Strategy of International Business

Chapter : 9
International Recruitment Methods
International Recruitment Methods
Introduction to strategy for International Business

 We have looked into political, legal, cultural, monetary aspect of

international business, now with strategy we focus on the firm itself
 It deals with larger environment where international business compete
 Its about the actions taken by managers to make firm more
competitive as an international business
 Primary focus of strategy is to increase profitability and expand
operations in foreign markets
Strategy and Firm

 A firms strategy can be defined as the actions manager take to attain

goal of the firm
 One of the common aim is to maximize value of the firm for its
shareholders
 How to maximize value of firm an to shareholders?
▪ Increasing profitability of the firm, which is calculated by rate of return
on invested capital (ROIC) = net profit/invested capital and Profit
Growth = percentage increase in net profit. It focused on cost
reduction
▪ Value Creation, which allows the firm to place a higher price for
product and services
Value Creation

 Value creation is measured by difference between V and C, where V is

the value of product to average customer and C is cost of product
that firm charges
 2 basic strategies to create value are cost reduction and differentiation
Strategic positioning

 It refers to choice of a strategic emphasis by a firm in the efficiency

frontier curve, with regards to value creation(differentiation) and low
cost, by configuring its internal operations in support of that strategic
emphasis
 It helps a firm to decide strategy by choosing a position in the
efficiency frontier curve, combination of value provided and cost for
creating the value, making sure that the firms operation and
capabilities support that level of position
 Efficiency Frontier basics;
 Y axis: increased value differentiation
 X axis: cost (high to low) i.e. reverse scale
Efficiency Frontier Curve (Example)
Efficiency Frontier Curve (Example)
Strategic positioning

 To maximize profit a firm must do 3 things with respect to Strategic position

scenario;
▪ Pick a position on the efficiency frontier looking at the level of demand to
support the choice
▪ Configure its internal operations, such as manufacturing, marketing,
logistics, information system, HR so that they support that position
▪ Make sure that the firm has right organization structure in place to execute
its strategy
Firm as a Value Chain

 Operation of a firm can be though as a value chain composed of series of

distinct value creation activities including; production, marketing, material
management, R&D, HR and more
 2 major categories of Value Chain activity/ Operation;
▪ Primary Activity
▪ Support Activity
Firm as a Value Chain

 Primary Activity
▪ It consist of design, creation, delivery of product, marketing, support and
after sale service
▪ Its divided into 4 functions;
- Research and Development (R&D)
- Production
- Marketing
- After sale support
Firm as a Value Chain

 Support Activities
▪ It’s the input that allow the primary activities to occur
▪ Its important to attain competitive advantage
▪ They are;
- Information System [tracking product, customer service inquiries, decision
making, inventory management]
- Logistics
- HR
- Company Infrastructure
Global Expansion, Profitability and Profit Growth

 Firms that operate internationally are able to;

 Expand the market or their domestic product offering by selling those
products in international market
 Realize location economies by dispersing individual value creation activities
to those locations around the globe where they can be performed most
efficiently and effectively
 Realize greater cost economics from experience effects by serving an
expanded global market from a central location thereby reducing the cost
of value creation
 Earn a greater return by leveraging any valuable skills developed in foreign
operations and transferring them to other countries whiting the firm’s global
network of operations
Expanding the Market

 All firms try to grow their market beyond national domestic boundary for
leveraging products and competencies
 Case of core competency; that other firms cannot attains as your firm can
do
 Transferring / Replicating domestic strategy and operational procedure to
new foreign market, flexible or customization as new market may vary in
multiple aspects compared to domestic
 Examples of companies who have used/transferred their core competency
to other host nations, to outperform domestic competitors are; Starbucks,
McDonald’s
Location Economy

 Trade theory have taught us that due to difference in factors of economy,

certain country have comparative advantage in the production of certain
products. Example; Japan at automobiles and consumer electronics, US at
computer software and pharmaceuticals, India at Information Technology
Services
 For withstanding global competition the firm will benefit by basing each
value creation activity it performs at the location where economic, political,
cultural conditions including relative factor cost are most conducive to
performance of that activity
 Firms that pursue such strategy can realize location economies, which is
economies that arise for performing a value creation activity in the optimal
location for that activity
 Example: Clear Vision (US eyewear company), shifted to Hong Kong and
then to China. For designer glasses (Japan, France and Italy)
Location Economy

 In the example of Clear Vision we saw the movement of production from

high cost location to low cost location ( with presence of skilled manpower
and efficiency )
 One thing to be considered in the case of adopting location economy is,
transportation cost and trade barrier could complicate the situation and not
realize cost benefit it was supposed to for global competition
 Critical Case of transportation and tariff;
▪ New Zealand has a comparative advantage for automobile assembly
operations, but high transportation cost would make it uneconomical
location from which to serve global markets
▪ Even a country looks attractive as a production location under standard
criteria, if government is unstable or totalitarian, its advisable not to base in
that country
Experience Effect

 It refers to systematic reduction of production cost that have been

observed to occur over the life of a product
 As per studies it is seen that there is some level of reduction in production
cost each time cumulative output doubles. For every double of output,
production cost decreases to 80% of earlier cost
 Learning Curve
▪ refers to cost saving that comes from learning by doing
▪ Same task done in repetition efficiency increases, complex tasks with
multiple steps take longer time in earlier phase but after some repetition
time taken to perform the task decreases due to learning effect
 Economies of Scale
▪ Refers to reduction of unit cost of product due to high volume of
production
Experience Curve
Experience Curve

 Strategic Significance of Experience Curve

▪ Moving downward the experience curve allows a firm to reduce its cost of
creating/adding value and increase profitability
▪ Key to progressing downward in a experience curve is to increase volume
of production by a single plant as rapidly as possible
▪ Increasing production in a single plant helps to spread the fixed cost of the
plant, over the high volume of production, resulting to overall decrease in
per unit cost of production
▪ With higher volume of production a firm can move downward in
experience curve, maintain a low-cost position in the market(domestic or
global), such that it can price its product at a value which could be lower
than per unit production cost of competitor firms
Leveraging Subsidiary Skills

 It is important for managers to;

▪ Recognize that valuable skills that could be applied elsewhere in the firm
can arise anywhere within the firm’s global network (not just at corporate
center)
▪ Establish an incentive system that encourages local employees to acquire
new skills
▪ Have a process for identifying when valuable new skills have been created
in a subsidiary
Situation Manager and Firms Faces

Pressure for local responsiveness

(customization) which raises cost

Manager
/ firm

Pressure for cost reduction due to

competition
Pressure for Cost Reduction

 Increasingly, international businesses face pressures for cost reductions. This

requires a firm to try to lower the costs of value creation by mass producing
a standardized product at the optimal location in the world to try to realize
location and experience curve economies
 Pressures for cost reductions can be particularly intense in industries
producing commodity products where meaningful differentiation on non
price factors is difficult and price is the main competitive weapon
 Pressures for cost reductions are also intense in industries where major
competitors are based in low-cost locations, where there is persistent
excess capacity, and where consumers are powerful and face low
switching costs
Pressure for Cost Reduction

 This tends to be the case for products that serve universal needs. Universal
needs exist when the tastes and preferences of consumers in different
nations are similar
 This is the case for conventional commodity products such as bulk
chemicals, petroleum, steel, sugar, also consumer products (for example,
handheld calculators, semiconductor chips, personal computers, liquid
crystal display screens)
 Many commentators have also argued that the liberalization of the world
trade and investment environment in recent decades, by facilitating
greater international competition, has generally increased cost pressures
Pressure for Local Responsiveness

 Differences in Consumer Tastes and Preferences

▪ Strong pressures for local responsiveness emerge when consumer tastes and
preferences differ significantly between countries--as they may for historic or
cultural reasons. In such cases, product and/or marketing messages have to be
customized to appeal to the tastes and preferences of local consumers. This
typically prompts delegating production and marketing functions to national
subsidiaries.
▪ For example, there is a strong demand among North American consumers for
pickup trucks, particularly in the South and West where many families have a
pickup truck as a second or third car. In contrast, in European countries, pickup
trucks are seen purely as utility vehicles and are purchased primarily by firms
rather than individuals. As a consequence, the marketing message needs to be
tailored to the different nature of demand in North America and Europe.
Pressure for Local Responsiveness

 Differences in Infrastructure and Traditional Practices

▪ Pressures for local responsiveness emerge when there are differences in
infrastructure and/or traditional practices between countries. In such
circumstances, customizing the product to the distinctive infra-structure
and practices of different nations may necessitate delegating
manufacturing and production functions to foreign subsidiaries. For
example, North American consumer electrical systems are based on 110
volts, while in some European countries, 240 volt systems are standard. Thus,
domestic electrical appliances have to be customized for this difference in
infrastructure. Traditional practices also often vary across nations. For
example, people drive on the left side of the road in Britain, creating a
demand for right-hand drive cars, but in neighboring France, people drive
on the right side of the road, creating a demand for left-hand drive cars.
Automobiles have to be customized to meet this difference in traditional
practices
Pressure for Local Responsiveness

 Differences in Distribution Channels

▪ A firm's marketing strategies may have to be responsive to differences in
distribution channels between countries. This may necessitate the
delegation of marketing functions to national subsidiaries. In laundry
detergents, for example, five retail chains control 65 percent of the market
in Germany, but no chain controls more than 2 percent of the market in
neighboring Italy. Thus, retail chains have considerable buying power in
Germany, but relatively little in Italy. Dealing with these differences requires
detergent firms to use varying marketing approaches. In the
pharmaceutical industry, the British and Japanese distribution systems are
radically different from the US system. British and Japanese doctors will not
accept or respond favorably to an American-style high pressure sales
force. Thus, pharmaceutical firms have to adopt different marketing
practices in Britain and Japan compared to the United States (soft sell
versus hard sell)
Pressure for Local Responsiveness

 Host Government Demand

▪ Threats of protectionism, economic nationalism, and local content rules
(which require that a certain percentage of a product be manufactured
locally) all dictate that international businesses manufacture locally.
Consider Bombardier, the Canadian-based manufacturer of railcars,
aircraft, jet boats, and snowmobiles. Bombardier has 12 railcar factories
across Europe. Some argue that the duplication of manufacturing facilities
leads to high costs and lowers profit margins, but Bombardier managers say
that informal rules in Europe favor companies that use local workers. To sell
railcars in Germany, they claim, you must manufacture in Germany. The
same goes for Belgium, Austria, and France. To address its cost structure in
Europe, Bombardier has centralized its engineering and purchasing
functions, but it has no plans to centralize manufacturing
 Implication of Local responsiveness
 Pressures for local responsiveness imply that it may not be
possible for a firm to realize the full benefits from experience
curve and location economies. For example, it may not be
possible to serve the global marketplace from a single low-cost
location, producing a globally standardized product and
marketing it worldwide to achieve experience curve cost
economies. The need to customize the product to local
conditions may work against such a strategy. Automobile firms,
for example, have found that Japanese, American, and
European consumers demand different kinds of cars, and this
necessitates producing products that are customized for local
markets. In response, firms such as Honda, Ford, and Toyota are
establishing top to bottom design and production facilities in
each of these regions so they can better serve local demands.
While such customization brings benefits, it also limits a firm's
ability to realize significant experience curve economies and
location economies
Implication of Local responsiveness

 In addition, pressures for local responsiveness imply that it may

not be possible to transfer the skills and products associated with
a firm's core competencies whole sale from one nation to
another. Concessions often have to be made to local
conditions. Despite being depicted as "poster boy" for the
proliferation of standardized global products, even McDonald's
has customized its product (i.e. its menu) to account for national
differences in tastes and preferences
International Strategies
 International Strategies

 International (Low Integration and Low Responsiveness)

▪ An international company therefore has little need for local adaption
and global integration
▪ The majority of the value chain activities will be maintained at the
headquarter. This strategy is also often referred to as an exporting
strategy
▪ Products are produced in the company’s home country and send to
customers all over the world. Subsidiaries, if any, are functioning in this
case more like local channels through which the products are being
sold to the end-consumer
▪ Large wine producers from countries such as France and Italy are
great examples of international companies
 International Strategies

 Multi-domestic (Low Integration and High Responsiveness)

▪ Companies with a multidomestic strategy have as aim to meet the
needs and requirements of the local markets worldwide by
customizing and tailoring their products and services extensively
▪ In addition, they have little pressure for global integration
▪ Multidomestic firms often have a very decentralized and loosely
coupled structure where subsidiaries worldwide are operating
relatively autonomously and independent from the headquarter
▪ Example of a multidomestic company is Nestlé. Nestlé uses a
unique marketing and sales approach for each of the markets in
which it operates. Furthermore, it adapts its products to local
tastes by offering different products in different markets.
 International Strategies

 Global (High Integration/cost reduction and Low Responsiveness)

▪ High integration business has the objective to reduce cost
▪ Global companies are the opposite of multidomestic companies.
They offer a standardized product worldwide and have the goal
to maximize efficiencies in order to reduce costs as much as
possible
▪ Global companies are highly centralized and subsidiaries are
often very dependent on the HQ
▪ Their main role is to implement the parent company’s
decisions and to act as pipelines of products and strategies
▪ Pharmaceutical companies such as Pfizer can be considered
global companies
 International Strategies

 Transnational (High Integration and High Responsiveness)

▪ Transnational company has characteristics of both the
global and multidomestic firm. Its aim is to maximize local
responsiveness but also to gain benefits from global
integration
▪ Even though this seems impossible, it is actually be done
when taking the whole value chain into considerations
▪ Transnational companies often try to create economies of
scale more upstream in the value chain and be more
flexible and locally adaptive in downstream activities such
as marketing and sales
 International Strategies

▪ In terms of organizational design, a transnational company

is characterised by an integrated and interdependent
network of subsidiaries all over the world. These subsidiaries
have strategic roles and act as centres of excellence. Due
to efficient knowledge and expertise exchange between
subsidiaries, the company in general is able to meet both
strategic objectives
▪ A great example of a transnational company is Unilever
International Strategies