Strategy of International BusinessChapter 12

Cho, Hee-Joo

Jang, Se-Yeop Luo, Lin

Morger, Raffael

International Business October 15, 2007

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Content

Strategy and the Firm Hee-Joo

Global Expansion Luo Lin

Cost & Localization Pressure Raffael Morger

Four Strategies Se-Yeop

3

Strategy and the Firm

4

Strategy and the Firm

Value Creation

C

P - C

V - P

C

P

VV - C

V = Value of product to and average consumer

P = Price per unit

C = Cost of production per unit

V – P = Consumer surplus per unit

V – C = Value created per unit

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Strategy and the Firm

Strategic Positioning

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Strategy and the Firm

Operations: the firm as a value chain

Primary Activities

Support Activities

Information Systems Logistics Human Resource

Company Infrastructure

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Global Expansion, Profitability, and Profit Growth

What can firms do after expanding globally?

Expanding the Market

Realizing Location Economies

Reducing Production Cost from Experience Effects

Earning a Greater Return by Leveraging Subsidiary Skills

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Global Expansion, Profitability, and Profit Growth

Expanding the Market

=>by selling products in international markets

• Leveraging Products

e.g. Microsoft ;Volkswagen and Toyota

• Core Competencies

e.g. Toyota

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Global Expansion, Profitability, and Profit Growth

Realizing Location Economies

=>by dispersing individual value creation activities

• Creating a Global Web

e.g. IBM’s ThinkPad X31 laptop computer

• Some Warnings

e.g. New Zealand (high transportation costs);

Political risk

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Reducing Production Cost from Experience Effects

=>by reducing the costs of value creation

Global Expansion, Profitability, and Profit Growth

Cumulative Output

Un

it C

os

ts

A

B

Cumulative output increases over time, and unit costs will lower gradually in one period. Why?

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• Learning Effects=>cost savings

e.g. Assembling airframe

• Economies of Scale=> reductions in unit cost

e.g. In the automobile industry

Global Expansion, Profitability, and Profit Growth

Reasons

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Global Expansion, Profitability, and Profit Growth

Earning a Greater Return by Leveraging Subsidiary

Skills

=>by leveraging any valuable skills developed in foreign operations and transferring them to other entities

e.g. McDonald's restaurant in France

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Pressures International Businesses

Firm A Firm C

Firm B

Pre

ssu

res

for

Co

st R

edu

ctio

n

Pressures for Local Responsiveness

Lo

wH

igh

Low High

--> Nowadays many companies are in the position of firm C

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Pressures for Cost Reductions

Companies have to lower cost of value creation

Outsourcing: eg. Call Centers to India, bank back office to developing nations

Pressures are particularly intense in commodity-type industries e.g. bulk chemicals, petroleum, steel, sugar etc

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Local Responsiveness (1)

Differences in Customer Tastes and Preferences

- Customer tastes and preferences

- Deeply embedded historic or cultural reasons

Marketing message have to be customized

e.g. Difference US vs. European automobile market

Differences in Infrastructure and Traditional Practices

- Electrical system

- Left side driving in Great Britain

- Mobile networks

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Differences in Distribution Channels

- Marketing strategies may have to be adapted

e.g. British and Japanese doctors will not accept or respond favorably to a US style high pressure sales force

Differences Host Government Demands

- Economic and political demands imposed by host-country government may require local responsiveness

- Threats of protectionism, economic nationalism

e.g. Pharmaceutical Companies are subject o local clinical testing, registration procedures etc.

Railcar production must be in purchasing country

Local Responsiveness (2)

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Four Basic Strategies

High

High

Low

Low

Pressures for Cost Reduction

Pressures for Local Responsiveness

Global Standardization

Strategy

Transnational Strategy

International Strategy

Localization Strategy

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Four Basic Strategies

High

High

Low

Low

Pressures for Cost Reduction

Pressures for Local Responsiveness

International Strategy

- Product of universal needs

- No major competitors

- Starts from domestic market and expands internationally

- Tight control over marketing and product strategy

=> Microsoft, Procter & Gamble

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Global Standardization Strategy

Global Standardization

Strategy

High

High

Low

Low

Pressures for Cost Reduction

Pressures for Local Responsiveness

- Low cost strategy on global Scale --> minimal adaptation

- Products usually serve universal needs

=> e.g. Samsung, Nokia

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Four Basic Strategies

High

High

Low

Low

Pressures for Cost Reduction

Pressures for Local Responsiveness

Localization

Strategy

- Customizing the product to local demands

- Value creation strategy in the local market

=> e.g. MTV

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Four Basic Strategies

High

High

Low

Low

Pressures for Cost Reduction

Pressures for Local Responsiveness

Transnational Strategy

- Focuses on leveraging subsidiary skills

- Build centralized manufacturing of components with assembling plants in each of its markets

=> e.g. Caterpillar

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The Evolution of Strategy - Xerox

- Invention of photocopier in 1960

- No major competition at first

- Expanded globally => pursuing international strategy

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Emergence of Competitors

Japanese companies such as Canon invented their way around Xerox’s patens.

1. produced their own photocopiers in very efficient

manufacturing system.

2. priced them below Xerox’s products.

- leads to Xerox’s failure in cost reduction

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The Evolution of Strategy

Mistake of Xerox: Failed in reducing cost before the emergence of competitors

=> In the long run, international strategy will face cost or localization pressure

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Questions

? Cho, Hee-JooJang, Se-Yeop

Luo, Lin Morger, Raffael