© Ram Mudambi, Temple University, 2007 1

Lecture 6The Strategy of International

Business

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What is the motivation for competing internationally?

Gain access to

new customers

Capitalizeon resource

strengths andcompetencies

Need toachieve

lower costsSpread business risk across wider

market base

Obtain access to valuable

resourcesMarket-seeking

Market-seeking

Asset-seekingAsset-seeking

Asset-seeking

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The U.K.The U.K. Continental EuropeContinental Europe

AustraliaAustralia

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ItalyItaly

GermanyGermany

SpainSpain

AustraliaAustralia

The U.K.The U.K.

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ItalyItaly

GermanyGermany

SpainSpain

AustraliaAustralia

The U.K.The U.K.

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The Role of Strategy

Strategy: Actions managers take to attain the goals

of the firm Identify and take action that

• lowers the cost of value creation and/or • differentiates the firm’s product through

superior design, quality, service, or functionality.

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Porter’s generic strategies

What Competitive DimensionWho Cost Differentiation

Competitive Broad Cost leadership Differentiation leadership

Scope Narrow Cost focus Differentiation focus

Offers low priced products

Offers unique or distinctive products

Serves the entire market Serves a specific niche

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Profiting from Global Expansion

International firms can: Earn a greater return from

distinctive skills or core competencies – leverage these in foreign markets

Realize location economies by dispersing value creation activities to locations where they can be performed most efficiently.

Realize greater experience curve economies, which reduces the cost of value creation.

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Locating activities to build global advantage

Two issues with regard to firm activities: Whether to concentrate in one or

two countries or disperse activities to many nations

Where to locate activities (which country is best location for which activity?)

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Global advantage: Concentrating vs. dispersing activities

Activities should be concentrated when Scale economies or experience curve effects need to be

captured Coordination of related activities is enhanced

Activities should be dispersed when They need to be performed close to buyers Transportation costs, scale diseconomies, or trade barriers

make centralization expensive Buffers for fluctuating exchange rates, supply interruptions,

and adverse politics are needed

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Location and the value chain - 1

Where to locateactivity X?

Optimal location for X considered independently

Importance of the links between X and other activities of the firm

Costs and availability

of inputs Trade policy

Strengths and skills of the firm relative

to the location

Strategy of the firm – cost vs. differentiation

advantages

Relative importance of

staff and line linkages

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Location and the value chain - 2Identify

key activities in the value chain principal requirements for each activity possible locations which meet the requirements

Final location decision must consider overall strategic objectives

Activities dictate location

Activities dictate location

Linkages dictate location

Linkages dictate location

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Inputs Markets

Value Value AddedAdded

R&DR&DKnowledgeKnowledge

MarketingMarketingKnowledgeKnowledge

VALUE CHAIN DISAGGREGATIONVALUE CHAIN DISAGGREGATION

Location 1 Location 2 Location 3 Location 4

The Smile of Value Creation** Mudambi, JIBS 2007* Mudambi, JIBS 2007

Vertically integrated firmVertically integrated firm

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Inputs Markets

R&DR&DKnowledgeKnowledge

MarketingMarketingKnowledgeKnowledge

VALUE CHAIN DISAGGREGATIONVALUE CHAIN DISAGGREGATION

Location 1 Location 2 Location 3 Location 4

The Smile of Value Creation*

* Mudambi, JIBS 2007* Mudambi, JIBS 2007

• Rich Countries

• Rich Countries

• Rich Countries

• Rich Countries

• PoorCountries

• PoorCountries

• Intangibles• Intangibles • Intangibles• Intangibles

• Tangibles• Tangibles

• Services• Services • Services• Services

• Manufacturing• Manufacturing

Catch-upCatch-up Catch-upCatch-up

Industry creation

Industry creation

Industry creation

Industry creation

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Location Economics

Pontiac LeMans

Design

GermanyGermany

Parts

Parts

Parts

SingaporeSingaporeTaiwanTaiwan

JapanJapan

Assembly

South KoreaSouth Korea

Advertising

The U.K.The U.K.

Sales

The U.S.The U.S.

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Caveats

The importance of linkages can be enhanced by Transportation costs Trade barriers Political and economic risks

US firms have shifted production from Asia to Mexico due to Low labor costs. Proximity to U.S. NAFTA.

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Concept: Profit sanctuaries?

Country markets where firm Has a strong or protected market position and

Derives substantial profits

Generally, a firm’s most strategically crucial profit sanctuary is its home market

Profit sanctuaries are a valuable competitive asset in global industries

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Concept: Cross-subsidization Involves supporting competitive efforts in

one market with resources/profits diverted from operations in other markets

Competitive power of cross-subsidization results from a global firm’s ability to Charge lower prices or otherwise launch a strategic

offensive to lure away a domestic firm’s customers and cover losses with profits earned in other critical markets

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Concept: Transfer-pricing Prices charged by one unit of a multinational firm

to a unit operating in another country. Can be used to shift profits from one tax regime to

another. It is the means of operationalizing cross-

subsidization. Can be illegal if undertaken without reference to

costs.

Subs 1Subs 1 Subs 2Subs 2GoodsGoods

PaymentPayment

MNCMNC

National BorderNational Border

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MNCs Face Two Conflicting Pressures

Reduce costs Be responsive to local

needs Examples?Examples?

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Four Basic Strategies

Importance of Local Responsiveness

Imp

ort

ance

of

Sca

le e

con

om

ies

Low High

Low

High

INTERNATIONAL MULTI-DOMESTIC

GLOBAL TRANSNATIONAL

Late 19Late 19thth century European century Europeanfirmsfirms

Post WW2 US firmsPost WW2 US firms Most modern knowledge-Most modern knowledge-intensive multinationalsintensive multinationals

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International Strategy Go where locals don’t have your skills Little adaptation. Products developed at home

(centralization) Can be a pure export strategy Marketing in each location If local manufacture, usually low-skill assembly

Makes sense where low skills, competition, and costs exist

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International Strategy

MNC Parent

Subsidiaries

Pre-dominant Knowledge flow – • Parent to subsidiary• Minimal local adaptation

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Multi-domestic Strategy High level of local autonomy Maximize local responsiveness.

Customize the product and marketing strategy to national demands.

Skill and product transfer Transfer all value-creation activities, no

experience curve rewards

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Multi-domestic Strategy

MNC Parent

Subsidiaries

Knowledge flows – • Parent to subsidiary• Very strong local influences

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Global Strategy

Theodore Levitt, HBS professor in the ’60s

Best use of the experience curve and location economies

This is the low cost strategy Utilize product standardization. Not good where local responsiveness

demand is high

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Global Strategy

MNC Parent

Subsidiaries

Pre-dominant Knowledge flow – • Parent to subsidiary• Virtually no local adaptation

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Transnational Strategy

Christopher Bartlett and Sumantra Ghoshal Core competencies can develop in any of the

firm’s worldwide operations. Flow of skills and product offerings occurs

throughout the firm - not only from home firm to foreign subsidiary (global learning).

Makes sense where there is pressure for both cost reduction and local responsiveness.

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Transnational Strategy

MNC Parent

Subsidiaries

Knowledge flows – • Parent to subsidiary• Subsidiary to parent• Subsidiary to subsidiary• Considerable local influences

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Linkages are least important in

Linkages are most important in

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Characterizing linkages –The source-target specification

Home Host

Numeraire knowledge flow(from parent to subsidiary)

Learning

SpilloversKnowledgetransfer

1

2

3

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The Evolution of Strategy

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The Advantages and Disadvantages of the Four Strategies

Strategy Advantages Disadvantages

Global Exploit experience curve effects

Exploit location economies

Lack of localresponsiveness

International

Transfer distinctive competencies to

Foreign Markets

Lack of localresponsivenessInability to realizelocation economiesFailure to exploit experience curve effects

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The Advantages and Disadvantages of the Four Strategies

Strategy Advantages Disadvantages

Multi-domestic Customize product offeringsand marketing in accordancewith local responsiveness

Inability to realize locationeconomies

Failure to exploitexperience curve effects

Failure to transferdistinctive competenciesto foreign markets

Transnational Exploit experience curveeffects

Exploit location economiesCustomize product offeringsand marketing in accordancewith local responsiveness

Reap benefits of global learning

Difficult to implement dueto organizationalproblems

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Takeaways The motivation for competing

internationally is based on gaining access to markets and/or assets

Location choice is driven by balancing the importance of activities and linkages in the value chain

Overall strategy is driven by balancing the importance of cost (scale economies) and local responsiveness