Strategy of International Business Chapter 12

1. Strategy of International BusinessChapter 12 International Business October 15, 2007 Cho, Hee-Joo Jang, Se-Yeop Luo, Lin Morger, Raffael

2. Content Strategy and the Firm Hee-Joo Global Expansion Luo Lin Cost & Localization Pressure Raffael Morger Four Strategies Se-Yeop

3. Strategy and the Firm

4. Strategy and the Firm Value Creation V - P V V - C P - C P V = Value of product to and average consumer P = Price per unit C = Cost of production per unit V – P = Consumer surplus per unit V – C = Value created per unit C C

5. Strategy and the Firm Strategic Positioning

6. Strategy and the Firm Operations: the firm as a value chain Support Activities Company Infrastructure Information Systems Logistics Human Resource Primary Activities

7. Global Expansion, Profitability, and Profit Growth What can firms do after expanding globally? • Expanding the Market • Realizing Location Economies • Reducing Production Cost from Experience Effects • Earning a Greater Return by Leveraging Subsidiary Skills

8. Global Expansion, Profitability, and Profit Growth Expanding the Market =>by selling products in international markets Leveraging Products e.g. Microsoft ;Volkswagen and Toyota Core Competencies e.g. Toyota

9. Global Expansion, Profitability, and Profit Growth Realizing Location Economies =>by dispersing individual value creation activities Creating a Global Web e.g. IBM’s ThinkPad X31 laptop computer Some Warnings e.g. New Zealand (high transportation costs); Political risk

10. Global Expansion, Profitability, and Profit Growth Unit Costs B A Cumulative Output • Reducing Production Cost from Experience Effects • =>by reducing the costs of value creation Cumulative output increases over time, and unit costs will lower gradually in one period. Why?

11. Learning Effects=>cost savings e.g. Assembling airframe Economies of Scale=> reductions in unit cost e.g. In the automobile industry Global Expansion, Profitability, and Profit Growth Reasons

12. Global Expansion, Profitability, and Profit Growth • Earning a Greater Return by Leveraging Subsidiary • Skills • =>by leveraging any valuable skills developed in foreign operations and transferring them to other entities • e.g. McDonald's restaurant in France

13. Pressures International Businesses Firm A Firm C High Pressures for Cost Reduction Firm B Low Low High Pressures for Local Responsiveness --> Nowadays many companies are in the position of firm C

14. Pressures for Cost Reductions • Companies have to lower cost of value creation • Outsourcing: eg. Call Centers to India, bank back office to developing nations Pressures are particularly intense in commodity-type industries e.g. bulk chemicals, petroleum, steel, sugar etc

15. Local Responsiveness (1) • Differences in Customer Tastes and Preferences • Customer tastes and preferences • Deeply embedded historic or cultural reasons • Marketing message have to be customized e.g. Difference US vs. European automobile market Differences in Infrastructure and Traditional Practices • Electrical system • Left side driving in Great Britain • Mobile networks

16. Local Responsiveness (2) • Differences in Distribution Channels • Marketing strategies may have to be adapted e.g. British and Japanese doctors will not accept or respond favorably to a US style high pressure sales force Differences Host Government Demands • Economic and political demands imposed by host-country government may require local responsiveness • Threats of protectionism, economic nationalism • e.g. Pharmaceutical Companies are subject o local clinical testing, registration procedures etc. • Railcar production must be in purchasing country

17. Four Basic Strategies High Global Standardization Strategy Transnational Strategy Pressures for Cost Reduction International Strategy Localization Strategy Low Low High Pressures for Local Responsiveness

18. Four Basic Strategies High • Product of universal needs • No major competitors • Starts from domestic market and expands internationally • Tight control over marketing and product strategy • => Microsoft, Procter & Gamble Pressures for Cost Reduction International Strategy Low Low High Pressures for Local Responsiveness

19. Global Standardization Strategy High Global Standardization Strategy Pressures for Cost Reduction • Low cost strategy on global Scale --> minimal adaptation • Products usually serve universal needs • => e.g. Samsung, Nokia Low Low High Pressures for Local Responsiveness

20. Four Basic Strategies High • Customizing the product to local demands • Value creation strategy in the local market • => e.g. MTV Pressures for Cost Reduction Localization Strategy Low Low High Pressures for Local Responsiveness

21. Four Basic Strategies High Transnational Strategy Pressures for Cost Reduction • Focuses on leveraging subsidiary skills • Build centralized manufacturing of components with assembling plants in each of its markets • => e.g. Caterpillar Low Low High Pressures for Local Responsiveness

22. Invention of photocopier in 1960 No major competition at first Expanded globally => pursuing international strategy The Evolution of Strategy - Xerox

23. Japanese companies such as Canon invented their way around Xerox’s patens. 1. produced their own photocopiers in very efficient manufacturing system. 2. priced them below Xerox’s products. - leads to Xerox’s failure in cost reduction Emergence of Competitors

24. Mistake of Xerox: Failed in reducing cost before the emergence of competitors => In the long run, international strategy will face cost or localization pressure The Evolution of Strategy

25. Questions ? • Cho, Hee-Joo • Jang, Se-Yeop • Luo, Lin • Morger, Raffael