978-0078112911 Chapter 12 Part 1

Global Business Today Ninth Edition Chapter 12

The Strategy of International Business

Chapter Outline

OPENING CASE: Ikea

INTRODUCTION

STRATEGY AND THE FIRM

Value Creation

Strategic Positioning

Operations: The Firm as a Value Chain

GLOBAL EXPANSION, PROFITABILITY, AND PROFIT GROWTH

Expanding the Market: Leveraging Products and Competencies

Location Economies

Experience Effects

Leveraging Subsidiary Skills

Profitability and Profit Growth Summary

COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS

Pressures for Cost Reductions

Pressures for Local Responsiveness

Management Focus: Local Responsiveness at MTV Networks

CHOOSING A STRATEGY

Global Standardization Strategy

Management Focus: Vodafone in Japan

Localization Strategy

Transnational Strategy

International Strategy

The Evolution of Strategy

Management Focus: Evolution of Strategy at Procter & Gamble

STRATEGIC ALLIANCES

The Advantages of Strategic Alliances

The Disadvantages of Strategic Alliances

Making Alliances Work

Global Business Today Ninth Edition Chapter 12

SUMMARY

CRITICAL THINKING AND DISCUSSION QUESTIONS

CLOSING CASE: Ford’s Global Strategy

Learning Objectives

1. Explain the concept of strategy.

2. Recognize how firms can profit by expanding globally.

3. Understand how pressures for cost reductions and pressures for local responsiveness influence

strategic choice.

4. Identify the different strategies for competing globally and their pros and cons.

5. Explain the pros and cons of using strategic alliances to support global strategies.

Chapter Summary

This chapter focuses on the strategies that firms use to compete in foreign markets. At the outset,

the chapter reviews the reasons that firms engage in international commerce, which range from

earning a greater return from distinctive skills to realizing location economies by dispersing

particular value creation activities to locations where they can be performed most efficiently. A

major portion of the chapter is dedicated to the pressures that international firm’s face for cost

reductions and local responsiveness. These pressures place conflicting demands on firms. On the

one hand, cost reductions are best achieved through product standardization and economies of

scale. On the other hand, pressures for local responsiveness require firms to modify their products

to suit local demands. The chapter also discusses the four basic strategies that firms utilize to

compete in international markets. These strategies include a global standardization strategy, a

localization strategy, a transnational strategy, and an international strategy. The advantages and

disadvantages of each of these strategies are discussed. The chapter concludes with a discussion of

international strategic alliances.

Opening Case: IKEA

Summary

The opening case describes the international strategy of Swedish furniture and home goods maker,

IKEA. IKEA, now the largest furniture retailer in the world, has successfully built its business

around its flat pack merchandise using a largely standardized approach to both its product line and

its store displays. While its standardized approach to international markets has been a competitive

advantage for the company, IKEA has also recognized that in some markets, it is also important to

Global Business Today Ninth Edition Chapter 12

tailor its product line and sales approach to local preferences. Discussion of the case can revolve

around the following questions:

Suggested Discussion Questions

QUESTION 1: Why do you think IKEA’s expansion into Europe went so well? Why did the

company subsequently stumble in North America? What lessons did IKEA learn from this

experience? How is the company now applying these lessons?

QUESTION 2: How would you characterize IKEA’s strategy prior to its missteps in North

America? How would you characterize its strategy today?

Chapter Outline with Lecture Notes, Video Notes, and Teaching Tips

INTRODUCTION

Global Business Today Ninth Edition Chapter 12

A) The primary concern so far in this book has been with aspects of the larger environment in

which international businesses compete. Now, our focus shifts from the environment to the firm

itself and, in particular, to the actions managers can take to compete more effectively as an

international business.

STRATEGY AND THE FIRM

A) A firm’s strategy can be defined as the actions that managers take to attain the goals of the

firm. Profitability can be defined as the rate of return the firm makes on its invested capital.

Profit growth is the percentage increase in net profits over time.

Value Creation

B) The way to increase profitability is to create more value. In general, the more value customers

place on the firm’s products, the higher the price the firm can charge for those products.

C) The value created by a firm is measured by the difference between V (the price that the firm

can charge for a product given competitive pressures) and C (the costs of producing the product).

D) Firms can increase their profits in two ways: by adding value to a product so that customers are

willing to pay more for it or by lowering the costs. Thus, there are two basic strategies for

improving a firm’s profitability– a differentiation strategy and a low cost strategy.

Strategic Positioning

E) Michael Porter notes that it is important for a firm to be explicit about its choice of strategic

emphasis with regard to value creation and low cost, and to configure its internal operations to

support that strategic emphasis.

F) A central tenet of the basic strategy paradigm is that in order to maximize its long run return on

invested capital, a firm must do three things: (a) pick a position on the efficiency frontier that is

viable in the sense that there is enough demand to support that choice; (b) configure its internal

operations so that they support that position; and (c) make sure that the firm has the right

organization structure in place to execute its strategy.

Lecture Note: Some experts are suggesting that the best way to reach customers in today’s hyper

competitive global environment is to return to strategic simplicity. To learn more, go to

{http://www.businessweek.com/articles/2014-10-13/branding-made-simple}.

Operations: The Firm as a Value Chain

G) It is useful to think of the firm as a value chain composed of a series of distinct value creation

activities, including production, marketing, materials management, R&D, human resources,

Global Business Today Ninth Edition Chapter 12

information systems, and the firm infrastructure. We can categorize these value creation activities

as primary activities and support activities (see Figure 12.4 in the text).

Lecture Note: To extend this discussion consider

{http://www.businessweek.com/management/common-strategy-mistakes-to-avoid-

12092011.html}.

Video Note: To expand this discussion, consider the video in the International Business Library on

Pinterest (http://www.pinterest.com/mheibvideos/) Norsk Hydro CFO Sees Strong Demand in

U.S., China.

Primary Activities

H) The primary activities of a firm have to do with creating the product, marketing and delivering

the product to buyers, and providing support and after-sale service to the buyers of the product.

Support Activities

I) Support activities provide the inputs that allow the primary activities of production and

marketing to occur. The logistics function controls the transmission of physical materials through

the value chain – from procurement through production and into distribution. The efficiency with

which this is carried out can significantly reduce the cost of creating value.

Organization: The Implementation of Strategy

J) The strategy of a firm is implemented through its organization. The term organization

architecture can be used to refer to the totality of a firm’s organization, including formal

organizational structure, control systems and incentives, organizational culture, processes, and

people (see Figure 12.5 in the text).

K) Organizational structure means three things. First, the formal division of the organization

into subunits; second, the location of decision-making responsibilities within that structure; and

third, the establishment of integrating mechanisms to coordinate the activities of subunits

including cross functional teams and or pan-regional committees.

L) Controls are the metrics used to measure the performance of subunits and make judgments

about how well managers are running those subunits. Incentives are the devices used to reward

appropriate managerial behavior.

M) Processes are the manner in which decisions are made and work is performed within the

organization. Organizational culture is the norms and value system that are shared among the

employees of an organization. Finally, by people we mean not just the employees of the

organization, but also the strategy used to recruit, compensate, and retain those individuals and the

type of people that they are in terms of their skills, values, and orientation.

Global Business Today Ninth Edition Chapter 12

In Sum: Strategic Fit

N) In sum, for a firm to attain superior performance and earn a high return on capital, its strategy

must make sense given market conditions (see Figure 12.6 in the text).

GLOBAL EXPANSION, PROFITABILITY, AND PROFIT GROWTH

Video Note: The video in the International Business Library on Pinterest

(http://www.pinterest.com/mheibvideos/) CEO Weighs Consequences of Globalization explores

how Ethan Allen, the American furniture company, has changed its strategy to reflect the

globalization of markets. The video fits in well with this discussion of firm strategy either as an

introduction at the beginning of the discussion or as a summary at the end of the material.

A) Firms that operate internationally are able to:

• Expand the market for their domestic product offerings by selling those products in

international markets

• Realize location economies by dispersing individual value creation activities to locations

around the globe where they can be performed most efficiently and effectively

• Realize greater cost economies from experience effects by serving an expanded global

market from a central location, thereby reducing the costs of value creation

• Earn a greater return by leveraging any valuable skills developed in foreign operations and

transferring them to other entities within the firm’s global network of operations

Expanding the Market: Leveraging Products and Competencies

B) A company can increase its growth rate by taking goods or services developed at home and

selling them internationally. The success of firms that expand in this manner is based not only on

the goods or services they sell, but also on their core competencies, or skills within the firm that

competitors cannot easily match or imitate. Core competencies enable the firm to reduce the costs

of value creation and/or to create perceived value in such a way that premium pricing is possible.

Video Note: The iGlobe As U.S. Automakers Struggle, Fiat Seizes Expansion Opportunities

explores Fiat’s efforts to become a bigger player in the global auto industry.

Location Economies

C) Trade barriers and transportation costs permitting, the firm will benefit by basing each value

creation activity it performs at that location where economic, political, and cultural conditions,

including relative factor costs, are most conducive to the performance of that activity. Firms that

pursue such as strategy can realize location economies, the economies that arise from performing

a value creation activity in the optimal location for that activity, wherever in the world that might

be.

Global Business Today Ninth Edition Chapter 12

D) Locating a value creation activity in the optimal location for that activity can have one of two

effects. It can lower the costs of value creation and help the firm to achieve a low cost position,

and/or it can enable a firm to differentiate its product offering from the offerings of competitors.

Creating a Global Web

E) Multinational firms that take advantage of different locational economies around the world

create a global web of value creation activities, with different stages of the value chain being

dispersed to those locations around the globe where perceived value is maximized or where the

costs of value creation are minimized.

Some Caveats

F) Introducing transportation costs and trade barriers complicates this picture. For example, due to

favorable factor endowments, New Zealand may have a comparative advantage for automobile

assembly operations, but high transportation costs would make it an uneconomical location for

most firms. Another caveat concerns the importance of assessing political risks when making

location decisions.

Experience Effects

G) The experience curve refers to the systematic reductions in production costs that occur over

the life of a product. The experience curve relationship between production costs and cumulative

output is illustrated in Figure 12.7 in the text.

Learning Effects

H) Learning effects refer to cost savings that come from learning by doing. In other words, labor

productivity increases over time as individuals learn the most efficient ways to perform particular

tasks and management typically learns how to manage the new operation more efficiently over

time.

Economies of Scale

I) Economies of scale refers to the reductions in unit cost achieved by producing a large volume of

a product. Economies of scale have a number of sources including the ability to spread fixed costs

over a large volume, and the ability of large firms to employ increasingly specialized equipment or

personnel.

Strategic Significance

J) The strategic significance of the experience curve is clear. Moving down the experience curve

allows a firm to reduce its cost of creating value. Serving a global market from a single location is

consistent with moving down the experience curve and establishing a low-cost position.

Leveraging Subsidiary Skills

Global Business Today Ninth Edition Chapter 12

K) Leveraging the skills created within subsidiaries and applying them to other operations within

the firm’s global network may create value. Managers must have the humility to recognize that

valuable skills can arise anywhere within the firm’s global network, not just at the corporate

center. Managers must also establish an incentive system that encourages local employees to

acquire new skills.

Profitability and Profit Growth Summary

L) Managers need to keep in mind the complex relationship between profitability and profit

growth when making strategic decisions about pricing.

COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS

A) Firms that compete in the global marketplace typically face two types of competitive pressures.

They face pressures for cost reductions and pressures to be locally responsive. These pressures

place conflicting demands on a firm.

Pressures for Cost Reductions

B) Responding to cost pressures requires that a firm try to lower the costs of value creation by

mass-producing a standard product at the optimal locations worldwide. Pressures for cost

reductions are greatest in industries producing commodity type products where price is the main

competitive weapon.

C) This tends to be the case for products that serve universal needs, or needs that exist when the

tastes and preferences of consumers 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, and where consumers are powerful and face low switching

costs.

Pressures for Local Responsiveness

D) Pressures for local responsiveness arise from differences in consumer tastes and preferences,

differences in traditional practices and infrastructure, differences in distribution channels, and from

host government demands.

Differences in Consumer Tastes and Preferences

E) Strong pressures for local responsiveness emerge when consumer tastes and preferences differ

significantly between countries.

Differences in Infrastructure and Traditional Practices

Global Business Today Ninth Edition Chapter 12

F) Pressures for local responsiveness emerge when there are differences in infrastructure and/or

traditional practices between countries.

Differences in Distribution Channels

G) A firm’s marketing strategies may have to be responsive to differences in distribution channels

between countries.

Host Government Demands

H) Economic and political demands imposed by host country governments may necessitate a

degree of local responsiveness.

Lecture Note: To extend this material, consider discussing the challenges faced by Apple when trying to

sell its iPad in China. Go to {http://www.businessweek.com/articles/2012-02-16/chinese-officials-

can-gloat-over-apples-ipad-woes}.

Lecture Note: The American fashion house Michael Kors has found that selling products that are

U.S.- influenced works well in some foreign markets. To learn more about Michael Kors

international strategy, go to {http://www.businessweek.com/articles/2014-05-01/michael-kors-

challenges-europes-luxury-brands}

Management Focus: Local Responsiveness at MTV Networks

Summary

This feature explores why MTV’s initial strategy in Europe and other foreign markets failed to

have the success of its current approach. MTV initially entered the European market by essentially

duplicating its U.S. programming. While European viewers shared some music tastes and

preferences with viewers in the United States, the company found that it was necessary to provide

a more localized feel to its product. Discussion of the feature can revolve around the following

questions: