978-0134200057 Chapter 12 Lecture Notes

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PART FIVE

GLOBAL STRATEGY, STRUCTURE, AND

IMPLEMENTATION

CHAPTER TWELVE

THE STRATEGY OF INTERNATIONAL BUSINESS

OBJECTIVES

12-1 Explain the idea of strategy in the MNE

12-2 Profile how executives make strategy

12-3 Differentiate resources, capabilities, and core competencies

12-4 Assess approaches to create value

12-5 Diagram the features and functions of the value chain

12-6 Compare global integration and local responsiveness

12-7 Differentiate the types of strategies used by MNEs

CHAPTER OVERVIEW

Chapter Twelve presents tools and concepts used in analyzing and formulating an

international business strategy. First, the role of strategy in international business is

examined. Next, value chain analysis is used to identify the internal capabilities of the

firm that can be leveraged to create competitive advantage. The dilemma of choosing

between two imperatives: standardizing products and processes or localization is also

discussed. Finally, a typology of strategic alternatives including international,

localization, global, and transnational strategies is presented.

CHAPTER OUTLINE

OPENING CASE: Zara’s Disruptive Vision: Data-Driven Fast-Fashion

[see Fig 12.1 and Map 12.1.]

Zara, a large clothing retailer headquartered in northwest Spain, has used an innovative

strategy to power its global expansion. The first Zara shop opened its doors in 1975 in La

Coruña. Today, there are more than 2,000 outlets and, on average, a new one opens

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every day. Now, in 2016, from its humble beginnings, there are more than 2,000 Zara

storefronts strategically located in leading cities spanning 88 countries. Zara’s vision of

data-driven fast-fashion anchors its strategy to integrate cutting-edge systems;

state-of-the-art information technology; efficient, scale-driven production; astonishing

logistics; and alluring distribution that designs, makes, moves, and sells sophisticated, yet

affordable, apparel. Zara, in starting and sustaining the data-driven fast-fashion

revolution, translates its vision into a practical strategy through a range of ingenious

choices in acquiring resources, developing capabilities, and creating competencies.

Separately and collectively, these anchor Zara’s competitiveness. Presently, no other

apparel company comes close to designing, making, moving, and selling fashion as

speedily as Zara. Its success leaves rivals with less time to figure out how to better

configure and coordinate their operations. Some stay in the game, such as H&M, while

others fall further behind, notably Gap.

I. STRATEGY IN THE MNE

Superior performance requires managers to plan for the opportunities and

threats in the global business environment. The scale and scope of opportunities and,

inevitably, threats spanning 214 markets can overwhelm analysis. The job of the

strategist is identifying the implications of these situations to which products to

make, where to make them, where to sell them, how to compete, and, all the while,

earn a profit. In principle, strategy is an integrated and coordinated set of

commitments and actions that reflect the company’s present situation, identifies

the direction it should go, and determines how it will get there [see Fig 12.1]

A. Getting Started: Vision and Mission

Strategy starts with a vision and a mission. Vision is the idealization of

what an MNE firm wants to be. It expresses, in broad terms, its ultimate goal.

The MNE’s mission defines its business, its objectives, and its approach to

achieving them. Table 12.1 profiles the vision and mission statements of various

MNEs.

1. Rhetoric to Reality. Translating the lofty rhetoric of an MNE’s vision and

mission into relevant programs and realistic performance standards, one can

imagine, is tough. Increasing the challenge for the typical MNE is the fact

that its vision and mission statements must work in many businesses run by

many different people operating in many different environments.

B. Moving Onward: Strategic Planning

Planning is a comprehensive process that determines how the firm can best

achieve its goals. Managers use various frameworks to organize strategic

planning. Most frameworks follow a similar logic and share common steps,

typically cycling through some variation of the following sequence: (1) identify

potential product markets and assess each for opportunities and threats; (2)

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assess the preferences of targeted customer segments; (3) analyze internal

strengths and weaknesses relative to customers’ expectations and competitors’

competencies; (4) formulate a strategy; (5) set clear and compelling objectives;

(6) formalize programs, policies, and tactics; (7) acquire resources, create

capabilities, and develop competencies; and (8) monitor thresholds and adjust

standards given change in performance, rivals, or markets.

II. MAKING SENSE TO MAKE STRATEGY

The complexity of the global business environment can easily overtax strategic

planning. Preempting analysis paralysis spurs managers to integrate sensemaking

perspectives into strategic planning. Sensemaking involves studying shifting

markets, competitors’ initiatives, and changing consumer behaviors in order to

determine how economics, politics, culture, trade, and industry influence the

company’s plans. Managers apply a range of sensemaking perspectives. One

commonly sees variations of the Industrial Organization and the Great by

Choice outlooks.

1. Industrial Organization (IO). The IO outlook sets the external environment

as the primary determinant of an MNE’s strategic plan. The IO model holds

that markets tend toward perfect competition. Strategic planning processes

anchored in the IO sensemaking perspective assess how an industry’s

structural characteristics shape competitive dynamics that, in turn, determine

the profitability of different choices

2. Great by Choice Outlook. In reality, some industries are, and persistently

remain, far from perfectly competitive. In these settings, proprietary

advantages, high entry barriers, or oligopolistic dynamics, for instance,

produce market imperfections. These sorts of situations spotlight an

alternative sensemaking perspective. That is, manager’s insight in terms of

acquiring resources, organizing capabilities, and developing competencies,

rather than the structure of the industry, fundamentally shapes strategic

success. This view, generally referred to as Great by Choice, highlights the

power of bright managers and their keen sense of devising a strategy that is

difficult, if not impossible, to copy.

III. THE ROLE OF RESOURCES, CAPABILITIES, AND COMPETENCIES

The IO Model and the Great by Choice outlooks both speak to the importance of

resources, capabilities, and competencies in supporting a strategy that creates

competitive

advantages. Resources are inputs into an MNE production process. A capability is

the capacity for resources to perform an activity in an integrated manner [see Table

12.2 and Table 12.3]. Managers bundle resources and capabilities to create a core

competency.

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IV. THE QUEST TO CREATE VALUE

We follow convention and define value in economic terms, specifying it as the

difference between the cost of making a product and the price that customers are

willing to pay for it. In broad terms, an MNE can create value by perfecting

processes and products in order to do things more efficiently than others, thereby

making products for lower costs than can competitors (the strategy of cost

leadership). Alternatively, MNE can create value by doing something no one else can

do, and do it effectively, thereby making products for which consumers pay a

premium price (the strategy of differentiation). In some situations, an MNE

insightfully combines the two approaches (the strategy of integrated cost

leadership/differentiation).

A. The Cost Leadership Strategy. The cost leadership strategy aims to make a

product at a given level of quality for a cost below those of competitors.

1. Risk of the Cost Leadership Strategy. The cost leadership strategy has

several risks, including (1) disruptive technologies change efficiency

standards; (2) customer’s needs change; and (3) cheaper, and better

products from rivals.

B. The Differentiation Strategy. The differentiation strategy champions

developing products that customers value and that rivals find hard, if not

impossible, to match or copy. Products are differentiated on a variety of tangible

and intangible dimensions.

1. Risk of the Differentiation Strategy. The differentiation strategy has

several risks, including (1) customers’ expectations change; (2) customers

no longer see sufficient value to justify the price premium; (3) a rival

introduces a newer, cooler, higher-performing alternative; (4) counterfeits

that offer a cheaper imitation.

C. The Integrated Cost Leadership/Differentiation Strategy. The differentiation

strategy calls for continual innovation, whereas cost leadership champions

sustainable efficiency. The integrated cost leadership/differentiation strategy

aims to do both. The integrated cost leadership/differentiation strategy provides

customers with relatively lower-cost products that also have differentiated

features.

1. Risks of the Integrated Cost Leadership/Differentiation Strategy. The

key threat to the integrated cost leadership/differentiation strategy is

getting “caught in the middle,” falling short of optimizing production or

sufficiently differentiating.

POINT—COUNTERPOINT:

Is Strategic Planning Productive?

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POINT: Indeed, in today complex global business environment, strategic planning is

necessary. Strategic planning pushes managers to break free of day-to-day routines, look

toward the horizon, and ask and answer big questions. Strategic planning improves the

flexibility to change as markets change. Strategic planning, by enforcing rigorous,

disciplined, systematic decision-making, makes expanding into familiar markets or

venturing into different territories manageable.

COUNTERPOINT: In actuality, the shifting dynamics of the global marketplace present

overwhelming challenges that suggest strategic planning is arguably ineffective.

Managers’ best intentions to map the future, many continually run into the problem that

the future famously does not cooperate with pre-set visions, missions, and plans.

Notwithstanding best intentions, strategic planning falls prey to deficiencies

and delusions.

V. ORGANIZING VALUE CREATION: THE VALUE CHAIN

Just as strategic planning helps managers develop their strategy; value chain analysis

helps them assess how activities create value. Value-chain analysis helps managers

understand the potential and performance of resources and capabilities, thereby

clarifying cost structures and value creation. The value chain is the set of linked

activities the company performs to design, make, market, distribute, and support

a product. A value chain disaggregates a firm into (1) primary activities that

design, make, sell, and deliver the product; and (2) support activities that

implement the primary activities.

A. Configuring the Value Chain

How an MNE distributes value activities around the world is the matter of

configuration—essentially, the task of deciding which activity to do where.

Besides the option to sell in the 214 markets that compose the global business

environment, the MNE has the option to install operations in each. In theory,

configuration ranges from concentrated (the MNE performs all value chain

activities in one location) to dispersed (the MNE performs different value-chain

activities in different locations).

1. Location Advantages. Differing environmental conditions, given differing

political, legal, and market features, means costs differ from country to

country. The option to go anywhere to do anything pushes MNEs to exploit

location advantages.

2. Economies of Scale. overcoming the liability of foreignness—namely, the

additional costs that an MNE operating outside its home country incurs

above those experienced by a local firm—requires achieving some

offsetting efficiencies, no matter which strategy an MNE chooses.

Technically, an MNE captures economies of scale in terms of size, output,

12-5

or scale of operation. Increasing output lets it distribute fixed costs across a

higher number of units, thereby systematically decreasing per-unit cost.

3. Experience and Learning Effects. Industry and firm conduct confirms that

low costs create strategic advantage. Hence, MNEs look to capitalize on the

scale and scope of their operations to exploit potential cost minimization via

experience and learning effects.

4. The Risks of Configuration Choices. Configuration decisions face the

risks of unpredictable market change. Disruptions, such as a regime change,

material shortages, labor unrest, or currency instability, can quickly convert

an efficient location into a costly one.

VI. GLOBAL INTEGRATION VERSUS LOCAL RESPONSIVENESS

Competing in the global marketplace puts an MNE on the horns of a dilemma:

should it single-mindedly standardize products and processes and resolutely exploit

location effects to maximize the efficiency gains of global integration? Or, should it

adapt products and processes to the unique situations in each market in order to

maximize the effectiveness benefits of local responsiveness? As we see in Table

12.6, significant motivations endorse each imperative.

A. The Potential for Standardization

The convergence of national markets, standardization of business, and efficiency

imperatives push MNEs to integrate activities.

B. The Characteristics of Consumer Preferences

Differences in local consumers’ preferences endure due to cultural redisposition,

historical legacy, and latent nationalism. Responding to local customers’

preferences requires customizing products and processes. Adaptation reduces the

efficiencies of standardization, thereby aggravating the liability of foreignness,

inflating operational costs, and reducing value creation.

C. The Effect of Institutional Agents

Aspects of standardization endorse global integration whereas the issue of

divergent consumer behaviors endorses local responsiveness. A third factor,

institutional agents and their policy agendas, can, at different times, support

either scenario. Various transnational institutions, such as the IMF, WTO, and

World Bank, build an increasingly seamless global business environment. On

the other hand, institutional agents, particularly host governments, often strongly

encourage, if not compel, local responsiveness.

D. Global Integration and Local Responsiveness: Mapping their

Interaction

Operating internationally calls for configuring and coordinating operations in

ways that reconcile the competing demands of global integration and local

responsiveness. The Integration-Responsiveness (IR) Grid provides a

straightforward framework to organize analysis (see Figure 12.4). Procedurally,

12-6

it positions an industry in the quadrant that represents its sensitivity to the dual

imperatives. As such, it provides executives a framework to interpret the

challenge. The IR Grid helps managers map their strategic options given

prevailing pressures for standardization and adaptation in their particular

industry

VII. INTERNATIONAL CORPORATE-LEVEL STRATEGIES

Corporate-level strategy determines the actions an MNE takes to gain a competitive

advantage by selecting and managing its business across a group of nations. A

corporate-level strategy (1) articulates how managers plan to reconcile global

integration and local responsiveness in ways that support the MNE’s vision and

mission, (2) stipulates how managers will integrate the MNE’s various parts into a

strategic whole, and (3) specifies the decision-making role the headquarters and

subsidiaries take doing so. The international, localization, global standardization, and

transnational strategies anchor contemporary interpretation. Table 12.7 profiles the

principles and practices of each archetype.

A. International Strategy. The international strategy emphasizes the transfer

of core competencies from the domestic operation to foreign subsidiaries. It

allows for limited local customization. Examples of companies using this

strategy include Airbus, Apple, and Google.

1. Advantages. The international strategy works well when an MNE’s

products or processes speak to a universal customer preference.

2. Limitations. Headquarters’ confidence in the superior competitiveness of

its competencies discourages local adaptation. Initially, this outlook does

not carry high risks. But, as an MNE expands its global operations, a

one-way view of the world may miss opportunities or misread threats in

foreign markets. Moreover, the international strategy sustains strong

performance as long as foreign rivals scramble futilely.

B. The Localization Strategy. The localization strategy encourages

decentralized decision-making so that local subsidiaries can adjust value

activities to local circumstances.

1. Advantages. The localization strategy superbly speaks to the unique

features of consumer preferences, market situations, and environmental

context found in a national market. It drives MNEs to customize products

and processes. The localization strategy gives the MNE’s local units a

distinctive advantage against in-country competitors who lack the

benefits provided by the parent company.

2. Limitations. The localization strategy, by encouraging operational

overlap, increases overhead expenses.

C. Global Strategy. A global strategy requires worldwide consistency and

standardization in order to be effective. Firms that choose the global strategy

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face strong pressures for cost reductions but weak pressure for local

responsiveness. Operationally, MNEs that adopt a global strategy usually are or

aim to become the low-cost player in their industry. This generally requires

global-scale production facilities in a few low-cost locations.

1. Advantages. The transnational strategy reconciles global integration and

local responsiveness in ways that leverage the MNE’s core competency

throughout worldwide operations.

2. Limitations. The transnational strategy is difficult to implement in

practice, given the challenges of complicated agendas, high costs, and

cognitive limits.

D. Transnational Strategy. The transnational strategy targets the efficiency of

global integration, the effectiveness of local responsiveness, and the systematic

diffusion of innovations.

1. Advantages. The global strategy exploits economies of scale, learning

effects, and location economies in order to translate the MNE’s resources

and capabilities into core competences that support cost leadership

worldwide.

2. Limitations. The cost sensitivity of the global strategy leaves MNEs little

latitude to customize processes or products to local conditions; each

change reduces efficiency. Hence, an MNE’s success is a function of the

validity of the ‘one type product fits all customers’ needs worldwide’

thesis.

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