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Global Business Today Eleventh Edition Chapter 12
12-1
The Strategy of International Business
Table of Contents
Learning Objectives
Chapter Summary
Chapter Opening Activity
Chapter Outline
Opening Case: Red Bull, A Leader in International Strategy
Introduction
Strategy and the Firm
Global Expansion, Profitability, and Profit Growth
Cost Pressures and Pressures for Local Responsiveness
Choosing a Strategy
Strategic Alliances
End-of-Chapter Resources
Critical Thinking and Discussion Questions
globalEDGE™ Research Task
Closing Case: Sony Corporation: An International Innovator?
Continuous Case Concept
Additional Readings and Sources of Information
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Learning Objectives
12-1 Explain the concept of international business strategy.
12-2 Recognize how firms can profit by expanding globally.
12-3 Understand how pressures for cost reductions and pressures for local responsiveness
influence strategic choice.
12-4 Identify the different international strategies for competing and their pros and cons.
12-5 Explain the pros and cons of using strategic alliances to support international 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 global standardization,
localization, transnational, and international strategies. The advantages and disadvantages of
each of these strategies are discussed. The chapter concludes with a discussion of international
strategic alliances.
Chapter Opening Activity
Ask students if they’ve traveled internationally, and if they’ve seen and used any products or
services there that they recognize from their home country: in the U.S., that could mean
McDonald’s, Coca-Cola, Burger King, Starbucks, Midas Muffler, Hertz, or Avis.
• Ask if their experience with the product or the service was the same in the foreign
country as it was at home. What differences did they experience? Why?
• Explain that this is part of a company’s international strategy, and that companies have to
make choices between global integration and local responsiveness.
• Ask them to research one or several of those companies and find out how they respond to
local customers’ wants and needs, while keeping the company globally integrated. A
Google search for the companies’ websites is a quick method.
Ask students about some other companies: Dannon, Michelin, Nestlé, and Bayer. Did they know
that Dannon, the yogurt maker (actually Danone), and Michelin, are French; that Nestlé is Swiss,
and that Bayer is a German chemical company that invented aspirin?
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• Explain that they may not have known because those companies do a very good job
adapting to local customer needs such that consumers are often unaware that they are
actually foreign companies.
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Chapter Outline
Red Bull, A Leader in International Strategy
opening case
Summary
The opening case describes international strategy at Red Bull GmbH. The company, founded in
Austria by Austrian Dietrich Mateschitz and Chaleo Yoovidhya of Thailand, owns the
bestselling energy drink, Red Bull, on the market. Moreover, the company has created a product
that is standardized globally, yet most people think it is a local product. Red Bull’s image and
message focuses on having amazing energy, being a go-getter attitude, and enjoying fun risk. To
that end, the company markets its products at various extreme sporting events around the world.
Discussion Questions
1. How would you describe the strategic positioning of Red Bull? Can you think of any other
company that has followed a similar strategy?
2. Discuss the marketing strategy used by Red Bull. How has its association with extreme sports
events made it easier for it to create a global product and global image?
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Introduction
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 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.
Did You Know Video Clip
The video clip asks: “Did you know Fedex's global strategy focuses on more than
transportation?”
1. When was FedEx founded, by whom, and how?
2. What did Fred Smith see as the challenge for global delivery systems?
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3. Why is FedEx no longer just a transportation company? Where do most of FedEx’s customers
live?
less about transportation and more about on-time delivery and keeping customers satisfied.
Teaching Tip: Visit FedEx’s websites, and try their tools that could help businesses (and
students) predict costs and transactions for international shipments:
https://www.fedex.com/en-us/shipping/international-shipping-guide.html.
CONNECT
Video Case
Raytheon CEO on Business Strategy, Opportunities, and International Growth
Summary
This activity focuses on international strategy at Raytheon. Managers need to understand the
different strategies that can be used to compete, their advantages and drawbacks, and the factors
that influence strategic choice.
Activity
Students are asked to watch a video on international strategy and then respond to a series of
questions related to the video.
Class Discussion
International managers need to understand how the actions they take influence how the company
will compete in the international marketplace. Discuss international strategy, global expansion,
profitability and profit growth, and the choice of strategy.
CONNECT
Click and Drag
Strategy and the Firm
Summary
This activity focuses on the choices managers make as they choose how their organization will
compete. Managers must pursue strategies that increase the profitability of the organization and
its growth over time.
Activity
Students are asked to match descriptions related to the choices a firm makes to the organization’s
strategy, operations, or organization.
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Class Discussion
Expanding into foreign markets can boost a firm’s profitability and growth. Making the choices
of how to best execute an expansion requires the organization to understand the competing
demands in the marketplace. Discuss the variables that might influence a firm’s choice of
strategy.
STRATEGIC POSITIONING
E) Michael Porter notes that it is important for a firm to be explicit about its choice of strategic
emphasis on 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: Today’s fast-moving, hyper-competitive marketplace requires technology
companies to continually reassess their position in the market and innovate to stay relevant. To
extend this discussion, consider http://fortune.com/2018/09/24/business-strategy-technology-
mckinsey.
CONNECT
Video Case
FedEx’s Global Strategy
Summary
This activity focuses on strategy in the international firm, specifically on international strategy at
FedEx.
Activity
Students are asked to watch a video on FedEx and then respond to a series of questions related to
the video.
Class Discussion
It is important for international managers to understand the concept of value creation as the
cornerstone of a successful international strategy. Discuss how Fed Ex competes in the
international marketplace.
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management FOCUS: AB InBev, Beer Globally, and Creating
Value
Summary
This management focus feature describes the global strategy and foundation of AB InBev.
Originating in Belgium in 1366 and the United States in 1852, the company has operations in 25
countries and sales in over 100 countries. AB InBev has more than 200 brands with some
holding the status of global brands, others are international brands, and still more brands are
considered local champions. The overall perspective of AB InBev’s global strategy is “Dream-
People-Culture,” which indicates that the company aims to operate as one company with one
dream and one organizational culture uniting them, despite operating worldwide in many
different national cultures.
Discussion Questions
1. AB InBev categorizes its brands into at least three categories: global brands, international
brands, and local champions. Discuss the differences across these three different types of brands.
2. Discuss the domain of the six zone presidents. Why do you think AB InBev divided duties in
this fashion?
Global Business Today Eleventh Edition Chapter 12
Copyright © 2020 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-
Hill Education.
12-9
Video Note: Consider expanding this discussion by exploring AB InBev’s strategy in China at
https://www.cnbc.com/2017/12/07/anheuser-busch-inbev-ceo-on-growth-in-the-premium-beer-
market-in-china.html.
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,
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).
Video Note: Norsk Hydro CFO Sees Strong Demand in U.S., China fits in well with this
discussion. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click
“Ctrl+F” on your keyboard to search for the video title.
Additionally, our McGraw-Hill Education International Business Video Library at
http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated
by key concept and major topic. Every new clip posted is supported by teaching notes and
discussion questions. Please feel free to leave comments in the library that you feel might be
helpful to your colleagues.
Primary Activities
H) The primary activities of a firm are 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.
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M) Processes are the way decisions are made and work is performed within the organization.
Organizational culture is the norms and value systems 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 their skills, values, and
orientation.
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
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
Video Note: To explore whether U.S. company business partnerships with Chinese
organizations add value, consider Are Chinese Business Partnerships A Good Deal for U.S.
Companies? in the International Business Library at http://bit.ly/MHEIBVideo. Click “Ctrl+F”
on your keyboard to search for the video title.
CONNECT
Click and Drag
Global Expansion, Profitability, and Profit Growth
Summary
This activity focuses on global expansion, profitability, and profit growth. Firms can grow by
entering new markets and capitalizing on opportunities not available to companies that only
compete in the domestic marketplace.
Activity
Students are asked to match various descriptions to the correct category of expansion,
profitability, or growth.
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Class Discussion
Expanding globally allows firms to increase their profitability and rate of profit growth. Discuss
the complex relationships between profitability and profit growth when making strategic
decisions about international expansion.
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.
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.
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
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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 include 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
K) Leveraging the skills created within subsidiaries and applying them to other operations within
the firm’s global network may create value. Managers must recognize that valuable skills can
arise from 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.
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CONNECT
Click and Drag
Cost Reductions and Local Responsiveness
Summary
This activity focuses on the competing pressures of cost reduction and local responsiveness when
choosing a strategy. Organizations must balance these pressures as they make their choices
among the four main strategic postures.
Activity
Students are asked to match various descriptions to the correct category of pressures for cost
reduction or pressure for local responsiveness.
Class Discussion
Finding a balance between pressure for cost reduction and pressure for local responsiveness can
be challenging. Discuss different pressures for cost reduction and for local responsiveness and
how a firm can respond.
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 Customer Tastes and Preferences
E) Strong pressures for local responsiveness emerge when consumer tastes and preferences differ
significantly between countries.
management FOCUS: IKEA’s Global Strategy
Summary
This feature 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
important to tailor its product line and sales approach to local preferences.
Discussion Questions
1. Why do you think IKEA uses a floorplan that “forces” the customers to move along a certain
path in the store?
2. Is it appropriate for IKEA to customize their furniture to each geographic location, for
example, differences between U.S. and European furniture? Some companies do not make these
changes, but IKEA does; why?
3. IKEA entered the United States in 1985 and China in the 2000s. But the company started in
1958; why did it take so long to move into the United States and China? Why do you think IKEA
is not in more than 28 countries today (there are almost 200 countries in the world)?
Differences in Infrastructure and Traditional Practices
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.
