International Strategy

Strategy & The Firm

Expansion, Profitability & Growth

Cost & Responsiveness Pressures

International Strategies

Overview What is strategy? What are some of its key components? How is global strategy different? What is competitive advantage? What is economic value? What are some of the principal ways of entering

foreign markets? What are the 2 main drivers of International

Strategy? What are the 4 international strategies?

Strategy

What is Strategy? Military: “Maneuvering large scale forces

into the most advantageous position to engage with the enemy.”

Strategy

Business Historian Alfred Chandler Combines

Setting of long term goals and objectives with Decisions and resources necessary to

accomplish them.

Strategy

In business competitive move to enhance firm’s performance.

Management’s game plan Strengthening firm’s competitive position

Satisfying customers Achieving performance targets Growing the company Shrinking the company?

Strategy

Strategy Top management for perspective & resource

allocation. Substantial resource allocations: finance, personnel,

asset allocations. Long term planning horizon: 5 years or more. Future oriented & forward looking Affects and is affected by the external environment. Involves choices and trade-offs

Decisions? Ian/trigger puller

Strategy Questions

Strategists Ask: Where are we now? Where do we want to go? How will we get there from here?

International Strategy

Major components are the same. Long term. Goals & objectives. Decisions &

resources Also main objectives

Better long-term competitive position (Strategic)

Improved financial performance (Financial)

International Strategy

How is global strategy different? FX risk Similar in concept, more complicated in

execution More diverse customer base Transportation and other costs. Suppliers and buyer relationships. Distribution and sales networks Government programs and policies

Competitive Advantage

Drucker Purpose of business is to create customers.

Firms Create & deliver economic value. Capture a portion in the form of profits.

Competitive Advantage When firms create more economic value than

rivals

Competitive Advantage

Set the company apart from its rivals Tilt the playing field in the company’s favor Give buyers a reason to prefer the company’s

goods and services over its rivals’ Some superiority for the firm

Resources Skills Market position.

Competitive Advantage

Key elements Efficiency

Lower the costs of operations and activities Flexibility

Tap local resources and opportunities to help keep the firm and its products unique

Learning Add to its proprietary technology, brand name and

management capabilities by internalizing knowledge gained from international ventures.

Competitive Advantage

Sources of Competitive Advantage Low cost producer Highest quality product Intellectual property (patent, copyright) Superior customer service Convenient locations. Cheaper financing

Competitive Advantage

Dynamic Hard to sustain Stand pat recommendations distrusted at the

board level. Any competitive advantage is liable to erosion

from Technology Resourceful competitors Market changes.

Economic Value

Economic Value Difference between total perceived benefits

gained by customers and the full economic cost of the good or service purchased.

Economic Value

Maximum willingness to pay measures the perceived worth of one unit of the product to the customer B.

Producer combines inputs (labor, capital, raw materials) to make a product at full economic cost per unit C.

Economic Value is created if B-C is positive. Often not positive

Value Creation & Profit

Profit? Portion of economic value retained by the firm

Sale Price-Cost of Product. Full economic cost Profitability measure?

Profitability

Profitability Indicators? Gross margin (sales-cost of sales/sales) Net margin (net income/sales) Operating margin (operating

income/sales)

Generic Strategy

Grand Strategy Long term Core Idea How firm can best compete in the market

place.

Generic Strategy

Cost Leadership Standardized products at a very low per-unit cost Cost

Product Differentiation Products and services considered unique in the

industry Higher price Quality

CMEX

Mexican cement maker. 3rd largest in the world. Pursues cost leadership & cost efficiencies in all

markets. Per ton cost 1/3 less than the rest of the industry

Energy conservation. Full capacity utilization Economies of scale Integration of key business processes

Super Quinn

High end Irish grocery chain. Extremely fresh high quality merchandise

No bread more than 4 hours old. Very attentive customer service

Stock individual items at personal request Benefits produce higher unit costs for

merchandise and staffing. Customers willing to pay more for the benefit

Entry Modes

From least to most globalized. Exporting: Minimal capital investment. Maximum

production and quality control. Licensing: Transfer of some patent, trademark, or

technical know-how for production overseas. Low capital investment. Competition and quality problems

Franchising: Form of licensing allowing franchisee to market high profile brand or service for a fee.

JVs: Pooling of capital, production, or marketing with foreign partner

Direct Investment: Heaviest commitment of capital and managerial resources

Exporting

Sale of products produced in one country to residents of another country.

Often an initial strategy to pursue international sales Low risk way to test international waters No direct investments in foreign countries Minimizes both risk and capital requirements

Turnkey Projects

Firm agrees to set up an operating plant for a foreign client. Firm handles every detail of the project for a

foreign client, including the training of operating personnel

At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation

Liscensing

Firm grants the intellectual property rights to another entity (the licensee) for a specified time in exchange for a royalty fee. Intellectual property includes patents,

inventions, formulas, processes, designs, copyrights, and trademarks.

Could be compromised

Franchising Benefits

Franchisee bears most of costs andrisks of establishing foreign locations

Local market knowledge

Franchisor has to expend only theresources to recruit, train, and support franchisees

Costs May inhibit the firm's ability to take profits out of one

country to support competitive efforts attacks in another Brand reputation. Quality control.

The geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect

Joint Ventures

Involve the establishment of an entity that is jointly owned by two or more otherwise independent firms LUK/Argentina

Joint ventures are attractive when A firm can benefit from a local partner's knowledge of

the host country's competitive conditions, culture, language, political systems, and business systems

The costs and risks of opening a foreign market are shared with the partner

They can help firms avoid the risk of nationalization or other adverse government interference

FDI

Wholly owned subsidiaries involve 100 percent ownership of the stock of the subsidiary

Firms establishing a wholly owned subsidiary can set up a new operation in that country acquire an established firm

FDI

Wholly owned subsidiaries are attractive when they give the firm the sufficient control over

operations to secure global strategic coordination

they may be required to achieve realize location and experience curve economies

Wholly owned subsidiaries can be unattractive because firms bear the full costs and risks of setting up overseas operations

Strategy Drivers

Competitive pressures are strategy drivers Pressures for cost reductions Pressures to be locally responsive Standardize vs Customize Consistent?

Standardize

Cost Reduction Concentrating manufacturing in a few select locations to achieve

economies of mass production. Global sourcing of raw materials, components, energy,

and labor. Sourcing of inputs from large-scale, centralized suppliers provides

benefits from economies of scale and consistent performance. Converging consumer trends and universal needs.

Some markets are global. Nike, Dell, ING, and Coca-Cola offer products that appeal to customers everywhere.

Uniform service to global customers. Services are easiest to standardize when firms can centralize their

creation and delivery. eBay lower maintenance and development costs

Customize

Despite globalization, tastes & preferences in many local markets are quite different.

Success in such markets may require specialized production, advertising, or distribution that can add additional costs. Luk/Pepsi

Customize Firms may have to adjust to

Differences in consumer tastes & preferences North American families like pickup trucks while in Europe they are

viewed as a utility vehicle for firms Luk/Pepsi

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

International Strategies

Different combinations of 2 drivers International Strategies

International Localization Global Standardization Transnational

International Strategy Low pressures for standardization or customization Home Replication Mini-mes

Hierachical, centralized Wal-Mart, Microsoft, McDonalds

Managerial Control Local subs in each country administer business as

instructed by head quarters. Key value elements such as R&D and branding kept

at home. Manufacturing and marketing functions in local

country with tight head office control.

Localization

Low standardization. High customization Maximum local responsiveness

Customize product offering, market strategy including production and R&D according to national conditions

Higher cost. Duplication of design, production and marketing

activities. But could differentiate to add value or increase local

demand.

Global Standardization

High standardization, low market customization Lower cost Production, marketing, and R&D often organized by

functional business units. Products and marketing standardized

Effective where there is strong pressures for cost reduction and few pressures for local responsiveness Universal use products

Transnational

Most difficult to pull off. Pressures for cost reduction and local

responsiveness are both high. Firms seek to do both.

Caterpillar competing with Komatsu world wide.