ADMS 3960

1. ADMS 3960 International Business

2. Chapter 11 The Strategy of International Business

3. Chapter Objectives • To identify how managers develop strategy • To examine industry structure, firm strategy, and value creation • To profile the features and functions of the value chain framework • To assess how managers configure and coordinate a value chain • To explain global integration and local responsiveness • To profile the types of strategies firms use in international business

4. The Role of Strategy in International Business

5. Industry, Strategy ,and Firm Performance • Industry organization paradigm leading strategy perspectives • The exceptions of imperfect competition • The idea of industry structure: The Five Forces Model

6. Five Forces Model

7. Industry Change Industry structure changes because of events like • Competitors’ moves • Government policies • Changes in economics • Shifting buyer preferences • Technological developments • Rate of market growth

8. Competition • In its pure form it refers to the conditions that are present in the marketplace when buyers and sellers interact to establish prices and exchange goods and services. • It refers to the means whereby the self interest of buyers and sellers acts to serve the needs of society as well as those of individual market participants.

9. The Practical Significance of Perfect Competition • A large number of small firms and many buyers do not possess the power to influence the behavior of the participants in the marketplace. • That power is thoroughly dispersed throughout the marketplace. • Perfect Competition rarely exists in the real world.

10. Desirable Conditions for Workable Competition • A market structure with at least two buyers and two sellers, but preferably more • A mixture of large and small firms • No collusion or coercion among sellers

11. Desirable Conditions for Workable Competition • As much market information as possibly is available to buyers and sellers • No barriers to entry and exit

12. Strategy and Value • Strategy helps managers assess the company’s present situation, identify the direction the company should go, and determine how the company will get there.

13. Strategies • Strategy is a set of goals and policies or actions to achieve those goals. • A strategic plan must link to sub-strategies at the operations level.

14. Strategic Programming • This focuses on, who what and how much. • Day to day priorities • Roles and responsibilities

15. Tactics and Execution • This focuses on how to get it done • Immediate objectives with a focus on adjustment based on new information

16. Michael Porter • Competitive strategy, is all about being different from others. As a nation or a company your differences will allow you to excel in areas that other will not. • Strategy is not about one activity, but a series of complementary and reinforcing activities.

17. What does strategy give us? • Organizational purpose • Competitive domains • Interpretations of opportunities, threats, strengths and weaknesses • Defines managerial tasks and processes • Defines the impact that the firm intends to make on its shareholders • Determines investment

18. Value • Value is what remains after costs have been deducted from the revenues of a firm. Cost leadership emphasizes high production volumes, low costs, and low prices. Firms that choose this strategy strive to be the low-cost producer in an industry for a given level of quality. This strategy requires that a firm sell its products at the average industry price to earn a profit higher than that of rivals or below the average industry prices to capture market share.

19. Value Chain • What is the value chain? A value chain disaggregates a firm into: • Primary activities that create and deliver the product • Support activities that aid the individuals and groups engaged in primary activities • Value chains identify the format and interactions between different activities of the company.

20. Porter’s Value Chain

21. Purpose of The Value Chain? Cost Analysis • Define the value chain in terms of sources of competitive advantage • Establish the relative importance of each activity in terms of total product cost • Compare costs by activity and against competitors • Identify cost drivers • Identify linkages between activities • Identify opportunities for reducing costs

22. Using the Value Chain • Using the value chain – leads to • Configuration of the Company • Macro Cost Factors • Logistics analysis • Industry Clusters • Digitization • Economies of Scale • Business Environment

23. Digitization • The process of digitization involves converting an analog product into a string of zeros and ones. Increasingly, products like software, music, and books, as well as services like call centers, application processing, and financial consolidation, can be digitized and, hence, located virtually anywhere. Equipped with networked computers, workers can move goods and services anywhere in the world at negligible cost and complication. • Consequently, the potential for digitization of goods or services influences how a company configures its value chain.

24. Clusters • An industry cluster is a system of businesses and institutions engaged with one another at various levels.

25. Manufacturing • Manufacturing costs vary from country to country because of wage rates, worker productivity, resource • availability, and fiscal and monetary policies.

26. Logistics • Logistics entails how companies obtain, produce, and exchange material and services in the proper place and in proper quantities for the proper value activity.

27. Economies of Scale • The concept of economies of scale refers to a situation wherein a firm doubles its cumulative output yet total cost less than doubles due to efficiency gains. Effectively, reductions in the unit cost of a product result from the increasing efficiency that comes with larger operations.

28. Economies of Scale Sources • The division of labour – This is related to specialization particularly in mass production. Leads to lower unit costs, machinery output increased, quality control improvements, time savings. • Economies of massed resources – Theory rests on the idea of large numbers. This is what insurance is based on. Any company needs excess resources and capacity. The larger the firm, the smaller the proportion of duplicate capacity needed.

29. Economies of Scale Sources • Firm-level economies of scale • Administrative economies • Financial economies • Marketing economies

30. Porter’s Value Chain

31. Economies of Scale Limits Diseconomies of scale in distribution Complexity of large-scale management Costs of product differentiation HRM costs in large plants

32. Economies of Scale

33. Coordination • Coordination Concerns • As companies globally configure value activities, they must develop coordination tools. Coordinated well, MNEs can leverage their core competencies, using them to serve customers, boost sales, and improve profits.

34. National Cultures • Cultures impose hurdles in coordinating a transaction from one stage of the value chain to another. Units anchored in individual versus collectivist cultures may disagree over information sharing or collaboration responsibilities; conflicts complicate coordination.

35. National Cultures • Hence, features of national culture require managers to understand their implications to the collaborative relationship that shape the coordination of value activities.

36. Learning Curve • Learning curve is the commonsense principle that the more one does something, the better one gets at it. • Companies configure value chain activities to exploit the learning curve.

37. The Experience Curve The Experience Curve Unit cost reductions arising from experience of production Benefits accrue to first movers and those who facilitate learning

38. Experience leads to Core Competency A core competency can emerge from various sources, including: •Product development •Employee productivity •Manufacturing expertise •Marketing imagination •Executive leadership

39. Operational Obstacles • Operating internationally inevitably runs into communication challenges because of time zones, differing languages, and ambiguous meanings. Increasingly, companies rely on browser-based communications methods to coordinate the handoffs from link to link.

40. Change and the Value Chain • The configuration and coordination of value chains respond to changes in customers, competitors, industries, and environments. • Caveat: The Risk of Strategy

41. Global Integration versus Local Responsiveness Pressures for Global Integration Globalization of Markets A provocative thesis, increasingly supported by global buying patterns and companies’ strategies, suggests that consumers worldwide seek global products—whether they are Apple iPods, Samsung plasma screens, Facebook connections, Starbucks espressos, Google searches, or Zara blouses.

42. Global Integration versus Local Responsiveness • Efficiency Gains of Standardization • Global and local pressures challenge how the firm configures and coordinates its value chain. The convergence of national markets and quest for production efficiency push for the global integration of value activities.

43. Standardization Standardization is the handmaiden of globalization, encouraging supply conditions that produce volumes of low-cost, high-quality products. That is, standardization is the push dynamic that drives supply, whereas the globalization of markets represents the pull dynamic that converges consumer preferences.

44. Standardization The logic of standardization is straightforward. Repeatedly doing the same task the same way improves the efficiency of effort. Improving efficiency in the value chain, in turn, supports aggressive product development, lower-cost production processes, and lower prices.

45. Local Responsiveness Contrary to the globalization-of-markets thesis, others argue that divergences in consumer preferences across countries necessitate locally responsive value chains. Differences in local consumers’ preferences endure due to cultural predisposition, historical legacy, and endemic nationalism. Regardless of the cause, consumers often prefer goods that are sensitive to the particular idiosyncrasies of their daily life.

46. When Pressures Interact The Integration-Responsiveness grid helps managers measure the global and local pressures that influence the configuration and coordination of their value chains.

47. Integration Responsiveness Grid

48. Strategic Choices

49. What Strategy to Pursue? Multidomestic Strategy Competition in one country is independent of competition elsewhere. Markets in each country have different consumer behaviour. Portfolio of independent subsidiaries Leads to product diversity.

50. From International to Global Strategy Global Strategy Competition in one country influenced by competition elsewhere. Markets and consumer behaviour broadly similar in all countries. International coordination and integration. Leads to product standardisation