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Strategy and structure of International Business
Course: MBA
Subject: GLOBAL BUSINESS ENVIRONMENT
Unit: 4
The Firm as a Value Chain• Primary Activities:– Those activities having to do with creating, marketing
and delivering the product to customers and providing support and after-sales service.
• Support Activities:– Provide inputs that allow primary activities to occur.
• An Efficient Infrastructure:– helps create value and reduce the cost of creating
value.
The Firm as a Value Chain
Organizational infrastructureInformation systems
Human resources
Research and development
Materials management
Manufacturing Marketing
Primary activities
Supportactivities
The Firm as a Value Chain
The Role of Strategy
• Strategy:– Actions managers take to attain the goals of the
firm.– Need to identify and take action that lowers the
cost of value creation and/or differentiates the firm’s product through superior design, quality, service, or functionality.
Profiting from Global Expansion
• International firms can:– Earn a greater return from distinctive
skills or core competencies.– Realize location economies by dispersing value
creation activities to locations where they can be performed most efficiently.
– Realize greater experience curve economies, which reduces the cost of value creation.
caution
• When making location decisions:– Consider trade barriers and transportation
costs.– Assess political and economic
risks.
Experience Curve Economies• Learning Effects:– Labor productivity increases over time as individuals
learn the most efficient ways to perform particular tasks.
• Economies of Scale:– Reductions in unit cost achieved by producing a large
volume of a product.
• Strategic Significance:– Moving down the experience curve allows a firm to
reduce its cost of creating value.
Firms Face Two Conflicting Concepts (Pressures) Overseas
• Reduce costs.• Be responsive to local
needs.
Cost Reduction• Desire to reduce costs by:– Mass production– Product standardization.– Optimal location production.
• Hard to do with commodity-type products.– products serving universal needs.
• Also hard where competition is in low cost producing location.
• Finally, int’l competition creates price pressures.
$
Local Responsiveness
• Different consumer tastes and preferences.
• Different infrastructure and practice.• Differences in distribution channels.• Government demands.
McDonalds• McDonald’s overseas experience.• Detailed planning• Export of management skills.• Foreign partners.• Adaptation/Adopting ideas.
Strategic Choice
• Four basic strategies:– International strategy.– Multidomestic strategy.– Global strategy.– Transnational strategy.
International Strategy
• Go where locals don’t have your skills.• Little adaptation. Products developed at home
(centralization).• Manufacturing and marketing in each location.• Makes sense where low skills, competition,
and costs exist.
Multi-domestic Strategy
• Maximize local responsiveness.– Customize the product and marketing strategy
to national demands.
• Skill and product transfer.• Transfer all value-creation activities• Good for high local responsiveness and low
cost reduction pressures.
Global Strategy
• Best use of the experience curve and location economies.
• This is the low cost strategy.• Utilize product standardization.• Not good where local responsiveness
demand is high.
Transnational Strategy
• Core competencies can develop in any of the firm’s worldwide operations.
• Flow of skills and product offerings occurs throughout the firm - not only from home firm to foreign subsidiary (global learning).
• Makes sense where there is pressure for both cost reduction and local responsiveness.
The Advantages and Disadvantages of the
Four StrategiesStrategy Advantages Disadvantages
Global Exploit experience curve effects
Exploit location economies
Lack of localresponsiveness
International
Transfer distinctive competencies to
Foreign Markets
Lack of local responsivenessInability to realizelocation economiesFailure to exploit experience curve effects
The Advantages and Disadvantages of the Four Strategies
Strategy Advantages Disadvantages
Multi-domestic Customize product offeringsand marketing in accordancewith local responsiveness
Inability to realize locationeconomies
Failure to exploitexperience curve effects
Failure to transferdistinctive competenciesto foreign markets
Transnational Exploit experience curveeffects
Exploit location economiesCustomize product offerings
and marketing in accordancewith local responsiveness
Reap benefits of global learning
Difficult to implement dueto organizationalproblems
Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar
CaterpillarCaterpillarTractorTractor
High
Cost pressures
Low
Low HighPressures for local responsiveness
EXPORTING
• The commercial activity of selling and shipping goods to a foreign country
• The most common overseas entry approach for small firms
EXPORTING
• Exporting can be either – direct or indirect– In direct exporting the
company sells to a customer in another country
– In contrast, indirect exporting usually means that the company sells to a buyer (importer or distributor) in the home country who in turn exports the product
EXPORTING• The Internet is becoming
increasingly important as a foreign market entry method
• Initially, Internet marketingfocused on domestic sales,however, a surprisingly large number of companies started receiving orders from customers in other countries, resulting in the concept of:– international Internet
marketing (IIM).
CONTRACTUAL AGREEMENTS
• Contractual agreements are long-term, non-equity associations between a company and another in a foreign market
• Approaches:– Licensing– Franchising – Contract manufacturing– Management contracting– Turnkey projects
LICENSING
• An arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period and in return, the licensor receives a royalty fee from the licensee.
• Offers know-how, shares technology, and shares brand name with licensee; licensee pays royalties; lower-risk entry mode; permits access to markets
FRANCHISING
• Franchising is a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business
• Longer-term commitments
TURNKEY PROJECTS
• A product or service which can be implemented or utilized with no additional work required by the buyer (just by 'turning the key')".
• The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel
Contract manufacturing
• Contract manufacturing is a process that establish a working agreement between two companies.
• As part of the agreement, one company will custom produce parts or other materials on behalf of their client.
Management contracting
• A management contract is an arrangement under which operational control of an enterprise is vested by contract in a separate enterprise which performs the necessary managerial functions in return for a fee.
Management contracting
• Management contracts involve not just selling a method of doing things (as with franchising or licensing) but involves actually doing them.
• A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training.
STRATEGIC ALLIANCE
• Cooperative agreements between potential or actual competitors
• A strategic international alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective
• SIAs are sought as a way to shore up weaknesses and increase competitive strengths.
• Licensing, Joint venture, consortia etc
Strategic alliances
• Firms enter SIAs for several reasons:– Opportunities for rapid expansion into new
markets– Access to new technology– More efficient production and innovation– Reduced marketing costs– Strategic competitive moves– Access to additional sources of products and
capital
Strategic alliances- JOINT VENTURES
• A JV entails establishing a firm that is jointly owned by two or more otherwise independent firms.
JOINT VENTURE
• Four Characteristics define joint ventures:– JVs are established, separate, legal entities– The acknowledged intent by the partners to share
in the management of the JV– There are partnerships between legally
incorporated entities such as companies, chartered organizations, or governments, and not between individuals
– Equity positions are held by each of the partners
Strategic alliances- Consortia
• Consortia are similar to joint ventures and could be classified as such except for two unique characteristics:– They typically involve a large number of participants– They frequently operate in a country or market in which
none of the participants is currently active.• Consortia are developed
to pool financial and managerial resources and
to lessen risks.
Introduction
• In today’s global economy, firms must decide– where to locate productive activities – what the long-term strategic role of foreign production
sites should be – whether to own foreign production activities or outsource
those activities – how to manage a globally dispersed supply chain and what
the role of Internet-based information technology should be in the management of global logistics
– whether to manage global logistics or outsource
Strategy, Production, and Logistics
Question: How can production and logistics be conducted internationally to
1. lower the costs of value creation2. add value by better serving customer needs?
• Production refers to activities involved in creating a product• Logistics refers to the procurement and physical
transmission of material through the supply chain, from suppliers to customers
Strategy, Production, and Logistics
• The strategic objectives of the production and logistics function are– to lower costs– to increase product quality by eliminating
defective products from both the supply chain and the manufacturing process
• These two objectives are interrelated
Strategy, Production, and Logistics
• Better quality control helps firms reduce costs because – time is not wasted manufacturing poor quality
products that cannot be sold– re-work and scrap costs are lower– warranty costs and the time used too fix defective
products are lower
Strategy, Production, and Logistics
Question: What management tool is used to increase the reliability of product offerings?
• The Six Sigma quality improvement program aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company
• Six Sigma is a direct descendant of total quality management (TQM)
• In addition, some countries have also promoted specific quality guidelines like the European Union’s ISO 9000 standards
Where to Produce
Question: Where should production activities be located?
• When deciding where to locate production facilities, firms must consider– country factors– technological factors– product factors
Strategy, Production, and Logistics
• Two other objectives are important for international companies
1. production and logistics functions must be able to accommodate demands for local responsiveness
2. production and logistics must be able to respond quickly to shifts in customer demand
Country Factors
• Firms should locate manufacturing activities where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity
• Regulations affecting FDI and trade can significantly affect the appropriateness of specific countries, as can expectations about future exchange rate changes
Technological Factors• The type of technology a firm uses in its manufacturing can
affect location decisions• Firms should consider 1. The level of fixed costs involved• If the fixed costs of setting up a manufacturing plant are very
high, it could make sense for the firm to serve the world market from a single location or from a very few locations
2. The minimum efficient scale of the technology• The larger the minimum efficient scale (the level of output at
which most plant-level scale economies are exhausted) of a plant, the more likely centralized production makes sense
Technological Factors
3. The flexibility of the technology• The term flexible manufacturing technology or lean
production covers a range of manufacturing technologies that are designed to:– reduce set up times for complex equipment– increase the utilization of individual machines through
better scheduling– improve quality control at all stages of the manufacturing
process
Product Factors
• Two product factors impact location decisions1. The product's value-to-weight ratio – If the value-to-weight ratio is high, it is practical to
produce the product in a single location and export it – If the value-to-weight ratio is low, there is greater
pressure to manufacture the product in multiple locations across the world
2. Whether the product serves universal needs– The need for local responsiveness is reduced for products
that do, which increases the attractiveness of concentrated manufacturing
Locating Production Facilities
• There are two basic strategies for locating manufacturing facilities
1. Concentrating them in the optimal location and serving the world market from there
2. Decentralizing them in various regional or national locations that are close to major markets
The Strategic Role of Foreign Factories
Question: Does the rationale for establishing a foreign production facility change?
• The strategic role of foreign factories and the strategic advantage of a particular location can change over time
• A factory initially established to make a standard product to serve a local market, or to take advantage of low cost inputs, can evolve into a facility with advanced design capabilities
• As governmental regulations change and/or countries upgrade their factors of production the strategic advantage of a particular location can change
The Strategic Role of Foreign Factories
• As the strategic role of a factory is upgraded and a firm develops centers of excellence in different locations worldwide, it supports the development of a transnational strategy
• A focus of a transnational strategy is global learning (the idea that valuable knowledge does not reside just in a firm’s domestic operations, it may also be found in its foreign subsidiaries)
• So, managers should promote the idea that factories are potential centers of excellence with strategic importance to the firm
Outsourcing Production: Make-or-Buy Decisions
Question: Should an international business make the component parts to go into their final product or outsource them?
• Make-or-buy decisions (decisions about whether to perform a certain value creation activity in-house or outsource it to another firm) are important to a firm’s manufacturing strategy
The Advantages of Make
• Making component parts in-house (vertical integration) is attractive because it
1. is associated with lower costs
2. facilitates investments in highly specialized assets
3. protects proprietary technology
4. facilitates the scheduling of adjacent processes
The Advantages of Make
1. Lowering Costs• A firm should consider manufacturing a part in-
house if the firm is more efficient at that a production activity than any other enterprise
2. Facilitating Specialized Investments• In-house production makes sense when substantial
investments in specialized assets (assets whose value is contingent upon a particular relationship persisting) are required to manufacture a component
The Advantages of Make
3. Protecting Proprietary Technology• When proprietary technology is involved, in-house
production can make sense to maintain control over the technology
4. Improving Scheduling • In some cases, in-house production can make
planning, coordination, and scheduling of adjacent processes easier
The Advantages of Buy
• Buying component parts from independent suppliers (outsourcing) is attractive because it
1. gives the firm greater flexibility
2. helps drive down the firm's cost structure
3. helps the firm to capture orders from international customers
The Advantages of Buy
1. Strategic Flexibility• Outsourcing provides the firm with the flexibility to
switching orders between suppliers as circumstances dictate
• This ability is particularly important when changes in exchange rates and trade barriers the attractiveness of supply sources
The Advantages of Buy
2. Lower Costs • Firms that outsource can avoid– the challenges involved with coordinating and
controlling additional subunits – the lack of incentive associated with internal suppliers– the difficulties with setting appropriate transfer prices
3. Offsets• Outsourcing can help firms capture more orders from
suppliers’ countries
Trade-Offs
• The benefits of manufacturing components in-house are greatest when– highly specialized assets are involved– when vertical integration is necessary for
protecting proprietary technology– when the firm is more efficient than external
suppliers at performing a particular activity
Globalization and Markets
• “Globalization seems to be the exception rather than the rule in many consumer goods markets and industrial markets; and,
• Procter and Gamble …still customizes the final product offering and market strategy to the conditions that pertain in individual national markets.” - Charles W. Hill -
Market Segmentation
• Identifying distinct groups of consumers whose purchasing behavior differs from others in important ways.
• Segmented markets: – Sex, age, income, race, education.– Social-cultural factors.– Psychological factors.
Cultural Differences
• Most important - the impact of tradition.• Impact is greatest in foodstuffs and beverages.• Scent preferences differ from country to country.
• Some tastes and preferences becoming international:
• Coffee (Japan).• American-style frozen dinners
(Europe).
Economic Differences• Consumer behavior is influenced by
economic development.– Consumers in highly developed countries tend
to have extra performance attributes in their products.
– Consumers in less developed countries tend not to demand these extra performance attributes.• Cars: no air-conditioning, power steering, power
windows, radios and cassette players.• Product reliability is more important.
Product and Technical Standards
• Government standards can prevent the introduction of global products.
• Different technical standards impede global markets, as well.– Come from distinctive decisions made long
ago.• Different television signal frequencies.
Distribution Strategy
• Three different distribution systems:– Retail consideration.– Channel length.– Channel exclusivity.
• Choice of channel:– Cost/benefit of each alternative
vary from country to country.
ConcentratedFragmented
Short
Long Channel
No Outsiders
Communications Strategy• Effectiveness of international
communications can be impacted by:– Cultural barriers.• Need to develop cross-cultural literacy.
– Source effects.• Emphasize/De-emphasize foreign origin.
– Noise levels.• Developed countries - high.• Less developed countries - low.
Global Advertising
• Standardized:– Significant economic advantages.– Scarce creative talent.– Many global brand names.
• Non-standardized:– Messages in one country may fail in another.– Advertising regulations can be a restriction.
Pricing Strategy• Price discrimination:– Must keep national markets separate.– Different price elasticities
• Arbitrage:Charging different prices in different countries for same product.– Doesn’t always work.
• Ford in Germany and Belgium
– Sometimes it does.• Ford in UK and Belgium
Using Arbitrage
The Location of R&D
• New product development is greater where:– More money spent on R&D.– Underlying demand is strong.– Consumers are affluent.– Competition is intense.
Configuring the Marketing Mix
Culture
Economy
Competition
Stan
dard
s
Distrib
ution
Gov’t Regs
Product
Attri
butes
Dist
ribut
ion
Stra
tegy
Communications
Strategy
Pricing Strategy
Differences Here
Requires Variation
Here
The Need to Integrate R&D, Marketing and Production
• High failure rate ratio between new products development and profit goals.
• Reasons for failure:– Limited product demand.– Failure to adequately commercialize product.– Inability to manufacture product cost-effectively.
Cross-Functional Integration• Integrating R&D, production and marketing
ensures:– Project development is driven by customer
need.– New products are designed for ease of
manufacture.– Development costs are kept in check.– Time to market is minimized.
• Use cross-functional development teams.
How different is Global HRM?
Several key factors make Global HRM different from domestic management:
i. Different labour markets
ii. Mobility problems: legal, economic, cultural barriers
iii. Different management styles
iv. Varied compensation practices
v. Labour laws.
I. Staffing Policy
Staffing policy is concerned with the selection of employees for particular jobs.
i. Selecting individuals who have the skill to do a particular job.
ii. Tool for developing and promoting the desired corporate culture (norms & value system) of the firm.
II. Training and Management Development
After selection, the next step is training the manager to do the specific job.
MDP is a broader concept, it is intended to develop a manager’s skills over her career in the firm, e.g., sending managers on various foreign postings over years to build her cross cultural sensitivity and experience.
To enhance management and leadership skills of executives. MDP have a strategic purpose, and helps reinforce desired
culture of the firm by creating an informal network.
III. Performance Appraisal These are the systems used to evaluate the performance of managers
against some criteria, that the firm judges to be important for the implementation of strategy and attainment of competitive advantage.
Important elements of control system. 2 groups evaluate the performance of Expatriates, - Host country
managers and home country managers. Biasness by cultural frame of reference and expectations Unfair evaluation Due to proximity, onsite manager should evaluate soft variables of
expatriate’s performance. Consultation of home country manager to balance out.
IV. Compensation
National differences in compensation Payments according to global standards or
country specific standards. Issues in compensation practices:i. How compensation should be adjusted to
reflect national differences in economic circumstances and practices?
ii. How should the expatriate managers be paid?
Expatriate Pay
Acc. To “Balance Sheet Approach”, it equalizes purchasing power across countries so employees can enjoy the same living standard in their foreign posting, as the enjoyed at home.
It also provides financial incentives to offset qualitative differences between assignment locations.
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&ved=0CBwQFjAA&url=http%3A%2F%2Fwww.unm.edu%2F~rauldg%2Fmgt728%2FChap12.ppt&ei=FZKzVIiUO8LmuQTolIFw&usg=AFQjCNEeS5MYYN7rHSAiXMMZX7Cyzwkp8g
http://www.slideshare.net/geeta_123/foreign-market-entry-strategies
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