Fourth Edition

1. International Business Fourth Edition

2. CHAPTER 12 The Strategy of International Business

3. Chapter Focus • Shifting focus from the international environment to the firm. • Actions managers can take to compete more effectively. • How firms can increase profitability by expanding to foreign markets. • Different international strategies. • Pros and cons of the strategies. • Factors affecting strategic choice. • Tactics.

4. Firms Profit Π = Profits = TR – TC Profits (π*Q) = (P*Q) – (ATC*Q)

5. Profitability • Profitability is a rate of return concept: • ROS (return on sale) = (Π/TR)

6. Profitability • Profitability is a rate of return concept: • ROS (return on sale) = (Π/TR) • ROI (return on investment) = (Π /I)

7. Strategy and the Firm Strategy Actions taken by managers to attain firm’s goals.

8. Firm’s Strategy Strategy could be to maximize: • Π = Profits = TR – TC • ROS (return on sale) = (Π/TR) • ROI (return on investment) = (Π /I)

9. V - P V = Consumer Value: The highest price a consumer is willing to pay for a product P - C V V - C P C Value Creation Figure 12-1

10. V - P V = Consumer Value: The highest price a consumer is willing to pay for a product P = Market Price: What actually a consumer pays for a product P - C V V - C P C Value Creation Figure 12-1

11. V - P V = Consumer Value: The highest price a consumer is willing to pay for a product P = Market Price: What actually a consumer pays for a product C =Cost of Production P - C V V - C P C Value Creation Figure 12-1

12. V - P V = Consumer Value: The highest price a consumer is willing to pay for a product P = Market Price: What actually a consumer pays for a product C = Cost of Production V-P =Consumer Surplus P - C V V - C P C Value Creation Figure 12-1

13. V - P V = Consumer Value: The highest price a consumer is willing to pay for a product P = Market Price: What actually a consumer pays for a product C = Cost of Production V-P = Consumer Surplus P-C =Profit Margin P - C V V - C P C Value Creation Figure 12-1

14. V - P V = Consumer Value: The highest price a consumer is willing to pay for a product P = Market Price: What actually a consumer pays for a product C = Cost of Production V-P = Consumer Surplus P-C = Profit Margin V-C =Value Added by the firm P - C V V - C P C Value Creation Figure 12-1

15. High Profit Strategy A firm could choose: • Low Cost Strategy: Strategy of lowering cost of production.

16. High Profit Strategy A firm could choose: • Low Cost Strategy: • Product Differentiation Strategy: Strategy of increasing the value of the product to consumers by making the product more valuable through superior design, quality, etc.

17. The Firm as a Value Chain A firm could be considered as a value chain composed of a series of distinct value creation activities. It could be categorized as: • Primary activities or • Support activities.

18. R & D (design) Production in manufacturing (physical) and in service MTV programs Marketing & Sales through brand name positioning and advertising “bottled water” value is increased After sale service The Firm as a Value Chain Primary Activities have to do with design, creation, and delivery of the product.

19. Materials Management: controls transmission of physical materials from Procurement through production. The Firm as a Value Chain Support Activities

20. Materials Management Human Resources: Ensures that the company has the right mix of people Ensures that people are well trained, well compensated and motivated The Firm as a Value Chain Support Activities

21. Materials Management Human Resources Information Systems: refers to the communication features of the Internet for managing inventories, tracking sales, pricing of the product, Dealing with customers, etc. The Firm as a Value Chain Support Activities

22. Materials Management Human Resources Information Systems Company Infrastructure:The environment within which all of the firm’s activities such as production, marketing, sales, service take place. It includes organizational structure, control systems, and culture of the firm. The Firm as a Value Chain Support Activities

23. Profiting from Global Expansion Firms operating internationally are able to: • Realize location economies. Trade barriers and transportation costs permitting, the firm will benefit from basing each activity that it must perform to deliver a commodity to its customer (given the economic, social, political, cultural conditions are appropriate) at a place where that activity is done most efficiently.

24. Profiting from Global Expansion Firms operating internationally are able to: • Realize location economies. • Realize greater cost economies. For example, cloths might be designed in Paris (better designers: They are the most capable designers to add value to cloths), materials could be purchased from India (cheap raw materials: minimize the cost of value creation) , and produced in China (cheap skilled labor: minimize the cost of value creation).

25. Profiting from Global Expansion Firms operating internationally are able to: • Realize location economies. • Realize greater cost economies. • Earn a greater return from the firm’s distinctive skills or core competencies (Firm skills that competitors can not easily match or imitate).

26. Profiting from Global Expansion Firms operating internationally are able to: • Realize location economies. • Realize greater cost economies. • Earn a greater return from the firm’s distinctive skills or core competencies. • Earn a greater return by leveraging valuable skills developed in foreign operations and transferring them to the firm’s other operations.

27. Profiting from Global Expansion Profitability is constrained by product customization and imperative of localization producing unique products to appeal to the local tastes and preferences.

28. Low labor costs. • Proximity to U.S. • NAFTA. Caveats • Needs for consideration: • Transportation costs. • Trade barriers. • Political risks. • Economic risks.

29. Cost of production goes down systematically as production increases. Every time production doubles, cost of production decreases to 80% what is was. Total output Cost of production 4 units $100 8 units $80 16 units $64 32 units $51.2 Experience Curve

30. Cost of production goes down systematically because: 1-- Learning effects: Cost savings that come from “learning by doing.” Experience Curve

31. Cost of production goes down systematically because: 1-- Learning effects: Cost savings that come from “learning by doing.” Are more significant in complex tasks. Experience Curve

32. Cost of production goes down systematically because: 1-- Learning effects: Cost savings that come from “learning by doing.” Are more significant in complex tasks. Decline and cease after two – three years. Experience Curve

33. Cost of production goes down systematically because: 1-- Learning effects: Cost savings that come from “learning by doing.” Are more significant in complex tasks. Decline and cease after two – three years. 2-- Economies of Scale: Reduction in unit cost achieved through volume production. Experience Curve

34. Cost of production goes down systematically because: 1-- Learning effects: Cost savings that come from “learning by doing.” Are more significant in complex tasks. Decline and cease after two – three years. 2-- Economies of Scale: Reduction in unit cost achieved through volume production. Sources: Spread fixed costs over volume. Experience Curve

35. Cost of production goes down systematically because: 1-- Learning effects: Cost savings that come from “learning by doing.” Are more significant in complex tasks. Decline and cease after two – three years. 2-- Economies of Scale: Reduction in unit cost achieved through volume production. Sources: Spread fixed costs over volume. Employing specialized equipment or personnel Experience Curve

36. Strategic Significance Moving down the curve reduces the cost of creating value. B Unit Costs A Accumulated Output Figure 12.3 The Experience Curve

37. Leveraging Core Competencies core competencies are firm skills that competitors can not easily match or imitate.

38. Leveraging Core Competencies core competencies are firm skills that competitors can not easily match or imitate. • Value of core competencies are greatest when: • Skills and products are most unique.

39. Leveraging Core Competencies core competencies are firm skills that competitors can not easily match or imitate. • Value of core competencies are greatest when: • Skills and products are most unique. • Value placed by consumers is great.

40. Leveraging Core Competencies core competencies are firm skills that competitors can not easily match or imitate. • Value of core competencies are greatest when: • Skills and products are most unique. • Value placed by consumers is great. • Few capable competitors with skills or products.

41. Leveraging Subsidiary Skills Note: Skills can be created anywhere in a multinational’s global operations network.

42. Leveraging Subsidiary Skills • Note: Skills can be created anywhere in a multinational’s global operations network. • Challenges for managers are: • To have the humility to recognize valuable skills can come • from anywhere.

43. Leveraging Subsidiary Skills • Note: Skills can be created anywhere in a multinational’s global operations network. • Challenges for managers are: • To have the humility to recognize valuable skills can come • from anywhere. • To establish incentives to encourage local employees to acquire new skills.

44. Leveraging Subsidiary Skills • Note: Skills can be created anywhere in a multinational’s global operations network. • Challenges for managers are: • To have the humility to recognize valuable skills can come • from anywhere. • To establish incentives to encourage local employees to acquire new skills. • To create a process to identify new skill development.

45. Leveraging Subsidiary Skills • Note: Skills can be created anywhere in a multinational’s global operations network. • Challenges for managers are: • To have the humility to recognize valuable skills can come • from anywhere. • To establish incentives to encourage local employees to acquire new skills. • To create a process to identify new skill development. • To facilitate transfer of new skills within the firm.

46. Pressures for Cost Reduction and Local Responsiveness Company A Company C High Cost pressures Low Generally reflects the position of most companies Company B Low High Figure 12.4 Pressures for local responsiveness

47. Cost Reduction Mass producing a standardized product at an optimal location. Intense: in commodity industries. Where competitors are in low cost locations. Where there is persistent excess capacity. Where there are low switching costs. Because of greater international competition. Local responsiveness Arise from: Differences in consumer taste and preferences. Differences in infrastructure and traditional practices. Differences in distribution channels. Host government demands.

48. Taste and preference Distribution channels Infrastructure And practice Delegate marketing to national subsidiaries. Delegate production and marketing to national subsidiaries Delegate manufacturing and production to foreign subsidiaries. Host government Manufacture locally. Local Responsiveness

49. High Cost pressures Low Global Strategy Transnational Strategy International Strategy Multi domestic Strategy Low High Pressures for local responsiveness Four Basic Strategies Figure 12.5

50. International create value by transferring skills to local markets where skills are not present. Global increase profitability through cost reductions from experience curve effects and location economies. Multidomestic oriented toward achieving maximum local responsiveness. Transnational Exploit experienced based cost and location economies, transfer core competencies within the firm, and pay attention to local responsiveness needs. Strategic Choices