CHAPTER 13 2.

Differentiation Strategy

The Strategy of International Business Focuses primarily on increasing the attractiveness of a

product.
Strategy - can be defined as the actions that managers
take to attain the goals of the firm. Strategic Positioning

 For most firms, the preeminent goal is to The efficiency frontier has a convex shape because of
maximize the value of the firm for its owners, its diminishing returns.
shareholders. To maximize the value of a firm,
Diminishing returns imply that when a firm already has
managers must pursue strategies that increase
significant value built into its product offering, increasing
the profitability of the enterprise and its rate of
value by a relatively small amount requires significant
profit growth over time.
additional costs.
Profitability - the rate of return that the firm makes on its
It is very important for management to decide where the
invested capital (ROIC), which is calculated by dividing the
company wants to be positioned with regard to value (V)
net profits of the firm by total invested capital.
and cost (C), to configure operations accordingly, and to
Profit growth is measured by the percentage increase in manage them efficiently to make sure the firm is
net profits over time. In general, higher profitability and a operating on the efficiency frontier.
higher rate of profit growth will increase the value of an
A central tenet of the basic strategy paradigm is that to
enterprise and thus the returns garnered by its owners,
maximize its profitability, a firm must do three things:
the shareholders.
1. pick a position on the efficiency frontier that is
 Managers can increase the profitability of the
viable in the sense that there is enough demand
firm by pursuing strategies that lower costs or by
to support that choice;
pursuing strategies that add value to the firm's
2. configure its internal operations, such as
products, which enables the firm to raise prices.
manufacturing, marketing, logistics, information
 Managers can increase the rate at which the
systems, human resources, and so on, so that
firm's profits grow over time by pursuing
they support that position; and
strategies to sell more products in existing
3. make sure that the firm has the right organization
markets or by pursuing strategies to enter new
structure in place to execute its strategy.
markets.
 Expanding internationally can help managers Operations: The Firm as a Value Chain
boost the firm's profitability and increase the rate
Operations - the different value creation activities a firm
of profit growth over time.
undertakes. (Primary & Support Activities)

Primary Activities - have to do with the design, creation,

Value Creation
and delivery of the product; its marketing; and its support
The way to increase the profitability of a firm is to create and after-sale service. Primary activities:
more value. The amount of value a firm creates is
 Research and development (R&D) is concerned
measured by the difference between its costs of
with the design of products and production
production and the value that consumers perceive in its
processes.
products.
 Production is concerned with the creation of a
The firm's value creation is measured by the difference good or service.
between V and C (V - C).  The marketing and sales functions of a firm can
help to create value in several ways.
A company can create more value (V - C) either by
 The role of the enterprise's service activity
lowering production costs, C, or by making the product
(customer service) is to provide after-sale service
more attractive through superior design, styling,
and support.
functionality, features, reliability, after-sales service, etc.
Support Activities
2 Basic Strategies in Attaining Value (Michael Porter)
The support activities of the value chain provide inputs
1. Low-Cost Strategy
that allow the primary activities to occur.
A firm has high profits when it creates more value for its
 information systems; these systems refer to the
customers and does so at a lower cost.
electronic systems for managing inventory,
A strategy that focuses primarily on lowering production tracking sales, pricing products, selling products,
costs. dealing with customer service inquiries, and so on
 GLOBAL EXPANSION, PROFITABILITY,
AND PROFIT GROWTH
1. Expanding the Market: Leveraging Products and
Competencies
A company can increase its growth rate by taking goods
or services developed at home and selling them
internationally.
Core competence refers to skills within the firm that
competitors cannot easily match or imitate.
2. Location Economies
Location economies are the economies that arise from
performing a value creation activity in the optimal
location for that activity, wherever in the world that might
be.
3. Experience Effects
The experience curve refers to systematic reductions in
production costs that have been observed to occur over
the life of a product.
Two things explain this: learning effects and economies of
scale.
Learning effects refer to cost savings that come from
learning by doing.
Economies of scale refer to the reductions in unit cost
achieved by producing a large volume of a product.
4. Leveraging Subsidiary Skills
Leveraging the skills created within subsidiaries and
applying them to other operations within the firm's global
network may create value.
Cost Pressures and Pressures for Local Responsiveness
Firms that compete in the global marketplace typically
face two types of competitive pressure that affect their
ability to realize location economies and experience
effects, to leverage products and transfer competencies
and skills within the enterprise.
They face pressures for cost reductions and pressures to
be locally responsive.
1. Pressures For Cost Reductions
In competitive global markets, international businesses
often face pressures for cost reductions. Responding to
pressures for cost reduction requires a firm to try to lower
the costs of value creation.
Universal needs exist when the tastes and preferences of
consumers in different nations are similar if not identical.
2. Pressures for Local Responsiveness
Pressures for local responsiveness arise from:
- Differences in consumer tastes and preferences,
- Differences in infrastructure & traditional
business practices,
- Differences in distribution channels, and
- Host-government demands.
CHOOSING A STRATEGY
1. Global Standardization Strategy
Firms that pursue a global standardization strategy focus
on increasing profitability and profit growth by reaping
the cost reductions that come from economies of scale,
learning effects, and location economies; that is, their
strategic goal is to pursue a low-cost strategy on a global
scale.
2. Localization Strategy
A localization strategy focuses on increasing profitability
by customizing the firm's goods or services so that they
provide a good match to tastes and preferences in
different national markets.
Localization is most appropriate when there are
substantial differences across nations with regard to
consumer tastes and preferences, and where cost
pressures are not too intense.
3. Transnational Strategy
Firms that pursue transnational strategy are trying to
simultaneously achieve low costs through location
economies, economies of scale, and learning effects;
differentiate their product offering across geographic
markets to account for local differences; and foster a
multidirectional flow of skills between different
subsidiaries in the firm's global network of operations.
This strategy is not an easy one to pursue since it places
conflicting demands on the company.
4. International Strategy
International strategy - taking products first produced for
their domestic market and selling them internationally
with only minimal local customization.
The Evolution of a Strategy
The Achilles' heel of the international strategy is that
over time, competitors inevitably emerge, and if
managers do not take proactive steps to reduce their
firm's cost structure, it will be rapidly outflanked by
efficient global competitors.