Chapter 12 The Strategy of International Business Strategy is the actions managers take to attain the goals of the business

ss (usually to maximize value for the shareholders/stakeholders). Value Chain The operations of the firm compose the value chain which are the series of value creating activities that occur to create value. These actions include sales, production, IT, accounting etc. These activities are divided into support and primary activities. Primary Activities Design, creation and delivery of the product. They are: 1.R&D 2.Production 3.Marketing 4.Sales Support Activities Inputs that allow the primary activities to occur 1. 2. 3. Information Systems Logistics Human Resources

Global Expansion Practices 1. Expand the market for your domestic products by selling internationally (Export) Requires a company to tap into their core competencies

2. Move production to the most efficient countries to realize location economies Some countries have a comparative advantage of production Transportation costs and trade barriers must not be an issue Location Economies is the value created by finding the most competitive place to produce product, therefore adding value

i. Competitive can mean cheapest or best Creates a global value web as opposed to a value chain

3. Serve expanded markets from a single location, while recovering experience effects Experience curve: Systematic reductions in production costs that occur over the life of a product i. A products production costs decline each time the cumulative output doubles Learning Effects Costs savings through learning by doing Economies of Scale Reduce costs by creating a large volume of product, the larger your market, the more opportunity for this you receive. 4. Learn from foreign operations to increase your value Mature multinationals who already have operations in foreign markets can learn from their operations in order to create value for those specific customers. Pressures for Cost Reduction Managers can be forced to create value by reducing costs. This can be done through: Mass-produce a standard product Outsource certain functions Tends to occur in highly commoditized products (Chemicals, sugar, gas, steel)

Pressures for local Responsiveness Arise because of: Difference in consumer tastes and preferences Infrastructure

Accepted Business practices Distribution channels - May require a change in marketing strategy Host government demands

International Expansion Strategies Global Expansion Strategy Focus Reaping cost reduction benefits through: Method R&D, Production and Marketing activities are concentrated in a few favorable locations Try not to customize their products/marketing strategy Use aggressive pricing Economies of Scale Learning effects Locations economies Low Cost on a Global Scale

When to use it Strong pressures for cost reductions Minimal demand for localization

Localization Strategy Focus Increase profitability by customizing goods to match tastes and preferences in international markets

Method Increase the value of the product in the local market Duplication of functions Smaller production runs Still need to be as efficient as possible

When to use it When cost pressures are not high When local tastes differ dramatically When you have fewer competitors

Transnational Strategy Focus Multidirectional transfer of core competencies and skills Leveraging subsidy skills Try to achieve low costs through location economies, economies of scale and learning effects while differentiating their products for the local market. Very difficult to accomplish

Method Redesign products to use the same components and produce them in one location Use assembly plants in key markets to assemble the more market specific final product When to use it When customization and cost reduction pressures are high When managers have to balance the divergent pressures

International Strategy Focus Taking products from your local country and without much customization, selling them in other markets. Method Centralize product development functions Tend to establish manufacturing and marketing functions in each major country or geographic region in which they do business. Increases costs but there are no cost pressures so that isnt an issue May decide to do some minor customization of the marketing strategy

When to use it Low cost pressures Low need for local responsiveness Selling products that serve universal needs Do not have many competitors

Organizational Structure 1) Vertical Differentiation location of decision making a) Centralized When the decisions are made by upper management Pros: Can facilitate coordination Ensure decisions are consistent with organizational objectives Give top level manager the means to bring about changes (authority) Avoid duplication of activities

b) Decentralized Local managers make the decisions Top management can become overburdened when decision making

authority is centralized, which can result in poor decisions. Motivational research favors decentralization, people are more likely to

give more to their jobs when they have a greater degree of individual freedom and control over their work. More rapid response Can result in better decisions because the people with the best information

are the ones making the decisions. Can increase control, making the management more autonomous and

therefore accountable. Frequently it makes sense to centralize some decisions and to decentralize others, depending on the type of decisions and the firms strategy. 2) Horizontal Differentiation formal organization structure Decision is made on functions, type of business or geographical area. International Division When a single division runs all the international activities. Facilitates the international strategy. Worldwide area structure World is divided into geographic areas, each division has its own value creation activities. Facilitates local responsiveness. Difficult to transfer core competencies. Worldwide product divisional structure - Each division has its own value creation activities organized around the products they produce. Headquarters retain responsibility for the overall strategic development and financial control. Gives

opportunities to consolidate the value chain creation of different subunits. Can require a lack of local responsiveness. Global Matrix Structure Tries to solve the issue Bartlett and Ghoshal have argued where a company needs to be price competitive and locally responsive by creating a matrix where decisions are made by both product and regional managers. It is very difficult to pull off a global matrix structure as it creates conflict for the employees having two bosses with two different goals. In light of these problems many firms that pursue a transnational strategy have tried to build flexible matrix structures based on enterprisewide management knowledge networks and a shared dual culture. 3) Integrating Mechanism mechanisms for coordinating subunits The need for integrating mechanisms changes with the strategy, the company is using: Lowest Localization strategy Highest Global and Transnational Very important in firms trying to transfer core competencies between units Very important in firms trying to recover economies of scale and learning experience with a web like value chain Chapter 14 Entry Strategy and Strategic Alliances Two Major Ideas: 1) The decision of which foreign markets to enter, when to enter them and on what scale 2) The choice of entry mode Which Market (Recap of chapter 2)

The attractiveness of a country as a potential market depends on balancing

the benefits, costs and risks associated with doing business in that country Long Run economic benefits of a function of size of the market, present

wealth, likelihood of future wealth Future economic growth, which is a function of a free market system and

the countrys capacity for wealth. Riskier in politically and economically unstable countries What kind of value the firm can create for consumers in that market

Timing of Entry Early entry when a firm enters a foreign market before others do First movers advantage Pre-empt rivals Gain market share Establish a strong brand Creating switching costs to tie your buyers to you Set the price so you can cut prices when competitors arrive

First movers disadvantage Pioneering costs, from the foreign business system being so different that time and expense must be sacrificed to learn the ropes Business failure if the firm makes mistakes based on bad knowledge Promotion of a new product or idea

Late Entry When a firm enters a foreign market after other firms do Can watch what your competitors do, and learn from their mistakes

Can ride the coattails of their marketing and promotion Dont need to educate your customers

Scale of entry Large scale o Requires significant resource commitment which can lead to strategy commitments, where you cant get out of the deal without suffering significant consequences o It does create a presence and instills belief that you are committed to your product and customers Small Scale o Allows a firm to learn the market without exposing the firm to risks o Way to gather information o Lack of commitment may make it harder to attract customers Entry Modes Exporting Advantages Avoids substantial costs of establish manufacturing operations in another country May help the firm achieve experience curve, location economies and economies of scale Disadvantages It may be cheaper to produce abroad High transportation costs on shipping could make it uneconomical to export

Tariff barriers may prohibit your exporting, making it uneconomical, and the threat of tariff barriers can make it risky

Delegates of the company that perform the sales, marketing, service may work for other competitors and therefore will not have your best interests in mind

Turnkey Projects The contractor agrees to handle every detail of the project for a foreign clients, including the training of operational personnel. At the end the client is handed the key to a fully functional plant. Typically in complex production businesses. Advantages The know how is a valuable asset and you can earn returns on that knowledge Useful when FDI is limited Can be less risky than traditional FDI

Disadvantages No long term interest in that country May create a competitor out of the creator of your factory Could be selling your comparative advantage

Licensing The licensor grants the rights to intangible property to another entity for a specified period, and in return, he licensor receives a royalty fee from the licensee. Advantages Licensee puts up most of the capital Good for firms lacking capital Prohibited from direct investment in a foreign market

Disadvantages (3 serious ones)

Does not give tight control over manufacturing, marketing, strategy, etc. that si required for realizing the experience curve and location economies.

Limits a firms ability to share wealth amongst various divisions, and therefore limits a coordinated international strategy

Giving away your comparative advantage

Franchising - a specialized form of licensing in which the franchiser sells the IP, but also the franchisee needs to follow those specific rules the franchisor sets out. Advantages Firm is relieved of many of the costs and risks Good for firms lacking capital Good when you are prohibited from FDI in that country Allows you to build a global presence quickly

Disadvantage Great for services, but perhaps not manufacturing Limits a firms ability to share wealth amongst various divisions, and therefore limits a coordinated international strategy There are different definitions of quality, safety, etc. in different places making it difficult to maintain your image across other countries Joint Ventures Establishing a firm that is jointly owned by two or more otherwise independent firms, its popular mode of entry into foreign markets. Advantages Get to benefit from the local firms knowledge of the host country culture, norms, language, political situation, etc.

Provide the local knowhow to a new country Share the risks with another company Sometime political factors make it impossible not to partner with a local firm

Disadvantages Risking giving away your comparative advantage to a potential competitor The firm doesnt have tight control over local operations, making it difficult for companies needing to transfer a culture Shared ownership can lead to conflicts between the two corporations, which can be exacerbated by the fact that the two firms are from different nations. Wholly Owned Subsidiary The firm owns 100% of the stock in the project. Can be done through a Greenfield venture, where you build a factory from scratch or via acquisition of an existing enterprise. Advantages Protect your knowledge Tight control Required to gain experience and locations economies Can engage in global strategic behaviors

Disadvantages High costs and risks Culture transfer can be difficult, especially in terms of an acquisition

Tesco Q2 How does Tesco create value in its international operations? Tesco creates value by offering something that the market is lacking: a well run competitive grocery store. They enter emerging markets with growth potential and few

competitors. They then acquire or partner with current enterprises in that country in order to ensure that the value they are creating will work for that particular consumer. Tesco researches their potential partners carefully, and they pick a solid chain with some stores and they build off of that known base. They bring to the table their core competencies, but they dont remove the local managers who have the knowledge of the customer. Finally they have the capital and the retailing know-how to bring their moderately successful firms into a globally back force. This value is created out of successfully leveraging the joint venture strategy, where both firms bring something useful to the table and both are given the opportunity to be successful with their knowledge. Grocery stores are part service and part goods firms. Tescos strengths exist in both, but they are leveraging their service and management know-how transfer through the use of the joint venture. We know that value creation is measured by the difference between the converted inputs that create the cost of a product and how much the consumer is willing to pay for that product. More specifically in this case it is the amount consumers are willing to pay for the goods inside of the Tesco subsidiary. Porter states that it is important for the firm to decide where it wants to be strategically positioned in terms of cost effectiveness, and differentiation. Tesco wants to be a low cost provider of all the goods a consumer would purchase at a grocery store. They compete through their value chain by gaining purchasing power through expansion, and by leveraging their values skills in foreign markets.