The Strategy of International Business
Chapter 4
CHAPTER OBJECTIVES
To discuss the meaning of strategy and how it effect firms competitiveness. To explain what are the action managers can take to compete more effectively in international market. Te determine how firms can increase profitability by expanding to foreign markets. To elaborate 2 major pressures faced by firm in international business. To discuss different international strategies.
Introduction
Previous chapter - concern
about environment surrounding Intl. Business.
Now shift our attention to the firm itself.
What manager could do to compete more effectively.
Strategies undertaken to focus on local
responsiveness & cost minimization.
Strategy and the firm
Purpose of business??
PROFIT!!
How to increase profit:
Adding value of product customer willing to pay more !! Lowering cost of production.
Differentiation
& Low-cost
Strategy.
VALUE CREATION
Difference between cost of production & the value consumer perceive in its product. More value Can charge higher price
The Role of Strategy
Strategy:
Actions managers take to attain the goals of the firm.
Need to identify and take action that lower the cost of value creation and/or, Differentiates the firms product through superior design, quality, service, or functionality.
Profiting from Global Expansion
International firms can: Expand the market leveraging products & core competencies.
Realize location economies: Disperse value creation activities to locations where they can be performed most efficiently & effectively Realize greater cost economies from experience effects: Serving global market from a central location
Leveraging subsidiary skills - Transfer them to other entities within the firms global network of operations
Transferring Core Competencies
Core competence:
Skills within firm that competitors cannot easily match or imitate.
Transfer skills to market where local competitors
lack = More earnings.
Core competencies
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Secret receipe, fast Quick service CustomSafe, made, reliable Online system, & elegance car delivery
Realizing location economies
Location economies: Economies that arise from performing value creation activity in the optimal location for that activity. When making location decisions:
Consider trade barriers and transportation costs. Assess political and economic risks.
The Experience Effects
Experience Curve: Systematic reduction in production costs that have been observed to occur over the life of a product. Result of Learning Effect & Economies of scale
Unit costs
Moving down the curve reduces the cost of creating value
B A
Accumulated output
Experience Curve Economies
Learning Effects: Labor productivity increases over time as individuals learn the most efficient ways to perform particular tasks. Economies of Scale: Reductions in unit cost achieved by producing a large volume of a product. Strategic Significance of LE & EOS: Moving down the experience curve allows a firm to reduce its cost of creating value.
Firms Face Two Conflicting Concepts (Pressures) Overseas
Reduce Be
costs.
responsive to local needs.
Cost Reduction
Try to reduce costs by: Mass production Product standardization. Optimal location production. What kind of situation do you think will put more pressure on your company to reduce cost??
industries producing commodity type products that fill universal needs major competitors are based in low cost locations there is persistent excess capacity consumers are powerful & face low switching costs
Local Responsiveness
Arise from a number of sources: 1. Different consumer tastes and preferences.
Local Responsiveness
2. Different infrastructure and practice.
Local Responsiveness
3. Differences in distribution channels.
Differences in marketing of product. Best distribution channel in the country, either retail chain or sales force. 4. Government demands. Testing, pricing & registration requirement Local content requirement. Implications of LR?? LR could hesitate firm from realizing benefit of experience curve & location economies. LR could increase cost & lost of core competencies.
Four Basic Strategies
International Strategy
Taking
products first produced for the domestic market and then selling them internationally with only minimal local customization
The
international strategy makes sense when there are low cost pressures low pressures for local responsiveness
Global Standardization Strategy
Focuses
on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies Low-cost strategy on a global scale
The
global standardization strategy makes sense when: there are strong pressures for cost reductions demands for local responsiveness are minimal
Localization Strategy
Increase
profitability by customizing the firms goods or services so that they provide a good match to tastes and preferences in different national markets Makes sense when:
There are differences across nations with regard to consumer tastes and preferences Cost pressures are not too intense
Transnational Strategy
Companies try to simultaneously: achieve low costs through location economies, EOS, and learning effects differentiate the product offering across geographic markets to account for local differences foster a multidirectional flow of skills between different subsidiaries in the firms global network of operations
Make sense when: cost pressures are intense pressures for local responsiveness are intense
The Evolution of Strategy
Changes in Strategy over Time