Textbook Behavior in Organizations, 8ed A. B. Shani

2. The Strategy of International Business

3. Introduction From the global environment to firm-level operations Why firms expand to international markets Strategic options for competing internationally Factors that affect a firm�s strategic choices A foundation for future discussions Entry strategies and strategic alliances Organizational structures and cultures Global production and logistics Global finance and marketing Global human resource management

4. WalMart Established in 1962; expanded to Mexico City in 1991 Reasons for going international Limited growth opportunities in home market Value creation through transfer of business model Preempt international expansion by competitors Challenges Adapting to local consumer demands Adapting to infrastructure limitations (WalMart/suppliers) Advantages Enhanced bargaining power with global suppliers Transfer of ideas across countries/markets

5. WalMart � In the Moment Continues to expand internationally Problems entering Japanese market Difficult to change established distribution system Differing customer expectations $196 million loss in 2006 Withdrew from Hong Kong/Indonesia, mid-1990s Germany/South Korea, 2006 Challenges Goods not matching consumer tastes Distribution/re-badging problems Customers loyal to local competitors

6. Strategy and the Firm Strategy The actions managers take to attain firm goals For most firms, the preeminent goal is to maximize the value of the firm for its owners Profitability the rate of return that the firm makes on its invested capital (ROIC), which is calculated by dividing the net profits of the firm by total invested capital Profit growth Measured by the percentage increase in net profits over time Managers can increase the profitability of the firm by pursuing strategies that lower costs or by pursuing strategies that add value to the firm�s products, which enables the firm to raise prices. Managers can increase the rate at which the firm�s profits grow over time by pursuing strategies to sell more products in existing markets or by pursuing strategies to enter new markets. As we shall see, expanding internationally can help managers boost the firm�s profitability and increase the rate of profit growth over time. For example, by expanding into foreign markets, Managers can increase the profitability of the firm by pursuing strategies that lower costs or by pursuing strategies that add value to the firm�s products, which enables the firm to raise prices. Managers can increase the rate at which the firm�s profits grow over time by pursuing strategies to sell more products in existing markets or by pursuing strategies to enter new markets. As we shall see, expanding internationally can help managers boost the firm�s profitability and increase the rate of profit growth over time. For example, by expanding into foreign markets,

7. Strategy and the Firm To maximize the value of a firm, managers must pursue strategies that increase the profitability of the enterprise and its rate of profit growth over time Figure 12.1, p. 409To maximize the value of a firm, managers must pursue strategies that increase the profitability of the enterprise and its rate of profit growth over time Figure 12.1, p. 409

8. Value Creation Firms increase their profitability by creating more value Measured by difference between costs of production and the value that consumers perceive in the firm�s products Two basic strategies for creating value and attaining a competitive advantage in an industry (Michael Porter) Low-cost strategy: firm has high profits when it creates more value for its customers and does so at a lower cost Differentiation strategy: firm has more profits when it can increase prices because of the unique features and attractiveness of its products

9. Value Creation The value of a product to an average consumer is V; the average price that the firm can charge a consumer for that product given competitive pressures and its ability to segment the market is P; and the average unit cost of producing that product is C (C comprises all relevant costs, including the firm�s cost of capital). The firm�s profit per unit sold () is equal to P C, while the consumer surplus per unit is equal to V P (another way of thinking of the consumer surplus is as �value for the money�; the greater the consumer surplus, the greater the value for the money the consumer gets). The firm makes a profit so long as P is greater than C, and its profit will be greater the lower C is relative to P. The difference between V and P is in part determined by the intensity of competitive pressure in the marketplace; the lower the intensity of competitive pressure, the higher the price charged relative to V.4 In general, the higher the firm�s profit per unit sold is, the greater its profitability will be, all else being equal. Figure 12.2, p. 410 The value of a product to an average consumer is V; the average price that the firm can charge a consumer for that product given competitive pressures and its ability to segment the market is P; and the average unit cost of producing that product is C (C comprises all relevant costs, including the firm�s cost of capital). The firm�s profit per unit sold () is equal to P C, while the consumer surplus per unit is equal to V P (another way of thinking of the consumer surplus is as �value for the money�; the greater the consumer surplus, the greater the value for the money the consumer gets). The firm makes a profit so long as P is greater than C, and its profit will be greater the lower C is relative to P. The difference between V and P is in part determined by the intensity of competitive pressure in the marketplace; the lower the intensity of competitive pressure, the higher the price charged relative to V.4 In general, the higher the firm�s profit per unit sold is, the greater its profitability will be, all else being equal. Figure 12.2, p. 410

10. Strategic Positioning Important to be explicit about choice of strategic emphasis with regard to value creation Management must decide where the company wants to be positioned with regard to value and cost A central tenet of the basic strategy paradigm is: To maximize its profitability, a firm must do three things Pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that choice Configure internal operations to support that position Make sure that the firm has the right organization structure in place to execute its strategy The strategy, operations, and organization of the firm must all be consistent with each other if it is to attain a competitive advantage and garner superior profitability. Operations refers to the different value creation activities a firm undertakes, which we shall review next. The strategy, operations, and organization of the firm must all be consistent with each other if it is to attain a competitive advantage and garner superior profitability. Operations refers to the different value creation activities a firm undertakes, which we shall review next.

11. Strategic Choice in the International Hotel Industry The convex curve in Figure 12.3 is what economists refer to as an efficiency frontier. The efficiency frontier shows all of the different positions that a firm can adopt with regard to adding value to the product (V) and low cost (C) assuming that its internal operations are configured efficiently to support a particular position (note that the horizontal axis in Figure 12.3 is reverse scaled�moving along the axis to the right implies lower costs). The efficiency frontier has a convex shape because of diminishing returns. Diminishing returns imply that when a firm already has significant value built into its product offering, increasing value by a relatively small amount requires significant additional costs. The converse also holds, when a firm already has a low-cost structure, it has to give up a lot of value in its product offering to get additional cost reductions. Figure 12.3, p. 411The convex curve in Figure 12.3 is what economists refer to as an efficiency frontier. The efficiency frontier shows all of the different positions that a firm can adopt with regard to adding value to the product (V) and low cost (C) assuming that its internal operations are configured efficiently to support a particular position (note that the horizontal axis in Figure 12.3 is reverse scaled�moving along the axis to the right implies lower costs). The efficiency frontier has a convex shape because of diminishing returns. Diminishing returns imply that when a firm already has significant value built into its product offering, increasing value by a relatively small amount requires significant additional costs. The converse also holds, when a firm already has a low-cost structure, it has to give up a lot of value in its product offering to get additional cost reductions. Figure 12.3, p. 411

12. The Value Chain The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities including production, marketing and sales, materials management, R&D, human resources, information systems, and the firm infrastructure. We can categorize these value creation activities, or operations, as primary activities and support activities (see Figure 12.4). If a firm is to implement its strategy efficiently, and position itself on the efficiency frontier shown in Figure 12.3, it must manage these activities effectively and in a manner that is consistent with its strategy. p. 411-412 The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities including production, marketing and sales, materials management, R&D, human resources, information systems, and the firm infrastructure. We can categorize these value creation activities, or operations, as primary activities and support activities (see Figure 12.4). If a firm is to implement its strategy efficiently, and position itself on the efficiency frontier shown in Figure 12.3, it must manage these activities effectively and in a manner that is consistent with its strategy. p. 411-412

13. Global Expansion, Profitability, and Profit Growth Expanding globally allows firms to increase their profitability and rate of profit growth in ways not available to purely domestic enterprises Firms that operate internationally are able to Expand the market for their domestic products Realize location economies by dispersing individual value creation activities Realize greater cost economies Earn a greater return by leveraging any valuable skills developed in foreign operations

15. Cost Pressures and Pressures for Local Responsiveness Firms that compete globally typically face two types of competitive pressure Pressures for cost reductions Pressures to be locally responsive Figure 12.6, p. 422Figure 12.6, p. 422

16. Pressures for Cost Reductions International firms face cost reduction pressures because of the competitive global market Particularly intense in industries producing commodity-type products Universal needs exist when the tastes and preferences in different nations are similar if not identical Pressures for cost reductions are also intense When major competitors are based in low-cost locations Where there is persistent excess capacity Where consumers are powerful or face low switching costs

17. Pressures for Local Responsiveness Differences in Consumer tastes and preferences Pick-ups are family cars in North American but utility vehicles in Europe Infrastructure and traditional practices Consumer electrical system in North America is based on 110 volts; in Europe on 240 volts Distribution channels Germany has few retailers dominating the food market, while in Italy it is fragmented Demands from host governments Different health care systems require pharmaceutical firms to change operating procedures

18. Choosing a Strategy How do differences in the strength of pressures for cost reductions versus those for local responsiveness affect the firm�s choice of strategy? Firms typical choose among four main strategic postures when competing internationally. These can be characterized as a global standardization strategy, a localization strategy, a transnational strategy, and an international strategy.31 The appropriateness of each strategy varies given the extent of pressures for cost reductions and local responsiveness. Figure 12.7 illustrates the conditions under which each of these strategies is most appropriate. p.427How do differences in the strength of pressures for cost reductions versus those for local responsiveness affect the firm�s choice of strategy? Firms typical choose among four main strategic postures when competing internationally. These can be characterized as a global standardization strategy, a localization strategy, a transnational strategy, and an international strategy.31 The appropriateness of each strategy varies given the extent of pressures for cost reductions and local responsiveness. Figure 12.7 illustrates the conditions under which each of these strategies is most appropriate. p.427

19. Global Standardization and Localization Strategies Global standardization strategy Standardize products across markets Increase profitability by reaping savings from learning effects and location economies Examples: Semiconductor industry/industrial goods (Intel, TI, Motorola) Localization (multidomestic) strategy Maximize profits through maximum local responsiveness Costs of customization recovered through higher prices or increase in local demand Examples: Food/consumer products (Unilever, MTV)

20. Transnational and International Strategies Transnational strategy Simultaneous pressures to be locally responsive and globally competitive (Glocalize) Scale economies, location economies, learning effects Product differentiation to meet local tastes/preferences Foster global transfer of skills and knowledge across international networks Examples: Ford, GM, Catepillar International strategy Weak pressures for local responsiveness and cost reductions (monopoly position/high barriers to entry) Difficult to maintain with increasing globalization Historical examples: Microsoft, Xerox, P&G, Boeing

21. The Evolution of Strategy Figure 12.8, p. 431Figure 12.8, p. 431