Strategy of International Business

How firms can increase their profitability by expanding operations into international markets

When trading across national borders

The customer profile in the foreign market is often very different from that of the customer in the domestic market, particularly in the areas of language, religion, ideology, living standards and fashion

When trading across national borders

Different and unfamiliar cultural, economic, legal, social and political systems may be encountered in foreign markets Foreign markets represent unfamiliar environments There are greater complexities associated with payment, distribution, transport and insurance

When trading across national borders

The role of documentation assumes added importance to prevent misunderstanding and costly litigation Goods are subject to customs control and the payment of import duty (where applicable)

When trading across national borders

A number of technical and administrative regulations may apply to exports - legal requirements in certain foreign markets in respect of the technical specifications of a product, that call for changes to be made before the product may be imported

When trading across national borders

Exchange rates, and in some cases exchange control regulations, are applicable There are new parameters that the exporter will need to take into consideration, such as import duties as well as legal restrictions, different modes of transport, international trade documentation, foreign currencies, and different and additional marketing channels

When trading across national borders

There is generally more extensive use made of the fax and e-mail than the telephone and when these are used, different time zones and different languages have to be considered Operating in foreign markets exposes the exporter to far wider and more intense competition than would be the case in the domestic market

When trading across national borders

The complexity of exporting, the additional environments that exporters face, as well as new parameters that exporters will need to deal with, makes the export management task far more difficult

When trading across national borders

The main distinguishing feature between export marketing and domestic marketing is thus that with the former, a company is operating within external environments that are highly uncertain and where the rules of the game are often ambiguous, contradictory and subject to rapid change! Export marketing is therefore more challenging, complex, risky and expensive.

When trading across national borders

Ultimately, export marketing takes more effort and more time, and requires greater financial resources than domestic marketing. In addition, it requires at least the same level of commitment that companies give to their local operations.

When trading across national borders

Multinational marketing (marketing across several different foreign markets) is even more complex. When dealing with more than one foreign market, the firm is faced with several different external environments, each of which may call for different product, pricing, promotion and distribution strategies.

When trading across national borders

The challenge is to co-ordinate, integrate and manage the various marketing programmes to achieve the firm's overall marketing objectives.

Wal-Marts experience

Moved into other countries

Growth opportunities at home were becoming constrained Create value by transferring core skills to markets where indigenous competitors lacked those skills Preempt other retailers who were expanding globally

Discovered had to change US model

Differences in local taste, preferences and local infrastructure Change store location, layout and stocking practices Keep companys core strategies and operations emphasize everyday low prices & realize operating efficiencies from world class logistics management and information systems

Benefits becoming transnational corporation

Enhanced bargaining power with suppliers Ability to transfer valuable ideas from one country to another Balance global standardization with local customization

Value Creation

Profits are determined by amount of value customers place on firms goods/services & firms costs

Generally the more value, the higher the price that can be charged Price is typically less that the value placed by customer (consumer surplus) because of competition in the market Cant segment the market enough to charge a price that reflects each individuals assessment (reservation price)

Company creates value by converting inputs that cost C into a product on which customers place value V

Can create more value by lowering production costs (C decreases) Can create more value by making product more attractive with superior design, functionality, features, quality, etc. (V increases so willing to pay a higher P) Higher profits when create more value for customers at lower cost

Value Creation Strategies

Low cost strategy focus primarily on lowering production costs Differentiation strategy focus primarily on increasing attractiveness of product Way to create superior value is to drive down the cost structure and/or differentiate product so consumers value more and willing to pay premium price

Strategic Positioning

Important for firm to be explicit about choice of strategic emphasis (differentiation & cost) Important to make sure to configure internal operations accordingly & manage them efficiently (efficiency frontier)

Basic tenet is that to maximize long-run ROK & competitiveness Pick a position that has a enough demand to support choice Configure internal operations to support position (manufacturing, marketing, logistics, information systems, HR) Install right organizational structure to execute strategy

Firm as Value Chain

Series of distinct value creation activities Primary activities - influence V or C

Research & development design of products & production process Production creation of a good or service Marketing and sales brand positioning, advertising; discovering consumer needs & communicating them to R&D Customer service after-sales service & support; solving customer problems

Support activities influence competitive advantage

Logistics transmission of physical materials through the value chain; procurement > production -> distribution Human resources right mix of skilled people; ensure that people are adequately trained, motivated & compensated Information systems electronic systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries, etc. Company infrastructure context within which all other value creation activities occur organizational structure, control systems, and culture of firm

Global Expansion

Increase profitability Realize location economies by dispersing individual value creation activities around the globe perform efficiently & effectively Realize cost economies from experience effects by serving global market from central location Earn a greater return from firms distinctive skills or core competencies by leveraging & applying to new geographic markets Earn a greater return by leveraging any valuable skills developed in foreign operations & transferring them to other locations

Location Economies

Countries differ along a range of dimensions (economic, political, legal, cultural) these differences either raise or lower the cost of doing business. Differences in factor costs certain countries have a comparative advantage in the production of certain products Trade barriers and transportation costs permitting firm will benefit from basing each value creation activity at that location where the economic, political , cultural, factor costs, etc. are most conducive to the performance of the activity. Location economy economies that arise from performing a value creation activity in the optimal location for that activity Lower the cost of value creation and help the firm achieve a low cost position Enable the firm to differentiate its product offering from those of its competitors

Clear Vision Strategy to lower cost structure (lower C) Shifting from US > Hong Kong -> China Strategy to increase perceived value (increase V) Investing in French, Italian & Japanese factories for superior design Strategy for premium pricing (increase P) Increase value thus profit and profitability

Global Web

Different stages of the value chain are dispersed to those locations around the globe where value added is maximized or where cost of value creation is minimized In general firm with global web should have competitive advantage by lowering its cost structure & differentiating its product Caution

Transportation costs & trade barriers complicate the picture Mexico vs Asia Assessing political & economic risks when making location decisions

Experience Effects

Experience curve systematic reduction in production costs that occur over the life of a product observed production costs decline each time cumulative output (not period output) doubles (aircraft industry) Learning effects Cost savings that come from learning by doing. Labor productivity & management Only during first 2-3 years Economies of Scale reduction in unit cost achieved by producing a large volume of product Ability to spread fixed costs over a large volume of sales Ability of large firms to employ increasingly specialized equipment or personnel - -> lower unit cost Strategic significance Moving down the experience curve allows firm to reduce its cost of creating Value (lower C) One key is to increase the volume in a single plant as quickly as possible - Serving global market from single location allows building accumulated volume more quickly Once a firm has established a low-cost position, it can act as a barrier to new competition.

Leveraging Core Competencies

Core competencies Skills within the firm that competitors cannot easily match or imitate Firms value creation activities = production, R&D, marketing, human resources, logistics, general management Expressed in product offerings that other firms find difficult to match or imitate Bedrock of a firms competitive advantage Global expansion is a way of further exploring the value creation potential of their skills and product offerings by applying to a larger market & where indigenous competitors lack similar skills and products

Leveraging Subsidiary Skills

Skills are developed first at home and then transferred to foreign operations Skills can be created anywhere within the global network, wherever people have the opportunity and incentive to try new things Management implications

Humility to recognize that valuable skills can arise anywhere Establish incentive system that encourages local employees to acquire new skills Have a process for identifying when valuable new skills have been created Act as facilitators to help transfer valuable skills within the firm

Pressures for cost reduction

Minimize unit costs

Base its productive activities at the most favorable low cost location Offer a standardized product to the global marketplace

Particularly intense in commodity industries with competitors in low cost locations, persistent excess capacity & consumers are powerful & face low switching costs products serve universal needs, e.g. tires

Pressures for local responsiveness

Recognize national differences in

consumer tastes & preferences, e.g world cars in infrastructure and traditional business practices, e.g. electrical requirements US vs EU in distribution channels, e.g. delegation of marketing functions to national subsidiaries competitive conditions & host government policies, e.g politics of health care with local clinical testing, registration procedures & pricing restrictions

Differentiate its product offering & marketing strategy from country to country

May not be possible to realize the benefits of experience curve & location economies Customizing may involve duplication & lack of standardization thereby raising costs May not be possible to leverage the skills and products associated with a firms core competence from location to location

Strategic Choices

Four basic strategies to compete in international environment appropriateness varies with extent of pressures for cost reduction & local responsiveness International Strategy

Firms create value by transferring valuable skills & products to foreign markets where indigenous competitors lack Centralize R&D at home, establish production & marketing in each country, retain control over strategy -> high operating costs Relatively weak pressure for cost reduction & local responsiveness (Microsoft)

Multidomestic Strategy

Achieving maximum local responsiveness extensively customize both product offering & marketing strategy Establish a complete set of value creation activities in each market - production, marketing and R&D -> realize value from experience curve effects High cost structure & poor job of leveraging core competencies High pressure for local responsiveness & low pressure for cost reduction

Strategic Choices continued

Global Strategy

Focus on increasing profitability by cost reductions from experience curve effects & location economies (low-cost strategy) Production, marketing and R&D in a few key locations do not customize product offering & marketing Standardized product to reap economies of scale from experience curve Strong pressure for cost reductions & low demand for local responsiveness (Industrial goods, e.g. Intel)

Transnational Strategy

Plan to exploit experienced-based cost and location economies, transfer core competencies within the firm & pay attention to local responsiveness High pressure for cost reduction, high pressure for local responsiveness & significant opportunities for leveraging valuable skills with the global network of operations simultaneously achieve cost & differentiation strategies (conflicting demands Caterpillar)

Table 11.1 on page 406 shows advantages & disadvantages of 4 strategies

Strategic Alliances

Cooperative agreements between potential or actual competitors Advantages

Facilitate entry into a foreign market Allow firms to share fixed costs & risks of developing new products or processes Bring together complimentary skills & assets Help the firm establish technological standards for the industry that benefit firm

Disadvantages

Give competitors a low cost route to new technology & markets (Japanese) If firms not careful they can give away more than they receive

Making Alliances Work

Partner Selection

Helps the firm attain strategic goals market access, sharing costs & risks of product development, gaining access to critical core competencies Shares the firms vision for purpose of the alliance Fair Play unlikely to exploit the firms technological knowhow while giving little away in return

Research

Collect as much publicly available info as possible Collect data from informed third parties Get to know the potential partner

Making Alliances Work

Alliance Structure - Risk of giving away too much reduced to acceptable level

Wall off critical technology to prevent leakage to other party Establish contract safeguards in alliance agreement to guard against risk of opportunism (technology or markets) Agree in alliance to swap skill and technologies to help ensure equitable gain Extract a significant credible commitment from partner in advance (50/50 JV)

Making Alliances Work

Managing the Alliance

Maximize benefits of the alliance by building trust & learning from partners relational capital Personal relationships foster informal management network between partners Japanese learn more from alliances than US or EU who view alliance as cost or risk sharing