Course Coordinator: Dr.

Ajmal Waheed Presenter: Sohail Hamayon Khan

A satisfied customer is the best business strategy of all Michael LeBoeuf

Learning Objectives
Identify why international Business strategies are

formed Understand the concept and Implementation of International business strategies Think like Manager

Books Articles Consulted

International business 5th edition by McGraw Hill
International Business Czinkota 8th edition
International Business by U. C. Mathur Cambridge University Press International Business

Strategy: Rethinking the Foundations of Global Corporate Success International Business, 4th Edition Griffin & Pustay

Out Line
Part 1: Introduction to International Business Strategies What is Strategy and firms goal Why to go global Bases of strategy Basic Strategies Part 2: Strategies and Organization Architecture Organization architecture and profitability Vertical differentiation Horizontal integration Integrating mechanisms Control systems & incentives

Out Line
Part 3: Strategy implementation
Basic foreign expansion entry decisions Entry modes Selecting an entry mode

Class Activity

What is Strategy and firms goal

Strategy: actions that managers must take to attain

the goals of the firm

Main goal usually to maximize long-term profit , (EPS) Profitability defined by return on sales or return on

equity
Think strategic, not operational - this is what makes a

great CEO

Value creation
Profit determined by :
The amount of value customers place on firms goods or services Firms cost of production

Consumer surplus occurs when price charged by a firm on a good or

service is less than value placed on it by a customer

Firm creates profit by increasing value or lowering cost Two basic strategies to create value and attain competitive advantage

according to Porter:
Low cost Differentiation strategy

Firm as a value chain

Strategy in international business

Strategy is concerned with identifying and taking

actions that will lower costs of value creation and/or differentiate the firms product offering through superior design, quality service, functionality, etc.

Why to go global
Location economies
Cost economies from experience effects Leveraging core competencies Leveraging subsidiary skills

BUT
Profitability is constrained by product customization

and the imperative of localization.

Location economies
Realized by performing a value creation activity in an optimal

location anywhere around the globe

Often arise due to differences in factor costs

It can lower costs of value to enable low cost strategy and/or

Help in differentiation of products from competitors Global web: different stages of value chain are dispersed to those

locations where perceived value is maximized or costs of value creation are minimized

Experience effects
The systematic reduction in production costs that

occurs over the life of a product

First observed in aircraft industry where unit costs

reduced by 80% each time output was doubled

Caused due to
Learning effects
Economies of scale

Learning effects
Cost savings that come from learning by doing
Arises due to increased worker productivity and

management efficiency
Significant in cases of technologically complex task as there

is a lot to be learned
Experienced during start-up phase, cease after two or three

years
Decline after this point comes from economies of scale.

Economies of scale
Refers to reduction in unit cost by producing a large

volume of a product
Sources:
Reduces fixed costs by spreading it over a large volume Ability of large firms to employ increasingly specialized

equipment or personnel

Strategic significance of the experience curve

The firm that moves down the

experience curve most rapidly

has a cost advantage over its

competitors
Serving the global market

from a single location helps to establish low cost strategy

Aim to rapidly build up sales

aggressive marketing strategies and first-mover advantages

Leveraging subsidiary skills

Value created by identifying them

and applying it to a firms global

Unique skills and ideas often developed in foreign subsidiaries

network of operations
Some Challenges:
Managers must create an

environment where incentives are given to take necessary risks and reward them
Need a process to identify new skill

development
Need to facilitate transfer of new

skills within the firm

Leveraging core competencies

Core competence: Skills within the firm that competitors cannot

easily match or imitate

Earn greater returns by transferring these skills and/or unique

product offerings to foreign markets who lack them

(McDonalds)
Examples:
Consumer marketing skills of U.S. firms allowed them to

dominate European consumer product market in 1960s and 70s

Bases of strategy
Pressures for cost reductions
Pressures for local responsiveness

Pressures for cost reductions

Intense in industries of standardized, commodity type

product that serve universal needs

Major competitors are based in low-cost locations Consumers are powerful and face low switching costs Liberalization of world trade and investment environment Examples
Bulk chemicals, petroleum, steel, personal computers

Pressures for local responsiveness

Differences in consumer tastes & preferences
North American families like pickup trucks while in Europe it is viewed as a utility vehicle

for firms

Differences in infrastructure & traditional practices

Consumer electrical system in North America is based on 110 volts; in Europe on 240 volts

Differences in distribution channels

Germany has few retailers dominating the food market, while in Italy it is fragmented

Host-Government demands
Health care system differences between countries require pharmaceutical firms to change

operating procedures

Pressures for cost reduction and local responsiveness

Tailoring world cars to the U.S. market

Japanese automobile manufacturers customize car design

to tastes of American consumers

Toyota released the Tundra with V8 engines which looks like a

heavy-duty pickup truck with a powerful engine

Nissan let U.S. engineers and planners be completely responsible

for development of most vehicles sold in North America

Honda customizes the Pilot, its next generation SUV according to

tastes for American families who wanted bigger vehicles with three row seating

Basic Strategies
Four basic strategies to enter and compete in the

international environment:
International strategy Multi domestic strategy Global strategy

Transnational strategy

Four basic strategies

International strategy
Create value by transferring valuable core competencies to

foreign markets that indigenous competitors lack

Centralize product development functions at home

Establish manufacturing and marketing functions in local

country but head office exercises tight control over it

Limit customization of product offering and market strategy
Strategy effective if firm faces weak pressures for local responsive and

cost reductions

International strategy
Focus Taking products from your local country and without much customization, selling them in other markets. Method Centralize product development functions Tend to establish manufacturing and marketing functions in each major country or geographic region in which they do business. Increases costs but there are no cost pressures so that isnt an issue May decide to do some minor customization of the marketing strategy When to use it Low cost pressures Low need for local responsiveness Selling products that serve universal needs Do not have many competitors

Multidomestic strategy
Main aim is maximum local responsiveness
Customize product offering, market strategy including

production, and R&D according to national conditions

Generally unable to realize value from experience

curve effects and location economies

Possess high cost structure

Multidomestic strategy
Focus Increase profitability by customizing goods to match tastes and preferences in international markets Method Increase the value of the product in the local market Duplication of functions Smaller production runs Still need to be as efficient as possible When to use it When cost pressures are not high When local tastes differ dramatically When you have fewer competitors

Global strategy
Achieving a low cost strategy by reaping cost reductions that

come from experience curve effects and location economies

Production, marketing, and R&D concentrated in few favorable

functions
Market standardized product to keep costs low Effective where strong pressures for cost reductions and low

demand for local responsiveness

Semiconductor industry

Global strategy
Focus Reaping cost reduction benefits through:
Economies of Scale Learning effects Locations economies

Low Cost on a Global Scale

Method R&D, Production and Marketing activities are concentrated in a few favorable locations Try not to customize their products/marketing strategy Use aggressive pricing When to use it Strong pressures for cost reductions Minimal demand for localization

Transnational strategy
To meet competition firms aim to reduce costs, transfer core

competencies while paying attention to pressures for local responsiveness

Global learning
Valuable skills can develop in any of the firms world wide operations Transfer of knowledge from foreign subsidiary to home country, to other

foreign subsidiaries

Transnational strategy difficult task due to contradictory demands

placed on the organization

Transnational strategy
Focus Multidirectional transfer of core competencies and skills Leveraging subsidy skills Try to achieve low costs through location economies, economies of scale and learning effects while differentiating their products for the local market. Very difficult to accomplish Method Redesign products to use the same components and produce them in one location Use assembly plants in key markets to assemble the more market specific final product When to use it When customization and cost reduction pressures are high When managers have to balance the divergent pressures

Organization architecture and profitability

Totality of a firms organization, including structure,

control systems, incentives, processes, culture and people.

Superior organization profitability requires three

conditions:
An organizations architecture must be internally consistent. Strategy and architecture must be consistent. Strategy, architecture and competitive environments must be

consistent

Organization architecture and profitability

Organizational architecture
Organizational structure: Location of decision-making

responsibilities within the structure (vertical differentiation)

Formal division of the organization into subunits e.g. product

divisions (horizontal differentiation)

Establishment of integrating mechanisms including cross-

functional teams and or pan-regional committees

Control systems : metrics used to measure performance of

subunits and judge managerial performance

Organizational architecture
Incentives: Devices used to reward appropriate

employee behavior
Closely tied to performance metrics

Processes: Manner in which decisions are made and

work is performed

Organizational architecture
Organizational culture: Values and norms shared

among employees of an organization

Strategy used to manage human resources

People: Employees
Strategy used to recruit, compensate, and retain

individuals with necessary skills, values and orientation

Vertical differentiation
Concerned with where

decisions are made

Where is decision

making power concentrated?

Two Approaches
Centralization Decentralization

Vertical differentiation
Centralization:
Facilitates coordination.

Decentralization:
Overburdened top

Ensure decisions consistent

management.
Motivational research favors

with organizations objectives.

Top-level managers have

means to bring about organizational change.

Avoids duplication of

decentralization.
Permits greater flexibility.
Can result in better decisions. Can increase control

activities

Strategy and organization structure

Global strategy : aim to realize location and experience economies

International firms: maintain centralized control over their core

Centralization of some operating decisions

competency and decentralize other

decision to foreign subsidiaries Transnational firms: aim to realize location and experience curve economies

Multi-domestic firms: aim for local responsiveness

Decentralizing operating decisions to foreign subsidiaries

Centralized control over global production centers

Need to be locally responsive

A typical functional structure

A typical product divisional structure

One Companys international division structure

Structure of the international division

International division
Organized on geography Initially export goods to foreign subsidiary but later outsource

production

Problems
Heads of foreign subsidiaries relegated to second-tier position

Lack of coordination between domestic and foreign operations

Therefore firms begin adopting worldwide structures

A worldwide area structure

Worldwide area structure

Favored by firms with low degree of diversification.
Area is usually a country. Largely autonomous.

Facilitates local responsiveness.

Worldwide area structure

Worldwide area structure
Favored by firms with low degree of diversification &

domestic structure based on function

World is divided into autonomous geographic areas
Operational authority decentralized Facilitates local responsiveness Fragmentation of organization can occur Consistent with multidomestic strategy

A worldwide product division structure

World wide product divisional structure

Reasonably diversified firms.

Attempts to overcome international division and worldwide area structure problems.

Weak local responsiveness. Believe that product value creation activities should be coordinated worldwide.

World wide product divisional structure

Adopted by firms that are reasonably diversified
Original domestic firm structure based on product division Value creation activities of each product division coordinated by

that division worldwide

Help realize location and experience curve economies Facilitate transfer of core competencies

Problem: area managers have limited control, subservient to

product division managers, leading to lack of local responsiveness

A Global matrix structure

Matrix structure
Attempts to meet needs of transnational strategy. Doesnt work as well as theory predicts. Flexible matrix structures.

Conflict and power struggles.

Global matrix structure

Helps to cope with conflicting demands of earlier strategies
Two dimensions: product division and geographic area Product division and geographic areas given equal

responsibility for operating decisions

Problems
Bureaucratic structure slows decision making Conflict between areas and product divisions Difficult to make one party accountable due to dual responsibility

Integrating mechanisms
Need for coordination follows the following order on an ascending basis
High

Low

Transnational companies Global companies International companies Multidomestic companies

Integrating mechanism
Impediments to coordination
Differing goals and lack of respect Different orientations due to different tasks Differences in nationality, time zone & distance Particularly problematic in multinational enterprises

with its many subunits both home and abroad

Formal integrating mechanisms

Informal integrating mechanisms

Informal management networks supported by an organization

culture that values teamwork and a common culture

Non-bureaucratic flow of information It must embrace as many managers as possible Two techniques used to establish networks
Information systems Management development policies

Rotating managers through various subunits on a regular basis

Control systems & incentives

Types of control systems Personal controls Bureaucratic controls Output controls Cultural controls Incentive systems Refer to devices used to reward appropriate behavior Closely tied to performance metrics used for output controls

Basic foreign expansion entry decisions

A firm contemplating foreign expansion must make

three decisions
Which markets to enter When to enter these markets What is the scale of entry

Which foreign markets

Favorable
Politically stable developed and developing nations Free market systems

No dramatic upsurge in inflation or private-sector debt

Unfavorable
Politically unstable developing nations with a mixed or

command economy or where speculative financial bubbles have led to excess borrowing

Timing of entry
Advantages in early market entry:
First-mover advantage. Build sales volume. Move down experience curve and achieve cost advantage. Create switching costs.

Tie customers to your product.

Disadvantages:
First mover disadvantage - pioneering costs. Changes in government policy

Scale of entry
Large scale entry
Strategic Commitments - a decision that has a long-term impact and is difficult

to reverse.
May cause rivals to rethink market entry.

May lead to indigenous competitive response

Jollibee Example

Small scale entry:

Time to learn about market. Reduces exposure risk.

Lack of Commitment problems

Entry modes
Exporting
Turnkey Projects Licensing

Franchising
Joint Ventures Wholly Owned Subsidiaries

Exporting
Advantages:
Avoids cost of establishing manufacturing

operations May help achieve experience curve and location economies

Disadvantages:

May compete with low-cost location manufacturers Possible high transportation costs Tariff barriers Possible lack of control over marketing reps

Local Agent Problems

Turnkey projects
Advantages: Can earn a return on knowledge asset

Contractor agrees to handle every detail of project for foreign client

Earn $ on Know How

Less risky than conventional FDI

Disadvantages: No long-term interest in the foreign country May create a competitor Selling process technology may be selling competitive advantage as well

Licensing

Advantages Licensee puts up most of the capital Good for firms lacking capital Prohibited from direct investment in a foreign market Disadvantages (3 serious ones) Does not give tight control over manufacturing, marketing, strategy, etc. that is required for realizing the experience curve and location economies. Limits a firms ability to share wealth amongst various divisions, and therefore limits a coordinated international strategy Giving away your comparative advantage

Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties.

Franchising
Advantages: Reduces costs and risk of establishing enterprise Disadvantages: May prohibit movement of profits from one country to support operations in another country Quality control
Franchiser sells intangible property and insists on rules for operating business

Joint Ventures
Advantages: Benefit from local partners knowledge. Shared costs/risks with partner. Reduced political risk. Disadvantages: Risk giving control of technology to partner. May not realize experience curve or location economies. Shared ownership can lead to conflict

Wholly owned subsidiary

The firm owns 100% of the stock in the project. Can

be done through a Greenfield venture, where you build a factory from scratch or via acquisition of an existing enterprise Advantages:
No risk of losing technical competence to a competitor Tight control of operations. Realize learning curve and location economies.

Disadvantage: Bear full cost and risk