2. Learning Objectives
To evaluate industry structure, firm
strategy, and value creation
To profile the features and functions of the
value chain
To assess how managers configure and
coordinate a value chain
To explain global integration and local
responsiveness
To profile the types of strategies firms use
in international business
11-2
5. Industry Structure
Industry structure involves the
relationships among
Suppliers of inputs
Buyers of outputs
Substitute products
Potential new entrants
Rivalry among competing firms
11-5
6. Industry Change
Industry structure changes because of
Competitor moves
Government policies
Shifting preferences
Technological developments
11-6
7. Industry Structure,
Strategy, and Value
The industry organization (IO)
paradigm
presumes that markets demonstrate perfect
competition where no firm or industry
consistently outperforms others
The power of innovative executives
bright executives exploit market imperfections
to outperform rivals
Strategy’s hallmarks
Value
Strategy
11-7
8. Creating Value
Value
the measure of a firm’s capability of selling
what it makes for more than the costs incurred
to make it
Create value using
A cost leadership strategy
make products for a lower cost than
competitors
A differentiation strategy
make products for which consumers are
willing to pay a premium price
11-8
9. The Firm as a Value Chain
Learning Objective 2:
To profile the features and functions of the
value chain
11-9
10. The Firm as a Value Chain
The value chain
the set of linked activities the company performs to
design, produce, market, distribute, and support a
product
The value chain consists of
Primary activities
design, make, sell, and deliver the product
Support activities
implement primary activities
Profit Margin (Value = TR-TC)
Value Chain Orientation
Upstream and Downstream Activities
11-10
11. The Firm as a Value Chain
Primary and Support Activities
11-11
12. The Firm as a Value Chain
Primary and Support Activities of the Value Chain
11-12
13. Managing the Value Chain
Learning Objective 3:
To assess how managers configure and
coordinate a value chain
11-13
14. Managing the Value Chain
Configuration
distributing value chain activities around the
world
concentrated
putting all value chain activities in one
location
dispersed
performing different value chain activities
in different locations
location economies
11-14
15. Managing the Value Chain
When configuring the value, consider
The business environment
Innovation context
Resource costs
Logistics
Digitization
Scale economies
Cluster effects
Customer needs
11-15
16. Managing the Value Chain
Coordination
linking the value chain activities
Factors that influence coordination
Operational obstacles
National cultures
Core competencies (Learning Effects &
Experience Curve)
special outlook, skill, capability, or technology
that runs through the firm’s operations,
threading disconnected activities into an
integrated value chain
Subsidiary networks
social networks
11-16
17. Change and the Value Chain
The configuration and coordination of a
value chain responds to changes in
customers, competitors, industries, and
environments
Even a well configured and coordinated value
chain can become obsolete
So, designing and delivering a strategy
should be an ongoing process
11-17
18. Global Integration vs.
Local Responsiveness
Learning Objective 4:
To explain global integration and local
responsiveness
11-18
19. Global Integration vs.
Local Responsiveness
Firms face two conflicting pressures:
Pressures for global integration
the process of combining differentiated parts
into a standardized whole
maximize efficiency
Pressures for local responsiveness
the process of disaggregating a standardized
whole into differentiated parts
optimize effectiveness
11-19
20. Pressures for Global Integration
Drivers of global integration
The globalization of markets
Technology helps standardize consumer
preferences
Global products have become popular
allows for standardization of product
design
The efficiency gains of standardization
Location, scale, and learning effects
WTO supports global standards
11-20
21. Pressures for Local
Responsiveness
Pressure for local responsiveness is driven
by
Consumer divergence
cultural predisposition
historical legacy
nationalism
Host government policies
fiscal, monetary, and business regulations
11-21
25. International Strategy
International strategy
leverage a company’s core competencies into
foreign markets
critical elements of the value chain are
centralized at headquarters
The strategy works well when
the firm has core competencies that foreign
rivals lack
there is low pressure for global integration
there is low pressure for local responsiveness
11-25
26. Multidomestic Strategy
Multidomestic strategy
emphasizes responsiveness to the unique
circumstances that prevail in a country’s
market
value added activities are adapted to local
markets
The strategy works well when
there is high pressure for local responsiveness
there is low pressure for global integration
11-26
27. Global Strategy
Global strategy
make standardized products that are marketed
with little adaptation to local conditions
exploit location economies and capture scale
economies
The strategy works well when
the MNE is the cost leader
there is low pressure for local responsiveness
there is high pressure for global integration
11-27
28. Transnational Strategy
Transnational strategy simultaneously
leverages core competencies worldwide,
reduces costs by exploiting location
economics, and adapts to local conditions
The strategy works well when
global learning and knowledge flows are
emphasized
there is high pressure for local responsiveness
there is high pressure for global integration
11-28
Editor's Notes
The Strategy of International Business
The Learning Objectives for this chapter are To evaluate industry structure, firm strategy, and value creation To profile the features and functions of the value chain To assess how managers configure and coordinate a value chain To explain global integration and local responsiveness To profile the types of strategies firms use in international business
This Figure shows how a firm’s strategy is influenced by outside forces. In particular, the environment for multinational companies is shaped by cultural, political, legal, economic, trade, monetary, governmental, and institutional forces. The goal for managers is to design a strategy that allows the company to compete successfully in international markets and sustain its growth.
Learning Objective 1: To evaluate industry structure, firm strategy, and value creation.
An industry is composed of those companies engaged in a particular type of enterprise. How an industry is structured influences the profitability of companies, particularly in situations where there is perfect competition. Industry structure involves the relationships among suppliers of inputs, buyers of outputs, substitute products, potential new entrants, and rivalry among competing firms.
Does industry structure change? Yes, many things can prompt a change including new products, new firms, new markets, and new managers. If changes are significant, firms may have to reassess their strategy.
Perfect competition presumes many buyers and sellers such that no individual affects price or quantity, there is perfect information for both producers and consumers, that there are few, if any, barriers to entry and exit, that full mobility of resources exists, and that firms and buyers have perfect knowledge. Do perfect markets exist? Well, most industries aren’t perfect, and companies typically have different levels of profitability. In fact, industries that are most attractive typically have imperfect competition that allows companies to seek above-average profits. It is in these industries that the power of innovative executives becomes so apparent as they devise strategies that create value. Strategy can help managers assess a company’s position, identify where it should go, and determine how to get there.
Companies create value using either a cost leadership strategy or a differentiation strategy. The former reduces costs below those of competitors for a given level of quality, while the latter involves developing products that customers value and that rivals find hard, if not impossible, to match or copy. Another way to think about the two approaches is that a differentiation strategy focuses on innovation while a cost leadership strategy emphasizes efficiency.
Learning Objective 2: To profile the features and functions of the value chain.
Regardless of which strategy a firms uses, cost leadership or differentiation, it can be helpful to think of the value creation process using the value chain. The value chain separates the notion of “creating value” into a series of discrete, sequential activities.
This Figure shows the different primary and support activities in the value chain.
This Table provides details on the different activities that make up the primary and support activities in the value chain.
Learning Objective 3: To assess how managers configure and coordinate a value chain.
Multinational companies have to efficiently distribute value activities and link them effectively. This can be done using a concentrated strategy or using a dispersed approach. The goal is to put value activities in the optimal location in the world to exploit location economies - the economies that arise from performing a value activity in the most productive location or locations given prevailing economic, political, legal, and cultural conditions.
What influences the configuration of the value chain? Several things do including the quality of the business environment, innovation context, resource costs, logistics, digitization, and scale economies. The business environment can affect the ease of doing business. Generally, it easiest to do business in high income countries. Innovation context is important because going forward, the pace of innovation accelerates. In fact, the singularity principle suggests that the change will be so fast that it will seem to be expanding at infinite speed. Resource costs like wage rates, worker productivity, resource availability, inflation rate, Government Regulations, and so on can also affect the configuration of the value chain. Logistics refers to how companies obtain, produce, and exchange material and services in the proper place and in proper quantities for the proper activity. Companies try to minimize the expense associated with logistics. Digitization involves converting an analog product into a string of zeros and ones. Digital activities can be located just about anywhere, and in fact today it’s allowing activities to be dispersed that had always been concentrated in a few locations. X-rays can now be taken in one country and read in another. Similarly, legal services can be outsourced to optimal locations. Finally, firms want to gain economies of scale where possible. This often requires companies to concentrate the value chain.
Once the firm has worked out the best configuration of the value chain, it must work on linking the various activities. This is known as coordination. Several factors influence coordination. Operationally, companies must deal with different languages, time zones, and so on as they pull together the different parts of the global value chain. While still quite challenging, improvements in communication have made this task easier today. A firm’s core competencies also affect coordination. Keep in mind that this special ability, outlook, or skill can emerge from different areas in the firm. For example, a firm’s core competencies may be a result of product development or employee productivity. Similarly, a firm may have core competencies in manufacturing expertise, marketing, or leadership. Finally, it’s important to consider the role of subsidiaries. The Internet and the real time connectivity it provides has changed the nature of this process. Today, information can flow easily between subsidiaries and the different parts of the value chain allowing for much greater and richer coordination. Firms have even embraced the power of social networks as a means of improving coordination.
Once the value chain is configured and coordinated, it’s time to consider change. Managers need to view the value chain and its configuration as a fluid concept – one that could change at any point depending on the factors that influence it. Some managers are able to anticipate change and adapt accordingly. For others, it’s an ongoing struggle.
Learning Objective 4: To explain global integration and local responsiveness.
When firms develop their strategies they face two conflicting pressures. On one hand they have pressure to standardize and concentrate configuration. On the other hand, they face pressure to disperse configuration and adapt coordination.
When there are strong pressures for global integration, firms will need to concentrate configuration and standardize coordination. The globalization of markets along with the efficiency gains that come with standardization are two main drivers of global integration. Standardization is attractive because of the cost savings it creates for both the firm and the consumer.
Despite the benefits of global integration, firms may find that there is considerable pressure to be locally responsive. A major reason to be locally responsive is the need to respond to consumer preferences. Consumers may be willing to pay a premium to get what they really want. In some case, local government policies dictate certain strategies.
This Figure shows how different industries fall in the integration/responsiveness grid. Managers can use the IR grid to determine strategy based on the different pressures they are facing.
Learning Objective 5: To profile the types of strategies firms use in international business.
There are four generic strategies used by multinational companies: the international, multidomestic, global, and transnational strategies.
The international strategy works well when the multinational has a core competency that foreign rivals lack, and pressures for local responsiveness and for global integration are both low. However, because key aspects of the value chain are centralized at headquarters there is little input from foreign markets and opportunities may be missed.
The multidomestic strategy makes sense when pressures for local responsiveness are high, and those for global integration are low. Because it involves adapting value added activities to local market conditions, it is a costly strategy to implement.
The global strategy works well when worldwide standardization is possible. This is usually the case for commodities, for example. However, keep in mind that because it emphasizes cost reductions is does not allow for local responsiveness, a situation that can be problematic if market conditions change.
Companies following a transnational strategy balance the conflicting pressures for local responsiveness with those for global integration. They emphasize global learning and the diffusion of knowledge throughout the organization. Keep in mind that while this strategy seems to allow firms to get the best of both worlds, it’s complicated and difficult to implement.
