ITB daniels

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PART FIVEGLOBAL STRATEGY, STRUCTURE,

AND IMPLEMENTATION

International Business

Chapter Eleven

The Strategy ofInternational Business


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Chapter Objectives

To examine the idea of industry structure, firmstrategy, and value creation

To profile the features and functions of thevalue chain framework

To appreciate how managers configure andcoordinate a value chain

To identify the dimensions that shape howmanagers develop strategy

To profile the types of strategies firms use ininternational business


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Introduction

Strategy: the framework that managers apply todetermine the competitive moves and businessapproaches that guide a firm, i.e., the means

used to achieve objectives Strategy represents managements idea on how tobest: attract customers stake out a market position

conduct operations compete effectively create value achieve goals


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Fig. 11.2: The Strategy of

International Business


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Fundamentals of Strategic

Management: Basic ConceptsPerfect competition presumes that: there are large numbers of fully informed buyers and

sellers of an homogeneous product

buyers and sellers possess perfect information there are no obstacles to the entry or exit of firms into

or out of the market resources are fully mobile

An industry is a group of firms, i.e., competitors, thatproduce products which are close substitutes.

A global industry is one in which a firms competitiveposition in one country is significantly affected by itsposition in other countries.


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Fundamentals of Strategic

Management: The IO ParadigmThe industry organization (IO) paradigm: risk-

adjusted rates of return should be constant

across firms and industries Over time no one firm or industry should

consistently outperform others.

The performance of a firm is a function of its

market conduct, which in turn is determined bythe structure of its industry.

Industry effects explain up to 75% of the differencesin average returns for firms within a given industry.


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Industry Structure:

The Five Fundamental ForcesThe Five Fundamental Forces Model: the nature of

competition in an industry is the combined out-come of competitive pressures generated by:

the moves of rivals battling for market share

the entry of new rivals seeking market share

the efforts of firms outside the industry to convincebuyers to switch to their substitute products

the push by suppliers to charge more for their inputs the push by buyers to pay less for products

Markets are not perfectly competitive;some firms consistently outperform industry averages.


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Fig. 11.3: Industry Structure: The

Five Fundamental Forces Model


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The five-forces model defines the structureand competition in an industry in a waythat reveals:

what forces are driving changes within an

industry the relative strength of each fundamental force which fundamental forces shape strategic

conduct

the strategic moves rivals are likely to makeCommon to each issue is the question of whether the

current or future outlook suggests that firms in the industryhave no, some, or great potential to realize profits.


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Changes in Industry Structure

Forces that can transform an industrys structureinclude:

changes in the long-term industry [market] growth rate

technological developments shifting customer purchase and usage patterns manufacturing innovations that revise cost and efficiency

frontiers

changes in government regulations and policies the entry or exit of major firms the diffusion of business, executive, and technical

expertise across countries


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Strategy and Value Creation

Strategy: a firms efforts to build and strengthenits competitive position within its industry inorder to create value and attain goals

A firms core competency may be a special outlook, skill,capability, or technology that creates unique value

essential to its competitiveness.

Value: the measure of a firms capability to sell theproducts it offers for more than the costs it incurs

Operationally, firms create value either throughcost leadership or product differentiation.

Differentiation spurs a firm to offer unique,high-value products that are difficult to match or copy.


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The Firm as a Value Chain

Value chain: the set of linked, value-creating activities afirm performs to design, produce, market, deliver, andsupport a product, i.e., the format and interactionsamongst the various functions of a firm

[Value chain analysis explains cost behavior and revealsexisting and potential sources of product differentiation.]

Primary activities: the classical managerial functions ofthe firm

Support activities: functions that provide inputs which

allow the primary activities to occurProfit margins: the differences between total revenues

generated and total costs incurredOrientation: upstream (in-bound) vs. downstream (out-

bound) activities


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Fig. 11.4: The Value Chain

Framework


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Value Chain Configuration

Value chain configuration may be influencedby:

cost factors [wage rates, productivity, inflation, etc.] business environments [political & economic risk] cluster effects [related value creation activities] logistics [value-to-weight ratio, just-in-time practices] degree of digitization [virtual value creation] economies of scale [unit cost reductions] customer needs [buyer-related support activities]

Configuration [spatial arrangement] should be optimized in lightof prevailing economic, legal, political, and cultural conditions.


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Map 11.2: Labor Costs and

Location Decisions


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Value Chain Coordination

Value chain coordination may be influenced by: operational obstacles [communication challenges,

currencies, and measurement systems]

national cultural differences [information sharing,time, etc.]

learning effects [cost savings via performance andquality improvements]

subsidiary networks [real-time connectivity andfunctional integration]Coordination [the balanced movement of different parts

at the same time] should be optimized in waysthat leverage a firms core competencies.


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The value chain serves as a system concept that

helps mangers: evaluate a firms strengths and weaknesses interpret the determinants of the firms internal cost

structure, the basis of its core competencies, and itsrelationships with customers

link the internal features and functions of a competitorto the content of its marketplace strategy

The configuration and coordination of a firmsvalue chain should reflect changes in its basesfor value creation, including:

customers and their needs competitors industries environments


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Countervailing Forces: Global

Integration vs. Local Responsiveness Pressures for global integration

Globalization of markets: the convergence of customerpreferences for similar products, minimal costs, andmaximum value

[A commodity serves a universal need across countries andcultures and is traded strictly on the basis of price.]

Globalization of production: efficiency gains via stan-dardization, i.e., the maximization of location economies

Pressures for local responsiveness Customer divergence: differences in culture, nationalattitudes, and economic and usage conditions

Host government policies: economic freedom, work-place and product regulation, buy-local legislation, etc.


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The Global Integration/

Local Responsiveness GridThe integration/responsiveness grid (IR) profiles the

interaction of the pressures for global integrationand pressures for local responsiveness.

Integration: the process of combining dif-ferentiated parts into a standardized whole

Responsiveness: the process of disaggregatinga standardized whole into differentiated parts

The IR grid reveals how a firms choice of strategy is afunction of the relationship between its idea of valuecreation and the pressures for integration and/or respon-siveness as it looks to international markets for growthopportunities, cost reductions, and risk diversification.


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Fig. 11.5: The Integration/

Responsiveness Grid and Industry Types


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Strategic Alternatives:

The International StrategyInternational strategy: opportunistic expansion

into foreign operations that leverages the firmscore (domestic) competencies

Ultimate control and decision-making reside atheadquarters.

Value is created by transferring core competencies andunique offerings from headquarters into foreign marketswhere rivals are unable to develop, match, or sustain

them. International activities are generally secondary to thepriorities of the domestic market.

Headquarters ethnocentric orientation, i.e., its home countryfocus, may lead to significant missed market opportunities.


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The Multidomestic StrategyMultidomestic strategy: expansion into foreign opera-

tions that grants decision-making authority to localmanagers and emphasizes responsiveness to local

conditions Decision-making is decentralized so that offerings can be

adjusted to meet the needs of individual countries or regions. Value is created by giving local managers the authority to

respond to unique local cultural, legal, and economicenvironments.

The polycentric view holds that people who are close to themarket both physically and culturally can best run a business.

The distribution of decision-making authority to local managers maylead to duplication in activities, significantly higher costs, and

unusually powerful (autonomous) local subsidiaries.


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The Global StrategyGlobal strategy: expansion into foreign operations

that champions worldwide consistency, standard-ization, and cost competitiveness

Although activities are dispersed to the most favorableglobal locations, decision-making remains highly cen-tralized at headquarters.

Value is created by designing products for a worldmarket and manufacturing and marketing them as

effectively and efficiently as possible. Global firms strive to convert global efficiency into pricecompetitiveness via production and location economies.

In markets where demand for local responsiveness remains high, globalstrategies are largely ineffective, and market opportunities are missed.


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The Transnational StrategyTransnational strategy: expansion into foreign opera-

tions that exploits location economies, leverages corecompetencies, and responds to key local conditions

The causes of interactive global learning and worldwideinformation sharing are championed. Value is created by the relentless renewal, enhancement, and

exchange of ideas, products, and processes across functionsand borders.

The transnational MNE differentiates capabilities and contribu-tions while finding ways to systematically learn and ultimatelyintegrate and diffuse knowledge, thus developing morepowerful core competencies.

Realistically, the transnational firm faces serious challenges to its attemptsto efficiently and effectively configure and coordinate its activities.


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Fig. 11.6: The Integration/

Responsiveness Grid and Strategy Types


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Implications/Conclusions

Industry structure explains the functions, form,

and interrelationships amongst suppliers,buyers, products, new entrants, and rivals.

Even though competition is not perfect, industrystructure does influence a firms performance.

Because competition is not perfect, oppor-tunities exist to convert innovative strategiesinto superior competitiveness.

[continued]


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Great managers devise great strategies thatbuild great companies that outperform theirindustry rivals.

Designing a strategy within the context of thevalue chain can improve the quality of analysesand decisions by deconstructing value creationopportunities into a series of discrete activities.

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