The Strategy of

International Business
Learning Objectives
 Be able to explain the concept of strategy
 Understand how firms can profit by
expanding globally
 Understand how pressures for cost
reductions and pressures for local
responsiveness influence strategic choice
Strategy and the firm
 A firm strategy can be defined as the action that managers take
to attain the goals of the firm.

 To maximize the value of a firm managers must pursue

strategies that increase the PROFITABILITY of the enterprise
and its rate of PROFIT GROWTH over time.

 PROFITABILITY can be measured in a number of ways, but for

consistency, we shall define it as the rate of return that the firm
makes on its invested capital.
 PROFIT GROWTH is measured by the percentage increase in
net profits over time
Value creation

 is the performance of action that increase

the worth of good, services or even a
business
Strategic Positioning

 A company’s relative position within its

industry matters for performance. Strategic
positioning reflects choices a company
makes about the kind of value it will create
and how that value will be created
differently than rivals. Strategic positioning
should translate into one of two things: a
premium price or lower costs for the
company
Differentiation
 Driving up prices is one way to increase
profitability. To command a premium price,
a company must deliver distinctive value
to customers.
Cost Leadership
 Driving down costs is another way to increase
profitability. To compete on cost, companies
must balance price with acceptable quality. This
is cost leadership.

THE VALUE CHAIN

 Strategists aim to shift relative price or relative
cost in a company’s favor, to achieve
competitive advantage. But how? By making
choices about the hundreds of activities
companies perform as they compete.
Operation: The Firm as a value
chain
 The operation of a firm can be thought of
as a value chain composed of a series of
distinct value creation activities and
categorize these value creation activities/
operations, as a primary activities and
support activities.
Primary Activities
 Have to do with the design, creation, and delivery of the
product; its marketing; and its support and after-sale
service. Primary activities are divided into four functions:
Research and development, production, marketing and
sales, and customer service.

Support Activities
 Provide inputs that allow the primary activities to occur.
In terms of attaining a competetive advantage, support
activities can be as important as, of not more important
than, the 'primary' activities of the firm. Considering the
information system, logistics function, human resource,
and the final support activity is the coompany
infrastructure.
GLOBAL EXPANSION,
PROFITABILITY AND PROFIT
GROWTH
Expanding globally allows firm to increase
their profitability and rate of profit growth in
ways not available to purely domestic
product enterprises, Firms that operate
internationally are able to:

 Expand the market for their domestic product

offerings by selling those products international
markets
 Realize location economies.
 Realize greater cost economies from
experience effects by serving an
expanded global markets from a central
location, thereby reducing the costs of
value creation
 Earn a greater return by leveraging any
valuable skills developed in foreign
operations
EXPANDING THE MARKET:
LEVERAGING PRODUCTS AND
COMPETENCES
 A company can increase its growth rate by
taking goods or service developed at
home and selling them internationally
 Core competence refer to skills within the
firm that competitors cannot easily match
or imitate
LOCATION ECONOMIES
 Locating 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 achieve a low cost
position
 It can enable a firm to differentiate its
product offering from those competitors
CREATING A GLOBAL WEB

 Global web of value creation activities,

dispersing different stages of the value
chain to those locations around the globe
where perceived value maximized or
where the costs of value creation are
minimize
EXPERIENCE EFFECT
 The experience effect refers to systematic reductions in
production cost that have been observed to occur over
the life of a product. Learning effects –
 Learning effects - refer to cost saving that come from
learning by doing. Example, learns by repetition how to
carry out a task, such assembling airframes, most
efficiently.
 Economic scale -refer to the reductions in unit cost
achieved by producing a large volume of a product.
Attaining economies of scale lowers a firms unit cost and
increases its profitablity. Economic scale have a
number of sources.
 1.Fixed cost are the cost required to set up a
production facility, develop a new product.
 2. A firm may not be able to attain an efficient
scale of production unless it serves global
markets.
 3. As a global sales increase the size of the
enterprise, so its bargaining power with supplier
increases, which may allow it to attain economies
of scale in purchasing, bargaining down the cost
of key inputes.
 Leveraging subsidiary skills -Implicit in our
earlier discussion of core competencies is the
idea that valuable skills are developed first at
home and then transffered to foreign operations.
Global Expansion
 We have seen how firms expand globally can
increase their profitability and profit growth by
entering new markets where indigenous
competitors lack similar competencies, by
lowering costs and adding value to their product
offering through the attainment of location
economies, by exploiting experience curve
effects, and by transferring valuable skills
between their global network of subsidiaries.
TWO TYPES OF COMPETITIVE PRESSURE

 PRESSURES FOR COST REDUCTION

 PRESSURES FOR LOCAL RESPONSIVENESS

PRESSURES FOR LOCAL
REPONSIVENESS
 Differences in Customer Tastes and
Preferences
 Differences in Infrastructure and
Traditional Practices
 Differences in Distribution Channels
 Host Government Demands
Choosing a Strategy

 Pressures for local responsiveness imply that it

may not be possible for a firm to realize the full
benefits from economies scale, learning effects,
and location economies. It may not be possible
to serve the global marketplace from a single
low-cost location, producing a globally
standardized product and marketing it worldwide
to attain the cost reductions associated with
experience effects. The need to customize the
product offering for local conditions may work
against the implementation of such a strategy
Global Standardization Strategy

 Firms that pursue a global standardization

strategy focus on increasing profitability
and profit growth by reaping the cost
reductions that come from economies of
scale, learning effects, and location
economies; that is, their strategic goal is to
pursue a low-cost strategy on a global
scale.
Localization Strategy

 focuses on increasing profitability by

customizing the firm's good or services so
they provide a good match to tastes and
preferences in different national markets.
 Localization is most appropriate where
consumer tastes and preferences differ
substantially across nations and cost
pressures are not too intense.
Transnational Strategy

 are trying to simultaneously achieve low

cost through location economies,
economies of scale, and learning effects;
differentiate their product offering across
geographic markets to account for local
differences; and foster a multidirectional
flow of skills between different subsidiaries
in the firm's global network operation.
INTERNATIONAL STRATEGY

 Many of these enterprises have pursued an

international strategy, taking products first
produced for their domestic market and selling
them internationally with only minimal local
customization.
 Enterprises pursuing an international strategy
have followed a similar development pattern as
they expanded into foreign markets.
THE EVOLUTION OF STRATEGY
 Firms meet to shift toward a global standardization
strategy or a transnational strategy in advance of
competitors.
 Localization may give a firm a competitive edge, but it is
simultaneously facing aggressive competitors, the
company will also have to reduce its cost structure and
the only way to do that may be to shift toward
transnational strategy International and localization
strategies tend to become less viable and manager need
to be orientate their companies toward either a global
standardization strategy or a transnational strategy
 International and localization strategies
tend to become less viable and manager
need to be orientate their companies
toward either a global standardization
strategy or a transnational strategy.