International Business

1. International Business Wendy Jeffus Harvard Summer School

2. Introduction • Midterm Exam Results • Vineet Garg “P&G Approach to Globalization” • Chapter 12: The Strategy of International Business • Case Study: MTV Networks • Case Study: Nestlé • Chapter 13: The Organization of International Business (Monday) • “We Can’t All Play the Violin” • Monday: The Great Globalization Debate!

3. Midterm Results • Average Score: 88.5 • Tricky Questions: • 26. A firm's bargaining power is highest in all of the following situations except • when the government places a high value on what the firm has to offer • when the number of alternatives open to the firm is high • when the time frame involved is short • when the negotiation process is unhurried

4. The _________ suggests that trade is mutually beneficial because it allows for the specialization of production, the realization of scale economies, the production of a greater variety of products, and lower prices. • product life cycle theory • new trade theory • theory of competitive advantage • theory of comparative advantage Chapter 5 (Summary p. 196) New Trade Theory states that trade allows a nation to specialize in the production of certain goods, attaining scale economies and lowering the costs of producing those goods, while buying goods that it does not produce from other nations that are similarly specialized. By this mechanism the variety of good available to consumers in each nation is increased which the average costs of those goods fall.

5. Wendy Jeffus Harvard Summer School Chapter 12: The Strategy of International Business

6. Group Projects Section 1 Water (Morocco) 20/20 (India) Oysho (China) Credit (Russia) Real E (Ukraine) Water (Nigeria) Energy (Poland) Energy (U.S.) Pace-M (Mauritius) ZipCar (Portugal) HeadH (Hungary) BlueT (Dominican Rep.)

7. Group Projects Section 2 Hogwarts (U.S.) ATIS (U.S.) Vending (France) Fruit (Pakistan) Barcode (Dubai) Scooter (India)

8. Strategy • Strategy – actions 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

9. Value Creation • Value Creation Activities – allow a company to achieve superior efficiency, excellent quality, innovation, and customer responsiveness. • Product development, investments in human capital, manufacturing, marketing, and/or R & D. • The way to increase the profitability of a firm is to create more value • 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

10. Value Creation • Example: Cost per unit (C) = $15,000; Price per unit (P) = $20,000*; Value to Customer (V) $22,000 20/20 (India) Vending (France) • Example: Cost per unit (C) = $1,500; Price per unit (P) = $2,000*; Value to Customer (V) $2,500 Note: (V) is the value to the average customer, customers have different perceptions of value. If you were a monopoly supplier, you could charge a price closer to this price.

11. Strategic Positioning & Value Creation • Michael Porter states that there are two basic strategies for creating value and attaining a competitive advantage in an industry: • Low-Cost Strategy vs. Differentiation • Low Cost - value is created for the customer by offering low priced products. • Differentiation – unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition

12. Pick a position that offers enough demand to support your choice. Configure internal operations, such as manufacturing, marketing, logistics, IT, and HR to support your position. Connect this decision to your organizational structure. Example: Where should the Skilled Labor Headhunter Service in Hungary position their services? Where should Organic Fruit from Pakistan compete? Increased Differentiation (V) Low Cost (C) Strategic Choice The Efficient Frontier shown below has a convex shape due to diminishing returns* HeadH (Hungary) Fruit (Pakistan) *Diminishing returns imply that when a firm has significant value built into its product offering, increasing value by a small amount requires significant additional costs. A firm with a low-cost structure, also may have to give up a lot of value to obtain further cost reductions.

13. Perceptions… • Which “red car with 2 doors” is worth more? • Which “brown bag” is worth more? 2008 Mitsubishi 2008 Ferrari http://allworldcars.com/wordpress/wp-content/uploads/2007/07/windowslivewriter2008ferrari430scuderia-1c202008-ferrari-430-scuderia-11.jpg http://fotogrill.com/wp-content/uploads/2008/01/2008-mitsubishi-lancer-evolution-x-front-and-side-1600x1200.jpg http://www.thebudgetfashionista.com/images/eluxurylv-thumb.jpg

14. The Firm as a Value Chain • Any firm is composed of a series of distinct value creating activities • Primary activities • Research & development • Production • Marketing & Sales • Activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc. • Customer Service • Customer support, repair services, etc. • Support Activities • Information systems • Process automation, and other technology development • Logistics • Inbound logistics include the receiving, warehousing, and inventory control of input materials. • Outbound logistics are the activities required to get the finished product to the customer, including warehousing, order fulfillment, etc. • Human resource • the activities associated with recruiting, development, and compensation of employees.

15. The Value Chain Scooter (India) Real E (Ukraine)

16. Global Expansion, Profitability, & Growth • Expanding globally allows firms to increase their profitability and rate of profit growth in ways not available to purely domestic enterprises • Firms that operate internationally are able to • Expand the market for their domestic products • Realize location economies by dispersing individual value creation activities • Realize greater cost economies • Earn a greater return by leveraging any valuable skills developed in foreign operations BlueT (Dominican Rep.) Barcode (Dubai)

17. Leveraging Products & Competencies • A company can increase its growth rate by taking goods or services developed at home and selling them internationally • Returns from such a strategy are likely to be greater if indigenous competitors in the nations a company enters lack comparable products • Success of multinational companies also rest upon the core competencies that underlie the development, production, and marketing of goods or services • Core competencies are skills within the firm that competitors cannot easily match or imitate • Core competencies are the bedrock of a firm’s competitive advantage and enable them to reduce the costs of value creation

18. McDonalds fast food P & G brand marketing Wal-Mart logistics Starbucks Freshly brewed coffee Toyota Low cost, high quality Boeing Multisourcing Dell Inventory management Apple graphics What are the Core Competencies?

19. Consider the following: • Where are the best designers? • Where is the low cost or skilled labor? • Who will develop the best marketing • strategy? Location Economies • Location economies are the economies that arise from performing a value creation activity in the optimal location for that activity • Can have one of two effects: • It can lower the costs of value creation and help the firm to achieve a low-cost position and/or • It can enable a firm to differentiate its product offering from those of competitors • One result of this kind of thinking is the creation of a global web of value creation activities, with different stages of the value chain being dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized Note: Transportation & trade complicate the picture. Pace-M (Mauritius) ATIS (U.S.)

20. Experience Effects • The experience curve refers to systematic reductions in production costs that have been observed to occur over the life of a product • There are two explanations for the experience effect • Learning effects refer to cost savings that come from learning by doing • Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product • The strategic significance of the experience curve is clear; moving down the experience curve allows a firm to reduce its cost of creating value and increase its profitability Credit (Russia) Scooter (India) Making the first electric scooter, is much more expensive than making the 1000th

21. Leveraging Subsidiary Skills • Leveraging the skills created within subsidiaries and applying them to other operations within the firm’s global network may create value • Learning how to leverage the skills of subsidiaries presents a challenge for managers of multinational organizations • They must have the humility to recognize that valuable skills leading to competencies can arise anywhere within the firm’s global network • They must establish an incentive system that encourages local employees to acquire new skills • They must have a process for identifying when valuable new skills have been created in a subsidiary • They need to act as facilitators, helping to transfer valuable skills within the firm

22. Old McDonalds New McDonalds Example: McDonalds http://images.businessweek.com/ss/06/05/mcdonalds/image/spring-road-interior-3.jpg http://www.danlockton.co.uk/research/images/mcdonaldsseating.jpg

23. Cost Pressure vs. Local Responsiveness • Firms that compete in the global marketplace typically face two types of competitive pressure • Pressures for cost reductions • Pressures to be locally responsive

24. Pressure for Cost Reductions • International businesses often face pressures for cost reductions because of the competitive global market • Pressures for cost reduction can be particularly intense in industries producing commodity-type products • Universal needs exist when the tastes and preferences of consumers in different nations are similar if not identical • Pressures for cost reductions are also intense • In industries where major competitors are based in low-cost locations • Where there is persistent excess capacity • Where consumers are powerful and face low switching costs

25. Pressure for Local Responsiveness • Differences in consumer tastes & preferences • North American families like pickup trucks while in Europe they are viewed as a utility vehicle for firms • Differences in infrastructure & traditional practices • Consumer electrical system in North America is based on 110 volts; in Europe on 240 volts • Differences in distribution channels • Germany has few retailers dominating the food market, while in Italy it is fragmented • Host-Government demands • Health care system differences between countries require pharmaceutical firms to change operating procedures

26. Where Does Your Company Fit? Hogwarts (U.S.) ATIS (U.S.) Vending (France) Fruit (Pakistan) Barcode (Dubai) Scooter (India)

27. Where Does Your Company Fit? Water (Morocco) Energy (Poland) 20/20 (India) Water (Nigeria) Energy (U.S.) Pace-M (Mauritius) Credit (Russia) Real E (Ukraine) ZipCar (Portugal) Oysho (China) HeadH (Hungary) BlueT (Dominican Rep.)

28. Choosing a Strategy

29. International Strategy • International Strategy – transfer the skills and products derived from distinctive competencies to foreign markets, while undertaking some limited local customization. • Create value by transferring valuable core competencies to foreign markets that indigenous competitors lack • Centralize product development functions at home • Establish manufacturing and marketing functions in local country but head office exercises tight control over it • Limit customization of product offering and market strategy • Strategy effective if firm faces weak pressures for local responsive and cost reductions

30. Localization Strategy • Localization Strategy – customize product offering, marketing strategy, and business strategy to national conditions • Local responsiveness • Main aim is maximum local responsiveness • Customize product offering, market strategy including production and R&D according to national conditions • Generally unable to realize value from experience curve effects and location economies • Possess high cost structure

31. Global Strategy • Global Strategy – focus on cost reductions • Experience curve effects – systematic reduction in production costs that occur over the life of a product • Learning effects • Economies of scale • Location economies – arise from performing a value creation activity in the optimal location • Focus is on achieving a low cost strategy by reaping cost reductions that come from experience curve effects and location economies • Production, marketing, and R&D concentrated in few favorable functions • Market standardized product to keep costs low • Effective where strong pressures for cost reductions and low demand for local responsiveness exist • Semiconductor industry

32. Transnational Strategy • Transnational Strategy – simultaneous focus on reducing costs, transferring skills and products, and being locally responsive. • To meet competition, firms aim to reduce costs, transfer core competencies while paying attention to pressures for local responsiveness • Global learning • Valuable skills can develop in any of the firm’s world wide operations • Transfer of knowledge from foreign subsidiary to home country, to other foreign subsidiaries • Transnational strategy difficult task due to contradictory demands placed on the organization • Caterpillar

33. The Evolution of Strategy • Over time competitors inevitably emerge • An international strategy may not be viable in the long-term so firms need to shift toward a global standardization strategy or a transnational strategy in advance of competitors • As competition intensifies • International and localization strategies tend to become less viable • Managers need to orient their companies toward either a global standardization strategy or a transnational strategy

34. The Evolution of Strategy

35. Managerial Implications: Global Activities • Benefits • Greater return on core competencies • Location economies • Challenges • Consumer tastes and preferences • Infrastructure and traditional practices • Distribution channels • Host government demands

36. The BCG Matrix is based on the product life cycle theory and it became on of the most well-known portfolio management decision making tools in the early 1970's. There are two dimensions - market share and market growth. BCG Matrix (Chapter 12) http://www.decide-guide.com/BCG-matrix.html http://www.decide-guide.com/porters-five-forces-model.html

37. 5 Forces Analysis (Chapter 12) • Entry of competitors • How easy or difficult is it for new entrants to start competing? • What economies of scale does a competitor need? • Is there a learning curve? • Threat of substitutes • How easy can a product or service be substituted? • Can products be made cheaper ? • What are the switching costs? • Bargaining power of buyers • What buyer information is available? • What price sensitivity exists in the market? • Bargaining power of suppliers • Is there a monopoly of suppliers? • Is there presence of substitute inputs? • Rivalry among the existing players • Does strong competition between the existing players exist? • What barriers to exit exists? • What kind of industry growth exists? http://www.decide-guide.com/porters-five-forces-model.html

38. We Can’t All Play the Violin. By Wendy Jeffus

39. We can’t all play the violin. • We need people to write the music. • Someone should direct the orchestra. • We need someone to design the building. • And someone should mow the lawn and take care of the flowers. • We also need people that can afford to buy the tickets.

40. We Can’t All Play the Violin. • Happy “Dependence Day”!

41. Be safe.

42. Monday • The Great Globalization Debate • www.courses.fas.harvard.edu/sum/32268 • There will be prizes for the best team! • Bring Your Cameras!