Lecture 6 The Strategy of International Business

1. Lecture 6The Strategy of International Business

2. Market-seeking Asset-seeking Asset-seeking Asset-seeking Market-seeking What is the motivation for competing internationally? Gain access to new customers Obtain access to valuable resources Need to achieve lower costs Capitalize on resource strengths and competencies Spread business risk across wider market base

3. Continental Europe The U.K. Australia

4. Italy Germany Spain Australia The U.K.

5. Italy Germany Spain Australia The U.K.

6. The Role of Strategy • Strategy: • Actions managers take to attain the goals of the firm • Identify and take action that • lowers the cost of value creation and/or • differentiatesthe firm’s product through superior design, quality, service, or functionality.

7. Offers low priced products Offers unique or distinctive products Serves the entire market Serves a specific niche Porter’s generic strategies

8. Profiting from Global Expansion • International firms can: • Earn a greater return from distinctive skills or core competencies – leverage these in foreign markets • Realize location economies by dispersing value creation activities to locations where they can be performed most efficiently. • Realize greater experience curve economies, which reduces the cost of value creation.

9. Locating activities to build global advantage • Two issues with regard to firm activities: • Whether to concentrate in one or two countries ordisperse activities to many nations • Where to locate activities (which country is best location for which activity?)

10. Global advantage: Concentrating vs. dispersing activities • Activities should be concentrated when • Scale economies or experience curve effects need to be captured • Coordination of related activities is enhanced • Activities should bedispersed when • They need to be performed close to buyers • Transportation costs, scale diseconomies, or trade barriers make centralization expensive • Buffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed

11. Location and the value chain - 1 Optimal location for X considered independently Costs and availability of inputs Trade policy Strengths and skills of the firm relative to the location Where to locate activity X? Importance of the links between X and other activities of the firm Strategy of the firm – cost vs. differentiation advantages Relative importance of staff and line linkages

12. Location and the value chain - 2 Identify • key activities in the value chain • principal requirements for each activity • possible locations which meet the requirements Final location decision must consider overall strategic objectives Activities dictate location Linkages dictate location

13. Value Added Location 1 Location 2 Location 3 Location 4 VALUE CHAIN DISAGGREGATION The Smile of Value Creation* * Mudambi, JIBS 2007 R&D Knowledge Marketing Knowledge Vertically integrated firm Inputs Markets

14. Rich • Countries • Services • Services • Rich • Countries • Intangibles • Intangibles • Poor • Countries Catch-up Catch-up • Tangibles • Manufacturing Location 4 Location 3 Location 2 Location 1 VALUE CHAIN DISAGGREGATION Industry creation Industry creation The Smile of Value Creation* R&D Knowledge Marketing Knowledge Inputs Markets * Mudambi, JIBS 2007

15. South Korea The U.S. Assembly Sales Japan Parts Advertising Design Parts Parts The U.K. Germany Taiwan Singapore Location Economics Pontiac LeMans

16. Caveats • The importance of linkages can be enhanced by • Transportation costs • Trade barriers • Political and economic risks • US firms have shifted production from Asia to Mexico due to • Low labor costs. • Proximity to U.S. • NAFTA.

17. Concept: Profit sanctuaries? • Country markets where firm • Has a strongor protected marketposition and • Derives substantialprofits • Generally, a firm’s most strategically crucial profitsanctuary is its home market Profit sanctuaries are a valuable competitive asset in global industries

18. Concept: Cross-subsidization • Involves supporting competitive efforts in one market with resources/profits diverted from operations in other markets • Competitive power of cross-subsidization results from a global firm’s ability to • Charge lower prices or otherwise launch a strategic offensive to lure away a domestic firm’s customers and cover losses with profits earned in other critical markets

19. Concept: Transfer-pricing • Prices charged by one unit of a multinational firm to a unit operating in another country. • Can be used to shift profits from one tax regime to another. • It is the means of operationalizing cross-subsidization. • Can be illegal if undertaken without reference to costs. National Border Goods Subs 1 Subs 2 MNC Payment

20. MNCs Face Two Conflicting Pressures • Reduce costs • Be responsive to local needs • Examples?

21. Four Basic Strategies High GLOBAL TRANSNATIONAL Most modern knowledge- intensive multinationals Post WW2 US firms Importance of Scale economies INTERNATIONAL MULTI-DOMESTIC Late 19th century European firms Low Low High Importance of Local Responsiveness

22. International Strategy • Go where locals don’t have your skills • Little adaptation. Products developed at home (centralization) • Can be a pure export strategy • Marketing in each location • If local manufacture, usually low-skill assembly • Makes sense where low skills, competition, and costs exist

23. International Strategy MNC Parent • Pre-dominant Knowledge flow – • Parent to subsidiary • Minimal local adaptation Subsidiaries

24. Multi-domestic Strategy • High level of local autonomy • Maximize local responsiveness. • Customize the product and marketing strategy to national demands. • Skill and product transfer • Transfer all value-creation activities, no experience curve rewards

25. Multi-domestic Strategy MNC Parent • Knowledge flows – • Parent to subsidiary • Very strong local influences Subsidiaries

26. Global Strategy • Theodore Levitt, HBS professor in the ’60s • Best use of the experience curve and location economies • This is the low cost strategy • Utilize product standardization. • Not good where local responsiveness demand is high

27. Global Strategy MNC Parent • Pre-dominant Knowledge flow – • Parent to subsidiary • Virtually no local adaptation Subsidiaries

28. Transnational Strategy • Christopher Bartlett and Sumantra Ghoshal • Core competencies can develop in any of the firm’s worldwide operations. • Flow of skills and product offerings occurs throughout the firm - not only from home firm to foreign subsidiary (global learning). • Makes sense where there is pressure for both cost reduction and local responsiveness.

29. Transnational Strategy MNC Parent • Knowledge flows – • Parent to subsidiary • Subsidiary to parent • Subsidiary to subsidiary • Considerable local influences Subsidiaries

30. Linkages are least important in MULTI-DOMESTIC STRATEGY Linkages are most important in TRANSNATIONAL STRATEGY

31. Spillovers Knowledge transfer Home Host 3 1 2 Numeraire knowledge flow (from parent to subsidiary) Learning Characterizing linkages –The source-target specification

32. The Evolution of Strategy

33. The Advantages and Disadvantages of the Four Strategies Strategy Advantages Disadvantages Global Exploit experience curve effects Lack of local responsiveness Exploit location economies Lack of local International responsiveness Inability to realize Transfer distinctive competencies to location economies Foreign Markets Failure to exploit experience curve effects

34. The Advantages and Disadvantages of the Four Strategies Strategy Advantages Disadvantages Customize product offerings Inability to realize location Multi-domestic and marketing in accordance economies with local responsiveness Failure to exploit experience curve effects Failure to transfer distinctive competencies to foreign markets Transnational Exploit experience curve Difficult to implement due effects to organizational Exploit location economies problems Customize product offerings and marketing in accordance with local responsiveness Reap benefits of global learning

35. Takeaways • The motivation for competing internationally is based on gaining access to markets and/or assets • Location choice is driven by balancing the importance of activities and linkages in the value chain • Overall strategy is driven by balancing the importance of cost (scale economies) and local responsiveness