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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:
Suggested Discussion Questions
1. How would you characterize MTV’s initial strategy in Europe? Why was the strategy
unsuccessful?
Global Business Today Ninth Edition Chapter 12
2. What type of strategy has MTV implemented today? What did MTV learn from its mistakes in
Europe? How did it apply this knowledge to other markets?
Teaching Tip: To learn more about MTV’s strategies in different markets, go to the company’s
web site {http://www.mtv.com/} and click on the individual country sites.
Lecture Note: MTV recently acquired a U.K. television channel with the goal of increasing its
programming in the United Kingdom and bring U.K.-created content to other markets. To learn
more, go to {http://www.businessweek.com/news/2014-05-01/viacom-to-buy-u-dot-k-dot-channel-
5-for-450-million-pounds-1}.
The Rise of Regionalism
I) Demand for local responsiveness is frequently a result of national differences. In addition, a
convergence of tastes, preferences, infrastructure, distribution channels, and host-government
demands can arise from regional differences. The European Union and NAFTA are both
examples of the rise of regionalism.
CHOOSING A STRATEGY
A) Firms use four basic strategies to compete in the international environment: a global
standardization strategy, a localization strategy, a transnational strategy, and an international
strategy. The appropriateness of each strategy varies with the extent of pressures for cost
reductions and local responsiveness. Figure 12.9 in the text illustrates when each of these
strategies is most appropriate.
Global Standardization Strategy
B) Firms that pursue a global standardization strategy focus on increasing profitability and profit
growth by reaping the cost reductions that come from economies of scale, learning effects, and
location economies. Their strategic goal is to pursue a low-cost strategy on a global scale. This
strategy makes sense when there are strong pressures for cost reductions and demands for local
responsiveness are minimal.
Management Focus: Vodafone in Japan
Summary
Global Business Today Ninth Edition Chapter 12
This feature examines the strategy of the United Kingdom’s Vodafone, the world’s largest
provider of wireless telephone service. As part of its strategy to expand internationally, Vodafone
acquired Japan’s J-Phone in 2002, but later sold the company for a loss. Analysts believe that the
acquisition was not successful because Vodafone failed to pay attention to local market conditions
in Japan, and instead tried to sell Japanese consumers a standardized product. Discussion of the
feature can revolve around the following questions:
Suggested Discussion Questions
1. Why do you think that Vodafone was pursuing a global standardization strategy? How did it
hope that this strategy would boost profitability and profit growth?
2. Why did the strategy not work in Japan? In retrospect, what should Vodafone have done
differently?
Teaching Tip: To learn more about Vodafone, go to {http://www.vodafone.com/hub_page.html}.
Localization Strategy
C) A localization strategy focuses on increasing profitability by customizing the firm’s goods or
services so that they provide a good match to tastes and preferences in different national markets.
Localization is most appropriate when there are substantial differences across nations with regard
to consumer tastes and preferences, and where cost pressures are not too intense.
Transnational Strategy
D) Firms pursuing a transnational strategy are trying to simultaneously achieve low costs
through location economies, economies of scale, and learning effects; differentiate their product
offerings across geographic markets to account for local differences; and foster a multidirectional
flow of skills between different subsidiaries in the firm’s global network of operations. A
