Chapter 13

The Strategy of International Business

Intl Expansion = Profits & Growth

Profits/Growth: Global Value ChainWhat are Global Value Chains?Activities that are required to bring a product from its conception to its end use and beyond (R&D, Design, Production, Distribution, Marketing)

EXAMPLEGovernment of Malaysia – Plan for 2020For Electrical & Electronics IndustryIdentified:

• What they now do well – strong competenceAssembly & Production

• Limited competence – need to developFabrication (design) & Testing

• Collaboration needed with industry clustersProduction & Sales and Distribution

• New competence to be developedConcepts, Design & Marketing Segmentation

Global Value Chain - CHOICESCHOICES?Company(s) Involved Single Firm- Can be contained within a single firm, or Partered - Collaboration - Divided among different firms

Geography Single geographical location, or Spread over wider areas

Examples:Companies are increasingly: Outsourcing some of their activities to third-parties Offshoring - Locating parts of their supply chains outside

their home country, and Partnering with other firms through strategic alliances and

joint ventures

Operations: The Firm As A Value Chain

Support Activities Primary ActivitiesCompany Infrastructure

Information SystemsLogistics

Human Resources

Research & DevelopmentProduction

Marketing & SalesCustomer Service

Support Activities: Invisible from “outside” – internal to support what we doPrimary Activities: What we “do” Dell’s Global Value Chain

A picture can say a thousand words, but it can also be confusing (as above)

Steps in Value Chain Analysis

Three sequential steps (we will look at each step):

(1) Break down a market/organization into its key activitiesunder each of the major headings in the model

(2) Assess the potential for adding value via cost advantageor differentiation

(3) Devise strategies on activities where competitive advantage can be built/sustained

Primary Activities Support ActivitiesResearch & DevelopmentProductionMarketing & SalesCustomer Service

Company InfrastructureInformation SystemsLogisticsHuman Resources

Step 1: Identify Key Activities (identification)Let’s say you have a business:Small import & wholesale business - import products (from abroad) and sell them in the U.S.

(Step 1) Break down a market/organization into its key activities under each of the major headings in the model;Look in detail at what it is that you currently do in each of these areas:

Primary ActivitiesResearch & Development - Design of products, or developing new servicesProduction - Manufacturing, delivering the service, or selecting merchandiseMarketing & Sales - Branding, advertising, sales, or market researchCustomer Service - After-sales service and support

Support ActivitiesCompany Infrastructure - Organizational structure, cultureInformation Systems - Computer systems - inventory, sales, pricing, customer service,

Use of InternetLogistics - Shipping, receiving, warehousing, supply chain managementHuman Resources - Employee recruitment, retention, training

Step 2: Low Cost or Differentiation (assessment)

Let’s say you have a business:Small import & wholesale business - import products (from abroad) and sell them in the U.S.

(Step 2) How to add value - via cost advantage or differentiationLook in detail at what it is that you can do in each of these areas (assessment) Ask: How can we ADD VALUE?

Primary ActivitiesResearch & Development - collaborative design with overseas supplier, based on U.S. trendsProduction - selecting unique items, high margin items, economic order quantityMarketing & Sales - exclusive brand for productsCustomer Service - negotiate spare parts/RMA allocations

Support ActivitiesCompany Infrastructure - collaborative culture with outside firms<- cost & differentiationInformation Systems - automated inventory system, transparent system with suppliersLogistics - collaborate (w/suppliers) lower costs shipping, packaging, routingHuman Resources - bilingual staff, incentivize cost savings

Step 3: Build Strategies (integration)Let’s say you have a business:Small import & wholesale business - import products (from abroad) and sell them in the U.S.(Step 3) Build strategies on activities where competitive advantage can be built or sustained, via cost advantage or differentiationLook in detail at how to integrate ideas in each of these areas (integration):Ask: How can we ADD VALUE to our areas of strength?(Bolded areas below were chosen)

Primary ActivitiesResearch & Development - collaborative design with overseas supplier, based on U.S. trendsProduction - selecting unique items, high margin items, economic order quantityMarketing & Sales - exclusive brand for productsCustomer Service - negotiate spare parts/RMA allocations

Support ActivitiesCompany Infrastructure - collaborative culture with outside firms<- cost & differentiationInformation Systems - automated inventory system, transparent system with suppliersLogistics - collaborate (w/suppliers) lower costs shipping, packaging, routing

Example for CostcoHuman Resources - bilingual staff, incentivize cost savings

Building Value – Support Activities - Logisitics

Packaging Design for 2018

Look at the snap-on:From 3 cm deep to 1 cm

Location Decision Scorecards - on-line tools http://www.global-production.com

Which emerging markets have: 1) Local Demand Potential 2) R&D Capacity

Local Demand Potential and R&D CapacityActual numbers as of September 2015

Local Demand Potential R&D Capacity

Country Profiles 2016 (examples)Source: http://global-production.com/scoreboard/countries/

Mexico Malaysia

Manufacturing Wages

Low Cost Regions Change (over time)

Responding to changes in low cost regions will be vital into the future (as it has in the past)

Five years ago, China was “the” source for low cost products

Now, Indonesia and Vietnam are competing against inland China and parts of India for that same position

Add the importance of market proximity (whether to the U. S., Europe, or emerging urban markets in India and China) – Mexico gains importance …

3 Key Questions – Continually Ask

1. Where to source materials, components, subassemblies and finished goods?

2. What makes a particular area attractive and how long before the next “hot” region appears on the horizon?

3. Government infrastructure support for sustainable growth and improvement for years to come?

Services:Global Business Service Location Selection

Source: https://www2.deloitte.com/content/dam/Deloitte/be/Documents/realestate/Deloitte_GLS_Choosing_the_right_Global_Business_Service_Location.pdf

Reshoring 2008 - 2014 (moving outsourced mfg. jobs back to the U.S.)

Source: https://agmetalminer.com

Global Manufacturing Competitiveness Index(China, U.S., and Germany at Top)

Reshoring & FDI trends will make U.S. most competitive by 2020 **** Depends upon taxes (fiscal policy)

Source: http://www2.deloitte.com/us/en/pages/manufacturing/articles/global-manufacturing-competitiveness-index.html

Outsourcing – CrowdSource and Upwork

http://www.crowdsource.comBreaks work into small tasksand outsources them

Global Time Efficiency –Start in LA work 8 hoursLondon work 8 hoursHong Kong work 7 hoursBack to LA – 3 days of workdone in 1 day (24 hrs )

Another site:https://www.upwork.com/Outsource any task – ORFind work Film

When we expand globally – the question is:

Global Integration vs.

Local Responsiveness?

Global Integration vs. Local Responsiveness

2 Types of Pressure:

1.Global Integration – Price pressure Globalization of markets: Convergence of customer

preferences for similar products, minimal costs, and maximum value

Globalization of production: Standardization brings efficiency

2.Local Responsiveness – Adapt locally to compete Customer divergence: differences in culture, national

attitudes, and economic and usage conditions Host government policies: economic freedom, product

and workplace regulation, buy-local legislation

Integration vs. Responsiveness –Determines Strategy

Ask TWO questions to determine strategy:

1. Must we compete on price (is standardization necessary)?Yes = High Integration No = Low Integration

2. Must we adapt our products/services to each market (is adaptation necessary)?Yes = High ResponsivenessNo = Low Responsiveness

Microsoft L Integration/L Responsiveness = International StrategyIntel H Integration/L Responsiveness = Global Standardization StrategyJohnson & Johnson L Integration/H Responsiveness = Localization StrategyGeneral Electric H Integration/H Responsiveness = Transnational Strategy

Choosing A Strategy

International Strategy

MicrosoftThe international strategy makes sense when: Customer tastes are similar L Responsiveness Pricing pressure is low L Integration1. Exploit global opportunities2. Concentrate on core competence

Localization StrategyJohnson & JohnsonThe localization strategy makes sense when: Customer tastes vary among countries H Responsiveness Pricing pressure is low L Integration 1. Subsidiaries run autonomous units2. Customize goods or services to local needs

How Johnson & Johnson sought new markets – FILM (4 min)

Global Standardization Strategy

IntelThe global standardization strategy makes sense when: Customer tastes are similar L Responsiveness High price competition H Integration1. Views the world as a single market2. Low-cost strategy on a global scale

Transnational Strategy

General ElectricThe transnational strategy makes sense when: Customer tastes vary among countries H Responsiveness High price competition H Integration1. Flexible value chain enables customization2. Coordination enables integration globally

Changes in Strategy over Time

McDonald’s StrategyBring your textbook to our Organization class session

McDonald’s Global Strategy – TransnationalFILM

1. What do they do Globally to reduce costs (standardize)?

2. What 5 reasons to localize (adaptation)?

1: Standardization (Integration)Standardized productsGlobal brandsGlobal customer satisfactionGlobal menu item research

2: Adaptation (Responsiveness)Local tastes and customsLocal competitionLocal government lawsLocal franchise operationsLocal service quality

Candy Bars

Give me a break …Give me a break …Break me off a piece of that Kit Kat Bar!

Made by Nestle worldwide –Except in the U.S. (licensed to Hershey)

Which country has the most variety?

Japan – Over 200 varieties of Kit KatWhy?

Convenience store business modelrequires that stores bring in new products every 2-3 weeks …

Go to: http://www.doingbusiness.org

Click “Explore Economy Data” -> Click on your assigned country:

Doing Business in..-----------------------------------

Identify Overall Rank

Identify Best Element (smallest #)

Identify Worst Element(highest #)

Describe, based on data, if you would consider doing business in this country …