International Business Fall 2013 – Lecture Slide 6

1. International Business Fall 2013 – Lecture Slide 6 Instructor : RAZA ILLAHE Lahore Leads University

2. The Strategy of International Business

3. Industry, Strategy, And Firm Performance • Managers, as agents of their firms, devise strategies to engage international markets in ways that sustain the company's profitability and growth • Strategycan be defined as the efforts of managers to build and strengthen the company’s competitive position within its industry in order to create superior value

4. Industry, Strategy, And Firm Performance • Firm performance is influenced by both the structure of the company’s industry and the insight of managers’ strategic decision making • Managers need to be familiar with industry- and firm-level conditions in making strategy

5. The Five Forces Model Managers typically perform analysis of industry structure by modeling the strength and importance of the so-called “five fundamental forces.”: • The moves of rivals battling for market share • The entry of new rivals seeking market share • The efforts of other companies outside the industry to convince buyers to switch to their own substitute products • The push by input suppliers to charge more for their inputs • the push by output buyers to pay less for products

6. Change in industry structure The structure of industries is dynamic, with new products, new firms, new markets, and new managers triggering new developments that impact the five industry forces. Changes in variables such as the long-term industry growth rate, new technologies, new consumer buying and usage patterns, manufacturing innovations, government regulation, and the diffusion of business and technical expertise across countries can all lead to industry change.

7. Strategy and Value Strategy is defined as the efforts of managers to build and strengthen the company’s competitive position within its industry in order to create superior value Value is the measure of a firm’s ability to sell what it makes for more than the cost it incurred to make it

8. Creating Value Traditionally,Firms create value either through a • low-cost leadership strategy or • a differentiation strategy

9. What Is a Value Chain? The value chain is a representation of the firm as a series of distinct value creating activities Questions central to the task of creating value include; How the company will design, make, move, and sell products; how it will find efficiencies in doing so; and how it will coordinate the decisions in one part of the business with those made in other parts. Thinking of the firm as a value chain provides a strong tool to deal with these challenges.

10. Dimensions of The Value Chain Primary activities—those that are involved in the physical movement of raw materials and finished products, the production of goods and services, marketing and subsequent services of the outputs of the business. Support activities—include procurement, technology and system development, human resource management, and firm infrastructure. Profit margin reports the difference between the total revenue generated by sales and the total cost of the activities that led to those sales. Orientation—namely, whether the particular activity takes place upstream or downstream.

11. I A company’s competitiveness is determined by how effectively it manages its value chain. Value chain analysis serves to guide managers’ efforts to build expertise in those value activities that are critical to reducing costs or improving differentiation. Using the Value Chain

12. Configuration of the value chain refers to the process of dispersing value chain activities to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized. Coordination of the value chain describes the process of integrating dispersed activities into a cohesive, coherent whole.

13. Configuration of Value Chain Every MNE looks to establish elements of its value chain in the best spots in the world. Location economies arise when MNEs locate activities in the optimal location for that activity, wherever in the world that may be. Conditions that shape how managers configure value chains worldwide include: Cost Factors. Differences in wage rates, worker productivity, inflation rates, and government regulations create significant variations in production costs from country to country. e.g, just recently the average hourly wage for production workers in China was $.80 versus $25.34 in the United States. Business Environment. Companies also configure their value chain to take advantage of favorable business conditions such as lower tax rates, more flexible operating requirements, and public policies or to avoid riskier environments. Cluster Effects. The cluster effect occurs when a particular industry gradually clusters more and more related value creation activities in a specific location. Examples of these clusters are Wall Street for global finance, Silicone Valley for information technology, Hollywood for mass media, Stuttgard for cars and electrical engineering, and Mumbai for business process outsourcing.

14. Logistics. Refers to how companies obtain, produce, and exchange material andservices in the proper place and in proper quantities for the proper value activity.e.g ,The greater the value of a product to its weight,the less storage and transportation costs matter.Decision to manufacture computer chips,softwar e,aircraft(unlike tractor,axles,furniture) need not pay much attention to the distance between factory and consumer. Degree of Digitization. The degree to which an analog product can be converted into a digitized product influences value chain configurations. Processes that were once rooted to a place can now be digitized and moved easily and outsourced or offshored. Customer Needs. The physical location of activities is often influenced by a need to be close to buyers, especially such activities as distribution to dealers, sales and advertising, and after sale service. Some companies physically locate these capabilities in every country in which they operate.

15. Coordination of Value Chain Coordination is the way that managers connect the discrete activities of the value chain. The task of coordinating the different activities that go into making and moving a product around the world has emerged as the basis of the superior performance that separates good from great MNEs. As seen in the opening case, Zara’s strategy of rapid response to ever-changing fashion trends demands lots of coordination in order to succeed. MNEs often try to identify core competencies, unique skills or knowledge that is better than that of its competitors, and link these through different parts of the value chain. •Product development •Employee productivity •Manufacturing expertise •Marketing imagination •Executive leadership

16. Coordination of Value Chain Coordination is the way that managers connect the discrete activities of the value chain. The task of coordinating the different activities that go into making and moving a product around the world has emerged as the basis of the superior performance that separates good from great MNEs. As seen in the opening case, Zara’s strategy of rapid response to ever-changing fashion trends demands lots of coordination in order to succeed. MNEs often try to identify core competencies, unique skills or knowledge that is better than that of its competitors, and link these through different parts of the value chain. •Product development •Employee productivity •Manufacturing expertise •Marketing imagination •Executive leadership

17. GLOBAL INTEGRATION VS. LOCAL RESPONSIVENESS Global and local pressures challenge how the firm configures and coordinates its value chain. On the one hand, firms must often respond to global competitive pressures demanding efficiency and lower cost achieved through standardization and scale economies. On the other hand, local competitive pressures place demands on the firm to customize its products or services to meet distinctive needs country by country.

18. Global markets produce more than 20% of world output currently, and are projected to increase to 80% of output by 2025. The trend toward rapid economic integration appears poised to continue. 1.Globalization of Markets Consumers are searching for products which meet their needs and provide superior value, regardless of where they originate. As communication and transportation infrastructures have become more integrated across borders, consumer preferences have begun to homogenize and companies’ abilities to meet those preferences on a global scale have increased. The resulting economies of scale translate to even lower prices, higher quality standardized goods, and yet more homogenization of consumer demand. Pressures for Global Integration

19. 2.Commodities There are many goods – so called commodities that serve a universal need (steel,oil,sugar,wheat etc). Preference of consumers in different countries are highly similar for many sorts of commodities.Hence companies can standardise their products to remarkable degrees. Pressures for global integration in such markets are asolute , given that product differentiation is difficult and competition tend towards price wars. 3. EfficiencyGains of Standardization Standardization is the process of increasing the uniformity of a product or service by decreasing the extent of variation. Worldwide standardization of an MNE’s products, purchases, methods, and policies can significantly reduce the costs of its operations. Standardization is also a powerful means to exploit location economies, since value chain activities can be placed in optimal locations for global production and distribution. Pressures for Global Integration

20. Pressures for Local Responsiveness Consumer divergence and host-government policies are two of the major forces contributing to pressures for local responsiveness. Consumer Divergence. Contrary to the globalization of markets thesis, some argue that differences in consumer tastes and preferences across countries emerge and endure due to cultural inclination, historical legacy, emergent nationalism, economic prosperity, and other factors. In some industries, like food production, products are unsuitable for standardization and local preferences remain strong. This forces international companies to do things such as designing products that local customers prefer (big engine cars in U.S, smaller in Europe),adopting local marketing preferences(heavy print and media promotion in U.S ,greater personal salesmanship in Brazil), and using marketing practices that address their consumption patterns(Large package sizes in Australia,s,smaller sizes in Japan).

21. Host-Government Policies. Differences in policies among host-country governments contribute to great variability in political, legal, and economic situations in various markets. Policies such as trade protectionism, and national product standards require some degree of local responsiveness and counterbalance the policy shifts toward privatization, economic freedom, legal uniformity, and deregulation that encourage standardization. e.g, Healthcare companies are least suitable to standardize their products because heavily regulated industry constraints this. These regulations obviously,vary country by country.

22. TYPES of STRATEGY Generally, MNEs choose from four basic strategies to guide how they will enter and compete in the international environment. These strategies correspond to the relative demands for global integration and national responsiveness and include the international, multidomestic, global, and transnational strategies. International Strategy. The international strategy emphasizes the transfer of core competencies from the home operation to foreign subsidiaries. It allows for limited local customization .Many critical activities, such as research and development or branding, are usually centralized at headquarters. Some subsidiaries may have power to adapt products to local conditions, but ultimate control resides in the home office. An international strategy makes sense if a firm has a core competence that local competitors in other markets lack and if industry conditions do not push the firm to improve its cost controls or local responsiveness. The liability/disadvantage of the international strategy is that headquarters’ central role hinders identifying and responding to local conditions and can lead to missed market opportunities. Examples of companies using this strategy include McDonald’s, Kellogg, Yahoo!, Wal-Mart, and Microsoft

23. TYPES of STRATEGY Multidomestic Strategy. Firms following a multidomestic strategy adjust products, services, and business practices to meet the needs of individual countries and regions. Management that chooses the multidomestic strategy believes in responding to the unique conditions prevailing in different markets. This strategy makes sense when the demands for local responsiveness are high and the demands for global integration are low, but there are high costs. Disadvantage could be : The multidomestic strategy leads to widespread duplication of management, design, production, and marketing activities since each local subsidiary must perform each of these activities. Furthermore,corporate headquarters may have a harder time controlling more independent subsidiaries. Example : Johonson and Johonson

24. TYPES of STRATEGY Global Strategy A global strategy requires worldwide consistency and standardization in order to be effective. Firms that choose the global strategy face strong pressures for cost reductions but weak pressure for local responsiveness. Operationally, MNEs that adopt a global strategy usually are or aim to become the low-cost player in their industry. This generally requires global-scale production facilities in a few low-cost locations. R&D, production, and marketing activities are also concentrated in the most favorable locations, which may not all be in the same country. Dispersed activities are coordinated by formal linkages, overseen by executives at the centralized world headquarters who standardize practices and processes. Strategic decision making authority resides almost exclusively at headquarters. Main Disadvantage include that, it does not give ,much latitude tocustomise products or systems to local conditions. Example : Nokia, Texas Instruments, American Express

25. TYPES of STRATEGY Transnational Strategy This strategy aims to simultaneously exploit location economies, leverage core competencies, and pay attention to local responsiveness. It is arguably the most direct response to the growing globalization of business. Capabilities and contributions are differentiated from country to country, with an emphasis on learning from various environments and then integrating and diffusing this knowledge throughout global operations. Rather than a top-down (global strategy) or bottom-up (multidomestic strategy) flow of ideas, the transnational strategy champions a flow from the idea generator to idea adopters wherever these may be. Major Example : General Electric - A self proclaimed 'Boundaryless Company'