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CH 11
Focus shift from environment to actions managers can take to compete
more effectively in international business
How firms can increase their can increase their profitability by expanding
operations into international markets
Organizational structure
Formal division of organization into subunits such as product divisions, national operations, and
functions
Location of decision-making activities in structure
Establishment of integrating mechanisms to coordinate activities of subunits eg. cross-functional
teams & pan-regional committees
Processes
Manner is which decisions are made & work is performed (formulating strategy, allocating resources,
evaluating performance)
Distinct from location of decision-making activities
Organizational culture
Shared norms & value system of firm
People = employees as well as strategy for recruitment, retention and compensation
Global Expansion
Increase profitability
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
Caveats
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)
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
Firm’s value creation activities = production, R&D,
to match or imitate
Bedrock of a firm’s competitive advantage
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
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)
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 firm’s vision for purpose of the alliance
Fair Play – unlikely to exploit the firm’s technological know-
how 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