forwarder is a specialized logistics service provider that arranges
international shipping on behalf of exporting firms, much like a travel agent for cargo. Facilitators
are found in both the home country and abroad.
Governments, or the public sector, are also active in international business as suppliers, buyers,
and regulators. State-owned enterprises account for a substantial portion of economic value added
in many countries, even rapidly liberalizing emerging markets such as Russia, China, and Brazil.
Governments in advanced economies such as France, Australia, and Sweden have significant
ownership of companies in telecommunications, banking, and natural resources. The recent global
financial crisis led governments to step up their involvement in business, especially as regulators.
- The activities of firms, intermediaries, and facilitators in international business overlap to some
degree. Whereas focal firms, intermediaries, and facilitators represent the supply side of
international business transactions, customers or buyers make up the demand side.
Customers consist of:
- Individual consumers and households.
- Retailers-businesses that purchase finished goods for resale.
- Organizational businesses, institutions, and governments purchase goods and services as
inputs to a production process or as supplies needed to run a business or organization.
- Governments and nonprofit organizations such as CARE ([Link]) and UNICEF
([Link]) also often constitute essential customers.
CHAPTER 2: NATIONAL DIFFERENCES IN POLITICAL ECONOMY
1. Political economy
- The political economy of a nation refers to how the political, economic, and legal systems of
that country are interdependent.
2. Political system
- It refers to the system of government in a nation, assessed according to two dimensions.
+ the degree to which the country emphasizes collectivism as opposed to individualism
+ the degree to which the country is democratic or totalitarian
2.1. What is Collectivism?
- Collectivism refers to a political system that stresses the primacy of collective goals over
individual goals.
- When collectivism is emphasized, the needs of society as a whole are generally viewed as
being more important than individual freedoms.
2.2. What is Individualism?
- Individualism refers to the philosophy that an individual should have freedom in his/her
economic and political pursuits.
- In contrast to collectivism, individualism stresses that the interest of the individual should
take precedence over the interests of the state.
- Individualism is built on two central tenets:
o The first is an emphasis on the importance of guaranteeing individual freedom and
self-expression.
o The second is the welfare of society is best served by letting people pursue their
economic self-interest, as opposed to some collective body dictating what is in
society’s best interest.
- The central message of individualism is that individual economic and political freedom are
the ground rules on which a society should be based.
- Conflicts between individualism and collectivism:
+ Individualism: Individual economic and political freedoms are the ground rules of a
society.
+ Collectivism: The primacy of the collective is more important than the individual.
2.3. What is Democracy?
- It refers to the political system in which government is by the people, exercised either
directly or through elected representatives.
o Usually associated with individualism.
o Pure democracy is based on the belief that the citizens should be directly involved in
decision-making.
o Most modern democratic states practice representative democracy where citizens
periodically elect individuals to represent them.
2.4. What is Totalitarianism?
- A form of government in which one person or political party exercises absolute control over
all spheres of human life and prohibits opposing political parties.
o Complete totalitarianism: the communist party monopolizes power.
o Theocratic totalitarianism: political power is monopolized by a party, group, or
individual that governs according to religious principles.
o Tribal totalitarianism: a political party represents the interest of a particular rule.
o Right-wing totalitarianism: permits some individual economic freedom, but restricts
individual political freedom.
3. What is an economic system?
- Three types of economic systems:
o Market economy: Productive activities are privately owned and production is
determined by supply and demand; the government encourages free and fair
competition.
o Command economy: Government's plan the goods and services, quantity, and prices;
businesses are state-owned, and governments allocate resources; with little incentive
to control costs and be efficient. Economies tend to stagnate.
o Mixed economy: Certain economic sectors are left to private ownership and free
market while others have significant state ownership and government planning;
governments tend to own firms that are considered important to national security.
4. What is a legal system?
Definition: The legal system of a country refers to the rules that regulate behavior along with the
processes by which the laws are enforced and through which redress for grievances is obtained.
4.1. Three types of legal system
- Common law: Based on tradition, precedent, and custom.
- Civil law: Based on a detailed set of laws organized into codes
- Theocratic law: Based on religious teachings.
4.2. Differences in contract law
- A contract is a document that specifies the condition under which an exchange is to occur
and details the rights and obligations of involved parties. Contract law is the body of law that
governs contract enforcement.
- Under a common law system, contracts tend to be very detailed with all contingencies
spelled out.
- Under a civil law system, contracts tend to be much shorter and less specific since many
issues are already covered in the civil code.
- Many countries have ratified the United Nations Convention on Contracts for the
International Sale of Goods (CISG) which establishes a uniform set of rules governing
certain aspects of everyday commercial contracts conducted in different nations.
4.3. Property rights and corruption
- How are property rights and corruption related?
o Property rights: the legal right over the use of a resource that it owns, which can be
violated.
▪ Private action: theft, piracy, blackmail.
▪ Public action: legally (excessive taxation), or illegally (bribes or
blackmailing)
o The Foreign Corrupt Practices Act makes it illegal for US firms to bribe foreign
government officials to obtain and maintain business over which that foreign official
has authority.
4.4. The protection of intellectual property
- Intellectual property (IP) - property that is the product of intellectual activity, which an be
protected by:
+ Patents – exclusive rights for a defined period to the manufacture, use, or sale of that
invention.
+ Copyrights – the exclusive legal rights of authors, composers, playwrights, artists,
and publishers to publish and disperse their work as they see fit.
+ Trademarks – design and names by which merchants or manufacturers designate and
differentiate their products.
4.5. What is Product Safety and Liability?
- Product safety laws set certain standards to which a product must adhere.
- Product liability involves holding a firm and its responsible officers when a product
causes injury, death, or damage.
- When product safety laws are stricter in a firm’s home country than in a foreign country, or
when liability laws are laxer, the firm has to decide whether to adhere to home country or
host country standards.
5. Differences in economic development
Determinations of economic development
- GNI - Gross national income
- PPP - Purchasing power parity
- HDI - Human development index
+ life expectancy at birth
+ educational attainment
+ whether average incomes are sufficient to meet the basic needs of life in a
country
6. Political economy and economic progress
- Innovation and entrepreneurship
+ are the engines of long-run economic growth
+ require a market economy and strong property rights
- Democratic regimes are probably more conducive to long-term economic growth;
subsequent economic growth leads to democratic regimes.
- Countries with favorable geography are more likely to engage in trade, and so, be more open
to market-based economic systems
- Countries that invest in education have higher growth rates
7. The change of political economy
- Democratic revolution swept the world
+ totalitarian regimes failed to deliver economic progress
+ new technologies have broken down the ability of the state to control access to
uncensored information
+ economic advances of the last 25 years have led to increasingly prosperous middle
and working classes who have pushed for democratic reforms
- A move away from centrally planned and mixed economies and toward a more free market
economic model.
8. The nature of economic transformation
- The shift toward a market-based system involves
+ deregulation – removing legal restrictions to the free play of markets, the
establishment of private enterprises, and the manner in which private enterprises
operate
+ privatization - transfers the ownership of state property into the hands of private
investors
+ the creation of a legal system to safeguard property rights
9. The implication of political economy for managers
- Markets that were formerly off-limits to Western business are now open
+ By identifying and investing early in a potential future economic stars, firms may
gain first mover advantages (advantages that accrue to early entrants into a market)
and establish loyalty and experience in a country.
- However, the potential risks are large
+ It can be more costly to do business in countries with dramatically different product,
workplace, and pollution standards, or where there is poor legal - protection for
property rights.
- Managers must consider
+ Political risk - the likelihood that political forces will cause drastic changes in a
country's business environment that adversely affects the profit and other goals of a
business enterprise.
+ Economic risk - the likelihood that economic mismanagement will cause drastic
changes in a country's business environment that adversely affects the profit and
other goals of a business enterprise.
+ Legal risk - the likelihood that a trading partner will opportunistically break a
contract or expropriate property rights.
10. Overall attractiveness
- The overall attractiveness of a country as a potential market and/or investment site for an
international business depends on balancing the benefits, costs, and risks associated with
doing business in that country.
- Other things being equal, the benefit-cost-risk trade-off is likely to be most favorable in
politically stable developed and developing nations that have free market systems and no
dramatic upsurge in either inflation rates or private sector debt.
CHAPTER 3: DIFFERENCES IN CULTURE
1. Values and norms
- Values provide the context within which a society’s norms are established and justified and
form the bedrock of a culture.
- Norms include:
+ folkways - the routine conventions of everyday life
+ mores - norms that are seen as central to the functioning of a society and to its social
life
2. Culture, society and the nation-state
- The relationship between a society and a nation state is not strictly one-to-one
- A society is defined as a group of people that share a common set of values and norms
(people who are bound together by a common culture).
- Nation-states are political creations that can contain one or more cultures.
- A culture can embrace several nations
3. What determines culture?
- The values and norms of a culture evolve over time.
- Determinants of culture:
o Religion
o Political and economic philosophies
o Education
o Language
o Social structure
4. Individuals and groups
- A group is an association of 2 or more people who have a shared sense of identity and who
interact with each other in structured ways on the basis of a common set of expectations
about each other’s behavior.
- Societies differ according to the degree to which the group is viewed as the primary means
of social organization. In some societies, individual attributes and achievements are viewed
as being more important than group membership; in others the reverse is true.
- In Western societies, there is a focus on the individual, benefits include:
o Common individual achievement
o The dynamism of the US economy
o High level of entrepreneurship
- However, individualism creates a lack of company loyalty and a failure to gain company-
specific knowledge:
o Competition between individuals instead of team building.
o Less ability to develop a strong network of contacts within a firm.
- In many Asian societies, the group is the primary unit of social organization:
o Discourages job switching between firms.
o Encourage lifetime employment systems.
o This leads to cooperation in solving business problems.
- However, the primacy of the value of a group might also suppress individual creativity and
initiative.
5. Social stratification
- Societies are stratified in two related ways:
o The degree of social mobility – the extent to which individuals can move out of the
strata into which they are born.
▪ Caste system: a closed system of stratification in which social position is
determined by the family into which a person is born.
▪ Class system: open stratification, social position can be changed through
achievement or luck.
o The significance attached to social strata in business contexts.
▪ Class consciousness is a condition where people tend to perceive themselves
in terms of their class background.
6. How do religious and ethical systems differ?
- Religion is a system of shared beliefs and rituals that are concerned with the realm of the
sacred; Ethical systems are a set of moral principles, or values, that are used to guide and
shape behavior. Religion and ethics are often closely intertwined.
- Four religions dominate society
● Christianity
○ The largest religion in the world +20% of the world's people identified as Christians
○ Found throughout Europe, the Americas, and other countries settled by Europeans
○ The three main branches of Christianity: Catholic, Orthodox, and Protestant - the
latter has the most important economic implications
○ the Protestant work ethic (Max Weber, 1804)
○ Hard work, wealth creation, and frugality is the driving force of capitalism
● Islam
○ The world's second-largest religion, with about 1 billion adherents
○ The central principle of Islam is that there is but one true omnipotent of God; people
do not own property, but only act as stewards for God
○ Teaching peace, justice, and tolerance is supportive of business, but the way business
is practiced is prescribed
○ Islamic fundamentalists have gained political power in many Muslim countries and
blame the West for many social problems; they are associated in the Western media
with militants, terrorists, and violent upheavals
● Hinduism
○ practiced primarily on the Indian subcontinent
○ focuses on the importance of achieving spiritual growth and development and
believes that a moral force requires the acceptance of certain responsibilities, called
dharma
○ Hindus are valued by their spiritual values rather than material achievements
○ Hindu culture's reverence for the cow
○ Promotion and adding new responsibilities may not be important or may be
infeasible due to the employee's caste
● Buddhism
○ has about 350 million followers
○ stresses spiritual growth and the afterlife rather than achievement while in this world
○ does not emphasize wealth creation
○ Entrepreneurial behavior is not stressed
○ does not support the caste system, individuals do have some mobility and can work
with individuals from different classes
● Confucianism is not a religion but influences behavior and shapes culture in many parts of
Asia.
7. What is the role of Language in Culture?
Language includes both the spoken and unspoken (nonverbal communication such as facial
expressions, personal space, and hand gestures) means of communication
- Countries with more than one language often have more than one culture
- English is the world's most widely spoken language and is also becoming the language
of IB
- Chinese is the mother tongue of the largest number of people, followed by English and
Hindi
- Knowledge of the local language is still beneficial
- Failing to understand the nonverbal cues of another culture can lead to communication
failure
8. What Is The Role of Education In Culture?
Formal education is the medium through which individuals learn many of the language,
conceptual, and mathematical skills that are indispensable in a modern society
- Important in determining a nation's competitive advantage
- Japan's excellent education system is an important factor underlying its economic
success
- General education levels can be a good index for the kinds of products that might sell in
a country
9. How Does Culture Impact the Workplace?
Probably the most famous study of how culture relates to value in the workplace was
conducted by Geert Hofstede, who identified four dimensions of culture
1. Power distance - how a society deals with the fact that people are unequal in
physical and intellectual capabilities
2. Uncertainty avoidance - the extent to which different cultures socialize their
members into accepting ambiguous situations and tolerating ambiguity
3. Individualism vs. collectivism
4. Masculinity vs. femininity - the relationship between gender and work roles
10. What Do Cultural Differences Mean For Managers?
- It is important to develop cross-cultural literacy companies that are ill informed about the
practices of another culture, which are unlikely to succeed in that culture managers must
beware of ethnocentric behavior, or a belief in the superiority of one's own culture.
- There is a connection between culture and national competitive advantage that suggests
which countries are likely to produce the most viable competitors has implications for the
choice of countries in which to locate production facilities and do business.
CHAPTER 4: ETHICS IN INTERNATIONAL BUSINESS
1. What is ethics?
- Ethics refers to accepted principles of right or wrong that govern
● the conduct of a person
● the members of a profession
● the actions of an organization
- Business ethics are the accepted principles of right or wrong governing the conduct of
business people.
- Ethical strategy is a strategy, or course of action, that does not violate these accepted
principles.
2. Which Ethical Issues are the most relevant to International Firms?
- Employment practices
+ Suppose work conditions in a host nation are clearly inferior to those in the
multinational’s home nation.
+ Which standards should apply?
● home country standards
● host country standards
● something in between
- Human rights
+ Basic human rights are taken for granted in developed countries
● freedom of association
● freedom of speech
● freedom of assembly
● freedom of movement
- Environmental regulations
+ Some parts of the environment are a public good that no one owns, but anyone can
despoil.
+ The tragedy of the commons occurs when a resource held in common by all, but
owned by no one, is overused by individuals, resulting in its degradation.
+ What happens when environmental regulations in host nations are far inferior to
those in the home nation?
+ It is not permissible for multinationals to pollute in developing countries even if
there are no regulations against it.
- Corruption
+ The U.S. Foreign Corrupt Practices Act outlawed the practice of paying bribes to
foreign government officials in order to gain business.
+ The Convention on Combating Bribery of Foreign Public Officials in International
Business Transactions adopted by the Organization for Economic Cooperation and
Development (OECD), obliges member states to make the bribery of foreign public
officials a criminal offense.
- The moral obligations of multinational corporations
+ Social responsibility refers to the idea that managers should consider the social
consequences of economic actions when making business decisions.
● in favor of decisions that have both good economic and good social
consequences
+ Advocates argue that businesses need to recognize their noblesse oblige - honorable
and benevolent behavior that is the responsibility of successful firms.
● give something back to the societies that have made their success possible
3. Ethical Dilemmas
- Ethical dilemmas are situations in which none of the available alternatives seems ethically
acceptable.
- The ethical obligations of a multinational corporation (MNC) toward employment
conditions, human rights, corruption, environmental pollution, and the use of power are not
always clear cut.
4. Why Do Managers Behave Unethically?
a. Personal ethics
- Expatriates may face pressure to violate their personal ethics because they are away from
their ordinary social context and supporting culture.
- Managers fail to question whether a decision or action is ethical, and instead rely on
economic analysis when making decisions.
b. Decision-making process: organization culture that does not emphasize business
culture encourages unethical behavior
c. Organizational culture: can legitimize unethical behavior or reinforce the need for
ethical behavior
d. Unrealistic performance expectations: encourage managers to cut corners or act in
an unethical manner
e. Leadership: helps establish the culture of an organization, and set the examples that
others follow
5. Philosophical Approaches to Ethics?
a. The Straw Men Approaches
- Friedman doctrine: the only social responsibility of business is to increase profits,
so long as the company stays within the rules of law.
- Cultural relativism: ethics are culturally determined and firms should adopt the
ethics of the cultures in which they operate.
- Righteous moralist: MNC’s home country standards of ethics should be followed in
foreign countries.
- Naive immoralist: if a MNC’s manager sees that firms from other nations are not
following ethical norms in a host nation, that manager should not either .
b. Utilitarian and Kantian Approaches to Ethics
- Utilitarian ethics - the moral worth of actions or practices is determined by their
consequences
+ actions are desirable if they lead to the best possible balance of good consequences
over bad consequences
+ but, it is difficult to measure the benefits, costs, and risks of an action
+ the approach fails to consider justice
- Kantian ethics - (Immanuel Kant) - people should be treated as ends and never purely as
means to the ends of others.
6. Right Theories
- Rights Theories - human beings have fundamental rights and privileges which transcend
national boundaries and cultures
+ establish a minimum level of morally acceptable behavior
+ the Universal Declaration of Human Rights specifies the basic principles that should
always be adhered to irrespective of the culture in which one is doing business
- Moral theorists argue that fundamental human rights form the basis for the moral compass
that managers should navigate by when making decisions which have an ethical component.
7. Justice Theories
- Justice theories focus on the attainment of a just distribution of economic goods and services
+ a just distribution is one that is considered fair and equitable
- John Rawls argued that all economic goods and services should be distributed equally
except when an unequal distribution would work to everyone’s advantage
+ impartiality is guaranteed by the veil of ignorance - everyone is imagined to be
ignorant of all his or her particular characteristics
8. How can managers make ethical decisions?
a. Hire and promote people with a well grounded sense of personal ethics
- prospective employees should find out as much as they can about the ethical climate in an
organization prior to taking a position
b. Build an organizational culture that places a high value on ethical behavior
- articulate values that place a strong emphasis on ethical behavior
- emphasize importance of code of ethics - formal statement of the ethical priorities
- implement a system of incentives and rewards that recognize people who engage in ethical
behavior and sanction those who do not
c. Make sure that leaders within the business articulate the rhetoric of ethical behavior and
act in a manner that is consistent with that rhetoric
d. Develop moral courage
- enables managers to walk away from a decision that is profitable, but unethical
- gives an employee the strength to say no to a superior who instructs him/her to pursue
actions that are unethical
- gives employees the integrity to go public to the media and blow the whistle on persistent
unethical behavior in a company
e. Put decision making processes in place that require people to consider the ethical
dimension of business decisions
f. Five steps to think through ethical problems
- Step 1: Identify which stakeholders a decision would affect and in what ways.
- Step 2: Determine whether a proposed decision would violate the fundamental rights of any
stakeholders
- Step 3: Establish moral intent - place moral concerns ahead of other concerns in cases where
either the fundamental rights of stakeholders or key moral principles have been violated
- Step 4: Engage in ethical behavior
- Step 5: Audit decisions and review them to make sure that they are consistent with ethical
principles
9. Ethics Officers
- Ethics officers ensure
● all employees are trained in ethics
● ethics is considered in the decision-making process
● the company’s code of conduct is followed
- In the end, there are clearly things that an international business should do, and there are
things that an international business should not do.
- But, not all ethical dilemmas have a clean and obvious solution.
CHAPTER 5: THE STRATEGY OF INTERNATIONAL BUSINESS
1. Strategy and the firm
A firm’s strategy can be defined as actions that managers 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, shareholders.
To maximize the value of a firm, managers must pursue strategies that increase the profitability of
the enterprise and its rate of profit growth over time.
Managers can increase the profitability of the firm by pursuing strategies that lower costs or by
pursuing strategies that add value to the firm’s products, which enables the firm to raise prices.
a. Value creation:
The amount of value a firm creates is measured by the difference between its costs of production
and the value that consumers perceive in its products. In general, the more value customers place on
a firm’s product, the higher the price the firm can charge for those products.
b. Strategic positioning
It is important for a firm to be explicit about its choice of strategic emphasis with regard to value
creation (differentiation) and low cost, and to configure its internal operations to support that
strategic emphasis
c. How are a firm’s operations configured?
2. Global Expansion, Profitability and Profit Growth
a. How can firms increase profits through international expansion?
- International firms can:
+ Expand their market - sell in international markets
+ Realize location economies - disperse value creation activities to locations where
they can be performed most efficiently and effectively
+ Realize greater cost economies from experience effects - serve an expanded global
market from a central location
+ Earn a greater return - leverage skills developed in foreign operations and transfer
them elsewhere in the firm
b. How can firms leverage their products and competencies?
- Firms can increase growth by selling goods or services developed at home internationally.
- The success of firms that expand internationally depends on
● the goods or services they sell.
● their core competencies - skills within the firm that competitors cannot easily match
or imitate.
Note: core competencies enable the firm to reduce the costs of value creation and/or to create
perceived value to that premium pricing is possible
c. Why are location economies important?
- Location economies are the economies that arise from performing a value creation activity
in the optimal location for that activity.
- By achieving location economies, firms can:
+ lower the costs of value creation and achieve a low cost position
+ differentiate their product offering
- Firms that take advantage of location economies in different parts of the world, create a
global web of value creation activities
+ different stages of the value chain are dispersed to locations where perceived value is
maximized or where the costs of value creation are minimized
d. Why are experiencing effects important?
- The experience curve refers to the systematic reductions in production costs that occur over
the life of a product
+ by moving down the experience curve, firms reduce the cost of creating value
+ to get down the experience curve quickly, firms can use a single plant to serve global
markets
- When labor productivity increases
+ individuals learn the most efficient ways to perform particular tasks
+ managers learn how to manage the new operation more efficiently
- The experience curve relationship between unit production costs and cumulative output.
- Economies of scale refer to the reductions in unit cost achieved by producing a large volume
of a product.
- Sources of economies of scale include:
+ spreading fixed costs over a large volume
+ utilizing production facilities more intensively
+ increasing bargaining power with suppliers
e. How can managers leverage subsidiary skills?
Manager should:
- Recognize that valuable skills that could be applied elsewhere in the firm can arise
anywhere within the firm’s global network - not just at the corporate center.
- Establish an incentive system that encourages local employees to acquire new skills.
- Have a process for identifying when valuable new skills have been created in a subsidiary.
- Act as facilitators to help transfer skills within the firm.
3. Cost Pressure and Pressure for Local Responsiveness
a. Types of Competitive Pressures
- Pressure for cost reduction: force the firm to lower unit costs
- Pressure to be locally responsive: require the firm to adapt its product to meet local
demands in each market—a strategy that raises costs
b. When are the pressures for cost reductions at the highest level?
- In industries producing commodity type products that fill universal needs, where price is the
main competitive weapon
- When major competitors are based in low cost locations
- Where there is persistent excess capacity
- Where consumers are powerful and face low switching costs (chi phí cho việc đổi từ sản
phẩm này sang sản phẩm khác).
c. When are the pressures for local responsiveness at the highest level?
- Differences in consumer tastes and preferences
+ strong pressure emerges when consumer tastes and preferences differ significantly
between countries
- Differences in traditional practices and infrastructure
+ strong pressure emerges when there are significant differences in infrastructure
and/or traditional practices between countries
- Differences in distribution channels
+ need to be responsive to differences in distribution channels between countries
- Host government demands
+ economic and political demands imposed by host country governments may require
local responsiveness
4. Choosing a strategy
a. Global standardization: increase profitability and profit growth by reaping the cost
reductions from economies of scale, learning effects, and location economies. The goal is to
pursue a low-cost strategy on a global scale.
- makes sense when there are strong pressures for cost reductions and demands for local
responsiveness are minimal
b. Localization: increase profitability by customizing goods or services so that they match
tastes and preferences in different national markets.
- makes sense when there are substantial differences across nations with regard to consumer
tastes and preferences and when cost pressures are not too intense
c. Transnational: tries to simultaneously achieve low costs through location economies,
economies of scale, and learning effects, differentiate the 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.
- makes sense when cost pressures are intense and pressures for local responsiveness are
intense
d. International: take products first produced for the domestic market and sell them
internationally with only minimal local customization
- makes sense when there are low cost pressures and low pressures for local responsiveness
e. How do strategies evolve?
CHAPTER 6: ENTRY STRATEGY AND STRATEGIC ALLIANCES
1. Basic entry decisions
- They must decide:
+ Which markets to enter
+ When to enter and what scale?
● large scale involves commitment of significant resources and implies rapid
entry => consequences of large scale are associated with the value of the
resulting strategic commitments (can have imp influence on nature of
competition in a market)
+ Which entry modes to use?
● exporting
● licensing or franchising
● joint venture
● a new wholly owned subsidiary
● an established enterprise
2. Entry modes
- What influences the choice of entry mode?
+ Transportation cost
+ Trade barriers
+ Political risks
+ Economic risks
+ Costs
+ Firm strategy
=> The optimal mode varies by situation.
- Which foreign market should firms enter?
+ Favorable foreign markets
● are politically stable
● have free market systems
● have relatively low inflation rates
● have low private sector debt
+ Less desirable foreign markets
● are politically unstable
● have mixed or command economies
● have excessive levels of borrowing
+ Markets are also more attractive when the product in question is not widely available
and satisfies an unmet need
- First-mover advantages
+ the ability to pre-empt rivals by establishing a strong brand name
+ the ability to build up sales volume and ride down the experience curve ahead of
rivals and gain a cost advantage over later entrants
+ the ability to create switching costs that tie customers into products or services
making it difficult for later entrants to win business
- First-mover disadvantages:
+ pioneering costs - arise when the foreign business system is so different from that in
a firm’s home market that the firm must devote considerable time, effort and expense
to learning the rules of the game, including the costs of business failure if the firm
makes major mistakes, the costs of promoting an establishing a product offering, the
costs of educating customers.
- Six entry modes
+ Exporting – commonly, first step for many manufacturing firms
+ Turnkey projects - the contractor handles every detail of the project for a foreign
client, including the training of operating personnel, and the foreign client is handed
the "key" to a plant that is ready for full operation
+ Licensing - a licensor grants the rights of intangible property (IP) to the licensee for
a specified time period, and in return, receives a royalty fee
+ Franchising - a specialized form of licensing in which the franchisor not only sells
IP to the franchisee, but also insists that the franchisee agree to abide by strict rules
as to how it does business; it is used primarily by service firms
+ Joint ventures (JVs) with a host country firm - a firm that is jointly owned by two
or more otherwise independent firms
+ Wholly owned subsidiary - the firm owns 100 percent of the stock; it can be done
● by setting up a new operation (Greenfield venture)
● by acquiring an established firm (M&A)
3. Selecting an entry mode
- Pros and cons of six entry modes
- Core competencies and Entry mode
+ The optimal entry mode depends to some degree on the nature of a firm’s core
competencies.
+ When competitive advantage is based on proprietary technological know-how
● avoid licensing and JVs unless the technological advantage is only transitory,
or can be established as the dominant design
+ When competitive advantage is based on management know-how
● the risk of losing control over the management skills or brand names is not
high, and franchising and JVs are a good option
- Pressure for Cost Reduction and Entry mode
+ When pressure for cost reductions is high, firms are more likely to pursue some
combinations of exporting and wholly owned subsidiaries
● allows the firm to achieve location and scale economies and retain some
control over product manufacturing and distribution
● firms pursuing global standardization or transnational strategies prefer wholly
owned subsidiaries
4. Greenfield or Acquisition
a. Greenfield strategy
- Build a subsidiary from the ground up.
- Advantages
+ give opportunities to build the firm that they want
- Disadvantages
+ slower to establish
+ more risky than the acquisition strategy
b. Acquisition strategy
- Acquire an existing company.
- Advantages
+ quick to execute
+ enable firms to preempt their competitors
+ less risky than Greenfield ventures
- Disadvantages
+ the acquiring firm overpays for the acquired firmi
+ the corporate culture are in conflict
+ fail to realize synergies
+ inadequate pre-acquisition screening
5. Strategic Alliances
- Strategic alliances refer to cooperative agreements between potential or actual competitors,
including formal joint ventures and short-term contractual agreements.
- Advantages:
+ facilitate entry into a foreign market
+ allow firms to share the fixed costs and risks of developing new products or
processes
+ bring together complementary skills and assets that neither partner could easily
develop on its own
+ help a firm establish technological standards for the industry that will benefit the
firm
- What makes strategic alliances successful?
+ Partner selection
■ helps the firm achieve its strategic goals and has the capabilities the firm
lacks and that it values
■ shares the firm’s vision for the purpose of the alliance
■ will not exploit the alliance for its own ends
+ Alliance structure
■ make it difficult to transfer unintended technology
■ have contractual safeguards to guard against the opportunism
■ allows for skills and technological swaps with equitable gains
+ Alliance management
■ It requires interpersonal relationships between managers
■ It requires learning from alliance partners