UNIVERSITY OF SOUTHERN MINDANAO
The Strategy of International
Business
Prepared by: R. Panaguiton
Business Administration Department
College of Business, Development Economics, and Management
Chapter Objectives
1. Explain the concept of strategy.
2. Recognize how firms can profit by expanding globally.
3. Understand how pressures for cost reductions and
pressures for local responsiveness influence strategic
choice.
4. Identify the different strategies for competing globally
and their pros and cons.
What Is Strategy?
A firm’s strategy refers to the actions that managers take to
attain the goals of the firm
• Firms need to pursue strategies that increase profitability
and profit growth
• Firms can
• add value
• lower costs
• sell more in existing markets
• expand internationally
What Is Strategy?
Determinants of Enterprise Value
How Is Value Created?
• The firm’s value creation is the difference between V and C
• a firm has high profits when it creates more value for its
customers and does so at a lower cost
• Profits can be increased by
[Link] a differentiation strategy
[Link] a low cost strategy
• To maximize long run return on invested capital firms pick a
viable position on the efficiency frontier, configure internal
operations to support that position, have the right organization
structure in place to execute the strategy
How Is Value Created?
Value Creation
How Are A Firm’s
Operations Configured?
A firm’s operations are like a value chain composed of distinct
value creation activities
• Primary activities
• R&D
• production
• marketing and sales
• customer service
• Support activities
• information systems
• logistics
• human resources
How Are A Firm’s
Operations Configured?
The Value Chain
How Can Firms Increase Profits Through
International Expansion?
International firms can
1. Expand their market
2. Realize location economies
3. Realize greater cost economies from experience
effects
4. Earn a greater return
How Can Firms Leverage Their Products
And Competencies?
The success of firms that expand internationally depends
on
• the goods or services sold
• the firm’s core competencies
Core competencies allow firms to reduce the costs of value
creation and/or to create perceived value so that premium
pricing is possible
Why Are Location
Economies Important?
• 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
Why Are Experience
Effects Important?
• The experience curve - 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
• Learning effects - cost savings that come from learning
by doing
• Economies of scale - the reductions in unit cost achieved
by producing a large volume of a product
What Competitive Pressures
Exist In The Global Marketplace?
Firms that compete in global markets face two conflicting types of
competitive pressures
• limit the ability of firms to realize location economies and
experience effects, leverage products, and transfer skills
within the firm
1. Pressures for cost reductions
• force the firm to lower unit costs
2. Pressures to be locally responsive
• require the firm to adapt its product to meet local demands in
each market, but raise costs
When Are Pressures Greatest?
Pressures for cost reductions are greatest
1. For firms producing products that fill universal needs
2. When major competitors are in low cost locations
3. Where there is persistent excess capacity
4. Where consumers are powerful and face low switching costs
Pressures for local responsiveness arise from
1. Differences in consumer tastes and preferences
2. Differences in traditional practices and infrastructure
3. Differences in distribution channels
4. Host government demands
Which Strategy
Should A Firm Choose?
There are four basic strategies to compete in international
markets
• the appropriateness of each strategy depends on the
pressures for cost reduction and local
responsiveness in the industry
1. Global standardization
2. Localization
3. Transnational
4. International
How Does Strategy Evolve?
An international strategy may not be viable in the long term
• to survive, firms may need to shift to a global
standardization strategy or a transnational strategy in
advance of competitors
Localization may give a firm a competitive edge, but if the
firm is simultaneously facing aggressive competitors, the
company will also have to reduce its cost structures
• would require a shift toward a transnational strategy
How Does Strategy Evolve?
Changes in Strategy over Time
References
[1] Geringer, M., McNett, J., Minor, M., & Ball, D. (2015). International Business - Standalone book
(1st ed.). McGraw-Hill Education.
[2] Griffin, R., & Pustay, M. (2014). International Business: A Managerial Perspective (8th ed.).
Pearson.
[3] Hill, C. (2014). International Business: Competing in the Global Marketplace (9th ed.). McGraw-
Hill Education.
[4] Hill, C., & Hult, T. G. M. (2018). International Business: Competing in the Global Marketplace
(12th ed.). McGraw-Hill Education.
[5] Hill, J. (2008). International Business: Managing Globalization. SAGE Publications, Inc.