PART FIVE GLOBAL STRATEGY, STRUCTURE, AND IMPLEMENTATION International Business . Chapter Eleven The Strategy of International Business. Chapter Objectives. To examine the idea of industry structure, firm strategy, and value creation
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The Strategy of International Business
Strategy: the framework that managers apply to determine the competitive moves and business approaches that guide a firm, i.e., the means used to achieve objectives
Perfect competition presumes that:
An industry is a group of firms, i.e., competitors, that produce products which are close substitutes.
A global industry is one in which a firm’s competitive position in one country is significantly affected by its position in other countries.
The industry organization (IO) paradigm: risk-adjusted rates of return should be constant across firms and industries
• Over time no one firm or industry should consistently outperform others.
Industry effects explain up to 75% of the differences in average returns for firms within a given industry.
The Five Fundamental Forces Model: the nature of competition in an industry is the combined out-come of competitive pressures generated by:
• the moves of rivals battling for market share
• the entry of new rivals seeking market share
• the efforts of firms outside the industry to convince buyers to switch to their substitute products
• the push by suppliers to charge more for their inputs
• the push by buyers to pay less for products
Markets are not perfectly competitive; some firms consistently outperform industry averages.
The five-forces model defines the structure and competition in an industry in a way that reveals:
Common to each issue is the question of whether the current or future outlook suggests that firms in the industry have no, some, or great potential to realize profits.
Forces that can transform an industry’s structure include:
Strategy: a firm’s efforts to build and strengthen its competitive position within its industry in order to create value and attain goals
A firm’s core competency may be a special outlook, skill, capability, or technology that creates unique value essential to its competitiveness.
Value: the measure of a firm’s capability to sell the products it offers for more than the costs it incurs
Differentiation spurs a firm to offer unique, high-value products that are difficult to match or copy.
Value chain: the set of linked, value-creating activities a firm performs to design, produce, market, deliver, and support a product, i.e., the format and interactions amongst the various functions of a firm
[Value chain analysis explains cost behavior and reveals existing and potential sources of product differentiation.]
Primary activities: the classical managerial functions of the firm
Support activities: functions that provide inputs which allow the primary activities to occur
Profit margins: the differences between total revenues generated and total costs incurred
Orientation: upstream (in-bound) vs. downstream(out-bound) activities
Value chain configuration may be influenced by:
Configuration [spatial arrangement] should be optimized in light of prevailing economic, legal, political, and cultural conditions.
Value chain coordination may be influenced by:
Coordination [the balanced movement of different parts at the same time] should be optimized in ways that leverage a firm’s core competencies.
The configuration and coordination of a firm’s value chain should reflect changes in its bases for value creation, including:
• customers and their needs
[A commodity serves a universal need across countries and cultures and is traded strictly on the basis of price.]
The integration/responsiveness grid (IR) profiles the interaction of the pressures for global integration and pressures for local responsiveness.
International strategy: opportunistic expansion into foreign operations that leverages the firm’s core (domestic) competencies
Headquarter’s ethnocentric orientation, i.e., its home country focus, may lead to significant missed market opportunities.
Multidomestic strategy: expansion into foreign opera-tions that grants decision-making authority to local managers and emphasizes responsiveness to local conditions
• Decision-making is decentralized so that offerings can be adjusted to meet the needs of individual countries or regions.
• Value is created by giving local managers the authority to respond to unique local cultural, legal, and economic environments.
• The polycentric view holds that people who are close to the market both physically and culturally can best run a business.
The distribution of decision-making authority to local managers may lead to duplication in activities, significantly higher costs, and unusually powerful (autonomous) local subsidiaries.
Global strategy: expansion into foreign operations that champions worldwide consistency, standardization, and cost competitiveness
In markets where demand for local responsiveness remains high, global strategies are largely ineffective, and market opportunities are missed.
Transnational strategy: expansion into foreign opera-tions that exploits location economies, leverages core competencies, and responds to key local conditions
Realistically, the transnational firm faces serious challenges to its attempts to efficiently and effectively configure and coordinate its activities.