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1. The Strategy of International Business Chapter 12

2. 12-1

3. The Firm as a Value Chain • Primary Activities: • Those activities having to do with creating, marketing and delivering the product to customers and providing support and after-sales service. • Support Activities: • Provide inputs that allow primary activities to occur. • An Efficient Infrastructure: • helps create value and reduce the cost of creating value. 12-2

4. The Firm as a Value Chain The Firm as a Value Chain Organizational infrastructure Support activities Information systems Human resources Research and development Materials management Manufacturing Marketing Primary activities Figure 12.1 12-3

5. The Role of Strategy • Strategy: • Actions managers take to attain the goals of the firm. • Need to identify and take action that lowers the cost of value creation and/or differentiates the firm’s product through superior design, quality, service, or functionality. 12-4

6. Profiting from Global Expansion • International firms can: • Earn a greater return from distinctive skills or core competencies. • 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. 12-5

7. Location Economies Assembly Parts Sales Design Advertising Parts Pontiac LeMans Parts 12-6

8. Caveats • When making location decisions: • Consider trade barriers and transportation costs. • Assess political and economic risks. 12-7

9. Experience Curve Economies • Learning Effects: • Labor productivity increases over time as individuals learn the most efficient ways to perform particular tasks. • Economies of Scale: • Reductions in unit cost achieved by producing a large volume of a product. • Strategic Significance: • Moving down the experience curve allows a firm to reduce its cost of creating value. 12-8

10. The Experience Curve Moving down the curve reduces the cost of creating value Unit costs B A Accumulated output Figure 12.2 12-9

11. Firms Face Two Conflicting Concepts (Pressures) Overseas • Reduce costs. • Be responsive to local needs. 12-10

12. Pressures for Cost Reduction and Local Responsiveness Company A Company C High Cost pressures Low Generally reflects the position of most companies Company B Low High Figure 12.3 Pressures for local responsiveness 12-11

13. Cost Reduction $ • Desire to reduce costs by: • Mass production • Product standardization. • Optimal location production. • Hard to do with commodity-type products. • products serving universal needs. • Also hard where competition is in low cost producing location. • Finally, int’l competition creates price pressures. 12-12

14. Local Responsiveness • Different consumer tastes and preferences. • Different infrastructure and practice. • Differences in distribution channels. • Government demands. 12-13

15. McDonalds • McDonald’s overseas experience. • Detailed planning • Export of management skills. • Foreign partners. • Adaptation/Adopting ideas. 12-14

16. Strategic Choice • Four basic strategies: • International strategy. • Multidomestic strategy. • Global strategy. • Transnational strategy. 12-15

17. Four Basic Strategies Global Strategy Transnational Strategy High Cost pressures Low International Strategy Multi domestic Strategy Low High Pressures for local responsiveness Figure 12.4 12-16

18. International Strategy • Go where locals don’t have your skills. • Little adaptation. Products developed at home (centralization). • Manufacturing and marketing in each location. • Makes sense where low skills, competition, and costs exist. 12-17

19. Multi-domestic Strategy • 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. • Good for high local responsiveness and low cost reduction pressures. 12-18

20. Global Strategy • 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. 12-19

21. 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. 12-20

22. 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 Figure 12.6a 12-21

23. 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 Figure 12.6b Reap benefits of global learning 12-22

24. Cost Pressures and Pressures forLocal Responsiveness Facing Caterpillar High Cost pressures Low Caterpillar Tractor Figure 12.5 Low High Pressures for local responsiveness 12-23