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Transcript of Chap011GBT
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Global Business Today6e
by Charles W.L. Hill
McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter 11
The Strategy ofInternational Business
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11-3
Introduction
Question: What actions can managers take tocompete more effectively in a global economy?
Managers must consider
the benefits of expanding into foreignmarkets
which strategies to pursue in foreign markets
the value of collaboration with globalcompetitors
the advantages of strategic alliances
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11-4
Strategy and the Firm
Question: What is strategy?
A firms strategy can be defined as the
actions that managers take to attain thegoals of the firmTypically, strategies focus on profitability
and profit growth
Profitabilityrefers to the rate of return thefirm makes on its invested capitalProfit growth is the percentage increase
in net profits over time
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Strategy and the Firm
Determinants of Enterprise Value
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Value Creation
Question: How do you increase the profitabilityof a firm?
To increase profitability, value must be createdfor the consumer
Value creation is measured by the differencebetween V (the price that the firm can chargefor that product given competitive pressures)and C (the costs of producing that product)
The two basic strategies for creating value are1. differentiation2. low cost
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Strategic Positioning
To maximize profitability, a firm mustpick a position on the efficiency frontier that
is viable in the sense that there is enoughdemand to support that choice
configure its internal operations so that theysupport that position
make sure that the firm has the rightorganization structure in place to execute itsstrategy
So, a firms strategy, operations, andorganization must all be consistent with eachother in order to achieve a competitiveadvantage and superior profitability
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11-8
Operations: The Firm as aValue Chain
Firms are essentially value chainscomposed of a series of distinct valuecreation activities, including production,
marketing, materials management,R&D, human resources, informationsystems, and the firm infrastructure
Value creation activities can be
categorized as1. primary activities
2. support activities
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Operations: The Firm as aValue Chain
1. Primary Activities
involves creating the product, marketingand delivering the product to buyers,and providing support and after-saleservice to the buyers of the product
2. Support Activities
provides the inputs that allow theprimary activities of production andmarketing to occur
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Operations: The Firm as aValue Chain
The Value Chain
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Classroom Performance System
All of the following are examples of primaryactivities except
a) Logistics
b) Marketing and sales
c) Customer service
d) Production
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11-12
Organization: The Implementationof Strategy
Organization architecturerefers to the totality ofa firms organization (formal organizationalstructure, control systems and incentives,organizational culture, processes, and people)
Organizational structure refers to
the formal division of the organization intosubunits
the location of decision-making
responsibilities within that structurethe establishment of integrating mechanisms
to coordinate the activities of subunitsincluding cross functional teams and or pan-regional committees
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Organization: The Implementationof Strategy
Organization Architecture
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Organization: The Implementationof Strategy
Controls are the metrics used to measure theperformance of subunits and make judgmentsabout how well the subunits are run
Incentives are the devices used to rewardappropriate managerial behavior
Processes are the manner in which decisionsare made and work is performed
Organizational culture is the norms and value
systems that are shared among the employees People refers to employees and the strategy
used to recruit, compensate, and retain thoseindividuals
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In Sum: Strategic Fit
So, to attain superior performance andearn a high return on capital, a firmsstrategy must make sense given marketconditions
The operations of the firm must supportthe firms strategy
The organizational architecture of thefirm must match the firms operations
and strategyIf market conditions shift, so must the
firms strategy, operations, andorganization
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In Sum: Strategic Fit
Strategic Fit
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Global Expansion, Profitabilityand Profit Growth
Firms that operate internationally can1. Expand the market for their domestic product offerings by
selling those products in international markets2. Realize location economies by dispersing individual
value creation activities to locations around the globewhere they can be performed most efficiently andeffectively
3. Realize greater cost economies from experience effectsby serving an expanded global market from a centrallocation, thereby reducing the costs of value creation
4. Earn a greater return by leveraging any valuable skills
developed in foreign operations and transferring them toother entities within the firms global network ofoperations
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Expanding the Market: LeveragingProducts and Competencies
To increase growth, a firm can sell products orservices developed at home in foreign markets
Success depends on the type of goods andservices, and the firms core competencies(skills within the firm that competitors cannoteasily match or imitate)
Core competencies
enable the firm to reduce the costs of value
creationcreate perceived value so that premium
pricing is possible
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11-19
Location Economies
Firms should locate value creation activitieswhere economic, political, and culturalconditions are most conducive to theperformance of that activity
Firms that successfully do this can realizelocation economies (the economies that arisefrom performing a value creation activity in theoptimal location for that activity, wherever in theworld that might be)
Locating value creation activities in optimallocationscan lower the costs of value creationcan enable a firm to differentiate its product
offering from those of competitors
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Location Economies
Multinationals that take advantage of locationeconomies create a global web of valuecreation activities
Under this strategy, different stages of the valuechain are dispersed to those locations aroundthe globe where perceived value is maximizedor where the costs of value creation areminimized
However, introducing transportation costsand trade barriers complicates this picture
Political risks must be assessed whenmaking location decisions
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Experience Effects
The experience curve refers to the systematicreductions in production costs that have beenobserved to occur over the life of a product
Studies show that a products productioncosts decline by some quantity about eachtime cumulative output doubles
Learning effects are cost savings that comefrom learning by doing
Labor productivity increases whenindividuals learn the most efficient ways toperform particular tasks and managementlearns how to manage the new operationmore efficiently
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Experience Effects
Economies of scale refer to the reductions inunit cost achieved by producing a large volumeof a product
Sources include
the ability to spread fixed costs over a largevolume
the ability of large firms to employincreasingly specialized equipment or
personnel Serving a global market from a single location is
consistent with moving down the experiencecurve and establishing a low-cost position
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Leveraging Subsidiary Skills
To help increase firm value, managers should
recognize that valuable skills can bedeveloped anywhere within the firms global
network (not just at the corporate center)incentive systems can encourage local
employees to acquire new skills
develop a process to identify when new skills
have been createdact as facilitators to transfer valuable skills
within the firm
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Summary
Firms that expand internationally canincrease their profitability and profitgrowth by
Entering markets where competitorslack similar competencies
Realizing location economies
Exploiting experience curve effectsTransferring valuable skills within the
organization
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Classroom Performance System
When different stages of a value chain aredispersed to those locations around theworld where value added is maximized or
where the costs of value creation areminimized, _____ is (are) created.
a) Experience effects
b) Learning effectsc) Economies of scale
d) A global web
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Cost Pressures and Pressuresfor Local Responsiveness
Firms that compete in the globalmarketplace typically face two types ofcompetitive pressures
1. pressures for cost reductions
2. pressures to be locally responsive
These pressures place conflicting
demands on the firm
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Cost Pressures and Pressuresfor Local Responsiveness
Pressures for Cost Reductions and LocalResponsiveness
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Pressures for Cost Reductions
Pressures for cost reductions are greatestin industries producing commodity type
products that fill universal needs (needs thatexist when the tastes and preferences of
consumers in different nations are similar ifnot identical)when major competitors are based in low
cost locationswhere there is persistent excess capacity
where consumers are powerful and face lowswitching costs
To respond to these pressures, firms need tolower the costs of value creation
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Pressures for Local Responsiveness
Pressures for local responsiveness arise from
1. differences in consumer tastes andpreferences
2. differences in traditional practices andinfrastructure
3. differences in distribution channels
4. host government demands
Firms facing these pressures need todifferentiate their products and marketingstrategy in each country
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Pressures for Local Responsiveness
1. Differences in Consumer Tastes andPreferences
When consumer tastes and preferences differsignificantly between countries, firms facestrong pressures for local responsiveness
2. Differences in Infrastructure and TraditionalPractices
When there are differences in infrastructureand/or traditional practices between countries,pressures for local responsiveness emerge
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Pressures for Local Responsiveness
3. Differences in Distribution Channels
A firms marketing strategies may be influenced
by differences in distribution channels betweencountries
4. Host Government Demands
Economic and political demands imposed by
host country governments may necessitate adegree of local responsiveness
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Classroom Performance System
Pressures for local responsiveness comefrom all of the following except
a) Excess capacity
b) Host government demands
c) Differences in consumer tastes andpreferences
d) Differences in distribution channels
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Choosing a Strategy
Question: How do the pressures for cost
reductions and local responsiveness influencea firms choice of strategy?
There are four basic strategies to compete inthe international environment
1. global standardization
2. localization
3. transnational
4. international
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Global Standardization Strategy
Question: When does a global standardizationstrategy make sense?
A global standardization strategyfocuses onincreasing profitability and profit growth by reaping
the cost reductions that come from economies ofscale, learning effects, and location economies
The strategic goal is to pursue a low-cost
strategy on a global scaleThis strategy makes sense when there arestrong pressures for cost reductions and demandsfor local responsiveness are minimal
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Localization Strategy
Question: When does a localization strategy makesense?
A localization strategyfocuses on increasingprofitability by customizing the firms goods or
services so that they provide a good match totastes and preferences in different nationalmarkets
This strategy makes sense when there aresubstantial differences across nations with regardto consumer tastes and preferences, and wherecost pressures are not too intense
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Transnational Strategy
Question: When does a transnational strategymake sense?A transnational strategytries to simultaneously
achieve low costs through location
economies, economies of scale, andlearning effects
differentiate the product offering acrossgeographic markets to account for localdifferences
foster a multidirectional flow of skillsbetween different subsidiaries
This strategy makes sense when there are bothhigh cost pressures and high pressures for localresponsiveness
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International Strategy
Question: When does an internationalstrategy make sense?
An international strategyinvolves takingproducts first produced for the domesticmarket and then selling theminternationally with only minimal localcustomization
This strategy makes sense when thereare low cost pressures and low pressuresfor local responsiveness
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The Evolution of Strategy
Question: Is the choice of strategy static?
As competition increases, international
and localization strategies become lessviable
To survive, firms may need to shift to aglobal standardization strategy or a
transnational strategy in advance ofcompetitors
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Classroom Performance System
When pressures are high for localresponsiveness, but low for costreductions, a _______ makes sense.
a) Global standardization strategyb) International strategy
c) Transnational strategy
d) Localization strategy
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Strategic Alliances
Question: What is a strategic alliance?
Strategic alliances refer to cooperative
agreements between potential or actualcompetitors
Examples include
formal joint ventures
short term contractual arrangements
The number of international strategic allianceshas risen significantly in recent decades
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The Advantages ofStrategic Alliances
Question: Why form a strategic alliance?
Strategic alliances are attractive because they
facilitate entry into a foreign market allow firms to share the fixed costs (and
associated risks) of developing newproducts or processes
bring together complementary skills andassets that neither partner could easilydevelop on its own
can help establish technological standardsfor the industry that will benefit the firm
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The Disadvantages ofStrategic Alliances
Question: What are the drawbacks ofstrategic alliances?
Strategic alliances can give competitorslow-cost routes to new technology andmarkets
Unless a firm is careful, it can give awaymore in a strategic alliance than it receives
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Making Alliances Work
Question: How can firms increase the successof their alliances?
Many international strategic alliances run intoproblems
The success of an alliance seems to be afunction of three main factors
1. partner selection
2. alliance structure
3. the manner in which the alliance ismanaged
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Making Alliances Work
1. Partner Selection
A good partner
helps the firm achieve its strategic
goals and has the capabilities thefirm lacks and that it values
shares the firms vision for thepurpose of the alliance
does not expropriate the firmstechnological know-how while givingaway little in return
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Making Alliances Work
2. Alliance Structure
A good alliance should
be designed to make it difficult to transfer
technology not meant to be transferred have contractual safeguards to guard
against the risk of opportunism by apartner
involve an agreement in advance to swap
skills and technologies to ensure a chancefor equitable gain
extract a significant credible commitmentfrom the partner in advance
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Making Alliances Work
3. Managing the Alliance
A good alliance
requires managers from both
companies to build interpersonalrelationships
should promote learning fromalliance partners
should promote the diffusion oflearned knowledge throughout theorganization
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Critical Discussion Question
1. In a world of zero transportation costs,no trade barriers, and non-trivialdifferences between nations with regard to
factor endowments, firms must expandinternationally if they are to survive.Discuss.
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Critical Discussion Question
2. Plot the position of the following firms onFigure 11.8 - Procter & Gamble, IBM,Nokia, Coca-Cola, Dow Chemical, US
Steel, and McDonald's. In each casejustify your answer.
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Critical Discussion Question
3. Re-Read the Management Focus box onProcter & Gamble and then answer thefollowing questions:a) What strategy was Procter & Gamblepursuing when it first entered foreignmarkets in the period up until the 1980s?b) Why do you think this strategy becameless viable in the 1990s?
c) What strategy does Procter & Gambleappear to be moving toward? What arethe benefits of this strategy? What are thepotential risks associated with it?
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Critical Discussion Question
4. What do you see as the main organizationalproblems that are likely to be associated with theimplementation of a transnational strategy?
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Critical Discussion Question
5. Reread the Management Focus box on thealliance between Cisco and Fujitsu. What are thebenefits to Cisco and Fujitsu respectively of thealliance? What are the risks to Cisco? How canCisco mitigate those risks?