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ADMS 3960 ADMS 3960 International Business International Business

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Page 1: Adms 3960 Class 6

ADMS 3960ADMS 3960International BusinessInternational Business

Page 2: Adms 3960 Class 6

Chapter 11

The Strategy of

International Business

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Chapter ObjectivesChapter Objectives

To identify how managers develop strategyTo identify how managers develop strategyTo examine industry structure, firm strategy, and To examine industry structure, firm strategy, and value creationvalue creationTo profile the features and functions of the value To profile the features and functions of the value chain frameworkchain frameworkTo assess how managers configure and To assess how managers configure and coordinate a value chaincoordinate a value chainTo explain global integration and local To explain global integration and local responsivenessresponsivenessTo profile the types of strategies firms use in To profile the types of strategies firms use in international businessinternational business

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The Role of Strategy in International The Role of Strategy in International BusinessBusiness

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Industry, Strategy ,and Firm Industry, Strategy ,and Firm PerformancePerformance

Industry organization paradigm leading Industry organization paradigm leading strategy perspectivesstrategy perspectivesThe exceptions of imperfect competitionThe exceptions of imperfect competitionThe idea of industry structure: The Five The idea of industry structure: The Five Forces ModelForces Model

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Five Forces ModelFive Forces Model

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Industry ChangeIndustry Change

Industry structure changes because of events like

• Competitors’ moves

• Government policies

• Changes in economics

• Shifting buyer preferences

• Technological developments

• Rate of market growth

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CompetitionCompetition

In its pure form it refers In its pure form it refers to the conditions that are to the conditions that are present in the present in the marketplace when marketplace when buyers and sellers buyers and sellers interact to establish interact to establish prices and exchange prices and exchange goods and services.goods and services.It refers to the means It refers to the means whereby the self interest whereby the self interest of buyers and sellers of buyers and sellers acts to serve the needs acts to serve the needs of society as well as of society as well as those of individual those of individual market participants.market participants.

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The Practical Significance of The Practical Significance of Perfect CompetitionPerfect Competition

A large number of small A large number of small firms and many buyers do firms and many buyers do not possess the power to not possess the power to influence the behavior of influence the behavior of the participants in the the participants in the marketplace.marketplace.That power is thoroughly That power is thoroughly dispersed throughout the dispersed throughout the marketplace.marketplace.Perfect Competition rarely Perfect Competition rarely exists in the real world.exists in the real world.

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Desirable Conditions for Workable Desirable Conditions for Workable CompetitionCompetition

1.1. A market structure with A market structure with at least two buyers and at least two buyers and two sellers, but two sellers, but preferably morepreferably more

2.2. A mixture of large and A mixture of large and small firmssmall firms

3.3. No collusion or No collusion or coercion among sellerscoercion among sellers

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Desirable Conditions for Workable Desirable Conditions for Workable CompetitionCompetition

4.4. As much market As much market information as information as possibly is possibly is available to buyers available to buyers and sellersand sellers

5.5. No barriers to No barriers to entry and exitentry and exit

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Strategy and ValueStrategy and Value

Strategy helps managers Strategy helps managers assess the company’s assess the company’s present situation, identify present situation, identify the direction the the direction the company should go, and company should go, and determine how the determine how the company will get there.company will get there.

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StrategiesStrategies

Strategy is a set of Strategy is a set of goals and policies goals and policies or actions to or actions to achieve those achieve those goals. goals. A strategic plan A strategic plan must link to sub-must link to sub-strategies at the strategies at the operations level.operations level.

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Strategic ProgrammingStrategic Programming

This focuses on, This focuses on, who what and how who what and how much. much. Day to day Day to day prioritiesprioritiesRoles and Roles and responsibilitiesresponsibilities

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Tactics and ExecutionTactics and Execution

This focuses on This focuses on how to get it done how to get it done Immediate Immediate objectives with a objectives with a focus on focus on adjustment based adjustment based on new informationon new information

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Michael PorterMichael Porter

Competitive strategy, is all Competitive strategy, is all about being different from about being different from others. As a nation or a others. As a nation or a company your differences company your differences will allow you to excel in will allow you to excel in areas that other will not.areas that other will not.Strategy is not about one Strategy is not about one activity, but a series of activity, but a series of complementary and complementary and reinforcing activities.reinforcing activities.

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What does strategy give us?What does strategy give us?

Organizational purposeOrganizational purposeCompetitive domainsCompetitive domainsInterpretations of opportunities, threats, Interpretations of opportunities, threats, strengths and weaknessesstrengths and weaknessesDefines managerial tasks and processesDefines managerial tasks and processesDefines the impact that the firm intends to Defines the impact that the firm intends to make on its shareholdersmake on its shareholdersDetermines investmentDetermines investment

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ValueValue

Value is what remains after costs have been Value is what remains after costs have been deducted from the revenues of a firm. Cost deducted from the revenues of a firm. Cost leadership emphasizes high production leadership emphasizes high production volumes, low costs, and low prices. volumes, low costs, and low prices. Firms that Firms that choose this strategy strive to be the low-cost choose this strategy strive to be the low-cost producer in an industry for a given level of producer in an industry for a given level of quality. This strategy requires that a firm sell quality. This strategy requires that a firm sell its products at the average industry price to its products at the average industry price to earn a profit higher than that of rivals or earn a profit higher than that of rivals or below the average industry prices to capture below the average industry prices to capture market share.market share.

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Value ChainValue Chain

What is the value chain?What is the value chain?A value chain disaggregates a firm into:A value chain disaggregates a firm into:• Primary activities that create and deliver Primary activities that create and deliver

the productthe product• Support activities that aid the individuals Support activities that aid the individuals

and groups engaged in primary activitiesand groups engaged in primary activities• Value chains identify the format and Value chains identify the format and

interactions between different activities of interactions between different activities of the company.the company.

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Porter’s Value ChainPorter’s Value Chain

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Purpose of The Value Chain? Cost Purpose of The Value Chain? Cost AnalysisAnalysis

1.1. Define the value chain in terms of Define the value chain in terms of sources of competitive advantagesources of competitive advantage

2.2. Establish the relative importance of each Establish the relative importance of each activity in terms of total product costactivity in terms of total product cost

3.3. Compare costs by activity and against Compare costs by activity and against competitorscompetitors

4.4. Identify cost driversIdentify cost drivers5.5. Identify linkages between activitiesIdentify linkages between activities6.6. Identify opportunities for reducing costsIdentify opportunities for reducing costs

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Using the Value ChainUsing the Value Chain

Using the value chain – leads to Using the value chain – leads to Configuration of the CompanyConfiguration of the Company Macro Cost FactorsMacro Cost Factors Logistics analysisLogistics analysis Industry ClustersIndustry Clusters DigitizationDigitization Economies of ScaleEconomies of Scale Business EnvironmentBusiness Environment

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DigitizationDigitization

The process of The process of digitization digitization involves converting an involves converting an analog product into a string of zeros and ones. analog product into a string of zeros and ones. Increasingly, products like software, music, and Increasingly, products like software, music, and books, as well as services like call centers, books, as well as services like call centers, application processing, and financial consolidation, application processing, and financial consolidation, can be digitized and, hence, located virtually can be digitized and, hence, located virtually anywhere. Equipped with networked computers, anywhere. Equipped with networked computers, workers can move goods and services anywhere in workers can move goods and services anywhere in the world at negligible cost and complication. the world at negligible cost and complication. Consequently, the potential for digitization of Consequently, the potential for digitization of goods or services influences how a company goods or services influences how a company configures its value chain.configures its value chain.

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ClustersClusters

An industry cluster An industry cluster is a system of is a system of businesses and businesses and institutions institutions engaged with one engaged with one another at various another at various levels.levels.

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ManufacturingManufacturing

Manufacturing Manufacturing costs vary from costs vary from country to country country to country because of wage because of wage rates, worker rates, worker productivity, productivity, resourceresourceavailability, and availability, and fiscal and fiscal and monetary policies.monetary policies.

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LogisticsLogistics

Logistics entails Logistics entails how companies how companies obtain, produce, obtain, produce, and exchange and exchange material and material and services in the services in the proper place and in proper place and in proper quantities proper quantities for the proper for the proper value activity.value activity.

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Economies of ScaleEconomies of Scale

The concept of The concept of economies of scale economies of scale refers to a situation refers to a situation wherein a firm doubles its wherein a firm doubles its cumulative output yet cumulative output yet total cost less than total cost less than doubles due to efficiency doubles due to efficiency gains. Effectively, gains. Effectively, reductions in the unit cost reductions in the unit cost of a product result from of a product result from the increasing efficiency the increasing efficiency that comes with larger that comes with larger operations.operations.

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Economies of ScaleEconomies of ScaleSources• The division of labour – This is related to

specialization particularly in mass production. Leads to lower unit costs, machinery output increased, quality control improvements, time savings.

• Economies of massed resources – Theory rests on the idea of large numbers. This is what insurance is based on. Any company needs excess resources and capacity. The larger the firm, the smaller the proportion of duplicate capacity needed.

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Economies of ScaleEconomies of ScaleSources• Firm-level economies

of scale– Administrative

economies– Financial economies– Marketing

economies

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Porter’s Value ChainPorter’s Value Chain

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Economies of ScaleEconomies of ScaleLimitsLimits• Diseconomies of scale in Diseconomies of scale in

distributiondistribution• Complexity of large-scale Complexity of large-scale

managementmanagement• Costs of product Costs of product

differentiation differentiation • HRM costs in large plantsHRM costs in large plants

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Economies of ScaleEconomies of Scale

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CoordinationCoordination

Coordination ConcernsCoordination ConcernsAs As companies globally configure companies globally configure value activities, they must develop value activities, they must develop coordination tools. Coordinated well, coordination tools. Coordinated well, MNEs can leverage their core MNEs can leverage their core competencies, using them to serve competencies, using them to serve customers, boost sales, and improve customers, boost sales, and improve profits. profits.

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National CulturesNational Cultures

Cultures impose hurdles in Cultures impose hurdles in coordinating a transaction coordinating a transaction from one stage of the value from one stage of the value chain to another. Units chain to another. Units anchored in individual versus anchored in individual versus collectivist cultures may collectivist cultures may disagree over information disagree over information sharing or collaboration sharing or collaboration responsibilities; conflicts responsibilities; conflicts complicate coordination. complicate coordination.

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National CulturesNational Cultures

Hence, features of Hence, features of national culture national culture require managers to require managers to understand their understand their implications to the implications to the collaborative collaborative relationship that relationship that shape the shape the coordination of value coordination of value activities.activities.

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Learning CurveLearning Curve

Learning curve is the Learning curve is the commonsense principle commonsense principle that the more one does that the more one does something, the better something, the better one gets at it.one gets at it.Companies configure Companies configure value chain activities to value chain activities to exploit the learning exploit the learning curve.curve.

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The Experience CurveThe Experience Curve

The Experience The Experience CurveCurve

Unit cost Unit cost reductions arising reductions arising from experience of from experience of productionproduction

Benefits accrue to Benefits accrue to first movers and first movers and those who facilitate those who facilitate learninglearning

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Experience leads to Core Competency

A core competency can emerge from various sources, including:• Product development• Employee productivity• Manufacturing expertise• Marketing imagination• Executive leadership

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Operational ObstaclesOperational Obstacles

Operating internationally inevitably Operating internationally inevitably runs into communication challenges runs into communication challenges because of time zones, differing because of time zones, differing languages, and ambiguous languages, and ambiguous meanings. Increasingly, companies meanings. Increasingly, companies rely on browser-based rely on browser-based communications methods to communications methods to coordinate the handoffs from link to coordinate the handoffs from link to link.link.

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Change and the Value ChainChange and the Value Chain

The configuration and coordination of value The configuration and coordination of value chains respond to changes in customers, chains respond to changes in customers, competitors, industries, and environmentscompetitors, industries, and environments..

Caveat: The Risk of StrategyCaveat: The Risk of Strategy

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Global Integration versus Local Global Integration versus Local ResponsivenessResponsiveness

Pressures for Global IntegrationPressures for Global Integration Globalization of MarketsGlobalization of Markets A provocative thesis, increasingly

supported by global buying patterns and companies’ strategies, suggests that consumers worldwide seek global products—whether they are Apple iPods, Samsung plasma screens, Facebook connections, Starbucks espressos, Google searches, or Zara blouses.

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Global Integration versus Local Global Integration versus Local ResponsivenessResponsiveness

Efficiency Gains of StandardizationEfficiency Gains of StandardizationGlobal and local pressures challenge how the firm configures and coordinates its value chain. The convergence of national markets and quest for production efficiency push for the global integration of value activities.

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Standardization

Standardization is the handmaiden of globalization, encouraging supply conditions that produce volumes of low-cost, high-quality products. That is, standardization is the push dynamic that drives supply, whereas the globalization of markets represents the pull dynamic that converges consumer preferences.

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Standardization

The logic of standardization is straightforward. Repeatedly doing the same task the same way improves the efficiency of effort. Improving efficiency in the value chain, in turn, supports aggressive product development, lower-cost production processes, and lower prices.

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Local ResponsivenessLocal Responsiveness

Contrary to the globalization-of-markets thesis, others argue that divergences in consumer preferences across countries necessitate locally responsive value chains.Differences in local consumers’ preferences endure due to cultural predisposition, historical legacy, and endemic nationalism. Regardless of the cause, consumers often prefer goods that are sensitive to the particular idiosyncrasies of their daily life.

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When Pressures InteractWhen Pressures Interact

The Integration-Responsiveness grid helpsThe Integration-Responsiveness grid helpsmanagers measure the global and localmanagers measure the global and localpressures that influence the configuration andpressures that influence the configuration andcoordination of their value chains.coordination of their value chains.

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Integration Responsiveness GridIntegration Responsiveness Grid

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Strategic Choices

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What Strategy to Pursue?Multidomestic Strategy

Competition in one country is independent of competition elsewhere.Markets in each country have different consumer behaviour.Portfolio of independent subsidiariesLeads to product diversity.

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From International to Global Strategy

Global StrategyCompetition in one country influenced by competition elsewhere.Markets and consumer behaviour broadly similar in all countries.International coordination and integration. Leads to product standardisation

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ToyotaOur global strategy used to center on ‘world cars’ which we would modify slightly to accommodate demand in different markets. Today our focus is shifting to models that we develop and manufacture for selected regional markets.

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Ford

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Transnational Strategies“Exploit experience-based cost economies and location economies, transfer distinctive competences within the company, and at the same time pay attention to pressures for local responsiveness”(Bartlett and Ghoshal, 1989)

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Why Global? Scale is important but..

1. Exposure to global best practices.

2. Access to technology

3. Ability to serve customers

4. Ability to anticipate competitors

5. Leaning and knowledge transfer

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Why Global? They are only viable if…

1. They serve locals better than the domestics

2. Are hard to copy

3. Are sustainable.

4. Change the economics of the industry

5. Are capable of further development.

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How to be BIG

MNEs go through three phases on the path to becoming a global powerhouse:1. First there was the nineteenth-century “international model, whereby the company was headquartered both physically and mentally in its home country; it sold goods, when it was so inclined, through a scattering of overseas sales offices.”

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How to be BIG

The third phase, the “globally integrated enterprise,” is one that builds a company-wide value chain that put people, jobs, and investments anywhere in the world “based on the right cost, the right skills and the right business environment . . . . now work flows to the places where it will be done best, that is, most efficiently and to the highest quality.”

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How to be BIG

Phase two of the evolution ushered in the classic, multinational firm of the late twentieth century. This model saw the parent company creating smaller versions of itself in foreign markets. These smaller satellite companies were run by home-nation executives sent from headquarters, who typically had great technical expertise but little cultural fluency and minimal foreign-language competency.

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Future: What’s New in the World of Future: What’s New in the World of Strategy TypesStrategy Types

Evolution of the Multinational CorporationEvolution of the Multinational CorporationVisions of the FutureVisions of the FutureThe “Metanational” CompanyThe “Metanational” Company““Micro-Nationals”Micro-Nationals”The “Cybercorp”The “Cybercorp”

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MetanationalMetanational

Thrives on seeking unique ideas, Thrives on seeking unique ideas, activities, and insights that activities, and insights that complement its existing operations as complement its existing operations as well as creating leverage points. The well as creating leverage points. The metanational company metanational company ““builds a new builds a new kind of competitive advantage by kind of competitive advantage by discovering, accessing, mobilizing, and discovering, accessing, mobilizing, and leveraging knowledge from many leveraging knowledge from many locations around the world.locations around the world.

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MetanationalMetanational

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Micro NationalMicro NationalAlthough the number of MNEs grows worldwide, Although the number of MNEs grows worldwide, their average size is fallingtheir average size is falling——most of the 70,000 most of the 70,000 or so firms that operate internationally employ or so firms that operate internationally employ less than 250 people. This anomaly signals the less than 250 people. This anomaly signals the era of so-called micro-multinationals: clever, era of so-called micro-multinationals: clever, small companies that are born global and small companies that are born global and operate worldwide from day one. Unlike their operate worldwide from day one. Unlike their bigger counterparts that expanded bigger counterparts that expanded internationally by gradually entering new internationally by gradually entering new markets, micro-multinationals go global markets, micro-multinationals go global immediately.immediately.

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CybercorpCybercorp

To this type of MNE, national boundaries To this type of MNE, national boundaries no longer organize consumers, locations, no longer organize consumers, locations, markets, or industries. Instead, the markets, or industries. Instead, the cyberspace created by evolving Internet cyberspace created by evolving Internet technologiestechnologies——not the physical geography not the physical geography of lines on a mapof lines on a map——defines markets. The defines markets. The cybercorp develops competencies that let cybercorp develops competencies that let it react in real time to changes in its it react in real time to changes in its customers, competition, industry, and customers, competition, industry, and environment.environment.

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Micro NationalMicro National